<PAGE>
As filed with the Securities and Exchange Commission on August 4, 1999.
Registration No. 333-63787
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Amendment No. 4
to
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
OnePoint Communications Corp.
OnePoint Communications Holdings, LLC
OnePoint Communications--Georgia, LLC
OnePoint Communications--Illinois, LLC
OnePoint Communications--Colorado, LLC
VIC-RMTS-DC, LLC
(Exact name of registrants as specified in their charter or operating
agreement)
Delaware 4813 36-4225811
Delaware 4813 36-4152762
Delaware 4813 36-4141380
Delaware 4813 36-4115274
Delaware 4813 36-4149806
Delaware 4813 36-4134906
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Number)
organization) --------------
2201 Waukegan Road, Suite E200, Bannockburn, Illinois 60015
Telephone: (847) 374-3700
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
--------------
John D. Stavig
2201 Waukegan Road, Suite E200, Bannockburn, Illinois 60015
Telephone: (847) 374-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copy to:
Laurie T. Gunther
Kirkland & Ellis
200 East Randolph Drive, Chicago, Illinois 60601
Telephone: (312) 861-2000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If any securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Amount to Offering Price Offering Registration
Securities to be Registered be Registered Per Unit(1) Price(1) Fee(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
14 1/2% Senior Notes due 2008, Series B......... $82,750,000 100% $82,750,000 $23,005
- -----------------------------------------------------------------------------------------------------------
Guarantees of 14 1/2% Senior Notes due 2008,
Series B....................................... $82,750,000 (3) (3) None
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</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(f)
(2) A fee of $51,625 was paid on September 19, 1998.
(3) No further fee is payable pursuant to Rule 457(n).
--------------
The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrants
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 4, 1999
PRELIMINARY PROSPECTUS
August 4, 1999
OnePoint Communications Corp.
Offer to Exchange its 14 1/2% Senior Notes due 2008, Series B
for any and all of its outstanding 14 1/2% Senior Notes due 2008.
The Exchange Offer will expire at 5:00 p.m., New York City time, on September
10, 1999, unless extended.
OnePoint Communications Corp., a Delaware corporation ( the "Company") hereby
offers (the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 14 1/2%
Senior Notes due 2008, Series B (the "Exchange Notes"), registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement of which this Prospectus is a part, for each $1,000
principal amount of its outstanding 14 1/2% Senior Notes due 2008 (the "Old
Notes"), of which $82,750,000 principal amount is outstanding. The form and
terms of the Exchange Notes are the same as the form and term of the Old Notes
except that (i) the Exchange Notes will bear a Series B designation and a
different CUSIP number than the Old Notes, (ii) the Exchange Notes will have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof and (iii) holders of the Exchange Notes will
not be entitled to certain rights of holders of Old Notes under the
Registration Rights Agreements (as defined). The Exchange Notes will evidence
the same debt as the Old Notes (which they replace) and will be issued under
and be entitled to the benefits of the Indenture dated as of May 21, 1998 (the
"Indenture") by and among the Company, the Subsidiary Guarantors (as defined)
and Harris Trust and Savings Bank, as trustee, governing the Old Notes. The Old
Notes and the Exchange Notes are sometimes referred to herein collectively as
the "Notes." See "The Exchange Offer" and "Description of the Notes."
The Company will accept for exchange any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time on September 10, 1999,
unless extended by the Company in its sole discretion (the "Expiration Date").
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date. The Exchange Offer is subject to certain customary conditions.
See "The Exchange Offer."
Interest on the Notes will accrue from their date of original issuance and
will be payable semiannually in arrears on June 1 and December 1 of each year,
commencing December 1, 1999, at the rate of 14 1/2% per annum. The Notes will
mature on June 1, 2008. The Notes are redeemable, in whole or in part, at the
option of the Company on or after June 1, 2003, at the redemption prices set
forth herein, plus accrued and unpaid interest, if any, to the date of
redemption. In addition, prior to June 1, 2001, the Company, at its option, may
redeem up to 35% of the aggregate principal amount of the Notes originally
issued with the net cash proceeds of one or more public or private public or
private offerings of Common Stock by the Company generating net cash proceeds
to the Company in excess of $20.0 million at a redemption price equal to 114.5%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of redemption; provided that at least 65% of the aggregate principal
amount of the Notes originally issued remains outstanding following such
redemption. See "Description of the Notes."
In the event of a Change of Control, the holders of the Notes have the right
to require the Company to purchase the Notes at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date of purchase. There can be no assurances
that, in the event of a Change of Control, the Company will have or will have
access to adequate funds to repurchase the Notes.
The Exchange Notes will be, as the Old Notes (which they replace) are, senior
obligations of the Company, and will, as the Old Notes (which they replace),
rank pari passu in right of payment with all existing and future unsubordinated
Indebtedness (as defined herein) of the Company and senior in right of payment
to any
(cover continued on following page)
-----------
See "Risk Factors" beginning on page 12 for a description of certain risks to
be considered by holders who tender their Old Notes in the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMIS-
SION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADE-
QUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
(cover page continued)
subordinated Indebtedness of the Company. As of March 31, 1999, the Company
had $110.4 million senior Indebtedness (as defined), including the Notes. The
Notes will be fully and unconditionally guaranteed (the "Subsidiary
Guarantees") by all Restricted Subsidiaries (as defined) of the Company
(together, the "Subsidiary Guarantors"). The Subsidiary Guarantees will be
general unsecured obligations of the Subsidiary Guarantors, will rank senior
in right of payment to any subordinated Indebtedness of the Subsidiary
Guarantors and pari passu with any unsubordinated Indebtedness of the
Subsidiary Guarantors. The Subsidiary Guarantors currently have no
Indebtedness outstanding. See "Description of Notes."
$175.0 million of the Old Notes were sold by the Company on May 21, 1998 to
Bear Stearns & Co. Inc. and NationsBanc Montgomery Securities LLC (the
"Initial Purchasers") pursuant to the offering (the "Initial Offering") of
Units (the "Units"), each consisting of $1,000 principal amount of Old Notes
and a Warrant to purchase 0.635 shares of the common stock of the Company (a
"Warrant"). The Initial Offering was made in a transaction not registered
under the Securities Act in reliance upon an exemption under the Securities
Act. The Initial Purchasers subsequently placed the Old Notes with qualified
institutional buyers in reliance upon Rule 144A under the Securities Act.
Accordingly, the Old Notes may not be reoffered, resold or otherwise
transferred in the United States unless registered under the Securities Act or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The Exchange Notes are being offered hereunder in
order to satisfy the obligations of the Company and the Subsidiary Guarantors
under the Registration Rights Agreements entered into by the Company, the
Subsidiary Guarantors and the Initial Purchasers in connection with the
Initial Offering (the "Registration Rights Agreements"). See "The Exchange
Offer."
Based upon an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in certain no-action letters issued to
third parties, the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes may be offered for resale, resold
and otherwise transferred by any holder thereof (other than any such holder
that is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's business and such holder
has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. See "The Exchange Offer--Resale of the
Exchange Notes." The Company has not, and does not plan to, submit a request
for its own no-action letter. Holders of Old Notes wishing to accept the
Exchange Offer must represent to the Company, as required by the Registration
Rights Agreements, that such conditions have been met. Each broker-dealer (a
"Participating Broker-Dealer") that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
participating Broker-Dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer in connection with resales of Exchange Notes
received in exchange for Old Notes where such Old Notes were acquired by such
Participating Broker-Dealer as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days
after the Expiration Date, it will make this Prospectus available to any
Participating Broker-Dealer for use in connection with any such resale. See
"Plan of Distribution."
Holder of Old Notes not tendered and accepted in the Exchange Offer will
continue to hold such Old Notes and will be entitled to all the rights and
benefits and will be subject to the limitations applicable thereto under the
Indenture and with respect to transfer under the Securities Act. The Company
will not receive any proceeds from the Exchange Offer. The Company has agreed
to bear the expenses of the Exchange Offer. No underwriter is being used in
connection with the Exchange Offer.
There has not previously been any public market for the Old Notes or the
Exchange Notes. The Company does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors--Absence of a Public Market
Could Adversely Affect the Value of the Old Notes
ii
<PAGE>
and the Exchange Notes." Moreover, to the extent that Old Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered and
tendered but unaccepted Old Notes could be adversely affected.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING HEREBY TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SUBSIDIARY GUARANTORS. NEITHER THE DELIVERY
OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
THE EXCHANGE NOTES WILL BE AVAILABLE INITIALLY ONLY IN BOOK-ENTRY FORM.
EXCEPT AS DESCRIBED UNDER "BOOK--ENTRY; DELIVERY AND FORM", THE COMPANY
EXPECTS THAT THE EXCHANGE NOTES ISSUED PURSUANT TO THE EXCHANGE OFFER WILL BE
REPRESENTED BY A GLOBAL NOTES (AS DEFINED), WHICH WILL BE DEPOSITED WITH, OR
ON BEHALF OF, THE DEPOSITORY TRUST COMPANY ("DTC") AND REGISTERED IN ITS NAME
OR IN THE NAME OF EUROCLEAR SYSTEM AND CEDEL, SOCIETE ANONYME, ITS NOMINEES.
BENEFICIAL INTERESTS IN THE GLOBAL NOTES REPRESENTING THE EXCHANGE NOTES WILL
BE SHOWN ON, AND TRANSFERS THEREOF WILL BE EFFECTED THROUGH, RECORDS
MAINTAINED BY DTC AND ITS PARTICIPANTS. AFTER THE INITIAL ISSUANCE OF THE
GLOBAL NOTES, NOTES IN CERTIFICATED FORM WILL BE ISSUED IN EXCHANGE FOR THE
GLOBAL NOTES ONLY UNDER LIMITED CIRCUMSTANCES AS SET FORTH IN THE INDENTURE.
SEE "BOOK--ENTRY; DELIVERY AND FORM."
PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES ARE NOT TO CONSTRUE THE CONTENTS
OF THIS PROSPECTUS AS INVESTMENT, LEGAL OR TAX ADVICE. EACH INVESTOR SHOULD
CONSULT ITS OWN COUNSEL, ACCOUNTANT AND OTHER ADVISORS AS TO LEGAL, TAX,
BUSINESS, FINANCIAL AND RELATED ASPECTS OF THE EXCHANGE NOTES. NEITHER THE
COMPANY NOR ANY OF THE SUBSIDIARY GUARANTORS IS MAKING ANY REPRESENTATION TO
ANY PROSPECTIVE INVESTOR IN THE EXCHANGE NOTES REGARDING THE LEGALITY OF AN
INVESTMENT THEREIN BY SUCH PERSON UNDER APPROPRIATE LEGAL INVESTMENT OR
SIMILAR LAWS.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Exchange Offer Registration Statement," which term shall encompass
all amendments, exhibits, annexes and schedules thereto) pursuant to the
Securities Act, and the rules and regulations promulgated thereunder, covering
the Exchange Offer contemplated hereby. This Prospectus does not contain all
the information set forth in the Exchange Offer Registration Statement. For
further information with respect to the Company and the Exchange Offer,
reference is made to the Exchange Offer Registration Statement. The material
provisions of all relevant contracts, agreements or other documents are
summarized herein. With respect to each such contract, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a more complete description of the
document or matter involved, and each such statement shall be deemed qualified
in its entirety by such reference.
iii
<PAGE>
The Exchange Offer Registration Statement, including the exhibits thereto,
and periodic reports and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and inspected at the Commission's regional offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, Suite
1400, 500 West Madison Street, Chicago, Illinois 60601. Copies of such
materials can be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
As a result of the Exchange Offer Registration Statement being declared
effective by the Commission, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. The obligation of
the Company to file periodic reports and other information with the Commission
will be suspended if the Exchange Notes are held of record by fewer than 300
holders as of the beginning of any fiscal year of the Company other than the
fiscal year in which the Exchange Offer Registration Statement is declared
effective. The Company has agreed that, whether or not it is required to do so
by the rules and regulations of the Commission, for so long as any Notes
remain outstanding, it will furnish to the holders of such Notes and, to the
extent permitted by applicable law or regulation, file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company was required to file such Forms, including for each a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereof by the Company's
independent certified public accountants and (ii) all reports that would be
required to be filed on Form 8-K if it were required to file such reports. In
addition, for so long as any of the Notes remain outstanding, the Company has
agreed to make available upon request to securities analysts and any
prospective purchaser of the Notes or beneficial owner of the Notes, in
connection with any sale thereof, the information required by Rule 144A(d)(4)
under the Securities Act.
The Company, a corporation organized under the laws of the state of
Delaware, has its principal executive office located at 2201 Waukegan Road,
Suite E200, Bannockburn, Illinois; telephone number is (847) 374-3700.
iv
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the consolidated financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Prospective investors should carefully consider the factors set
forth in "Risk Factors." As the context requires, references in this Prospectus
to the "Company" or "OnePoint" shall mean OnePoint Communications, LLC or
OnePoint Communications Corp., its successor by merger, and the subsidiaries in
which the Company has a greater than 50% interest. Unless otherwise indicated,
all information contained in this Prospectus has been adjusted to give effect
to the Recapitalization (as defined below).
The Company
OnePoint Communications Corp. is a rapidly growing provider of bundled
telephony and video services to residents of multi-dwelling unit buildings
("MDUs") in high growth, densely populated urban and suburban markets. The
Company offers MDU residents bundled telephony and video services at moderate
to significant discounts to prices charged by incumbent local exchange carriers
("ILECs"), interexchange carriers ("IXCs") or franchise cable providers with
the convenience of "one point" of contact and a single integrated bill for such
multiple services. OnePoint seeks to offer bundled telephony and video services
by entering into long-term contracts providing preferential rights for on-site
marketing of telephony and video services (with respect to each service, a
"Right of Entry" for the MDU and a "passing" for each residential unit therein)
with national real estate investment trusts ("REITs") and other MDU property
owners, developers and managers (each, an "MDU Manager") and, where
appropriate, by acquiring private cable television operators having exclusive
video Rights of Entry for MDUs.
Through March 1999, the Company had entered into long term contracts
providing for approximately 219,300 telephony passings and 29,600 video
passings in the Company's 6 targeted markets. The Company also holds an
approximate 41.4% equity interest in Mid-Atlantic Telcom Plus, LLC ("Mid-
Atlantic"), a large private cable television operator in the
Washington/Baltimore/ Philadelphia metropolitan area. The Company is an
authorized competitive local exchange carrier ("CLEC") and has obtained
authority for the resale of local exchange services in eleven states (Colorado,
Delaware, Florida, Georgia, Illinois, Maryland, North Carolina, Pennsylvania,
South Carolina, Tennessee and Virginia) and the District of Columbia.
Additionally, it has applied for CLEC status in Arizona and is permitted to
provide telecommunications services there while its application is pending.
The Company offers a wide range of services, including local telephony,
domestic and international long distance telephony and cable and Direct
Broadcast Satellite ("DBS") television. The Company also enhanced its bundled
product offering by offering high-speed Internet access service on a trial
basis during 1998. The Company currently delivers telephony services
exclusively through resale of services offered by ILECs and an IXC. During
1999, the Company expects to begin selectively replacing its resale platform
with higher margin facilities-based services as warranted by subscriber traffic
levels. Video services are delivered through Satellite Master Antenna
Television ("SMATV") or DBS systems and point-to-point 18GHz microwave links.
See "Business--The Company".
Key Strategic Relationships
The Company has several relationships and agreements which management
believes offer significant advantages, including:
. its relationship with Southwestern Bell Communications Inc. ("SBC"),
which invested $35 million in the Company at its inception in 1996 and
has continued to provide support to the Company,
1
<PAGE>
. its investment in Mid-Atlantic, which enables the Company to market
local and long distance telephony services to Mid-Atlantic's video
passings in the Washington/Baltimore/Philadelphia metropolitan area, and
. its relationships with national REITs, which the Company believes will
be a competitive advantage in obtaining Rights of Entry.
See "Business--Key Strategic Relationships."
Business Strategy
OnePoint's objective is to be a leading provider of bundled telephony and
video services to MDU residents in selected markets. The key elements of the
Company's strategy are as follows:
.focus on dense concentrations of demographically diverse customers,
.utilize a "smart-build" strategy to expedite customer acquisition and
minimize initial investment,
.leverage SBC affiliation,
.build customer base through long-term contracts,
.build customer base through acquisitions,
. increase revenue through bundling, creative marketing and cross-
promotions, and
. provide superior customer care.
See "Business--Business Strategy."
2
<PAGE>
Management Expertise
OnePoint believes that its management and operations team is a critical
component of its initial success and will continue to be a key element of
differentiation for the Company. The Company has built an aggressive and
experienced management team with extensive prior experience at ILECs, CLECs,
IXCs and cable television companies, including MFS Communications Company, MCI
WorldCom, Inc. ("MCI WorldCom"), Sprint Communications Co. ("Sprint") and AT&T
Corp. ("AT&T"), among others. See "Business--Management Expertise" and
"Management."
Financing Strategy
The Company used approximately $80.5 million of the net proceeds from the
Initial Offering to fund the purchase of a portfolio of U.S. government
securities (the "Pledged Securities"), which is intended to provide funds
sufficient to pay in full when due the first seven scheduled interest payments
on the Notes. The Pledged Securities are pledged as security for the repayment
of principal of and interest on the Notes, Liquidated Damages, if any, and all
other obligations under the Indenture. See "Use of Proceeds" and "Description
of the Exchange Notes--Interest Reserve." Other proceeds have been, or will be,
used to acquire private cable television operators or their assets, to invest
in video infrastructure, to invest selectively in a facilities-based platform
for telephony services, to repay borrowings under the Credit Facility (which
were reborrowed on December 14, 1998), to fund future capital calls by Mid-
Atlantic, to fund working capital, to repurchase Notes and for general
corporate purposes, including operating losses. There can be no assurance that
the Company will be successful in raising sufficient additional debt or equity
capital if necessary, or of the terms of any such capital. Failure to raise and
generate sufficient funds may require the Company to delay or abandon some of
its planned future expansion or expenditures, which could have a material
adverse effect on the Company's growth and its ability to compete in the
telephony and video industry.
Recent Developments
In June 1998, the Company, through a wholly owned subsidiary, entered into a
definitive agreement to acquire substantially all of the assets used by
People's Choice TV Corp. ("PCTV") and Preferred Entertainment, Inc. to provide
video service to MDUs in Chicago. Pursuant to the agreement, the Company
acquired approximately 28,000 video passings in 160 properties in July through
October (the "PCTV Acquisition").
On November 6, 1998, the Warrants were separated from the Notes.
Between November 9, 1998 and June 10, 1999, the Company repurchased $92.25
million in principal amount of Notes in the open market (the "Note
Repurchases") for an aggregate total cost of $47.9 million. The Company
recognized extraordinary gains on the early extinguishment of this debt of
$19.8 million in the fourth quarter of 1998 and $12.4 million in the first
quarter of 1999. The Company expects to recognize an extraordinary gain of $8.1
million in the second quarter of 1999. Pursuant to the restricted securities
agreement entered into in connection with the issuance of the Notes, upon
request by the Company, the trustee of the Pledged Securities released
approximately $26.7 million of such securities in February 1999 and an
additional $11.5 million of Pledged Securities in July 1999.
On November 18, 1998, the Notes began accruing Liquidated Damages as a result
of the failure of the Exchange Offer Registration Statement to be declared
effective by the SEC.
In December, 1998 the Company borrowed $8.75 million and a $250,000 letter of
credit was issued on its behalf under the Credit Agreement.
The Company is at various stages of discussion with respect to other
potential acquisitions in its targeted markets but is not a party to a purchase
agreement or letter of intent with respect thereto. The Company is also
3
<PAGE>
negotiating letters of intent with franchise cable television operators in its
targeted markets providing for co-marketing of local and long distance
telephony services to residents of the MDU passings served by these franchise
cable television operators.
The Recapitalization
The Company is the successor to OnePoint Communications, LLC (the
"Predecessor"). The Predecessor was originally formed in 1996 by Ventures in
Communications, L.L.C. ("VIC"), and AMI-VCOM2, Inc. ("AMI2"). Through a series
of transactions from the fourth quarter of 1997 through April 1998, VenCom,
L.L.C. acquired an equity interest in the Predecessor, and the Predecessor was
recapitalized and merged with the Company in order to become a corporation. See
"The Recapitalization."
Risk Factors
See "Risk Factors" for a discussion of certain factors relating to the
Company and its business that should be carefully considered before tendering
Old Notes in exchange for Exchange Notes.
The Initial Offering
Old Notes................... The Old Notes were sold by the Company on May
21, 1998 to the Initial Purchasers as part of
the Units pursuant to a Purchase Agreement
dated May 15, 1998 (the "Purchase
Agreement"). The Initial Purchasers
subsequently resold the Units, including the
Old Notes to qualified institutional buyers
pursuant to Rule 144A under the Securities
Act.
Registration Rights Pursuant to the Purchase Agreement, the
Agreement................... Company, the Subsidiary Guarantors and the
Initial Purchasers entered into a
Registration Rights Agreement dated as of May
21, 1998 (the "Registration Rights
Agreements"), which grants the holders of the
Old Notes certain exchange and registration
rights. The Exchange Offer is intended to
satisfy such exchange rights which terminate
upon the consummation of the Exchange Offer.
The Exchange Offer
Securities Offered.......... $82,750,000 aggregate principal amount of 14
1/2% Senior Notes due 2008, Series B.
The Exchange Offer.......... $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of
Old Notes. As of the date hereof, $82,750,000
aggregate principal amount of Old Notes are
outstanding. The Company will issue the
Exchange Notes to holders on or promptly
after the Expiration Date.
Based on an interpretation by the staff of
the Commission set forth in no-action letters
issued to third parties, the Company believes
that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may
be offered for resale, resold and otherwise
transferred by any holder thereof (other than
any such holder which is an "affiliate" of
the Company within the meaning of Rule 405
4
<PAGE>
under the Securities Act) without compliance
with the registration and prospectus delivery
provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holder's business and
that such holder does not intend to
participate and has no arrangement or
understanding with any person to participate
in the distribution of such Exchange Notes.
The Company has not, and does not plan to,
submit a request for its own no-action
letter.
Any Participating Broker-Dealer that acquired
Old Notes for its own account as a result of
market-making activities or other trading
activities may be a statutory underwriter.
Each Participating Broker-Dealer that
receives Exchange Notes for its own account
pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus
in connection with any resale of such
Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by
delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit
that it is an "underwriter" within the
meaning of the Securities Act. This
Prospectus, as it may be amended or
supplemented from time to time, may be used
by a Participating Broker-Dealer in
connection with resales of Exchange Notes
received in exchange for Old Notes where such
Old Notes were acquired by such Participating
Broker-Dealer as a result of market-making
activities or other trading activities. The
Company has agreed that, for a period of 180
days after the Expiration Date, it will make
this Prospectus available to any
Participating Broker-Dealer for use in
connection with any such resale. See "Plan of
Distribution."
Any holder who tenders in the Exchange Offer
with the intention to participate, or for the
purpose of participating, in a distribution
of the Exchange Notes could not rely on the
position of the staff of the Commission
enunciated in no-action letters and, in the
absence of an exemption therefrom, must
comply with the registration and prospectus
delivery requirements of the Securities Act
in connection with any resale transaction.
Failure to comply with such requirements in
such instance may result in such holder
incurring liability under the Securities Act
for which the holder is not indemnified by
the Company.
Expiration Date.............
5:00 p.m., New York City time, on September
10, 1999 unless the Exchange Offer is
extended, in which case the term "Expiration
Date" means the latest date and time to which
the Exchange Offer is extended.
Accrued Interest on the
Exchange Notes and the Old
Notes.......................
Each Exchange Note will bear interest from
its issuance date. Holders of Old Notes that
are accepted for exchange will receive, in
cash, accrued interest thereon to, but not
including, the issuance date of the Exchange
Notes. Such interest will be paid with the
first interest payment on the Exchange Notes.
Interest on the Old Notes
5
<PAGE>
accepted for exchange will cease to accrue
upon issuance of the Exchange Notes.
Conditions to the Exchange The Exchange Offer is subject to certain
Offer....................... customary conditions, which may be waived by
the Company. See "The Exchange Offer--
Conditions."
Procedures for Tendering Each holder of Old Notes wishing to accept
Old Notes................... the Exchange Offer must complete, sign and
date the accompanying Letter of Transmittal,
or a facsimile thereof, in accordance with
the instructions contained herein and
therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with the Old Notes and any other
required documentation to the Exchange Agent
(as defined) at the address set forth herein.
By executing the Letter of Transmittal, each
holder will represent to the Company that,
among other things, the Exchange Notes
acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of
business of the person receiving such
Exchange Notes, whether or not such person is
the holder, that neither the holder nor any
such other person has any arrangement or
understanding with any person to participate
in the distribution of such Exchange Notes
and that neither the holder nor any such
other person is an "affiliate," as defined
under Rule 405 of the Securities Act, of the
Company. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer" and "--
Procedures for Tendering."
Untendered Old Notes........ Following the consummation of the Exchange
Offer, holders of Old Notes eligible to
participate but who do not tender their Old
Notes will not have any further exchange
rights and such Old Notes will continue to be
subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for
such Old Notes could be adversely affected.
Consequences of Failure to
Exchange................... The Old Notes that are not exchanged pursuant
to the Exchange Offer will remain restricted
securities. Accordingly, such Old Notes may
be resold only (i) to the Company, (ii)
pursuant to Rule 144A or Rule 144 under the
Securities Act or pursuant to some other
exemption under the Securities Act, (iii)
outside the United States to a foreign person
pursuant to the requirements of Rule 904
under the Securities Act, or (iv) pursuant to
an effective registration statement under the
Securities Act. See "The Exchange Offer--
Holders Who Fail to Exchange Will Be Subject
to Restrictions on Transfer."
Shelf Registration If any holder of the Old Notes (other than
Statement................... any such holder which is an "affiliate" of
the Company or a Subsidiary Guarantor within
the meaning of Rule 405 under the Securities
Act) is not eligible under applicable
securities laws to participate in the
Exchange Offer, and such holder has satisfied
certain conditions relating to the provision
of information to the Company for use
therein, the Company and the Subsidiary
Guarantors have agreed to register the Old
Notes on a
6
<PAGE>
shelf registration statement (the "Shelf
Registration Statement") and use their best
efforts to cause it to be declared effective
by the Commission as promptly as practical on
or after the consummation of the Exchange
Offer. The Company and the Subsidiary
Guarantors have agreed to maintain the
effectiveness of the Shelf Registration
Statement for, under certain circumstances, a
maximum of two years, to cover resales of the
Old Notes held by any such holders.
Special Procedures for
Beneficial Owners..........
Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender should
contact such registered holder promptly and
instruct such registered holder to tender on
such beneficial owner's behalf. If such
beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of
Transmittal and delivering its Old Notes,
either make appropriate arrangements to
register ownership of the Old Notes in such
owner's name or obtain a properly completed
bond power from the registered holder. The
transfer of registered ownership may take
considerable time.
Guaranteed Delivery Holders of Old Notes who wish to tender their
Procedures.................. Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply
with the procedures for book-entry transfer)
prior to the Expiration Date must tender
their Old Notes according to the guaranteed
delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights........... Tenders may be withdrawn at any time prior to
5:00 p.m., New York City time, on the
Expiration Date.
Acceptance of Old Notes and
Delivery of Exchange
Notes....................... The Company will accept for exchange any and
all Old Notes which are properly tendered in
the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The
Exchange Notes issued pursuant to the
Exchange Offer will be delivered promptly
following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
Use of Proceeds............. There will be no cash proceeds to the Company
from the exchange pursuant to the Exchange
Offer.
Exchange Agent.............. Harris Trust and Savings Bank (the "Exchange
Agent") is serving as Exchange Agent in
connection with the exchange offer of
Exchange Notes for Old Notes.
The Exchange Notes
General..................... The form and terms of the Exchange Notes are
the same as the form and terms of the Old
Notes (which they replace) except that (i)
the Exchange Notes bear a Series B
designation and a different CUSIP
7
<PAGE>
number than the Old Notes, (ii) the Exchange
Notes will have been registered under the
Securities Act and, therefore, will not bear
legends restricting the transfer thereof, and
(iii) the holders of Exchange Notes will not
be entitled to certain rights under the
Registration Rights Agreements, including the
provisions providing for an increase in the
interest rate on the Old Notes in certain
circumstances relating to the timing of the
Exchange Offer, which rights will terminate
when the Exchange Offer is consummated. See
"The Exchange Offer--Purpose and Effect of
the Exchange Offer." The Exchange Notes will
evidence the same debt as the Old Notes and
will be entitled to the benefits of the
Indentures. See "Description of Exchange
Notes."
Maturity.................... June 1, 2008.
Interest....................
The Exchange Notes will bear interest at the
rate of 14 1/2% per annum, payable semi-
annually in arrears on June 1 and December 1,
commencing December 1, 1999.
Ranking..................... The Exchange Notes will be general
obligations of the Company, will rank pari
passu in right of payment with all existing
or future unsubordinated Indebtedness of the
Company, and will rank senior in right of
payment to any subordinated Indebtedness of
the Company. As of March 31, 1999, the
Company had $110.4 million of senior
Indebtedness, including the Notes.
Interest Reserve............
The Company used approximately $80.5 million
of the net proceeds from the Initial Offering
to purchase the Pledged Securities, which
were pledged to the Trustee for the benefit
of the holders of the Notes, and which are in
an amount intended to be sufficient upon
receipt of scheduled interest and principal
payments, to provide for payment in full when
due of the first seven scheduled interest
payments on the Notes. When each of the first
seven interest payments is due, the Trustee
will apply the proceeds of a sufficient
amount of Pledged Securities to pay the
interest then due. As a result of the Note
Repurchases, on February 24, 1999 upon
request by the Company, the trustee of the
Pledged Securities released approximately
$26.7 million of such securities and an
additional $11.5 million of such securities
in July 1999 to the Company which are
available to the Company for general
corporate purposes.
Upon the acceleration of the maturity of the
Notes or upon certain redemptions and
repurchases of the Notes, the Pledge
Agreement provides that the Trustee will
apply the proceeds of a sufficient amount of
Pledged Securities to pay the amounts owed by
the Company to holders of the Notes at such
time. Immediately following the earlier of
(i) the payment in full of the seventh
scheduled interest payment on the Notes and
(ii) the day on which all of the Notes have
been repurchased, redeemed or defeased, if no
Default or Event of Default is then
continuing, the remaining Pledged Securities,
if any, will be released from the pledge and
the outstanding Notes (if any) will be
unsecured obligations of the Company.
8
<PAGE>
Subsidiary Guarantees....... The Company's obligations under the Notes are
jointly and severally, fully and
unconditionally, guaranteed by the Subsidiary
Guarantors. The Subsidiary Guarantees will
rank senior in right of payment to any
subordinated Indebtedness of the Subsidiary
Guarantors and pari passu with any
unsubordinated Indebtedness of the Subsidiary
Guarantors. See "Description of the Notes--
Subsidiary Guarantees."
Sinking Fund................ None.
Optional Redemption......... The Notes may be redeemed at the option of
the Company, in whole or in part, on or after
June 1, 2003, at a premium declining to par
in 2006, plus accrued and unpaid interest and
Liquidated Damages, if any, through the
redemption date.
In addition, the Company will be entitled, at
any time on or before June 1, 2001 to redeem
up to 35% of the aggregate principal amount
of the Notes with the net cash proceeds of
one or more public or private offerings of
Common Stock by the Company generating net
cash proceeds to the Company in excess of
$20.0 million at a redemption price equal to
114.5% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated
Damages, if any, thereon, to the redemption
date; provided at least 65% of the aggregate
principal amount of Notes originally issued
remain outstanding immediately after giving
effect to such redemption. See "Description
of the Notes--Optional Redemption."
Change of Control........... In the event of a Change of Control, the
holders of the Notes have the right to
require the Company to purchase the Notes at
a price equal to 101% of the aggregate
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if
any, to the date of purchase. See
"Description of the Notes--Repurchase at the
Option of the Holders--Change of Control."
Covenants................... The Indenture contains certain covenants
that, among other things, limits the ability
of the Company and its Restricted
Subsidiaries to make certain restricted
payments, incur additional Indebtedness and
issue Disqualified Stock (as defined herein),
pay dividends or make other distributions,
repurchase equity interests or subordinated
Indebtedness, engage in sale or leaseback
transactions, create certain liens, enter
into certain transactions with affiliates,
sell assets of the Company or its Restricted
Subsidiaries, conduct certain lines of
business, issue or sell equity interests of
the Subsidiary Guarantors or enter into
certain mergers and consolidations. In
addition, under certain circumstances, the
Company is required to offer to purchase the
Notes at a price equal to 100% of the
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if
any, to the date of purchase, with the
proceeds of certain asset sales. See
"Description of Notes--Certain Covenants."
For additional information concerning the Notes and the definitions of
certain capitalized terms used above, see "Description of Notes."
9
<PAGE>
Summary Historical and Pro Forma Financial Data of the Company
The following table sets forth selected historical and pro forma financial
and other data of the Company. The selected consolidated statement of
operations and balance sheet data set forth below as of December 31, 1996, 1997
and 1998 and for the periods then ended are derived from the financial
statements of the Company which have been audited by Ernst & Young LLP,
independent auditors. The unaudited consolidated financial data at March 31,
1999 and for the three months ended March 31, 1998 and 1999 include all
adjustments (consisting only of normal recurring adjustments) which management
considers necessary for a fair presentation of the financial information for
those unaudited periods. The results of operations for the three months ended
March 31, 1999 are not necessarily indicative of the results of operations that
may be expected for the full fiscal year ending December 31, 1999. The Company
was formed in 1996 and has generated operating losses and negative cash flow
from its limited operating activities to date. As a result of the Company's
limited operating history, prospective investors have limited operating and
financial data about the Company upon which to base an evaluation of the
Company's performance and the decision to tender Old Notes in exchange for
Exchange Notes. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements, including
the notes thereto and the Pro Forma Unaudited Condensed Balance Sheet and
Statement of Operations, contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Unaudited
Period from Unaudited Pro Forma
March 14, Pro Forma Three Months Three Months
1996 to Year Ended Year Ended Year Ended Ended Ended
December 31, December 31, December 31, December 31, March 31, March 31,
1996 1997 1998 1998(1) 1999 1999(1)
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue............ $ -- $ 43 $ 6,953 $ 9,585 $ 4,419 $ 4,419
Cost of revenue........ -- 83 8,765 10,550 4,177 4,177
Selling, general and
administrative
expenses.............. 2,021 12,788 27,873 28,852 10,118 10,118
Depreciation and
amortization.......... 19 235 1,455 2,842 587 587
Loss from operations... (2,040) (13,063) (31,140) (32,659) (10,463) (10,463)
Interest expense....... -- (11) (15,846) (13,154) (4,242) (3,292)
Other income (expense). 4 55 6,059 6,059 473 473
Income tax provision
(2)(3)................ -- -- -- -- -- --
Loss on equity
investments........... -- (3,072) (3,698) (3,698) (870) (870)
Extraordinary item..... -- -- 19,799 19,799 12,427 12,427
Net loss............... (2,036) (16,091) (24,826) (23,653) (2,675) (1,725)
</TABLE>
<TABLE>
<CAPTION>
As of As of March 31,
December 31, 1998 1999
----------------- -------------------
Actual Actual Pro Forma
----------------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents............... $ 5,730 $ 6,103 $ 6,013
Working capital......................... 15,199 14,906 5,451
Total assets............................ 149,307 117,054 106,682
Long term debt.......................... 138,503 107,233 88,773
Redeemable preferred stock.............. 35,000 35,000 35,000
Unitholders' equity..................... -- -- --
Stockholder's equity.................... (36,872) (40,228) (32,140)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Period from Pro Forma
March 14, Pro Forma Three Months Three Months
1996 to Year Ended Year ended Year Ended Ended Ended
December 31, December 31, December 31, December 31, March 31, March 31,
1996 1997 1998 1998(1) 1999 1999
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Financial Data:
Pro forma income tax provision (3)..... $ -- $ -- $ -- $ -- $ -- $ --
Adjusted EBITDA (4).................... (2,021) (12,845) (29,685) (29,817) 9,876 9,876
Net cash used in operating activities.. (2,020) (11,427) (37,672) (37,672) (11,639) (11,639)
Net cash used in investing activities
(5)................................... (13,517) (2,573) (118,372) (125,614) 30,029 30,029
Net cash from financing activities..... 15,640 19,360 156,511 121,532 (18,107) (18,107)
Capital expenditures................... 517 2,441 9,374 9,374 (2,619) (2,619)
Ratio of losses to fixed charges (6)... -- -- -- -- -- --
Other Data:
Passings:
Telephony passings under contract...... -- 71,034 207,500 207,500 219,300 219,300
Telephony passings actively marketed (7). -- 17,536 150,000 150,000 165,600 165,600
Video passings under contract.......... -- 184 30,000 30,000 29,600 29,600
Video passings actively marketed (7)... -- -- 30,000 30,000 29,600 29,600
Telephony subscribers.................. -- 365 17,067 17,067 20,755 20,755
Telephony Penetration Rate............. -- 2.1% 11.4% 11.4% 12.5% 12.5%
Video subscribers...................... -- -- 17,347 17,347 17,208 17,208
Video Penetration Rate................. -- -- 57.8% 57.8% 58.1% 58.1%
</TABLE>
- -------
(1) Gives effect to (i) the issuance of $175.0 million aggregate principal
amount of Notes and recognition of (a) the related interest expense thereon
with an interest rate of 14 1/2% per annum; (b) amortization of deferred
debt issuance costs and (c) amortization of the discount on debt resulting
from the issuance of warrants for 111,125 shares of common stock; (ii) the
repurchase of $92.25 million aggregate principal amount of Notes from
November 1998 through June 1999 as if such repurchase had occurred at the
beginning of each period presented or as of December 31, 1998 and March 31,
1999; (iii) the change in tax status from a limited liability company to a
"C" corporation; and (iv) the PCTV Acquisition.
(2) Prior to the merger with OnePoint Communications Corp. in April 1998 the
Company was treated as a partnership for income tax purposes. Accordingly,
no provision for income taxes has been included in these financial
statements, as taxable income or loss passed through to unitholders
individually.
(3) See pro forma tax discussion in the notes to the Pro Forma Unaudited
Statement of Operations.
(4) Adjusted EBITDA is defined as net income (loss) before income taxes and
depreciation, amortization and equity investment income (loss). Adjusted
EBITDA is presented because it is a widely accepted financial indicator of
a company's ability to incur and service debt. However, Adjusted EBITDA
should not be considered in isolation as a substitute for net loss or cash
flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
Further, funds depicted by Adjusted EBITDA may not be available for
management's discretionary use (due to legal or functional requirements to
conserve funds for capital replacement and expansion, debt service and
other commitments and uncertainties). In addition, this measure of Adjusted
EBITDA may not be comparable to similar measures reported by other
companies.
(5) Cash flows from investing activities included the changes in the Company's
restricted cash balances on deposit in an escrow account pending investment
in Mid-Atlantic. Cash and cash equivalents as of December 31, 1996 includes
$13 million of restricted cash.
(6) For the purpose of the ratio of losses to fixed charges, (i) losses are
calculated as net loss before fixed charges and (ii) fixed charges include
interest on all Indebtedness, and operating lease expense. Fixed charges
for the period from March 14, 1996 to December 31, 1996 and for the years
ended December 31, 1997 and 1998 were approximately $79,000, $629,000 and
$1,107,000, respectively. For the period from March 14, 1996 to December
31, 1996, the years ended December 31, 1997 and 1998, the Company's
deficiency of earnings to cover fixed charges was approximately $2.0
million and $16.1 million and $24.8 million, respectively. Fixed Charges
for the three months ended March 31, 1999 were approximately $4.8 million.
The Company's deficiency of earnings to cover fixed charges was
approximately $2.7 million for the three months ended March 31, 1999.
(7) Passings actively marketed are passings in an MDU in which the Company had
one or more subscribers at the end of the relevant period.
11
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of Old Notes should consider carefully the following information relating to
the Company and the Notes before tendering their Old Notes in the Exchange
Offer. The risk factors set forth below are generally applicable to the Old
Notes as well as the Exchange Notes.
Holders Who Fail to Exchange Will Be Subject to Restrictions on Transfer
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon, as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, including Exxon Capital Holdings
Corporation, SEC No-Action Letter (available April 13, 1988) (the "Exxon
Capital Letter"), Morgan Stanley & Co. Incorporated, SEC No-Action Letter
(available June 5, 1991) (the "Morgan Stanley Letter"), and similar letters,
the Company believes that the Exchange Notes issued pursuant to the Exchange
Offer may be offered for resale, resold or otherwise transferred by any holder
thereof (other than any such holder which is an "affiliate" of the Company or
any Subsidiary Guarantor within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and such Holder has
no arrangement with any person to participate in the distribution of such
Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
Any holder who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes cannot rely on the
Morgan Stanley Letter or similar letters and must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
a secondary resale transaction. To the extent that Old Notes are tendered and
accepted in the Exchange Offer, the trading market, if any, for the Old Notes
not so tendered could be adversely affected. See "The Exchange Offer."
Absence of a Public Market Could Adversely Affect the Value of the Old Notes
and the Exchange Notes
The Old Notes were issued to, and the Company believes are currently owned
by, a relatively small number of beneficial owners. Between November 9, 1998
and June 10, 1999, the Company repurchased $92.25 million in principal amount
of Old Notes in open market purchases, thus decreasing the number of
beneficial owners of the Notes. Prior to the Exchange Offer, there has not
been any public market for the Old Notes. The Old Notes have not been
registered under the Securities Act and will be subject to restrictions on
transferability to the extent that they are not exchanged for Exchange Notes
by holders who are entitled to participate in this Exchange Offer. To the
extent Old Notes are tendered and accepted in the Exchange Offer, the already
small number of beneficial owners of Old Notes would be decreased, and the
trading market for Old Notes would be adversely affected.
The Exchange Notes will constitute new issues of securities with no
established trading market. The Company does not intend to list the Exchange
Notes on any national securities exchange or seek the admission thereof to
trading in the National Association of Securities Dealers Automated Quotation
System. The Initial Purchasers have advised the Company that they currently
intend to make a market in the Exchange Notes, but they are not obligated to
do so and may discontinue such market making at any time. In addition, such
market making activity will be subject to the limits imposed by the Securities
Act and the Exchange Act and may be limited during the Exchange Offer and the
pendency of the Shelf Registration Statement. Accordingly, no
12
<PAGE>
assurance can be given that an active public or other market will develop for
the Exchange Notes or as to the liquidity of the trading market for the
Exchange Notes. If a trading market does not develop or is not maintained,
holders of the Exchange Notes may experience difficulty in reselling the
Exchange Notes or may be unable to sell them at all. If a market for the
Exchange Notes develops, any such market may be discontinued at any time.
If a public trading market develops for the Exchange Notes, future trading
prices of such securities will depend on many factors including, among other
things, prevailing interest rates, the Company's results of operations and
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the Exchange Notes may trade at a discount from
their principal amount.
A Holder's Failure to Follow Exchange Offer Procedures Could Invalidate Its
Exchange
Issuance of the Exchange Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Company of such
Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Holders of the Old Notes should complete these
documents carefully and allow sufficient time to ensure timely delivery. The
Company is under no duty to give notification of defects or irregularities
with respect to the tenders of Old Notes for exchange. Old Notes that are not
tendered or are tendered but not accepted will continue to be subject to the
existing restrictions upon transfer. Upon consummation of the Exchange Offer
certain registration rights under the Registration Rights Agreement will
terminate.
Any holder of Old Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities, and if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Old Notes, where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such Exchange Notes. See "Plan
of Distribution."
Limited History and Early Stage of Operations
The Company was formed in 1996 and has generated operating losses and
negative cash flow from its limited operating activities to date. Until
January 1998, the Company's primary activities consisted of the procurement of
governmental authorizations, the negotiation of telephony and video Rights of
Entry for MDUs, the hiring of management and other key personnel, the raising
of capital, the development, acquisition and integration of customer service,
billing and other back office systems, the identification of potential
acquisition targets and the negotiation of resale agreements.
As a result of the Company's limited operating history, prospective
investors have limited operating and financial data about the Company upon
which to base an evaluation of the Company's performance and a decision to
tender Old Notes in exchange for Exchange Notes. The Company's ability to
provide bundled telephony and video services in its six targeted markets and
to generate operating profits and positive operating cash flow will depend on
its ability to, among other things: (i) attract and retain an adequate
customer base; (ii) attract and retain qualified personnel; (iii) implement
and manage interconnection arrangements with ILECs; (iv) obtain additional
state authorizations to operate as a CLEC and any other required governmental
authorizations; (v) obtain necessary video programming on satisfactory terms
and (vi) expand its customer service, billing and other back office systems.
There can be no assurance that it will be able to achieve any of these
objectives or generate sufficient cash flow to make principal and interest
payments on the Notes or any other existing or future Indebtedness.
13
<PAGE>
Negative Cash Flow and Operating Losses
The Company has had negative cash flow from operations and has generated
operating losses since its inception.
The Company expects to continue to generate negative cash flow from
operations while it develops and expands its telephony and video services
business. Revenues to date have been minimal and may be slow in growing due to
start-up and other delays. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." There can be no assurance that
the Company will achieve or sustain profitability or generate sufficient cash
flow from operations to meet its working capital and debt service
requirements, which could have a material adverse effect on the Company's
results of operations and financial condition and its ability to meet its
obligations on the Notes. See "--Substantial Leverage; Possible Inability to
Service Indebtedness."
The Company's Substantial Leverage Could Adversely Affect its Financial Health
As a result of the Initial Offering, the Company will be highly leveraged.
At December 31, 1998 and March 31, 1999, the Company's aggregate outstanding
Indebtedness was $138.753 million and $107.483 million, respectively, and the
Company's stockholder's equity was $(36.9) million and $(40.2) million,
respectively. See "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources," "Description of Certain Indebtedness" and
"Description of the Notes." The Indenture limits, but does not prohibit, the
incurrence of additional Indebtedness by the Company. See "Description of the
Notes--Certain Covenants."
The Company's high degree of leverage could, among other things, (i) impair
its ability to obtain additional financing; (ii) leave little, if any, cash
flow after payment of principal and interest for the Company's operations and
growth; (iii) place it at a competitive disadvantage; (iv) impair its ability
to adjust rapidly to changing market conditions; and (v) make it more
vulnerable to changes in economic conditions or in its business.
The Company's Ability to Service its Debt is Dependent on Many Factors Beyond
its Control
There can be no assurance that the Company will be able to meet its debt
service obligations. If the Company is unable to make required payments or if
it fails to comply with the other covenants in its debt obligations, it would
be in default under the terms thereof, which would permit the holders of such
Indebtedness to accelerate the maturity of such Indebtedness and could cause
defaults under the terms of the Company's other Indebtedness. The Company's
ability to repay or to refinance its Indebtedness will depend on its financial
and operating performance, which, in turn, will be subject to prevailing
economic and competitive conditions and to financial, business and other
factors, many of which are beyond the Company's control. These factors could
include operating difficulties, increased operating costs, pricing pressures,
the response of competitors, regulatory developments and delays in
implementing strategic projects.
The successful implementation of the Company's business strategy and
significant and sustained growth in the Company's cash flow are necessary for
the Company to be able to meet its debt service and working capital
requirements. There can be no assurance that the Company will successfully
implement its business strategy, that the anticipated results of its strategy
will be realized, or that the Company will be able to generate sufficient cash
flow from operating activities to meet its debt service obligations and
working capital requirements. See "Business--Business Strategy."
If the Company does not achieve sufficient cash flow and capital resources
there can be no assurance that the Company's cash flow and capital resources
will be sufficient for payment of principal of, and premium, if any, and
interest on, its Indebtedness (including the Notes) and it may be forced to
reduce or delay product development or capital expenditures, sell assets, seek
to obtain additional capital, or to refinance or restructure its debt or
employ other measures to enhance liquidity, none of which may prove
successful. There can be no assurance that any asset sale would generate the
highest price for such assets. The Company's Obligations under its Credit
Facility bear interest at floating rates, so an increase in interest rates
could adversely affect, among other things, the Company's ability to meet its
debt service requirements. See "Description of Certain Indebtedness."
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The Company Has Significant Capital Requirements and May Not Be Able to Obtain
Additional Financing
The expansion and development of the Company's business will require
significant capital to finance investment in billing and customer care
capabilities, investment in video infrastructure, including capacity upgrades
or customer equipment, acquisitions of private cable television operators,
selective investment in a facilities-based platform for telephony services,
repayment of borrowings under the Company's Credit Facility and the funding of
working capital and general corporate purposes, including operating losses.
The Company is negotiating with Northern Trust Company and SBC to obtain an
additional $16 million credit facility from Northern Trust, which would be
guaranteed by SBC. The Company expects that its current financing, together
with the additional financing from Northern Trust, would be sufficient to meet
its current capital plans. There can be no assurance that the Company will be
able to obtain the additional financing from Northern Trust, however, and the
actual amount and timing of the Company's future capital requirements may
differ materially from the Company's estimates as a result of, among other
things, the demand for the Company's services and regulatory, technological
and competitive developments (including additional market developments and new
opportunities) in the Company's industry. The Company's revenues and costs are
dependent upon factors that are not within the Company's control, such as
regulatory changes, changes in technology and increased competition. Due to
the uncertainty of these factors, actual revenues and costs may vary from
expected amounts, possibly to a material degree, and such variations are
likely to affect the Company's future capital requirements. The Company also
expects that it will require additional financing (or require financing sooner
than anticipated) if: (i) its development plans or projections change or prove
to be inaccurate, (ii) it is unable to continue to take advantage of the
pricing provided for in certain SBC-negotiated contracts for any reason, (iii)
it engages in acquisitions (iv) it achieves market penetration for its
services at different rates or stages than management estimates, (v) it
achieves lower than expected pricing for its services, (vi) it enters
additional markets, or (vii) it encounters higher than expected costs to
purchase or upgrade telephony, cable or DBS services, equipment or facilities.
Sources of additional financing may include commercial bank borrowings, vendor
financing, or the private or public sale of equity or debt securities.
There can be no assurance that the Company will be successful in raising
sufficient additional capital at all or on terms that it will consider
acceptable, that the terms of any additional Indebtedness will be within the
limitations contained in the Company's financing agreements, including the
Indenture, or that the terms of such Indebtedness will not impair the
Company's ability to develop its business. See "--Restrictive Covenants." The
Company's ability to raise equity capital may be constrained by its desire to
retain its status as an SBC affiliate. Failure to raise sufficient funds may
require the Company to modify, delay or abandon elements of its planned future
expansion or expenditures, which could have a material adverse effect on the
Company's results of operations and financial condition and its ability to
meet its obligations on the Notes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company Has No Operations and is Dependent Upon Funds From its
Subsidiaries
The Company is a holding company. Its principal assets consist of equity
interests in its operating subsidiaries and an equity interest in Mid-
Atlantic. The Company is dependent upon funds from its subsidiaries. Mid-
Atlantic has not paid dividends in the past, and its current agreements with
its lenders prohibit payment of dividends. The Company does not anticipate
that Mid-Atlantic will pay dividends for the foreseeable future. Accordingly,
the Company will rely upon dividends and other payments from its subsidiaries
to generate the funds necessary to meet its obligations, including the payment
of principal of and interest on the Notes. The subsidiaries, however, are
legally distinct from the Company. The ability of the Company's subsidiaries
to make such payments to the Company will be subject to, among other things,
the availability of funds, the terms of such subsidiaries' Indebtedness and
applicable state laws. As a result of the Company's holding company structure,
the Notes are effectively subordinated to obligations of the Company's
subsidiaries.
The Notes are Effectively Subordinated to the Company's Secured Indebtedness
The Notes will not be secured by any of the Company's or its subsidiaries'
assets. The Company's obligations under its Credit Facility are secured by a
security interest in certain of the assets of the Company,
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including its accounts, leases, contract rights, general intangibles
(including intellectual property rights), inventory, goods other than
inventory, funds on deposit with the lender, books and records, documents of
title and proceeds and products of the foregoing. In the event that a default
were to occur with respect to any secured Indebtedness of the Company
(including the Credit Facility) and the holders thereof were to foreclose on
the collateral, or in the event of a bankruptcy, liquidation or reorganization
of the Company, the holders of such Indebtedness would be entitled to payment
out of the proceeds of their collateral prior to any holders of general
unsecured Indebtedness, including the Notes, notwithstanding the existence of
an event of default with respect to the Notes. Also, to the extent that the
value of such collateral is insufficient to satisfy such secured Indebtedness,
holders of amounts remaining outstanding on such secured Indebtedness would be
entitled to share pari passu with holders of the Notes with respect to any
other assets of the Company. Such assets may not be sufficient to pay amounts
due on any or all of the Notes then outstanding. See "Description of Certain
Indebtedness." In addition, the Indenture permits the Company to incur
additional secured Indebtedness, and such secured Indebtedness would have a
prior claim over the Notes to the assets of the Company that secure such
Indebtedness. See "Description of the Notes--Certain Covenants" and
"Description of Certain Indebtedness."
Dependence on SBC Affiliation for Favorable Contracts
The Company is dependent upon its status as an affiliate of SBC for its
ability to purchase services and equipment on terms available to and
negotiated by SBC. The Company believes that terms available to SBC are more
favorable than those that would otherwise be available to the Company. In
particular, the Company believes that its long distance telephony contract is
a significant competitive advantage because it permits the Company to obtain
long distance service at costs which are significantly less than those which
would otherwise be available to the Company. As the Company invests
selectively in a facilities-based telephony strategy, management believes the
Company may be able to obtain cost advantages in the purchase of telephony
infrastructure based on similar arrangements with equipment vendors.
The Company's ability to purchase services and equipment pursuant to SBC-
negotiated contracts is dependent upon SBC's continued ownership, directly or
indirectly, of an equity interest in the Company which meets or exceeds the
definition of "affiliate" in any SBC contract and whether such contract
provides SBC "affiliates" opportunities to purchase thereunder. The definition
of "affiliate" varies in such contracts. Although SBC has an incentive to keep
the definition broad, its negotiation of vendor contracts is typically based
on considerations other than the inclusiveness of the definition of affiliate
and the interests of potential affiliates in the availability of such
contracts.
There can be no assurance that future SBC contracts or amendments or
renewals of existing SBC contracts will contain provisions which have the
effect of permitting the Company to purchase services or equipment pursuant
thereto. If the Company is not able to continue to enjoy the advantageous
prices on services and equipment derived from its relationship with SBC, its
results of operations and financial condition would be materially adversely
affected, which would in turn affect the Company's ability to meet its
obligations under the Notes. The Company has received no indication or
assurance from SBC that it will retain its indirect ownership interest in the
Company for any period of time. SBC has guaranteed the Company's $9 million
Credit Facility and the Company's obligations under two of its leases for
office space. Management believes that the Company would have been unable to
obtain the Credit Facility of such leases absent the SBC guarantee. Any
repudiation or unenforceability of the SBC guarantee or the lender's otherwise
deeming itself insecure constitutes an event of default under the Credit
Facility. Any such event of default could 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.
From time to time, at the Company's request, SBC has provided material
assistance to the Company with regard to systems evaluation and procurement,
technical due diligence, corporate development and regulatory filings and
other matters. In addition, SBC has seconded employees to the Company, in some
cases for extended periods of time. There can be no assurance that SBC will
continue to provide similar assistance in the future on terms acceptable to
the Company, or at all. See "Certain Relationships and Related Transactions--
SBC Affiliation and Related Contracts."
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The Company's Ability to Provide Service in SBC Region is Restricted
As an affiliate of SBC for regulatory purposes, the Company may be
prohibited from providing long distance service to customers in Arkansas,
California, Kansas, Missouri, Nevada, Oklahoma and Texas (the "SBC Region").
As a result of the potential restrictions, the Company does not expect to
enter the markets in the SBC Region while current regulatory conditions
persist. Accordingly, the Company's competitors may obtain MDU Rights of Entry
in the SBC Region that would either preclude the Company from subsequently
competing in such markets or make it more costly to do so. Difficulty in
obtaining MDU Rights of Entry could 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.
The area which constitutes the SBC Region may change due to other
transactions entered into by SBC or regulatory changes. Expansion of the SBC
Region, through a business combination between SBC and another regional Bell
operating company ("RBOC") or otherwise, could have a material adverse effect
on the Company's results of the operations and financial condition and its
ability to meet its obligations under the Notes. There can be no assurance
that the SBC Region, in which the Company is currently prohibited from
providing long distance telephony and interLATA Internet service will not
expand, or that any such expansions will not include areas currently served,
or targeted to be served, by the Company.
SBC's Proposed Merger with Ameritech May Restrict the Company's Ability to
Provide Services
SBC has announced that it has agreed to merge with Ameritech Corporation
("Ameritech") to create a telecommunications company with a "national-local"
focus to compete against ILECs, CLECs, long distance companies and global
competitors. If Ameritech has not received approval to provide long distance
service and interLATA Internet services in Illinois prior to the consummation
of the merger, the Company may be prohibited from continuing to provide long
distance and interLATA Internet services in Chicago following consummation of
the merger, and similarly, if Ameritech has not received approval to provide
long distance service in Indiana, Michigan, Ohio and Wisconsin (together with
Illinois, the "Ameritech Region"), the Company could be prohibited from
providing long distance service and interLATA Internet services in such states
following consummation of the merger. There can be no assurance that the
Company would be able to restructure its Illinois operations to avoid such
prohibition, or of other amendments or consents that might be required in
connection therewith. The inability to provide long distance service in the
Ameritech Region could 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.
The Company May be Unable to Repurchase Notes Upon a Change of Control
In the event of a Change of Control (as defined in the Indenture), each
holder of Notes may require the Company to repurchase all or a portion of such
holder's Notes at a price equal to 101% of the principal amount thereof plus
accrued and unpaid interest. There can be no assurance that the Company will
have sufficient funds to make such repurchases.
A Change of Control is defined in the Indenture to include, among other
things:
. the first day on which SBC fails to hold, whether directly or indirectly,
9.9% or more of the total Voting Stock (as defined herein) of the Company
or
. the first day on which the Company's long distance telephony contract in
place on the Closing Date (or any replacement thereof) terminates and is
not replaced by a contract having no less favorable economic terms than
the Company's long distance telephony contract in existence as of the
Closing Date, and a term (assuming exercise of any renewal options)
ending after the maturity date of the Notes.
SBC currently holds a 19.7% indirect equity ownership interest in OnePoint.
There can be no assurance that SBC will retain its equity ownership interest
for any period of time.
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At the Closing Date, the Company purchased long-distance telephony service
under a contract negotiated by SBC by virtue of its affiliate relationship
with SBC. SBC terminated the contract effective March 17, 1999.
The Company and the long-distance provider have agreed to continue the
underlying agreement while the Company determines whether it will (i)
negotiate a new agreement directly with the long-distance provider, (ii)
continue operating under the terms of the current contract until January 1,
2002 or (iii) notify the long-distance provider of its desire to terminate the
service agreement.
There can be no assurance that the Company will be able to obtain a
replacement contract that does not constitute a Change of Control under the
Indenture, or that the terms of the current contract are not less favorable
than those the Company could obtain under such a replacement contract. See
"Description of the Notes--Change of Control."
Dependence on MDU Rights of Entry That May Be Determined to be Unenforceable
The Company's business depends upon its ability to obtain, capitalize upon
and renew Rights of Entry. The Company enters into long-term contracts with
national REITs and other MDU Managers providing telephony and video Rights of
Entry. The Company also seeks to acquire private cable television operators
which have video Rights of Entry for MDUs or to acquire assets from such
operators. The Company's success in entering into and capitalizing on such
contracts may be affected by a number of factors, including (i) the extent of
competition in the provision of telephony and video services, (ii) the
Company's ability to identify suitable MDUs and obtain Rights of Entry, (iii)
the demographics of the markets in which the Company has chosen to focus its
business, (iv) occupancy rates in the MDUs that the Company serves, (v) the
quality of customer service the Company provides, (vi) regulatory developments
and (vii) the enforceability of the material terms of its contracts, including
exclusivity provisions. See "Business--Competition," "--Federal Regulation"
and "--State Regulation."
The Company's telephony Right of Entry contracts typically grant the Company
the exclusive rights to market on-site and the right to provide voice
telecommunications services to the residents of applicable MDUs, subject to
the legal right of ILECs and other third parties to provide telephony services
where specifically requested by a resident. The Company's video Right of Entry
contracts typically grant the Company the exclusive rights to market on-site
and the right to provide video services to residents of applicable MDUs,
subject to the legal rights of franchise cable providers to offer services to
residents. There can be no assurance that the enforceability of these
provisions will not be successfully challenged, as suggested by a number of
developments at the federal, state and local levels. See "Business--Government
Regulation."
If the FCC concludes that exclusive contracts should be limited, the
Company's ability to market its bundled services could be adversely affected,
which could 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. If the FCC does not grant MDU Managers the rights to take a
"fresh look" at incumbent cable operator exclusive contracts, the addressable
market for the Company's services could be sharply diminished, which could
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.
Broad mandatory access requirements would likely increase the Company's
capital costs associated with new video Rights of Entry if construction of
duplicative video infrastructure (or "overbuilding") were required. It should
also be noted that in a number of instances video Rights of Entry are
subordinate by their terms to indebtedness secured by the MDU, with the effect
that enforcement of the security interest or default under the indebtedness
could result in termination of the Right of Entry. Bankruptcy of an MDU owner
could also result in rejection of the agreement as an "executory contract."
The FCC recently adopted a notice of proposed rulemaking regarding access to
rights of way located on rooftops and riser cable in MDUs, including whether
building owners should be forced to offer access to all
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telecommunications and cable providers on a nondiscriminatory basis. The
results of this rulemaking may adversely affect the Company to the extent they
impede the Company's exclusive rights to provide telecommunications and video
services in MDUs.
Dependence on Products and Services of Others
The Company's success requires that the Company effectively market its
products to MDU residents and provide reliable service to its subscribers. The
Company relies to a significant extent on face-to-face marketing efforts of
on-site leasing staff. Although these leasing consultants receive commissions
from the Company for their sales of the Company's services, they are not
employees of the Company, and there can be no assurances that leasing
consultants will market the Company's services to MDU residents effectively,
or at all.
The Company currently resells telephony services offered by the ILECs and an
IXC, and provides video programming provided by others. Such services and the
ultimate service providers are subject to power loss, capacity limitations,
signal interference, software defects, network outages and other factors,
certain of which have caused in the past, and will continue to cause,
interruptions in service or reduced capacity for the Company's customers. Such
problems, whether they are the result of actions or inactions by the Company
or others, can result in dissatisfaction among the Company's customers with
the services provided by the Company. The Company's success will depend in
part on customer satisfaction with its services, and any dissatisfaction with
such services could 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.
Difficulties in Implementing Local Exchange and Long Distance Telephony
Services
The Company is a recent entrant into the newly created competitive local
telephony services industry. The local exchange telephony services market in
most states was only recently opened to competition due to the passage of the
Telecommunications Act of 1996 (the "Telecommunications Act") and related
regulatory rulings. There are numerous operating complexities associated with
providing these services. The Company will be required to develop new
products, services and systems and will need to develop new marketing
initiatives to sell these services. The inability to overcome any of these
operating complexities could 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. In addition, the Company's local exchange
telephony services may not be profitable due to, among other factors, attempts
by local governments to impose franchise fees on CLECs, attempts by property
owners to obtain unreasonable access payments, lack of customer demand,
difficulties initiating service and competition and pricing pressure from the
ILECs and other CLECs. There can be no assurance that the Company will be able
to implement its services strategy successfully.
The Company currently resells local telephony services provided by ILECs.
Although the Telecommunications Act requires all ILECs to permit resale of
their telephony services without unreasonable restrictions or conditions, and
requires ILECs to offer their retail telecommunications services to other
telecommunications carriers for resale at discounted rates, based on the costs
avoided by the ILEC in such offering, there can be no assurance that the
Company will be able to initiate or provide service in a timely manner or at
competitive prices. The Company's ability to expand its services to new
markets will require the negotiation of additional resale agreements with the
ILECs, which can require considerable time, effort and expense and are subject
to federal, state and local regulation. As long as the Company is considered
to be an affiliate of SBC for regulatory purposes it is prohibited from
providing long distance telephony and interLATA Internet services to customers
in the SBC Region until SBC has obtained regulatory authority to do so and is
also subject to certain other restrictions, including regulations regarding
provision of other services in the SBC Region.
The Company plans to replace selectively its resale platform with higher
margin facilities-based services as warranted by subscriber traffic levels and
the availability of alternative network facilities within each market. The
Telecommunications Act requires ILECs to permit their competitors to
interconnect with the ILECs' facilities on nondiscriminatory terms, and
permits competitors to purchase from the ILECs only the origination
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and termination services needed (thereby decreasing the competitors' operating
expenses). There can be no assurance that this "unbundling" will be effected
in a timely manner or that it will result in prices favorable to the Company.
Migration to facilities-based services will also require the Company to face
increased operational complexity and risks as it takes over functions
performed by the ILECs under existing resale arrangements. In particular, the
Company will become responsible for designing, constructing, operating and
maintaining key elements of its own network and providing for required
resident services such as 911, operator services and directory assistance.
Building the capabilities to provide such services will require the
recruiting, selection, and hiring of significant numbers of skilled engineers
and technicians, as well as the purchase and successful installation of
complex network equipment. There can be no assurance that the Company will be
able to effect this migration to facilities-based services efficiently and
without temporary service interruptions. In addition, the Company's ability to
migrate to facilities-based services will require the negotiation of
interconnection agreements with ILECs, which can take considerable time,
effort and expense and are subject to federal, state and local regulation.
Available Transmission Sites Are Limited
The Company's microwave network expansion plans require the Company to lease
or otherwise obtain permission to install equipment at rooftop and tower
transmission sites in substantially all of its markets. The availability of
these sites is subject to market conditions and may be subject to zoning and
other municipal restrictions. The Company believes that as additional wireless
video services and telecommunications providers emerge, competition for such
transmission sites will continue to increase. There can be no assurance that
the Company will be able to obtain or maintain the necessary rights to
implement its microwave network expansion plan on acceptable terms, in a
timely manner, or at all. The Company's inability to obtain such rights could
preclude it from providing video services at a reasonable cost, and could
therefore 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.
Higher Subscriber Turnover at MDU Units May Adversely Affect the Company
Many of the MDU units served by the Company are apartments, which generally
have significantly higher turnover rates than businesses and other types of
residences. As a result, the Company's potential subscriber base is likely to
have a higher rate of turnover than other types of subscribers. Higher
turnover rates typically result in increased administrative and promotional
expenses. The Company has had, and expects to continue to have, a higher
Penetration Rate among residents moving into a served building than among
existing residents. Management believes that a majority of apartment turnover
occurs between the months of April and October. Should the Company fail to
maximize its subscription of new customers for any reason during these
critical months, such a failure could have a material adverse effect on the
Company's results of operations and financial condition and ability to meet
its obligations under the Notes. Moreover, although management believes the
Company's resources, including its customer care facility and billing systems,
are adequate to handle a large increase in customer volume, there can be no
assurances that they will perform adequately under such circumstances.
Dependence on Ability to Expand and to Manage Growth
The Company began actively marketing its services in January 1998.
Management expects that the Company will need to increase its number of
employees rapidly as it obtains new Rights of Entry and adds subscribers. The
need for installation and repair technicians and customer care representatives
is expected to be particularly acute. The Company's success will depend upon,
among other things, its ability to provide timely, courteous service to its
customers, and difficulties in hiring a sufficient number of qualified
employees could result in delays in installation and repair calls and lower
levels of customer care, particularly during any periods of rapid growth.
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The Company's ability to market its services effectively in MDUs will be
dependent upon the Company's training and support of third party on-site
leasing agents. The Company anticipates that it will need to increase its
training and marketing resources as its business expands. Delay or failure in
providing such training or support may affect the Company's ability to achieve
its revenue and Penetration Rate targets. Failure by the Company to train and
support leasing agents, to meet the demands of customers or to manage the
expansion of its business and operations could have a material adverse effect
on the Company's results of operations and financial condition and its ability
to meet its obligations on the Notes.
The Company's success will also depend on its ability to assess potential
markets, obtain additional required governmental authorizations, franchises
and permits, secure financing, provision new customers, implement resale and
interconnection arrangements with ILECs, develop and implement a facilities-
based platform, including obtaining capacity and equipment (either through the
leasing of existing facilities or the installation of new switches, digital
loop carrier equipment, fiber optic cable or other similar facilities),
implement efficient customer service, billing and other back office systems
and develop a sufficient customer base. In addition, as the Company implements
a facilities-based platform, it may be subject to more extensive regulation.
The successful implementation of the Company's business plan will result in
rapid expansion of its operations and the provision of bundled telephony and
video services on a widespread basis. The Company's ability to manage such
future growth, should it occur, will depend upon its ability to develop
efficient customer service, billing and other back office systems, monitor
operations, control costs, maintain regulatory compliance, maintain effective
quality controls and significantly expand the Company's internal management,
technical, information and accounting systems and to attract, assimilate and
retain additional qualified personnel. See "--Dependence on Key Personnel."
Failure of the Company to manage its future growth effectively could adversely
affect the expansion of the Company's customer base and service offerings.
There can be no assurance that the Company will successfully implement and
maintain such operational and financial systems or successfully obtain,
integrate and utilize the employees and management, operational and financial
resources necessary to manage a developing and expanding business in an
evolving, highly regulated and increasingly competitive industry. Any failure
to expand these areas and to implement and improve such systems, procedures
and controls in an efficient manner at a pace consistent with the growth of
the Company's business could 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.
Risks Related to Market Acceptance and Value of Bundled Service Offering
The Company is providing services which have historically been provided by
the ILECs, and the OnePoint brand is not well known. The Company's success
will depend upon, among other things, the willingness of customers to accept
the Company as an alternate provider of local and long distance telephony
service and/or video service. There can be no assurance that such acceptance
will occur, and the lack of such acceptance could 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.
Management believes that the Company's ability to offer bundled services in
MDUs will result in increased market penetration leading to additional
revenues, reduced subscriber churn and reduced operating and other expenses.
There can be no assurance that the Company will be successful in creating or
marketing its bundled service offering, or that it will be able to realize
incremental revenue and cost savings from its bundled offerings. Failure to
market bundled services successfully or to realize incremental revenue and
cost savings in connection therewith could 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.
Risks Relating to Internet Business
With respect to its planned Internet offerings, the Company believes that it
is not currently subject to direct regulation by the FCC or any other
governmental agency, other than regulations applicable to businesses
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generally. To date, the FCC has not actively sought to regulate the provision
of Internet access and related services although the FCC has determined that
Internet services are interstate in nature, and thus potentially subject to
FCC jurisdiction. The FCC recently announced its intention to determine on a
case-by-case basis whether to require Internet telephony services to
contribute financially to universal service support mechanisms which could
also subject these services to other forms of regulation.
Due to the increase in Internet use and publicity, it is possible that new
laws and regulations may be adopted, and that changes in laws or regulations
may be made, with respect to the Internet, including laws regarding privacy,
pricing, and characteristics of services or products. Certain other
legislative initiatives, including those involving taxation of Internet
services and transactions, and payment of access charges by Internet providers
have also been proposed. Any legislation or regulation regarding the Internet
could impact adversely the Company's ability to provide various planned
services and 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. See "Business--Federal Regulation--Internet Regulation."
In addition, federal and state laws and regulations relating to the
liability of online services companies and Internet access providers for
information carried on or disseminated through their networks are currently
unsettled. Several private lawsuits seeking to impose such liability upon
online services companies and Internet access providers are currently pending.
In addition, legislation has been enacted and new legislation has been
proposed that imposes liability for the transmission of or prohibits the
transmission of certain types of information on the Internet, including
sexually explicit and gambling information. The imposition of potential
liability on the Company as an Internet access provider for information
carried on or disseminated through its systems could require the Company to
implement measures to reduce its exposure to such liability, which may require
the Company to expend substantial resources or to discontinue certain service
or product offerings and could 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.
Dependence on Billing, Customer Care and Information Systems
Sophisticated back office information and processing systems are vital to
the Company's growth and its ability to monitor costs, bill customers,
provision customer orders and achieve operating efficiencies. The Company's
right to use these systems is dependent upon license agreements with third
party vendors. Certain of such agreements may be cancelable by the vendor and
the cancellation or nonrenewal of these agreements could have a material
adverse effect on the Company's results of operations and financial condition
and its ability to meet its obligations on the Notes. The Company's employees
input customer information into the systems and interface with the ILECs to
provision services. Columbia Services Group Inc. ("CSG") processes, prints and
mails the Company's billing statements, however. The Company has been using
its customer information systems for less than eighteen months and only with
respect to a limited number of subscribers. The failure of the Company's
customer care, billing and information systems to perform as expected, or
failure of CSG to perform bill processing and distribution in a timely and
effective manner could 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. The Company's customer care facility and billing systems have
never been tested with large numbers of subscribers and although management
believes such resources are adequate to handle a large increase in customer
volume, there can be no assurances that they will perform adequately under
such circumstances. Portions of the customer care facility are currently
operated jointly with Mid-Atlantic. See "--Risks Related to Mid-Atlantic Joint
Ventures."
Dependence on Key Personnel
The Company's performance is dependent upon the performance of its officers
and key employees. Given the early stage of deployment, the Company is
dependent on its ability to retain and motivate high quality personnel,
especially its management, which currently consists of a small number of key
executive officers, most
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notably James A. Otterbeck, the Company's Chairman and Chief Executive
Officer, William F. Wallace, the Company's President and Chief Operating
Officer and John Stavig, the Company's Chief Financial Officer. Mr. Otterbeck
is President of The VenCom Group, Inc., a venture capital company ("VenCom"),
and devotes a portion of his time and attention to the affairs of VenCom. Mr.
Otterbeck does not currently receive any compensation as an employee of
OnePoint. See "Management" and "Certain Relationships and Related
Transactions." The loss of services of one or more of these key individuals
could have a material adverse effect on the Company's results of operations
and financial condition and its ability to meet its obligations on the Notes.
The Company believes that its success will depend in large part on its ability
to develop large and effective sales and service forces and its ability to
attract and retain highly skilled and qualified personnel. The Company
maintains key person life insurance only for its Chairman and Chief Executive
Officer. Competition for qualified managers in the telecommunications industry
is intense and, accordingly, there can be no assurance that the Company will
be able to hire or retain necessary personnel in the future.
Control by Investors; Potential Conflicts of Interest
Mr. Otterbeck and SBC (collectively, the "Equity Investors"), own indirectly
91% of the common stock of the Company on a fully diluted basis after giving
effect to the exercise of the Warrants. Accordingly, the Equity Investors are
able to control the management policy of the Company and all fundamental
corporate actions, including mergers, substantial acquisitions and
divestitures and other agreements and the election of the Board of Directors
of the Company. See "Security Ownership of Certain Beneficial Owners and
Management" and "Certain Relationships and Related Transactions."
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the Equity Investors and the
holders of the Notes. For example, if the Company encountered financial
difficulties or were unable to pay its debts as they matured, the interests of
the Equity Investors might conflict with those of the holders of Notes. In
addition, the Equity Investors may have an interest in pursuing acquisitions,
divestitures, financings or other transactions that, in their judgment, could
enhance their investment in the Company, even though such transactions might
involve increased risk to the holders of the Notes. In addition to their
investment in the Company, the Equity Investors and their affiliates currently
have significant investments in other telecommunications companies and may in
the future invest in other entities engaged in the telecommunications business
or in related business (including entities engaged in the business and in
areas in which the Company operates). As a result, the Equity Investors have,
and may develop additional, relationships with businesses that are or may be
competitive with the Company. Conflicts may also arise in the negotiation or
enforcement of arrangements entered into by the Company and entities in which
these investors have an interest.
The Company May be Unable to Complete Acquisitions
The Company expects to acquire other businesses that management believes
will complement its existing business. Management is unable to predict whether
or when any prospective acquisitions will occur or the likelihood of a
material transaction being completed on favorable terms and conditions. The
Company's ability to finance acquisitions may be constrained by, among other
things, its high degree of leverage and the terms of the Indenture. There can
be no assurance the Company will be able to obtain financing for acquisitions.
The inability of the Company to effect such transactions will limit its
ability to achieve rapid market penetration and execute its strategy and thus
have a material adverse effect on the Company's results of operations and
financial condition and its ability to meet its obligations on the Notes.
The Company May be Unable to Integrate Acquired Businesses
Acquisitions are likely to involve certain risks, including, among other
things: the difficulty of assimilating the acquired operations and personnel;
the potential disruption of the Company's ongoing business and diversion of
resources and management time; the possible inability of management to
maintain uniform standards, controls, procedures and policies; the risks of
entering markets in which the Company has little or no direct prior
experience; and the potential impairment of relationships with employees or
customers as a result of changes in
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management. There can be no assurance that the Company will be able to
successfully integrate acquired businesses into the Company's operations or
that acquired business will perform as expected.
Joint Ventures May Subject the Company to Joint Venture Partners' Obligations
The Company may also enter into joint venture transactions. See "--Risks
Related to Mid-Atlantic Joint Ventures." These transactions present many of
the same risks involved in acquisitions and may also involve the risk that
other joint venture partners have economic, business or legal interests or
objectives that are inconsistent with those of the Company. Joint venture
partners may also be unable to meet their economic or other obligations,
thereby forcing the Company to fulfill these obligations. The inability of any
joint venture partners to meet their obligations could have a material adverse
effect on the Company's results of operations or financial condition and its
ability to meet its obligations under the Notes.
The Company Does Not Control Mid-Atlantic
From February to June 1997, the Company made investments totalling
approximately $12.0 million to acquire a 50% ownership interest in Mid-
Atlantic. The Company elected not to meet capital calls in February and June
of 1998, and as a result it currently holds an approximately 41% equity
interest in Mid-Atlantic. Pursuant to the terms of Mid-Atlantic's operating
agreement, the joint venture is not managed by the Company and the Company's
consent is required for a limited number of actions by Mid-Atlantic. As a
consequence, the Company has limited ability to control Mid-Atlantic and may
be unable to prevent actions by Mid-Atlantic which might be adverse to the
interests of the Company, and which might result in a material adverse change
in the value of the Company's interest in Mid-Atlantic.
Mid-Atlantic's High Degree of Leverage Could Affect the Value of the Joint
Venture
Mid-Atlantic is highly leveraged. The degree of leverage of Mid-Atlantic
could affect, among other things, the ability of Mid-Atlantic to fulfill its
obligations under its agreements, the frequency and amount of capital calls by
Mid-Atlantic, the value of the Company's equity in Mid-Atlantic and the
likelihood that the Company will be able to recoup its investment in the
future. Although the Company is not required to make additional capital
contributions to Mid-Atlantic, its failure to do so on a pro rata basis will
result in a decline in the Company's percentage ownership of Mid-Atlantic, and
could affect the value of the Company's investment in Mid-Atlantic. There can
be no assurance that a reduction in the Company's percentage ownership of Mid-
Atlantic would not have a material adverse effect on the Company's results of
operations and financial condition and its ability to meet its obligations on
the Notes. Mid-Atlantic's agreements with its lenders prohibit the payment of
dividends by Mid-Atlantic.
On August 6, 1998 OnePoint made a demand for arbitration of certain disputes
under the Mid-Atlantic operating agreement. The arbitration demand seeked the
resolution of several disputes between the parties, including among other
things, whether OnePoint was entitled to disclose Mid-Atlantic's financial
results in connection with the Exchange Offer. On January 15, 1999 the
Company, Mid-Atlantic and other related parties entered into a Settlement
Agreement (the "Settlement Agreement") which resolved the disputes covered by
the arbitration demand. See "Business--Mid-Atlantic Joint Venture."
There can be no assurances that further disputes between the Company and
Mid-Atlantic will not arise, or of the effects of any such disputes on the
Company's results of operations and financial condition and its ability to
meet its obligations on the Notes.
The Company contributed $5 million to form VIC-RMTS-DC, LLC, the company
that provides telephony services in the Mid-Atlantic region, and Mid-Atlantic
RMTS Holdings, LLC ("Mid-Atlantic Holdings"), an affiliate of the other owners
of equity in Mid-Atlantic, was to contribute a like amount of assets or cash.
Upon review, however, the Company believes that the value of the assets
contributed by Mid-Atlantic Holdings was sufficient to give Mid-Atlantic
Holdings only an approximate 5% interest based upon capital contributions
through December 31, 1998. The Manager of Mid-Atlantic Holdings has suggested
that they are entitled to an
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unspecified, but higher, equity interest in VIC-RMTS-DC, LLC. OnePoint has
also made additional capital contributions to VIC-RMTS-DC, LLC which to date
have not been matched by Mid-Atlantic Holdings. On March 30, 1999, the Company
filed a decree for arbitration seeking a declaratory ruling on the equity
ownership at VIC-RMTS-DC, LLC. On April 5th, 1999 the Company's joint venture
partner in VIC-RMTS-DC, LLC filed its own decree for arbitration to resolve
issues of equity ownership of VIC-RMTS-DC, LLC. OnePoint will be entitled only
to that portion of any distributions made by VIC-RMTS-DC, LLC corresponding to
its percentage ownership therein.
Portions of the Company's customer care facility are currently operated
jointly with Mid-Atlantic. The billing and operating support system is
operated pursuant to a contract between the Company and a third party, and
Mid-Atlantic reimburses the Company for a portion of the variable expenses
related to the system, based on usage. Both the Company and Mid-Atlantic
utilize the facility to perform services for their customers, and data
relating to both companies' customers are integrated into the billing and
operating support systems. The PBX/ACD telephone equipment used at the
facility is leased by Mid-Atlantic and the Company reimburses Mid-Atlantic for
half of the expenses related to such equipment. In certain circumstances, the
Company relies on Mid-Atlantic's employees to answer the Company's inbound
phone calls. The Company also reimburses Mid-Atlantic for certain payroll and
other expenses with respect to shared employees. Any event that required the
separation of Mid-Atlantic and OnePoint customer care and billing operations
could result in a disruption in the Company's ability to provide adequate
service to its customers. There can be no assurance that such occurrence would
not 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.
In addition, the Company is a co-tenant with Mid-Atlantic with respect to both
companies' offices in Washington, D.C., and is jointly and severally liable
for lease payments with respect to space used by Mid-Atlantic.
Risks Related to the Mid-Atlantic Joint Venture Non-Competition Agreements
In connection with the Mid-Atlantic joint venture, the Company, its co-joint
venturer and certain of their affiliates entered into a series of Non-
Competition Agreements. Such agreements restrict the rights of such parties
(other than Mid-Atlantic and VIC-RMTS-DC, LLC, the telephony joint venture
company controlled by the Company) to provide cable and telephony services,
respectively, under certain circumstances in either (i) the "D.C. Metro" area,
defined to include Washington D.C., Baltimore, Maryland and certain areas of
Virginia, or (ii) the "Territory," defined to include the States of Delaware,
Maryland, New Jersey, Pennsylvania and Virginia and Washington, D.C.
The agreements restrict parties other than Mid-Atlantic from pursuing any
opportunity related to, or providing, any private cable service or any
franchise cable service with less than 75,000 dwelling units passed or
available to be passed anywhere in the Territory unless such opportunity has
been offered first to Mid-Atlantic, and then to VIC-RMTS-DC, LLC and, within
the D.C. Metro area, only if Mid-Atlantic has ceased to develop cable
opportunities therein for not less than six consecutive months.
The agreements restrict parties other than VIC-RMTS-DC, LLC from pursuing
any opportunity related to, or providing any, telephony services in the
Territory unless such opportunity has been offered first to VIC-RMTS-DC, LLC,
and then to Mid-Atlantic and, within the DC Metro area, only if VIC-RMTS-DC,
LLC has ceased to develop telephony opportunities therein for not less than
six consecutive months.
In the event that any proposed telephony or cable acquisition would provide
a legal or regulatory conflict for SBC such that neither VIC-RMTS-DC, LLC nor
Mid-Atlantic could pursue such acquisition, there is no offer requirement.
Each party to the agreements is restricted from providing a bundled service
offering consisting of telephony and cable services (other than pursuant to
the joint venture) within the D.C. Metro area. The agreements prohibit the
recruiting or solicitation of any employees, customers, subscribers or
suppliers of either of the joint venture companies who perform services in the
Territory. The duration of such agreements with respect to any party is
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dependent on such party's continued equity ownership in the joint venture
entities, and the continued operation of the joint venture entities, but last
in no event longer than one year following the end of such party's affiliation
with the joint venture entities.
The Company Faces Significant Competition, Often From Larger Competitors
The Company faces significant competition for each of the services it
offers, in each of the markets in which it offers services. Most of the
Company's competitors are larger than the Company, and have greater financial
resources and more experience than the Company in offering telecommunications
services. Several of the Company's competitors are among the largest
corporations in the world, and a number of the Company's competitors are
incumbent providers that have historically dominated their respective local
markets. These competitors may be able to use their superior resources to
develop their service offerings and infrastructures more rapidly and more
efficiently than OnePoint. They may be able to react more quickly and more
appropriately to changes in regulation, technology or the marketplace.
Additionally, these competitors may be able to improve their competitive
positions through mergers and acquisitions. The Company may also face
increased competition as a result of new technologies and changes in the
marketplace and regulatory and legislative environment.
In addition, SBC has announced that in connection with its planned merger
with Ameritech, the company resulting from the merger (the "'Combined
Company") would provide an integrated mix of local, long distance, Internet
and high-speed data services to consumers and businesses in 30 additional U.S.
markets outside of its region, including certain of the Company's targeted
markets. The Company cannot predict the effect on OnePoint of entry of the
Combined Company into such markets, including the effect on OnePoint's ability
to compete in such markets and its ability to continue to purchase certain
services and equipment on favorable terms pursuant to SBC agreements, and
there can be no assurance that such competition from the Combined Company
would not 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. See "--Dependence on SBC Affiliation for Favorable
Contracts."
Local Telephony
With respect to local telephony services, the Company competes with the
ILECs, which currently dominate their local telephony markets, and with
alternative service providers including CLECs and cellular and other wireless
telephony service providers. AT&T, MCI WorldCom, Sprint and other IXCs have
announced their intention to offer local services in major U.S. markets. ILECs
generally have greater resources than the Company to devote to the
implementation of new product offerings, enhanced customer service and pricing
alternatives.
Long Distance Telephony
With respect to long distance telephony services, the Company faces, and
expects to continue to face, significant competition from IXCs, including
AT&T, Sprint and MCI WorldCom, which account for the majority of all long
distance revenue. The long distance business is highly competitive and prices
have declined substantially in recent years and are expected to continue to
decline. There can be no assurance that the Company's contract for long
distance will be at competitive rates. See "--Limitations on the Company's
Ability to Repurchase Notes Upon a Change of Control." In addition, the long
distance industry has historically had a high average churn rate, and
customers continue to change long distance providers frequently, and,
increasingly, to use multiple long distance providers in response to rate
offerings and promotional incentives. See "--Government Regulation."
The ILECs have begun to expand the amount of fiber facilities in their
networks and to prepare to enter the long distance telephony services market
and, in addition, have long-standing relationships with their customers. ILECs
other than RBOCs already may provide in-region long distance telephony
service, and all ILECs may provide out-of-region long distance telephony
service. The Company expects that the increased competition made possible by
regulatory reform will result in certain pricing and margin pressures in the
telecommunications services business.
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Video
The Telecommunications Act permits the ILECs and others to provide a wide
variety of video services directly to subscribers in competition with the
Company. Various ILECs, including certain subsidiaries of SBC, currently are
providing video services within and outside their telephony service areas
through a variety of distribution methods, including the deployment of
broadband wire facilities and the use of wireless transmission facilities. The
Company cannot predict the likelihood of success of video service ventures by
ILECs or the impact on the Company of such competitive ventures.
Certain of the Company's video service businesses compete with incumbent
franchise cable companies in their respective service areas. In particular,
OnePoint's wireless satellite systems (DBS and SMATV) compete for cable
subscribers with the major franchise cable operators. The Company also
competes with home satellite dish earth stations and wireless program
distribution services such as multi-channel multipoint distribution service
systems. The Company expects that its video service will face growing
competition from current and new DBS service providers.
Internet
The market for most Internet-related services is extremely competitive and
the number of competitors in the Internet-related services market is likely to
increase steadily. In addition, the FCC recently adopted rules that allow so-
called "wireless cable" licensees (which includes "multipoint distribution
service" ("MDS"), "multichannel multipoint distribution service" ("MMDS") and
"instructional television fixed service" ("ITFS") licensees) to offer two-way
digital services, including high-speed and high capacity data transmission
services, Internet service, and video-conferencing and various other telephony
services. As a result of this expanded authority granted to MDS/MMDS/ITFS
operators, it is reasonable to anticipate that the Company may experience
greater competition from the wireless cable service sector in the areas of
data transmission services, Internet service, and various telephony services.
There are few barriers to entry in many Internet-related markets, and new
competitors, such as computer hardware or software manufacturers, other
telecommunications providers, and foreign entities, may enter the market with
considerable resources. Furthermore, competitors currently devoting only a
small part of their resources to Internet-related services may expand their
presence in the marketplace. Regulatory changes may allow telecommunications
providers to improve their competitive position by permitting service bundling
that will create attractive new one-stop-shopping marketing opportunities. For
additional information on the competitive environment in which the Company
operates, see "Business--Competition."
The Company is Subject to Substantial Government Regulation That Governs its
Operations
The Company's networks and the provision of telecommunications services are
subject to significant regulation at the federal, state and local levels. See
"Business--Federal Regulations," "--State Regulation" and "--Local
Regulation." Delays in receiving required regulatory approvals or the
enactment of new adverse regulation or regulatory requirements may have a
material adverse effect upon the Company's results of operations and financial
condition and its ability to meet its obligations under the Notes.
Tariffs
The FCC exercises jurisdiction over the Company with respect to interstate
and international telecommunications services. Additionally, the Company files
tariffs with the FCC for long distance services. The continuation of tariff
filing requirements is in dispute. If tariffs are no longer required,
telecommunications carriers such as the Company will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms, and conditions on which they offer interstate
services. Tariffs also allow the Company to limit its liability to its
customers, including in connection with service interruptions. If tariffs are
eliminated, the Company may become subject to significantly increased
liability risks, and there can be no assurance that such liabilities will not
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.
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CPNI
In February 1998, the FCC adopted rules implementing Section 222 of the
Communications Act of 1934, as amended (the "Communications Act"), which
governs the use of customer proprietary network information ("CPNI") by
telecommunications carriers. CPNI generally includes any information regarding
a subscriber's use of a telecommunications service, where it is obtained by a
carrier solely by virtue of the carrier-customer relationship. These rules,
either as adopted or as requested to be modified, may impede the Company's
ability to effectively market integrated packages of services and to expand
existing customers' use of the Company's services.
State Regulation
All states in which the Company operates require a certification or other
authorization from the state regulatory commission to offer intrastate
telecommunications services. Many of the states in which the Company operates
are in the process of addressing issues relating to the regulation of CLECs.
Some states may require authorization to provide enhanced services.
In states where the Company operates, numerous state rulemaking proceedings
and arbitrations that may affect the Company's ability to compete with ILECs
are now underway or may be instituted in the future. These rulemaking
proceedings and arbitrations involve numerous telecommunications issues. To
the extent the Company decides in the future to install its own transmission
facilities, other state rulemaking proceedings and arbitrations may also
affect the Company's ability to compete with ILECs.
Local Regulation
The Company's networks are subject to numerous local regulations, including
those relating to building codes and licensing. Such regulations vary on a
city by city and county by county basis. To the extent the Company decides in
the future to install its own transmission facilities, it will need to obtain
rights-of-way over private and publicly owned land. There can be no assurance
that such rights-of-way will be available to the Company on economically
reasonable or advantageous terms.
Long Distance and InterLATA Internet Restrictions
The Telecommunications Act provides for a significant deregulation of the
domestic telecommunications industry, including the local exchange, long
distance and cable television industries. The Telecommunications Act remains
subject to judicial review and additional FCC rulemaking, and thus it is
difficult to predict what effect the legislation will have on the Company and
its operations. There are currently many regulatory actions underway and being
contemplated by federal and state authorities regarding the telecommunications
industry. There can be no assurance that these changes will not have a
material adverse effect upon the Company's results of operations and financial
condition and its ability to meet its obligations under the Notes.
Due to SBC's indirect ownership of 19.7% of the sole stockholder of the
Company, the Company is considered to be an affiliate of SBC for regulatory
purposes and is, therefore, prohibited from providing long distance telephony
and InterLATA Internet service to customers in the SBC Region. The Company is
also subject to certain other restrictions, including regulations regarding
the provision of other services in the SBC Region. Under current regulatory
conditions, such restrictions would hamper the Company's ability to enter into
and compete in the SBC Region. As a result, the Company does not expect to
enter the markets in the SBC Region while current regulatory conditions
persist. Accordingly, the Company's competitors may enter such regions and
obtain MDU Rights of Entry that would either preclude the Company from
subsequently competing in such regions or make it more costly to do so. The
area which constitutes the SBC Region may change due to transactions entered
into by SBC or regulatory changes. Expansion of the SBC Region, through a
business combination between SBC and another RBOC or otherwise, could 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.
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There can be no assurance that the SBC Region, in which the Company is
currently prohibited from providing long distance telephony service, will not
expand, or that any such expansion will not include areas currently served, or
targeted to be served by the Company.
Local Exchange Requirements
In addition to requirements placed on ILECs, the Telecommunications Act
subjects the Company to certain federal regulatory requirements relating to
the provision of local exchange service in a market. In addition, the FCC's
rules require that the Company contribute to universal service funds, the
Telecommunications Relay Services fund and the North American Numbering Plan
Administrator fund. Compliance with these obligations, individually and in the
aggregate, may cause the Company to incur substantial expenses. There can be
no assurance that these expenses will not have a material adverse effect upon
the Company's results of operations and financial condition and its ability to
meet its obligations under the Notes.
In addition, the Company might incur significant expenses to assure that its
networks comply with the requirements of the Communications Assistance for Law
Enforcement Act ("CALEA"), which requires telecommunications carriers to
provide law enforcement officials with call content and call identifying
information ("assistance capability requirements") and to reserve circuits for
use by law enforcement officials in executing court authorized electronic
surveillance ("capacity requirements").
Universal Service
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. Providers of interstate
telecommunications services, such as the Company, as well as certain other
entities, must pay for these programs. The Company's share of these federal
subsidy funds will be calculated based on end-user revenues. The Company is
currently unable to quantify the amount of subsidy payments that it will be
required to make in future years and the effect that these required payments
will have on its financial condition.
Access Charges
To the extent the Company provides interexchange telecommunications service,
it is required to pay access charges to ILECs when it uses the facilities of
those companies to originate or terminate interexchange calls. Also, as a
CLEC, the Company provides access services to other interexchange service
providers. With limited exceptions, the current policy of the FCC for most
interstate access services dictates that ILECs charge all customers the same
price for the same service. Thus, the ILECs generally cannot lower prices to
some customers without also lowering charges for the same service to all
similarly situated customers in the same geographic area. The FCC may,
however, alleviate this constraint on the ILECs and permit them to offer
special rate packages to certain customers, as it has done in a few cases, or
permit other forms of rate flexibility. Further FCC action is expected during
1999 that may grant ILECs subject to the FCC's price cap rules ("price cap
LECs") increased pricing flexibility upon demonstrations of increased
competition (or potential competition) in relevant markets. The manner in
which the FCC implements this approach to lowering access charge levels could
have a material adverse effect on the Company's ability to compete in
providing interstate access services.
Reciprocal Compensation
All ILECs and CLECs must complete calls originated by other carriers under
reciprocal compensation arrangements. That is, the LEC terminating a local
call is entitled to payment from the LEC originating a call. Charges assessed
by the ILECs for terminating calls originated on a CLEC's network must be
based on a reasonable approximation of additional cost or through mutual
exchange of traffic without explicit payment. The FCC recently determined that
Internet traffic is interstate in nature, not local, and has initiated a
proceeding to determine appropriate carrier-to-carrier compensation. At the
same time, the FCC declined to overturn a multitude of state decisions
requiring ILECs to pay CLECs compensation for delivering Internet traffic to
ISPs.
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The FCC's decision is on appeal, and ILECs are expected to ask state or
federal courts to reverse the existing state determinations. The outcome of
those challenges and the compensation scheme ultimately adopted by the FCC
could 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.
Video Regulation
A number of recent and on-going developments in Congress, at the FCC, and at
the United States Copyright Office are likely to have an impact on the extent
to which governmental regulations burden the entertainment component of the
Company's business and on its ability to compete with other MVPDs.
Access to Property. Franchise cable operators must rely on state or local
access laws to obtain the right to compete for MDU subscribers for which
private cable systems hold exclusive rights. These statutes, referred to as
"mandatory access" provisions, typically empower only franchise cable
operators to gain access to an MDU in order to provide service to the
residents regardless of whether the MDU owner objects or has entered into a
contract with an alternative provider of video services such as the Company.
Thus, in jurisdictions where a mandatory access provision has been enacted, a
franchise operator might be able to access an MDU and provide service in
competition with the Company despite any exclusive Rights of Entry contract
that the company might have entered into with the owner. The ability of
franchise operators to force access to an MDU may create additional
competition for a limited subscriber base and poses a potential threat to the
Company's operating margin at the property in question. A number of
jurisdictions in which the Company's targeted markets are located have enacted
mandatory access provisions, including the states of Illinois and Pennsylvania
and the District of Columbia. While the state of Virginia has not enacted a
mandatory access statute, its laws prohibit landlords from accepting payment
from a video services provider in exchange for access to an MDU. The inability
of video service providers such as the Company to include compensation
provisions in video Rights of Entry contracts for properties located in
Virginia may limit their ability to induce property owners to enter into these
contracts. There can be no assurance that existing or future mandatory access
provisions will not 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.
Inside Wiring. In some instances, a new provider such as the Company faces
difficulty in taking over a property because the ownership of the wiring is
uncertain or contested and the property owner is hesitant to allow
installation of additional wiring. In late 1997, the FCC issued new rules that
address such problems and impose conditions on the sale, removal or
abandonment of wiring and govern shared use of space by competing providers.
The new rules are being challenged, however, and there can be no assurance
that uncertainty regarding ownership or use of inside wiring will not 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.
Competitive Networks Rulemaking. The FCC recently began a new rulemaking
proceeding on whether to grant telecommunications providers and cable TV
companies competitive access to rooftops and riser cable. There is no
assurance that the rules adopted in this proceeding would protect the
Company's exclusive rights to provide services in MDUs.
Regulation of DBS Providers. Congress is considering several pieces of DBS
legislation that could enhance the ability of DBS providers to compete with
traditional franchise cable systems or private cable operators like the
Company. In addition, the FCC has adopted rules that prohibit MDU Managers
from imposing certain restrictions that might impair reception by viewers who
do not own the affected property, including MDU residents. This could
adversely affect the value of the Company's present and future Rights of
Entry, which could have a material effect on the Company's results of
operations and financial condition and its ability to meet its obligations
under the Notes.
The foregoing discussion of regulatory considerations does not review all
laws or regulations under consideration by federal and state governmental
bodies that may affect the Company's operations. It is possible
30
<PAGE>
that present and future laws and regulations not discussed here could 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.
Year 2000 Problems May Disrupt Our Operations
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's 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 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). 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.
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
results of operations and financial condition and its ability to meet its
obligations on the Notes. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Impact of the Year 2000 Issue."
Rapid Technological Changes and Uncertain Market Development
The telephony and video industries are subject to rapid and significant
changes in technology and frequent service innovations. The effect on the
business of the Company of future technological changes, such as changes
relating to emerging transmission technologies, cannot be predicted. The
Company believes that its future success will depend on its ability, as to
which no assurance can be given, to enhance its existing systems or implement
new systems to respond to new technologies and to develop and introduce in a
timely fashion new products and services on a competitive basis.
The markets in which the Company competes are constantly evolving. The
convergence of traditional telephony services and video services is a recent
trend in the industry in which the Company competes. As part of this trend,
many telephony and video services providers are attempting to integrate
network components. For example, multi-channel television distribution
equipment is being considered for voice and data telecommunications and vice
versa. The convergence of these traditional services towards integrated
multimedia services presents both opportunity and material risk to companies
such as OnePoint. The Company will face enhanced competition from competitors
with much greater financial, technical, marketing and other resources. Many of
these competitors may offer packages of services that are more extensive than
the services which the Company plans to offer. There can be no assurance that
the Company will be able to predict accurately the direction of this evolving
market or be able to respond effectively to the highly competitive
environment. See "--Competition."
Antitakeover Provisions
The Company's Certificate of Incorporation and Bylaws and the Delaware
General Corporation Law contain certain provisions that may have the effect of
discouraging, delaying or making more difficult a change in control
31
<PAGE>
of the Company or preventing the removal of incumbent directors. The existence
of these provisions may have a negative impact on the price of the Common
Stock and may discourage third-party bidders from making a bid for the Company
or may reduce any premiums paid to stockholders for their Common Stock.
Pursuant to the Operating Agreement of the Company's sole stockholder, the
consent of VIC is required for the sale of all or substantially all of the
Company's assets.
Absence of Public Market
The Notes are a new issue of securities for which there presently is no
active trading market and none may develop. If the Notes are traded after
their initial issuance, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for
similar securities, the financial condition and prospects of the Company and
other factors beyond the control of the Company, including general economic
conditions. Although the Initial Purchasers have informed the Company that
they currently intend to make a market in the Notes, the Initial Purchasers
are not obligated to do so and any such market-making may be discontinued at
any time without notice, at the sole discretion of the Initial Purchasers.
Accordingly, there can be no assurance as to the development or liquidity of
any market for the Notes. See "Plan of Distribution."
Fraudulent Conveyance Risks
Under applicable provisions of the federal bankruptcy law or comparable
provisions of state fraudulent transfer law, if the Company, at the time of
issuance of, or making any payment in respect of, the Notes, (a)(i) was or was
rendered insolvent thereby, was engaged or about to engage in a business or
transaction for which its assets constituted unreasonably small capital, or
intended to incur, or believed that it would incur, debts beyond its ability
to pay such debts as they matured and (ii) the Company received less than
reasonably equivalent value or fair consideration for such issuance or (b) the
Company issued the Notes or made any payment thereunder with intent to hinder,
defraud or delay any of its creditors, the obligations of the Company under
some or all of the Notes could be voided or held to be unenforceable by a
court, the obligations of the Company under the Notes could be subordinated to
claims of other subordinated creditors, or the holders of Notes could be
required to return payments already received. In particular, if the Company
were to cause a subsidiary to pay a dividend in order to enable the Company to
make payments in respect of the Notes, and such transfer were deemed a
fraudulent transfer, the holders of Notes could be required to return the
payment. In any of the foregoing cases, there could be no assurance that the
holders would ultimately recover the amounts owing under the Notes.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law applied in any such case. Generally, however, the Company would
be considered insolvent if the sum of its debts, including contingent
liabilities, was greater than all of its assets at a fair valuation, if it had
unreasonably small capital to conduct its business, or if the present fair
salable value of its assets were less than the amount that would be required
to pay the probable liability on its existing debts, including contingent
liabilities, as they become absolute and matured. The Company believes that it
was not insolvent at the time of or as a result of the Initial Offering, that
it has not engaged in a business or transaction for which its remaining assets
constituted unreasonably small capital and that it did not and does not intend
to incur or believe that it will incur debts beyond its ability to pay such
debts as they mature. There can be no assurance, however, that a court passing
on such questions would agree with the Company's analysis.
The Indenture provides that certain subsidiaries of the Company will be
required to guarantee the obligations of the Company under the Indenture and
the Notes. When any subsidiary enters into such a guarantee, if bankruptcy or
insolvency proceedings were initiated by or against that subsidiary within 90
days (or, possibly, one year) after that subsidiary issued a guarantee, or if
that subsidiary incurred obligations under its guarantee in anticipation of
insolvency, all or a portion of the guarantee could be avoided as a
preferential transfer under federal bankruptcy or applicable state law. In
addition, a court could require holders of the Notes to return all payments
made within any such 90 day (or, possibly, one year) period as preferential
transfers.
32
<PAGE>
Original Issue Discount; Possible Unfavorable Tax and Other Legal Consequences
for Holders of Notes and the Company
The Notes are deemed to have been initially issued at a discount equal to
the sum of the estimated value of the Warrants and the amount, if any, by
which the principal amount of the Notes exceeds the issue price of the Units.
Consequently, for federal income tax purposes, original issue discount (that
is, the difference between the stated redemption price at maturity and the
deemed issue price of the Notes) may accrue from the issue date of the Notes
and may be includable in a holder's gross income as it accrues. See "Certain
United States Federal Income Tax Considerations" for a more detailed
discussion regarding the federal income tax consequences of the purchase,
ownership and disposition of the Notes.
The "yield to maturity" on the Notes exceeds the sum of 5% and the
"applicable federal rate" (a rate based on the yield on Treasury Securities
with similar maturity) in effect for the month in which the Notes were issued.
Accordingly, if the Notes have "significant" OID, the Notes will be considered
"applicable high yield discount obligations." A debt instrument has
"significant" OID if the aggregate amount of unpaid interest (including OID)
as of the close of any accrual period ending after the date five years after
the date of issue exceeds the product of the issue price of such instrument
and its yield to maturity.
If the Notes are "applicable high yield discount obligations," the Company
will not be permitted to deduct for United States federal income tax purposes
OID accrued on the Notes until such time as the Company actually pays such OID
in cash or in property other than stock or debt of the Company (or persons
related to the Company). Moreover, to the extent that the yield to maturity of
the Notes exceeds the sum of 6% and the applicable federal rate, such excess
(the "Dividend-Equivalent Interest") will not be deductible at any time by the
Company for United States federal income tax purposes (regardless of whether
the Company actually pays such Dividend-Equivalent Interest in cash or in
other property). Such Dividend-Equivalent Interest would be treated as a
dividend to the extent it is deemed to have been paid out of the Company's
current or accumulated earnings and profits. Accordingly, a holder of Notes
that is a domestic corporation may be entitled to take a dividends-received
deduction with respect to any Dividend-Equivalent Interest received by such
corporate holder on the Note.
If a bankruptcy case under the U.S. Bankruptcy Code were to be commenced by
or against the Company after the issuance of the Notes, the claim of a holder
of Notes with respect to the principal amount thereof may be limited to an
amount equal to the sum of (i) the initial offering price and (ii) that
portion of the original issue discount that is not deemed to constitute
"unmatured interest" for purposes of the U.S. Bankruptcy Code. Any original
issue discount that was not amortized as of the time of any such bankruptcy
filing would constitute "unmatured interest."
Corporate Acquisition Indebtedness--Possible Limitation of Federal Tax
Deduction for Interest Expense on the Notes
Interest on a debt obligation issued as part of an investment unit (such as
the Notes) may not be deductible for federal income tax purposes to the extent
such interest exceeds $5 million (subject to certain reductions) for a tax
year if, among other things, the proceeds of such debt are used to make
certain asset or stock acquisitions and the debt is expressly subordinated or
is subordinated to trade creditors (determined on a group basis). While the
Company believes that the federal tax deduction for interest on the Notes
should not be subject to such limitation due to, among other things, the
presence of the Subsidiary Guarantees (resulting in the Notes being ranked
pari passu with the trade creditors of such Subsidiaries), no assurances can
be given in this regard and a ruling from the Internal Revenue Service has not
been sought.
Restrictive Covenants
The Indenture contains a number of covenants that will limit the discretion
of the Company's management with respect to certain business matters. These
covenants, among other things, restrict the ability of the Company
33
<PAGE>
to incur additional Indebtedness, pay dividends and make other distributions,
prepay subordinated Indebtedness, make Investments and other restricted
payments, enter into sale and leaseback transactions, create liens, sell
assets, and engage in certain transactions with affiliates. See "Certain
Relationships and Related Transactions," "Description of Certain Indebtedness"
and "Description of the Notes."
A failure to comply with the covenants and restrictions contained in the
Indenture or agreements relating to any subsequent financing could result in
an event of default under such agreements which could permit acceleration of
the related debt and acceleration of debt under other debt agreements that may
contain cross-acceleration or cross-default provisions, and the commitments of
the lenders to make further extensions under such other agreements could be
terminated.
Classification as an Investment Company
Until the proceeds of the Initial Offering are deployed in the Company's
business, the Company will have substantial short-term investments and other
investment securities. See "Capitalization," "Use of Proceeds" and the
consolidated financial statements, including the notes thereto. This may
result in the Company being treated as an "investment company" under the
Investment Company Act of 1940 (the "1940 Act"). The 1940 Act requires the
registration of, and imposes various substantive restrictions on, certain
companies ("investment companies") that are, or hold themselves out as being,
engaged primarily, or propose to engage primarily in, the business of
investing, reinvesting or trading in securities, or that fail certain
statistical tests regarding composition of assets and sources of income and
are not primarily engaged in businesses other than investing, reinvesting,
owning, holding or trading securities.
The Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding or trading securities and, therefore,
is not an investment company within the meaning of the 1940 Act. If the
Company were to be an investment company, the Company currently would intend
to rely upon a one year safe harbor exemption from the 1940 Act for certain
"transient" or temporary investment companies.
If the Company were required to register as an investment company under the
1940 Act, it would become subject to substantial regulation with respect to
its capital structure, management, operations, transactions with affiliated
persons (as defined in the 1940 Act) and other matters. Application of the
provisions of the 1940 Act 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.
34
<PAGE>
THE RECAPITALIZATION
The Predecessor was initially formed in 1996 by VIC, which initially owned
99% of the equity interests in the Predecessor, and AMI2, which owned the
remaining 1% equity interest in the Predecessor. VIC is an affiliate of SBC,
and 99% of the equity of VIC is owned indirectly by SBC. The remaining 1% of
the equity of VIC is owned by The VenCom Group, Inc., which is, in turn, owned
by James A. Otterbeck, the Company's Chairman and Chief Executive Officer. VIC
is the sole stockholder of AMI2.
In October 1997, AMI2 transferred to VIC its membership units of the
Predecessor, Mr. Otterbeck became a member of the Predecessor and the
Predecessor was recapitalized. Pursuant to the Recapitalization, VIC agreed to
guarantee up to $9 million of secured indebtedness of the Predecessor,
contributed additional capital to the Predecessor (resulting in aggregate
equity contributions to the Predecessor of $33.5 million) and exchanged its
membership interests for (i) 19.9% of the Predecessor's membership units,
which had a preferred return of 10% per annum and a priority on the first
$33.5 million of distributions, (ii) a promissory note in the principal amount
of $1.5 million due October 15, 2007 which bore interest at 10% per annum (the
"Predecessor Note"), and (iii) a warrant to purchase 5% of the common units
outstanding following exercise of the warrant. In connection with the
Recapitalization, Mr. Otterbeck purchased 80.1% of the Predecessor's
membership units (which did not have a preferential return or priority on
distributions) for an aggregate of $80,100 and agreed to contribute up to an
additional $1.5 million to the Predecessor no later than the Predecessor's
dissolution. The parties also entered into (i) a Members Agreement that
restricted the transfer of membership units and provided preemptive rights on
the sale of new securities and (ii) a Registration Agreement that provided
certain rights to register the Predecessor's securities under the Securities
Act of 1933, as amended. In April 1998, Mr. Otterbeck transferred his equity
interest in the Predecessor to VenCom, L.L.C., of which he is the sole member.
In April 1998, in order to convert the Predecessor into a corporation, VIC
and VenCom, L.L.C. contributed their membership interests in the Predecessor
and the Predecessor Note to Ventures in Communications II, LLC ("VIC2"), a
newly-formed limited liability company, in exchange for membership interests
of VIC2. VIC's membership units in VIC2 do not accrue dividends, however, and
the VIC2 warrant relates to 9.9% of the common units of VIC2. Subsequently,
the Predecessor merged with and into the Company, with the Predecessor's
outstanding membership interests and the Predecessor Note exchanged for shares
of the Company's common stock and preferred stock. In addition, the
Predecessor Note was replaced with a note in the same principal amount issued
by VIC2 to VIC (the "VIC2 Note"), and the parties entered into a Registration
Agreement. As a result of the merger transactions, the Company is a Delaware
corporation which is wholly owned by VIC2; 80.1% of VIC2's membership units
are owned by VenCom, L.L.C. and the remaining 19.9% of VIC2's membership units
are owned by VIC. As a result of SBC's indirect ownership of 99% of the equity
interests of VIC, SBC indirectly owns 19.7% of the Company's Common Stock.
The Operating Agreement of VIC2 entered into in April 1998 in connection
with the Recapitalization (i) imposes certain restrictions on the transfer of
VIC2's membership units; (ii) grants certain participation rights in
connection with a sale of membership units by a member; (iii) grants VIC
certain preemptive rights with respect to VIC2 membership units in connection
with issuances by VIC2 of membership units or issuances by the Company of
Common Stock; (iv) grants VIC the right to require VenCom, L.L.C. to purchase
all or any portion of the VIC2 membership units held by VIC; (v) grants a
first refusal right to the members in connection with a transfer of VIC2
membership units and shares of the Company's Common Stock; (vii) requires the
members to take certain actions in the event of an initial public offering by
VIC2; and (viii) grants VIC the right to require VIC2 to exercise its demand
and piggyback registration rights and to require VIC2 to distribute the
proceeds of the resulting offering.
35
<PAGE>
USE OF PROCEEDS
The net proceeds from the Initial Offering were approximately $168.1
million. The Company used approximately $80.5 million to fund the purchase of
Pledged Securities. The remaining $87.6 million of net proceeds has been or
will be used (i) to acquire private cable television operators or their
assets, (ii) to invest in video infrastructure, (iii) to invest selectively in
a facilities-based platform for telephony services, (iv) to repay borrowings
under the Credit Facility, (which were reborrowed on December 14, 1998), (v)
to fund future capital calls by Mid-Atlantic, (vi) to fund working capital,
(vii) to repurchase Notes and for general corporate purposes, including
operating losses. Prior to the application of the net proceeds of the Initial
Offering, such funds will be invested in Cash Equivalents.
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights
Agreements. The Company will not receive any cash proceeds from the issuance
of the Exchange Notes offered hereby. In consideration for issuing the
Exchange Notes contemplated in this Prospectus, the Company will receive Old
Notes in like principal amount, the form and terms of which are the same as
the form and terms of the Exchange Notes (which replace the Old Notes), except
as otherwise described herein. The Old Notes surrendered in exchange for
Exchange Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any increase or
decrease in the indebtedness of the Company. As such, no effect has been given
to the Exchange Offer in the pro forma statements or capitalization table.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to declare any such dividends in the foreseeable
future. Payment of any future dividends will depend upon earnings and capital
requirements of the Company, the Company's debt facilities and other facts the
Board of Directors considers relevant. OnePoint intends to retain its
earnings, if any, to finance the development and expansion of its business,
and therefore does not anticipate paying any cash dividends in the foreseeable
future. The Company's Certificate of Incorporation prohibits the payment on
cash dividends on the Common Stock while the Company's Preferred Stock is
outstanding and, upon liquidation of the Company, requires payment of the
liquidation value of the Preferred Stock prior to any payments with respect to
the Common Stock. See "Description of Capital Stock." The Company's ability to
declare and pay cash dividends on its Common Stock is also restricted by
certain covenants in the Indenture. See "Description of Notes--Certain
Covenants--Restricted Payments."
36
<PAGE>
CAPITALIZATION
The following table sets forth the actual and pro forma capitalization and
cash and cash equivalents of the Company at March 31, 1999 and as adjusted on
a pro forma basis to give effect to the repurchase of $19.0 million aggregate
principal amount of Notes that occurred in June 1999 as if such purchase had
occurred on March 31, 1999. The table should be read in conjunction with
"Selected Historical Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements, including the notes thereto, included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------
Actual Pro Forma
----------- ------------
(unaudited)
(Dollars in thousands)
<S> <C> <C>
Cash and cash equivalents(1)......................... $ 6,103 $ 6,103
=========== ===========
14 1/2% Senior Notes due 2008(2)..................... $ 98,733 $ 80,273
Term Note (including current portion of $250)........ 8,750 8,750
----------- -----------
Total debt..................................... 107,483 89,023
Redeemable preferred stock, $1.00 par value, 35,000
shares
authorized, 35,000 shares issued and outstanding, at
redemption value.................................... 35,000 35,000
Stockholders' deficit:
Common stock $0.01 par value, 2,000,000 shares
authorized, 1,000,000 shares issued and
outstanding(3).................................... 10 10
Additional capital(2).............................. 6,870 6,870
Note receivable--stockholder....................... (1,500) (1,500)
Accumulated deficit................................ (45,628) (37,540)
Unrealized gains on securities..................... 20 20
----------- -----------
Total stockholders' deficit...................... (40,228) (32,140)
----------- -----------
Total long term debt, redeemable preferred stock
and stockholders' deficit....................... $ 102,255 $ 91,883
=========== ===========
</TABLE>
- --------
(1) Excludes the $80.5 million of net proceeds from the Initial Offering used
to purchase Pledged Securities.
(2) The carrying amount of 14 1/2% Senior Notes reflect the debt discount of
$5.3 million (less approximately $0.15 million of accumulated amortization
and $2.7 million of write-offs related to repurchased Notes) resulting
from the issuance of Warrants in conjunction with the Old Notes and the
Note Repurchases. The Company has obtained an independent valuation,
issued by Sturgill & Associates LLP, to determine the fair value of the
Warrants. In addition, from November 9 through June 10, 1999, the Company
repurchased certain of its Notes with an aggregate principal amount of
$92.25 million, for an aggregate amount of approximately $47.9 million,
including interest, fees, and other transaction costs. The Company
recognized net gains on the early extinguishment of this debt of
approximately $19.8 million in the fourth quarter of 1998 and
approximately $12.42 million in the first quarter of 1999. The Company
will recognize a net gain on the early extinguishment of this debt of
approximately $8.1 million in the second quarter of 1999. The Company
funded these Note repurchases through the liquidation of certain non-
current investments originally purchased with the proceeds from the
original issuance of the Notes.
(3) Excludes 111,125 shares of Common Stock reserved for issuance upon
exercise of the Warrants.
37
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial and other data
of the Company. The selected consolidated statement of operations and balance
sheet data set forth below as of December 31, 1996, 1997 and 1998 and for the
periods then ended are derived from the financial statements of the Company
which have been audited by Ernst & Young LLP, independent auditors. The
unaudited consolidated financial data at March 31, 1999 and for the three
months ended March 31, 1999 include all adjustments (consisting only of normal
recurring adjustments) which management considers necessary for a fair
presentation of the financial information for those unaudited periods. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results of operations that may be expected for
the full fiscal year ended December 31, 1999. The Company was formed in 1996
and has generated operating losses and negative cash flow from its operating
activities to date. As a result of the Company's short operating history,
prospective investors have limited operating and financial data about the
Company upon which to base an evaluation of the Company's performance and the
decision to tender Old Notes in exchange for Exchange Notes. The selected
financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, including the notes
thereto, contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Period from Year Ended Three Months
March 14, 1996 to Year Ended December Ended
December 31, 1996 December 31, 1997 31, 1998 March 31, 1999
----------------- ----------------- ---------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue............... $ -- $ 43 $ 6,953 $ 4,419
Cost of revenue:.......... -- 83 8,765 4,177
Selling, general and
administrative expenses.. 2,021 12,788 27,873 10,118
Depreciation and
amortization............. 19 235 1,455 587
Loss from operations...... (2,040) (13,063) (31,140) (10,463)
Other income (expense).... 4 44 (9,787) (3,769)
Income tax provision (1).. -- -- -- --
Loss on equity
investments.............. -- (3,072) (3,698) (870)
Extraordinary item........ -- -- 19,799 12,427
Net loss.................. (2,036) (16,091) (24,826) (2,675)
<CAPTION>
As of December 31,
---------------------------------------------- As of March 31,
1996 1997 1998 1999
----------------- ----------------- ---------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Consolidated balance sheet
data:
Cash and cash equivalents
(4)...................... $13,103 $ 5,463 $ 5,730 $ 6,103
Working capital........... 12,771 3,851 15,199 14,906
Total assets.............. 14,031 19,681 149,307 117,054
Long term debt............ -- 1,500 138,503 107,233
Redeemable preferred
stock.................... -- -- 35,000 35,000
Unitholders'/stockholders'
equity/(deficit)......... 13,604 15,373 (36,872) (40,228)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Period from Three Months
March 14, 1996 to Year Ended Year Ended Ended
December 31, 1996 December 31, 1997 December 31, 1998 March 31, 1999
----------------- ----------------- ----------------- --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Other Financial Data:
Pro forma income tax
provision (2)........ $ -- $ -- $ -- $ --
Adjusted EBITDA (3)... (2,021) (12,845) (29,668) (10,342)
Net cash used in
operating
activities........... (2,020) (11,427) (37,672) (11,639)
Net cash used in
investing
activities (4)....... (13,517) (2,573) (118,572) 30,029
Net cash from
financing
activities........... 15,640 19,360 156,511 (18,107)
Capital expenditures.. 517 2,440 9,374 (2,619)
Ratio of losses to
fixed charges (5).... -- -- -- --
Other Data:
Passings:
Telephony passings
under contract..... -- 71,034 207,500 219,300
Telephony passings
actively marketed
(6)................ -- 17,536 150,000 165,600
Video passings under
contract........... -- 184 30,000 29,600
Video passings
actively marketed
(6)................ -- -- 30,000 29,600
Telephony
subscribers.......... -- 365 17,067 20,755
Telephony Penetration
Rate................. -- 2.1% 11.4% 12.5%
Video subscribers..... -- -- 17,347 17,208
Video Penetration
Rate................. -- -- 57.8% 58.1%
</TABLE>
- --------
(1) Prior to the merger with OnePoint Communications Corp. in April 1998 the
Company was treated as a partnership for income tax purposes. Accordingly,
no provision for income taxes has been included in these financial
statements, as taxable income or loss passed through to unitholders
individually.
(2) See pro forma tax discussion in the notes to the Pro Forma Unaudited
Statement of Operations.
(3) Adjusted EBITDA is defined as net income (loss) before income taxes and
depreciation, amortization and equity investment income (loss). Adjusted
EBITDA is presented because it is a widely accepted financial indicator of
a company's ability to income and service debt. However, Adjusted EBITDA
should not be considered in isolation as a substitute for net loss or cash
flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity.
Further, funds depicted by Adjusted EBITDA may not be available for
management's discretionary use (due to legal or functional requirements to
conserve funds for capital replacement and expansion, debt service and
other commitments and uncertainties). In addition, this measure of
Adjusted EBITDA may not be comparable to similar measures reported by
other companies.
(4) Cash flows from investing activities included the changes in the Company's
restricted cash balances on deposit in an escrow account pending
investment in Mid-Atlantic. Cash and cash equivalents as of December 31,
1996 includes $13 million of restricted cash.
(5) For the purpose of the ratio of losses to fixed charges, (i) losses are
calculated as net loss before fixed charges and (ii) fixed charges include
interest on all Indebtedness, and operating lease expense. Fixed charges
for the period from March 14, 1996 to December 31, 1996, and for the years
ended December 31, 1997 and 1998 were approximately $79,000, $629,000, and
$1,107,000 respectively. For the period from March 14, 1996 to December
31, 1996, the year ended December 31, 1997 and 1998 the Company's
deficiency of earnings to cover fixed charges was approximately $2.0
million, $16.1 million, and $24.8 million respectively. Fixed charges for
the three months ended March 31, 1999 were approximately $4.8 million. The
Company's deficiency of earnings to cover fixed charges was approximately
$2.7 million for the three months ended March 31, 1999.
(6) Passings actively marketed are passings in an MDU in which the Company had
one or more subscribers at the end of the relevant period.
39
<PAGE>
PRO FORMA UNAUDITED CONDENSED FINANCIAL DATA
The following pro forma unaudited condensed financial data is based upon the
historical financial statements of OnePoint Communications Corp. and
Subsidiaries as of December 31, 1998 and for the year then ended and as of
March 31, 1999 and for the three months then ended, adjusted to give effect to
(i) the issuance of $175.0 million aggregate principal amount of Notes and
recognition of (a) the relative interest expense thereon with an interest rate
of 14 1/2% per annum, (b) amortization of deferred debt issuance costs and (c)
amortization of the discount on debt resulting from the issuance of warrants
for 111,125 shares of common stock; (ii) the repurchase of $92.25 million
aggregate principal amount of notes; (iii) the change in the tax status from a
limited liability company to a "C" corporation; and (iv) the PCTV Acquisition.
The transaction and the related adjustments are described in the
accompanying notes. The pro forma adjustments are based upon available
information and certain assumptions that management believes are reasonable.
The Pro Forma Financial Data does not purport to represent what the Company's
results of operations would have actually been had such transaction in fact
occurred on January 1, 1998 or to project the Company's results of operations
for any future period. The Pro Forma Financial Data should be read in
conjunction with the historical financial statements of OnePoint
Communications, LLC included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PRO FORMA UNAUDITED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Pro Forma
OnePoint OnePoint
Communications, Communications
LLC Offering and Adjustments to Corp.
Year ended Pro Forma Reflect PCTV Year ended
December 31, 1998 Adjustments Acquisition (c) December 31, 1998
----------------- ------------ --------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Revenue................. $ 6,953 $ -- $ 2,632 $ 9,585
Cost of revenue......... 8,765 -- 1,785 10,550
-------- ------- ------- --------
(1,812) -- 847 (965)
Selling, general and
administrative
expenses............... 27,873 -- 979 28,852
Depreciation and
amortization........... 1,455 -- 1,387 2,842
-------- ------- ------- --------
Loss from operations.... (31,140) -- (1,519) (32,659)
Interest expense (a).... 15,846 (2,692) -- 13,154
Other income (expense).. 6,059 -- -- 6,059
-------- ------- ------- --------
Income before taxes and
loss on equity
investments............ (40,927) 2,692 (1,519) (39,754)
Income tax provision
(b).................... -- -- -- --
-------- ------- ------- --------
Income before losses on
equity method
investments............ (40,927) 2,692 (1,519) (39,754)
Losses on equity method
investments............ (3,698) -- -- (3,698)
Extraordinary item...... 19,799 -- -- 19,799
-------- ------- ------- --------
Net loss................ $(24,826) $ 2,692 $(1,519) $(23,653)
======== ======= ======= ========
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
OnePoint
OnePoint Adjustments Communications
Communications Corp. Offering and to Reflect Corp.
Three Months Ended Pro-Forma PCTV Three Months Ended
March 31, 1999 Adjustments Acquisition March 31, 1999
-------------------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Revenue................. $ 4,419 $ -- $ -- $ 4,419
Cost of revenue......... 4,177 -- -- 4,177
-------- ----- ----- --------
242 242
Selling, general and
administrative
expenses............... 10,118 -- -- 10,118
Depreciation and
amortization........... 587 -- -- 587
-------- ----- ----- --------
Loss from operations.... (10,463) -- -- (10,463)
Interest expense (a).... (4,242) (950) (3,292)
Other income (expense).. 473 -- -- 473
-------- ----- ----- --------
Income before taxes and
loss on equity
investments............ (14,232) 950 -- (13,282)
Income tax provision
(b).................... -- -- -- --
-------- ----- ----- --------
Income before losses on
equity method
investments............ (14,232) 950 -- (13,282)
Losses on equity method
investments............ (870) -- -- (870)
Extraordinary item...... 12,427 -- -- 12,427
-------- ----- ----- --------
Net loss................ $ (2,675) $ 950 $ -- $ (1,725)
======== ===== ===== ========
</TABLE>
41
<PAGE>
Pro Forma Balance Sheet
As of March 31, 1999 (unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
OnePoint Pro Forma
Communications Pro Forma Balance
Corp. Adjustments Sheet
-------------- ----------- ---------
<S> <C> <C> <C>
Assets
Cash and cash equivalents................. $ 6,013 $ -- $ 6,013
Restricted cash........................... 129 -- 129
Investments, current (d).................. 19,333 (9,455) 9,878
Accounts receivable, net.................. 2,733 -- 2,733
Affiliate receivable...................... 159 -- 159
Prepaid expenses.......................... 1,588 -- 1,588
-------- -------- --------
Total current assets.................. 29,955 (9,455) 20,500
Investments, non-current ($46,792
restricted) ............................. 53,453 -- 53,453
Investment in unconsolidated subsidiaries. 5,493 -- 5,493
Property and equipment, net............... 13,047 -- 13,047
Intangible assets, net of accumulated
amortization (d)......................... 9,231 (917) 8,314
Other assets.............................. 5,875 -- 5,875
-------- -------- --------
$117,054 $(10,372) $106,682
======== ======== ========
Liabilities, Redeemable Preferred Stock
and Stockholders' Deficit
Accounts payable.......................... $ 6,380 $ -- $ 6,380
Affiliate payable......................... 3,537 -- 3,537
Accrued interest payable.................. 4,882 -- 4,882
Current portion of long-term debt......... 250 -- 250
-------- -------- --------
Current liabilities..................... 15,049 -- 15,049
Notes payable, non-current (d)............ 107,233 (18,460) 88,773
Redeemable preferred stock................ 35,000 -- 35,000
Stockholders' deficit:
Common stock............................ 10 -- 10
Additional capital...................... 6,870 -- 6,870
Note receivable stockholder............. (1,500) -- (1,500)
Accumulated deficit (d)................. (45,628) 8,088 (37,540)
Unrealized gain on securities........... 20 -- 20
-------- -------- --------
Total stockholders' deficit .......... (40,228) 8,088 (32,140)
-------- -------- --------
Total liabilities, redeemable
preferred stock and stockholders'
deficit.............................. $117,054 $(10,372) $106,682
======== ======== ========
</TABLE>
- --------
(a) The pro forma adjustment to interest expense for the year ended December
31, 1998 reflects the following:
<TABLE>
<S> <C>
Elimination of historical interest expense related to the
Notes........................................................ $(15,404)
Interest expense on the Notes, at an interest rate of 14 1/2%
per annum, net of repurchases through June, 1999............. 12,000
Amortization of debt issuance costs related to the Initial
Offering..................................................... 248
Amortization of debt discount................................. 199
Amortization of warrants...................................... 265
--------
$ (2,692)
========
</TABLE>
42
<PAGE>
The pro forma adjustment to interest expense for the three months ended
March 31, 1999 reflects the following:
<TABLE>
<S> <C>
Elimination of historical interest expense related to the Notes. $(4,128)
Interest expense on the Notes, at an interest rate of 14 1/2%
per annum, net of repurchases through June 1999................ 2,999
Amortization of debt issuance costs related to the Initial
Offering....................................................... 62
Amortization of debt discount................................... 50
Amortization of warrants........................................ 67
-------
$ (950)
=======
</TABLE>
(b) As part of the Company's Recapitalization, in April 1998, OnePoint
Communications, LLC merged with and into OnePoint Communications Corp. See
"The Recapitalization." The pro forma condensed statement of operations
contains adjustments to reflect the estimated income tax provision on
historical income before taxes which would have occurred had OnePoint
Communications LLC been a "C" corporation for the period presented. The
Company was in a loss position for all periods presented, accordingly, no
tax provisions have been provided.
(c) The Pro Forma acquisition adjustments assume the PCTV Acquisition occurred
on January 1, 1998. The acquisition adjustments include an adjustment to
record the increase in depreciation and amortization expense for the year
ended December 31, 1998 related to the re-valuation of certain assets and
the recognition of intangibles and goodwill. (Also see the Company's
December 31, 1998 audited financial statements, the Predecessor's 1997
audited financial statement and PCTV's 1997 financial statements).
(d) To reflect the repurchase of an aggregate principal amount of $19.0
million of Notes on June 10, 1999 for an aggregate amount of $9.5 million,
less approximately $0.07 million of purchased interest, the write-off of
the net book value of (i) debt issuance costs and the initial debt
discount, and (ii) additional debt discounts attributable to the warrants
related to the repurchased Notes, and the corresponding gain on early
extinguishment of debt of approximately $8.1 million as if such
transaction had occurred on March 31, 1999.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations is qualified in its entirety by, and should be read
in conjunction with, the consolidated financial statements, including the
notes thereto, included elsewhere in this Prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in the forward-
looking statements as a result of certain factors including, but not limited
to, those discussed in "Risk Factors," "Business" and elsewhere in this
Prospectus. The Company disclaims any obligation to update information
contained in any forward-looking statement.
Overview
OnePoint is a rapidly growing provider of bundled telephony and video
services to residents of 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 Rights of Entry
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 twelve months. As a result of the Company's limited operating
history, prospective investors have limited operating and financial data about
the Company upon which to base an evaluation of the Company's performance and
a decision to tender the Old Notes in exchange for the Exchange Notes.
Revenues
Addressable Telephony Market. Through March 1999, the Company had entered
into long term contracts with seven national REITs and numerous other MDU
Managers providing for approximately 248,900 telephony or video passings in
the Company's six targeted markets. Through March 1999, the Company had 20,755
telephony and 17,208 video subscribers, and had commenced marketing of
services to 165,600 telephony and 29,600 video passings in six target markets.
Through March 1999, the Company had 365 internet subscribers through its high-
speed internet trial launched during the third quarter. Through March 1999,
the Company's proportional ownership share of Mid-Atlantic represented an
additional 20,460 video subscribers and 38,100 video passings. The Company
expects to increase the number of buildings for which it has Rights of Entry
through a combination of agreements with additional MDU Managers and the
expansion of existing agreements as MDU Managers acquire additional properties
in the Company's target markets. Through the above activities, the Company
seeks to add between approximately 300 to 450 buildings representing
approximately 90,000 to 150,000 telephony passings per year (at the higher end
of such range in later years).
In addition, the Company seeks to acquire private cable operators or their
assets in order to have the opportunity to market a full bundle of services to
the MDUs served, either directly or by obtaining a telephony Right of Entry
from the MDU Manager.
The Company also seeks to form strategic relationships with franchise or
private cable providers to co-market telephony services to their MDU customer
bases. Such strategic relationships may take a variety of forms, including but
not limited to equity investments by the Company (as in the case of Mid-
Atlantic). For example, OnePoint is leveraging its strategic relationship with
Mid-Atlantic to market telephony services to residents of MDUs currently
receiving video services from Mid-Atlantic. In addition, the Company is
currently negotiating telephony co-marketing agreements with franchise cable
operators throughout its targeted markets. Pursuant to such strategic
relationships, the Company may market its services under the OnePoint brand
name or that of the strategic partner. The Company believes that such
arrangements will benefit the Company and the franchise or private cable
operator through greater revenues and reduced churn.
44
<PAGE>
Addressable Video Market. OnePoint seeks opportunities to (i) acquire
private cable operators or their assets, (ii) replace existing cable operators
in buildings where the Company has telephony Rights of Entry; and (iii)
install video distribution systems in newly constructed MDUs. The Company
believes that the expansion of its video service passings and resulting
increase in the number of MDUs where the Company can offer bundled telephony
and video services will increase subscriber revenues and reduce marketing and
sales expenses.
The Company seeks to acquire private cable operators or their assets in
order to build scale rapidly by obtaining rights which are otherwise currently
unavailable to provide video services. In June 1998, the Company, through a
wholly owned subsidiary, entered into a definitive agreement to acquire
substantially all of the assets used by People's Choice TV Corp. and Preferred
Entertainment, Inc. to provide video services to MDUs in Chicago. Pursuant to
the agreement, the Company acquired approximately 28,000 video passings in 160
properties in July through October. Management expects to invest in video
reception and transmission equipment to upgrade the video services offering
for the acquired passings.
Market Penetration. From the beginning of the year through March 1999,
OnePoint had marketed telephony services to a total of 165,600 units
(including approximately 30,800 Mid-Atlantic video passings), and had marketed
video services to approximately 29,600 units (not including Mid-Atlantic video
passings). Through March 1999 the Company's Penetration Rates were 12.5% and
58.1%, respectively, for telephony and video. The Company primarily targets
new residents and believes that it will be able to achieve significantly
higher telephony Penetration Rates with respect to such residents, who are
introduced to the Company's services when moving in. The Company estimates
that its overall Penetration Rates will lag behind new resident Penetration
Rates but will increase over time as a result of residential turnover.
The turnover of residents is a key factor in the penetration of the
Company's telephony services. OnePoint anticipates that initial telephony
penetration for MDU residents at the time the Company commences offering
service will be significantly lower than that of residents who move in
subsequently. The Company focuses its marketing efforts on new residents at
the time they move in. Anticipated regulation mandating number portability may
enable the Company to accelerate telephony penetration, although the timing
for the implementation of this requirement is uncertain. Management believes
that the average term of an apartment lease is 18 months and, based on data
from the National Multi-Housing Council, that apartment turnover averages
approximately 35% to 40% per year. Management believes it has designed its
marketing efforts, sales channels and operational infrastructure so the
Company may benefit from this expected high turnover of MDU residents.
Through March 1999, the Company had 365 Internet subscribers through its
high-speed Internet trial launched during the third quarter.
Telephony Prices and Services. OnePoint offers a full range of local
telephony services at discounted rates to those charged by the ILEC, with
feature packages at discounts of up to 30%. Installation and service charges
are similar to those charged by the ILECs. Long distance telephony is offered
at prices competitive with major IXCs. Average subscriber revenues will be
impacted by the Company's ability to bundle local and long distance telephony
services as well as any pricing pressure brought about by deregulation and
increased competition. The Company is an authorized agent for CellularOne.
The Company plans in the future to offer various options for high speed
Internet access, including cable modem and xDSL. The Company commenced market
trials under a memorandum of understanding with an Internet service provider
to test on a limited basis an MDU-specific Ethernet-based application in up to
ten MDUs during 1998.
Video Prices and Services. OnePoint plans to offer basic and expanded cable
service at a slight discount to the franchise provider. The Company estimates
that average revenue per subscriber (adjusted for bulk discounts) will exceed
$35 per month as the Company improves the number and variety of channels and
services offered, upgrades its delivery systems and adds DBS capability to
individual buildings. In addition, average monthly revenue per subscriber will
be affected by any acquisition of private cable operators having different
average
45
<PAGE>
revenue per subscriber and service levels. Moreover, the Company's average
revenue per subscriber will be affected by the demographics of any MDUs for
which the Company obtains video Rights of Entry in the future. Pricing may be
affected by potential regulatory actions restricting price increases by
franchise cable providers.
Costs of Products and Services
Telephony. OnePoint resells local services purchased from the ILECs. Future
regulatory and/or judicial developments may affect the timing and method of
the Company's partial migration to a facilities-based platform and thus affect
the Company's ability to reduce its local service cost structure. To the
extent that the concentration of the Company's telephony subscriber base leads
to investment in facilities to replace ILEC facilities, the Company believes
it will be able to achieve significant ongoing savings in the provisioning of
telephony services. Long-distance services are provided by an IXC at
competitive prices as a result of the Company's affiliation with SBC, or by
the ILEC for intraLATA services within certain markets. Costs are typically
higher for intraLATA toll services, varying by market based on the cost of
intraLATA services from either the ILEC or IXC.
Video. The Company has entered into an agreement for the purchase of video
programming with a programming wholesaler. The Company has purchased
programming to date on the terms of Mid-Atlantic's contracts with such
programming wholesaler and individual programming providers, although the
Company is not a party to Mid-Atlantic's contracts. The Company's programming
costs are directly related to the number of subscribers. The Company expects
to realize a small reduction in programming costs per subscriber as the volume
of purchases increases.
General. For both telephony and video services, OnePoint frequently
compensates MDU Managers on either a flat rate per passing per year or a
percentage of revenues tied to penetration rates, as well as compensating
leasing agents based on new subscribers. The Company has already made
significant capital expenditures to develop its integrated billing system,
automated EDI interfaces with ILECs for telephony service provisioning and
customer care center systems and equipment. These investments and utilization
of third-party leasing agents reduce the cost of acquiring customers and
improve the Company's ability to increase subscription rates.
Selling, General and Administrative Expenses
The principal component of OnePoint's selling, general and administrative
expenses is employee compensation and benefits. Other significant components
include marketing expenses, facilities rental costs and depreciation and
amortization, communications and information systems and
professional/consulting fees.
Capital Expenditures
Telephony. The Company currently offers telephony services through a resale
platform, thereby avoiding capital expenditures for network facilities. The
Company plans to replace selectively its resale platform with a facilities-
based infrastructure as warranted by subscriber traffic levels and the
availability of alternative network facilities within each market in order to
improve gross margins. Such investments may include installation of switches,
installation of digital loop carriers and leasing of transmission capacity
from ILECs. The Company will also evaluate the potential for leasing
transmission facilities and/or partitioning switch capacity from facilities-
based CLECs with excess capacity. Expenses for operating and maintaining
equipment may increase significantly as the Company's investment in network
facilities increases, although such increases are expected to be offset by
savings from the elimination of certain other costs, such as local access and
origination fees. The Company may incur other costs, including installation of
inside telephony wiring required for newly constructed properties, for which
costs vary according to the number of buildings and units on the property.
Video. Capital expenditures for video services vary according to the number
of properties served, the number of units in the MDUs, and the delivery
platform. SMATV systems require multiple large receiving dishes and headend
equipment for each property. Point-to-point microwave links enable the
utilization of a single
46
<PAGE>
headend for multiple properties via installation of transmission and reception
equipment at each property. The DBS delivery platform requires a single
receiving dish for each property and less expensive headend equipment, if any.
Converter boxes are required for certain network configurations and services.
Installation of inside wiring is required for newly constructed properties
with costs varying according to the number of buildings and units on the
property. Additional capital expenditures may be required to upgrade or
retrofit equipment, depending on the age, configuration and capacity of
existing wiring.
Historical Results of Operations
From its inception in 1996 until January 1998, the Company engaged
principally in procuring governmental authorizations, negotiating telephony
and video Rights of Entry 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. Accordingly, the Company's
historical results should not be relied upon as an indicator of future
performance.
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998.
Revenue
The Company began actively marketing its services during the first quarter
of 1998. Total revenues for three months ended March 31, 1999 were $4.4
million compared to $0.1 million in three months ended March 31, 1998.
Telephony revenues and cable television revenues for three months ended March
31, 1999 were $3.3 million and $1.1 million, respectively.
Cost of Revenue
Cost of revenue (programming, telecommunication service costs and payments
to owners and employees of MDUs) was $4.2 million in three months ended March
31, 1999 as compared to $0.5 million in three months ended March 31, 1998.
Revenue for the three months ended March 31, 1999 exceeded cost of revenues by
$0.2 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $10.1 million in three
months ended March 31, 1999 compared to $3.2 million in three months ended
March 31, 1998, an increase of $6.9 million. This was primarily the result of
increases in personnel and related costs 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 services through resale agreements with the ILECs and is
dependent on the ILECs for the efficiency of order processing and installation
while it operates on a resale platform.
Depreciation and Amortization
Depreciation and amortization was $0.6 million in three months ended March
31, 1999 compared to $0.1 million in three months ended March 31, 1998, an
increase of $0.5 million. The increase is primarily attributable to an
increase in cable and telephone systems and intangible assets resulting from
purchases and construction of such equipment during the three months ended
March 31, 1999.
Interest Income and Expenses
Interest expense was $4.2 million in three months ended March 31, 1999. The
Company had no interest expense in three months ended March 31, 1998. The
increase results from the interest accrued on the Notes, which were issued in
May 1998. Interest income was $0.9 million in three months ended March 31,
1999, compared to $44,000 in three months ended March 31, 1998. The increase
reflects interest income from short-term investment of the proceeds from the
offering of the Notes.
47
<PAGE>
Equity in Losses in Unconsolidated Subsidiaries
The Company recognized an equity in losses of its unconsolidated
subsidiaries of $0.9 million. Such losses represent the Company's
proportionate share of losses from the operations of Mid-Atlantic and MAC
Interactive during the three months ended March 31, 1999 compared to an equity
loss of $0.5 million from such investments for the same period in 1998.
Extraordinary Gain
The Company repurchased approximately $32.25 million in principal amount of
its Notes during the three months ended March 31, 1999 at various prices for
an aggregate total cost of approximately $18.1 million, including accrued
interest and transaction fees, and recognized an extraordinary gain of
approximately $12.4 million related to these transactions.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenue
The Company began actively marketing its services 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. Total revenues for 1998 were $7.0 million compared to $42,669 for
1997. Telephony revenues and cable television revenues for 1998 were $4.4
million and $2.5 million, respectively. Total revenue per average billed
subscriber during the fourth quarter of 1998 was approximately $68.53 for
telephony services and $23.02 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 average billed subscriber is impacted by the relative proportion of new
subscribers incurring installation charges.
Cost of Revenue
Cost of Revenue (programming, telecommunication service costs and payments
to owners and employees of MDUs) was $8.8 million in 1998 as compared to
$82,288 in 1997. Cost of Revenue for 1998 exceeded revenues by $1.8 million
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. Total costs of telephony revenues and
cable television revenues for 1998 were $7.1 million and $1.6 million,
respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $27.9 million in 1998
compared to $12.8 million in 1997, an increase of $15.1 million, or 118%. 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 services through resale agreements with the
ILECs and is dependent on the ILECs for the efficiency of order processing and
installation. The reserve for bad debts was increased in December from 4% to
9% of telephony revenue as the Company has recently experienced an increased
volume of non-pay disconnections and anticipates this higher level of bad
debts to continue for the foreseeable future.
Depreciation and Amortization
Depreciation and amortization was $1.5 million in 1998 compared to $0.2
million in 1997, an increase of $1.3 million, or 519%. The increase is
primarily attributable to an increase in cable and telephone systems and
intangible assets resulting from purchases and construction of such equipment
and the acquisition of PCTV during 1998.
48
<PAGE>
Interest Income and Expenses
Interest expense was $15.8 million in 1998 compared to $11,286 in 1997. The
increase results from the interest accrued on the Senior Notes. Interest
income was $6.0 million in 1998, compared to $71,596 in the same period in
1997. The increase reflects interest income from short-term investment of the
proceeds from the Initial Offering.
Equity Losses of Investments in Unconsolidated Subsidiaries
The Company recognized an equity loss of $3.7 million from the operations of
Mid-Atlantic and MAC Interactive in 1998 compared to an equity loss of $3.1
million from such investees in 1997.
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Revenue
The Company commercially introduced service on a very limited basis in July
of 1997, while it was refining its organization and customer care capability.
In 1997 the Company generated revenue of approximately $43,000 from telephony
services in the Washington/Baltimore/Philadelphia metropolitan area. The
Company did not generate any revenue during 1996.
Cost of Revenue
Cost of Revenue for 1997 was approximately $82,000. This consisted of
charges from ILECs for local service, installation and order processing,
charges for long-distance usage and payments to MDU Managers and leasing
consultants. Additionally, certain connection charges from the ILECs during
1997 resulted from the manual entry of orders, prior to the completion of the
automated EDI links for provisioning of services. The Company did not generate
any revenue during 1996.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses were approximately $12.8
million for 1997, an increase of $10.8 million over 1996 expenses of $2.0
million as a result of increased development expenses, headcount and other
start-up costs. Such expenses consisted primarily of salaries and related
expenses for the development of the Company's business and operational
infrastructure, completion of regulatory filings, systems development expenses
and sales and marketing efforts directed toward MDU Managers.
Depreciation and Amortization
Depreciation and amortization was approximately $235,000 in 1997, an
increase of $216,000 over 1996 depreciation and amortization of $19,000,
primarily due to the depreciation of equipment and leasehold improvements
which were purchased in 1997.
Taxes
Income taxes will consist of federal, state and local taxes, when
applicable. The Company expects significant net losses for the foreseeable
future which should generate net operating loss ("NOL") carryforwards.
However, utilization of such prospective NOLs is subject to substantial annual
limitations. In addition, income taxes may be payable during this time due to
operating income in certain tax jurisdictions. Once the Company achieves
operating profits and the NOLs have been exhausted or have expired, the
Company may experience significant tax expense. The Company has recognized no
provision for taxes as it operated at a loss through 1997. The Predecessor was
a limited liability company, and, accordingly, NOLs for periods prior to April
29, 1998 will not be available to the Company.
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Other
The Company recognized an Equity Loss of $3.1 million from the operations of
Mid-Atlantic during 1997, based on its 50% equity ownership during the period.
Liquidity and Capital Resources
The Company has financed its development through March 1999 with $35.0
million of funding provided by VIC, $80,100 of equity invested by VenCom,
L.L.C., borrowings under the Credit Facility and the proceeds of the Initial
Offering. As a result of the Recapitalization transactions, as of March 31,
1999: (i) VIC2 owns all of the Company's outstanding capital stock; (ii) Mr.
Otterbeck indirectly owns 80.3% of VIC2's common membership units; (iii) SBC
indirectly owns 19.7% of VIC2's common membership units, and has a priority on
the first $35.0 million of distributions by VIC2 (less all principal and
interest payments on the VIC2 Note), and VIC has a warrant exercisable for
9.9% of VIC2's equity. See "The Recapitalization."
From February to June 1997, the Company made investments totalling
approximately $12.0 million in Mid-Atlantic and in December 1997 the Company
invested $750,000 in MAC Interactive to establish a separate joint venture
with the other investors in Mid-Atlantic to secure exclusive marketing rights
for certain programming services from an affiliated company. During January
1999, the Company committed to a plan to liquidate MAC Interactive. See
"Certain Relationships and Related Transactions--MAC Interactive." Net cash
used in the Company's operating activities from inception through December
1997 totaled $13.4 million. Net cash used by the Company for acquisitions of
property and equipment during this period totaled $3.0 million. As of December
31, 1997 the Company had an accumulated deficit of $18.1 million, and had cash
and cash equivalents of $5.5 million. Net cash used in the Company's operating
activities in 1998 totaled $37.7 million. Net cash used by the Company for
acquisitions of property and equipment during this period totaled $9.4
million. As of December 31, 1998 the Company had an accumulated deficit of
$(42.9) million, and had cash and cash equivalents of $5.7 million in addition
to available investments of $26.4 million (excluding the Pledged Securities).
Subsequent to December 31, 1997, the Company obtained the Credit Facility.
Borrowings under the Credit Facility as of December 15, 1998 will be amortized
over a five-year period. The interest rate on borrowings under the Credit
Facility is, at the Company's election: (i) Northern Trust's prime rate less
3/4 of 1%; (ii) LIBOR plus 50 basis points; or (iii) the federal funds rate
(as defined) plus 50 basis points. As of December 31, 1998, there was an
outstanding balance under the Credit Facility of $8.75 million and the Company
had obtained a $250,000 letter of credit under the facility. See "Description
of Certain Indebtedness."
In May 1998, the Company issued the Units for gross proceeds of $175.0
million. The Company used approximately $80.5 million of the net proceeds from
the Initial Offering to purchase Pledged Securities. The Company also used a
portion of the proceeds to pay down borrowings under the Credit Facility. From
November 1998 to June 1999, the Company used approximately $47.9 million to
repurchase $92.25 million of principal amount of Senior Notes in the open
market. The Company recognized extraordinary gains on the early extinguishment
of this debt of $19.9 million in the fourth quarter of 1998 and $12.4 million
in the first quarter of 1999. The Company expects to recognize an
extraordinary gain of $8.1 million in the second quarter of 1999. Pursuant to
the restricted securities agreement entered into in connection with the
issuance of the Notes, upon request by the Company, the trustee of the Pledged
Securities released approximately $26.7 million of such securities in February
1999 and an additional $11.5 million of Pledged Securities in July 1999. 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 balance of the net proceeds of the Initial Offering have been, or will
be, used to acquire private cable operators or their assets, to invest in
video infrastructure, to invest selectively in a facilities-based platform for
telephony services, to fund future capital calls by Mid-Atlantic, to fund
additional open-market purchases of Notes, to fund working capital and for
general corporate purposes, including operating losses. The Company is
negotiating with Northern Trust Company and SBC to obtain an additional $16
million credit facility from
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Northern Trust, which would be guaranteed by SBC. The Company expects that its
current financing, together with the additional financing from Northern Trust,
would be sufficient to meet its current capital plans. There can be no
assurance that the Company will be able to obtain the additional financing
from Northern Trust, however, and the Company may require additional capital
if it achieves market penetration for its services significantly different
than, or at a different stage than, management estimates, achieves lower than
expected pricing for its services, enters additional markets, locates
additional or larger acquisition opportunities or encounters higher than
expected costs to purchase or upgrade telephony, cable or DBS services,
equipment or facilities. The Company also expects that it will require
additional financing (or require financing sooner than anticipated) if the
Company's development plans or projections change or prove to be inaccurate or
if the Company is unable to continue to take advantage of the pricing provided
for in SBC-negotiated contracts for any reason. There can be no assurance that
the Company will be successful in raising sufficient additional debt or equity
capital, or of the terms of any such capital-raising activities. Failure to
raise and generate sufficient funds may require the Company to delay or
abandon some of its planned future expansion or expenditures, which could have
a material adverse effect on the Company's growth and its ability to compete
in the telephony and video industry. See "Risk Factors."
In June 1998, the Company, through a wholly-owned subsidiary, entered into a
definitive agreement to acquire certain assets used by Preferred
Entertainment, Inc., a subsidiary of PCTV to provide video service to MDUs in
Chicago. Pursuant to the agreement, the Company acquired Rights of Entry for
approximately 28,000 video passings in 160 properties in July through October
for total consideration of $12.4 million. The Company has begun to invest in
video reception and transmission equipment to upgrade the video services
offering for the acquired passings.
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.
Cash flows used in operating activities were $11.6 million and $5.1 million
in three months ended March 31, 1999 and three months ended March 31, 1998,
respectively, an increase of $6.5 million or 127%. The roll-out and expansion
of business operations during three months ended March 31, 1999 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.
Net cash used by the Company for acquisitions of property and equipment
during three months ended March 31, 1999 totaled $2.6 million, compared to
$0.9 million in three months ended March 31, 1998. As of March 31, 1999, the
Company had an accumulated deficit of $(40.2) million, and had cash and cash
equivalents of $6.0 million and available investments of $26.0 million, net of
the Pledged Securities totaling $46.8 million.
Cash flows from investing activities in three months ended March 31, 1999
were $30.0 million. Cash flows used in investing activities in three months
ended March 31, 1998 were $0.9 million. Cash flows from financing activities
were ($18.1) million and $1.0 million in three months ended March 31, 1999 and
three months ended March 31, 1998, respectively.
Cash flows used in operating activities were $37.6 million and $11.4 million
in 1998 and 1997, respectively, an increase of $26.2 million or 230%. 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.
Net cash used by the Company for acquisitions of property and equipment
during 1998 totaled $9.4 million, compared to $2.4 million in 1997. As of
December 31, 1998, the Company had an accumulated deficit of $(42.9)
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million, and had cash and cash equivalents of $5.7 million (excluding the
Pledged Securities) in addition to available investments of $26.4 million, net
of the Pledged Securities totaling $73.4 million.
Cash flows used in investing activities in 1998 was $118.5 million. Cash
flows used in investing activities in 1997 was $2.6 million. Cash flows
provided by financing activities was $156.5 million and $19.4 million in 1998
and 1997, respectively.
The Company is currently incurring liquidated damages resulting from its
failure to have this Registration Statement declared effective by the
Commission by November 17, 1998. The Company incurred liquidated damages of
approximately $5,000 to $7,000 per week through February 17, 1999, based on
the amount of Notes outstanding. Following an escalation on February 17, 1999,
liquidated damages (based on the Notes outstanding at March 31, 1999), are
accruing at approximately $10,000 per week. On May 17, 1999 these damages
escalated to approximately $15,000 per week, with subsequent escalations each
90 day period thereafter up to a maximum penalty of approximately $51,000 per
week.
The Company has entered into a long-term contract with VenCom whereby the
Company is required to make annual payments of up to $0.9 million to VenCom
for financial and management consulting services and assistance with capital
financing activities. Pursuant to this agreement, the Company receives ongoing
consulting services in exchange for annual payments of $0.75 million and is
required to pay a fee of 2% of any capital raising activity or acquisition
activity, including debt and equity transactions. The Company has accrued $3.5
million of fees related to the issuance of the Old Notes, of which
approximately $0.2 million has been paid through March 31, 1999. The Company's
chairman and chief executive officer is the sole shareholder of VenCom.
The Company has entered into agreements with the owners of MDUs whereby the
Company has exclusive rights to provide video services and preferred provider
status for the provision of bundled telephony services to the occupants of the
MDU. These agreements are typically for periods from five to seven years and
contain renewal options. Certain of these agreements require the Company to
pay the MDU owner a fixed fee per year based on the number of units subject to
the contract without regard to the occupant's use of the Company's services
while other agreements require the Company to pay varying amounts per month
based on actual usage of the Company's services by the MDU occupants.
The Company's future results of operations will be materially impacted by
its ability to finance its planned business strategies. A considerable portion
of the Company's capital expenditure requirements are scaleable dependent upon
the number of Right of Entry 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 Rights of Entry, (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, and (v) the expansion to
additional markets, if any.
Results of Operations for VIC-RMTS-DC, LLC
Three Months Ended March 31, 1999 Compared with Three Months Ended March 31,
1998
Revenue
VIC-RMTS-DC, LLC's total revenues for the three months ended March 31, 1999
were $0.9 million compared to $0.1 million in the three months ended March 31,
1998, as VIC-RMTS-DC, LLC significantly increased its volume of operations
throughout three months ended March 31, 1999.
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Cost of Revenue
Cost of revenue (telecommunication service costs and payments to owners and
employees of MDUs was $1.1 million in the three months ended March 31, 1999 as
compared to $0.3 million in the three months ended March 31, 1998. Cost of
revenue for the three months ended March 31, 1999 exceeded revenue by $0.2
million 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $2.8 million in the three
months ended March 31, 1999 compared to $1.5 million in the three months ended
March 31, 1998, an increase of $1.3 million, or 87%. This was primarily the
result of increases in personnel and related costs associated with the
initiation of service and the increased volume of subscribers for VIC-RMTS-DC,
LLC's communications services. VIC-RMTS-DC, LLC continues to experience higher
than anticipated customer activation costs as it currently provides services
through resale agreements with the ILECs and is dependent on the ILECs for the
efficiency of order processing and installation.
Depreciation and Amortization
Depreciation and amortization was $93,000 in the three months ended March
31, 1999 compared to $54,000 in the three months ended March 31, 1998, an
increase of $39,000 or 72%. The increase is primarily attributable to an
increase in telephone systems and intangible assets resulting from purchases
and installation of such equipment.
Year Ended December 31, 1998--Compared with Year Ended December 31, 1997
Revenue
VIC-RMTS-DC, LLC's total revenues for 1998 were $1.7 million compared to
$43,000 in 1997, as VIC-RMTS-DC, LLC significantly increased its volume of
operations throughout 1998.
Cost of Revenue
Cost of Revenue (telecommunication service costs and payments to owners and
employees of MDUs) was $2.8 million in 1998 as compared to $82,000 in 1997.
Cost of Revenue for the twelve months ended December 31, 1998 exceeded revenue
by $1.2 million 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $10.3 million in 1998
compared to $4.6 million in 1997, an increase of $5.7 million, or 124%. This
was primarily the result of increases in personnel and related costs
associated with the initiation of service and the increased volume of
subscribers for VIC-RMTS-DC, LLC's communications services. VIC-RMTS-DC, LLC
continues to experience higher than anticipated customer activation costs as
it currently provides services through resale agreements with the ILECs and is
dependent on the ILECs for the efficiency of order processing and
installation. The reserve for bad debts was increased in December 1998 from 4%
to 9% of telephony revenue as VIC-RMTS-DC, LLC has recently experienced an
increased volume of non-pay disconnections and anticipates this higher level
of bad debts to continue for the foreseeable future.
Depreciation and Amortization
Depreciation and amortization was $0.3 million in 1998 compared to $0.2
million in 1997, an increase of $0.1 million, or 50%. The increase is
primarily attributable to an increase in telephone systems and intangible
assets resulting from purchases and installation of such equipment.
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Liquidity and Capital Resources of VIC-RMTS-DC, LLC
VIC-RMTS-DC, LLC has financed its development with $23.9 million of
contributed equity by unit holders.
Cash flows used in operating activities were $3.2 million and $2.0 million
in the three months ended March 31, 1999 and the three months ended March 31,
1998, respectively, an increase of $1.2 million, or 60%. The roll-out and
expansion of business operations during the three months ended March 31, 1999
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.
Net cash used by VIC-RMTS-DC, LLC for acquisitions of property and equipment
during the three months ended March 31, 1999 totaled $0.2 million, compared to
$0.3 million in the three months ended March 31, 1998. As of March 31, 1999
VIC-RMTS-DC, LLC had an accumulated deficit of $(20.3) million, and had no
cash or cash equivalents.
Cash flows used in investing activities in the three months ended March 31,
1999 were $0.2 million. Cash flows used in investing activities in the three
months ended March 31, 1998 were $0.3 million. Cash flows provided by
financing activities were $3.4 million and $2.3 million in the three months
ended March 31, 1999 and the three months ended March 31, 1998, respectively.
Cash flows used in operating activities were $12.1 million and $4.3 million
in 1998 and 1997, respectively, an increase of $7.8 million or 181%. 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.
Net cash used by VIC-RMTS-DC, LLC for acquisitions of property and equipment
during 1998 totaled $1.2 million, compared to $1.1 million in 1997. As of
December 31, 1998 VIC-RMTS-DC, LLC had an accumulated deficit of $(17.2)
million, and had no cash and cash equivalents.
Cash flows used in investing activities in 1998 were $1.2 million. Cash
flows used in investing activities in 1997 were $1.1 million. Cash flows
provided by financing activities were $13.3 million and $5.4 million in 1998
and 1997, respectively.
VIC-RMTS-DC, LLC 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 internet services.
VIC-RMTS-DC, LLC's future cash requirements will depend on a number of factors
including (i) the rate at which VIC-RMTS-DC, LLC secures Rights of Entry, (ii)
the level of penetration achieved for telephony services and the pricing of
such services, (iii) the rate at which VIC-RMTS-DC, LLC deploys telephony and
internet facilities, the cost of equipment required to do so, and its ability
to aggregate traffic onto VIC-RMTS-DC, LLC's facilities, (iv) the expansion to
additional markets, if any.
VIC-RMTS-DC, LLC's future results of operations will be materially impacted
by its ability to finance its planned business strategies. VIC-RMTS-DC, LLC
expects that its current financing, together with additional financing from
the Company's proposed credit facility from Northern Trust, would be
sufficient to meet its current capital plans. There can be no assurance that
the Company will be able to obtain the additional financing from Northern
Trust, however.
Year 2000 Issue
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's 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
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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.
The Company has completed the assessment phase for substantially all of the
major components of the systems purchased to date, and continues to assess all
new purchases or upgrades. The Company estimates it has completed testing for
approximately 75% of its overall systems and anticipates concluding the
remediation and testing phase by August 31, 1999. The Company anticipates
completing the development of contingency plans to handle the most reasonably
likely worst case year 2000 scenarios by Sept. 30, 1999.
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 internal software applications. The Company
believes all internal systems and software have been purchased or developed
after 1995 and will thus be Year 2000 compliant. 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 received written confirmation of
their compliance or their intention to become compliant before the Year 2000
(although these assurances are not legally binding). 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 the Company is
planning the upgrade. Each of the desktop computers is a Compaq Deskpro-line
PC running either Windows 95 or Windows NT 4.0, which, based on the Company's
review of manufacturer information contained on their web sites, are compliant
according to the manufacturer. The BIOS of each of these machines has been
updated by the Company based on manufacturer recommendations. The customer
care and billing system, provided by CSG is Year 2000 compliant and has been
tested by CSG. The telephony provisioning system, provided by Beechwood Data
Systems is reported to be Year 2000 compliant and has been tested by Beechwood
Data Systems. 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 assurances
received by the Company regarding Year 2000 compliance are not legally
binding. 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 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
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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 OnePoint'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 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 the Company's internal
systems fail, but those of its 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 contingency plans after it has monitored 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 timely progress toward their year 2000
compliance.
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 results of operations and financial condition and its
ability to meet its obligations on the Notes.
Inflation
The Company's obligations under the Credit Facility bear interest at
floating rates, and an increase in interest rates could adversely affect,
among other things, the Company's ability to meet its debt service
requirements.
Impact of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("Statement 130"), which establishes standards for the reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Statement 130 is effective for fiscal years
beginning after December 15, 1997. Disclosure of total comprehensive income is
required in interim period financial statements. The Company did not have any
components of comprehensive income for prior periods, accordingly, adoption of
this standard did not affect net income or comprehensive income prior to 1998.
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In June, 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("Statement 131"), which is effective for years beginning after December 15,
1997. However, Statement 131 need not be applied to interim financial
statements in the initial year of application. Statement 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. Since Statement 131 is effective for financial statements for
fiscal years beginning after December 15, 1997, the Company adopted the new
requirements in 1998 and prior period disclosures.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and for Hedging Activities
("Statement 133"). Statement 133 is effective for years beginning after June
15, 1999. Statement 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities.
Management does not anticipate that the adoption of Statement 133 will have a
material impact on its financial position or the results of its operations.
In Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). This Statement of Position provides guidance on the
financial reporting of start-up costs and organization costs. It requires
costs of start-up activities and organization costs to be expensed as incurred
and broadly defines start-up activities SOP 98-5 applies to all non-
governmental entities, except for certain entities, and is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company will recognize the effects of the initial application of SOP 98-5 as
the cumulative effect of a change in accounting principal, as described in
Accounting Principles Board (APB) Opinion No. 20, Accounting Changes. The
Company will not report the pro forma effects of retroactive application of
SOP 98-5.
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BUSINESS
The Company
OnePoint Communications Corp. is a rapidly growing provider of bundled
telephony and video services to residents of MDUs in high growth, densely
populated urban and suburban markets. The Company offers MDU residents bundled
telephony and video services at moderate to significant discounts to prices
charged by ILECs, IXCs or franchise cable providers with the convenience of
"one point" of contact and a single integrated bill for such multiple
services. OnePoint seeks to offer bundled telephony and video services by
entering into long-term contracts providing Rights of Entry with MDU Managers
and, where appropriate, by acquiring private cable television operators having
exclusive video Rights of Entry for MDUs. Where the Company is initially
unable to obtain video Rights of Entry, it may pursue alternative
arrangements, such as co-marketing with the incumbent operator, in order to
provide bundled services. In addition, the Company plans to enhance its
existing bundled product offering by introducing high speed Internet access
service by the end of 1998.
The Company was founded in 1996 with a $35 million investment, primarily
from a subsidiary of SBC (the sole stockholder of Southwestern Bell Telephone
Co., an RBOC). The Company's strategy evolved from SBC's highly successful
SmartMoves(R) program for marketing to MDU residents within SBC's service
area. As a result of the Recapitalization, SBC currently indirectly owns 19.7%
of the Common Stock of the Company. The remaining 80.3% of the Company's
Common Stock is indirectly owned by James A. Otterbeck, the Company's Chairman
and Chief Executive Officer.
Through March 1999, the Company had entered into long term contracts with 7
national REITs and numerous other MDU Managers providing for approximately
219,300 telephony passings and 29,600 video passings in the Company's 6
targeted markets. From February to June 1997, the Company made investments
totalling approximately $12.0 million in Mid-Atlantic, a large private cable
television operator with approximately 50,000 subscribers in the
Washington/Baltimore/Philadelphia metropolitan area. The Company currently
holds an approximately 41.4% equity interest in Mid-Atlantic. As a result of
its interest in Mid-Atlantic, the Company has begun marketing local and long
distance telephony services to Mid-Atlantic's video passings.
The Company's current targeted markets are Atlanta;
Charlotte/Raleigh/Durham; Chicago; Denver; Phoenix; and
Washington/Baltimore/Philadelphia, in each of which it has aggregated over
10,000 telephony passings. The Company is an authorized CLEC and has obtained
authority for the resale of local exchange services in eleven states
(Colorado, Delaware, Florida, Georgia, Illinois, Maryland, North Carolina,
Pennsylvania, South Carolina, Tennessee and Virginia) and the District of
Columbia. Additionally, it has applied for CLEC status in Arizona and is
permitted to provide telecommunications services there while its application
is pending.
Commencing in July 1997, the Company initiated service in a limited number
of MDUs in order to refine its billing, provisioning and customer care
infrastructure. In January 1998, the Company began actively marketing its
services. From the beginning of the year through December 1998, the Company
had marketed telephony services to a total of 150,000 units (including
approximately 30,500 Mid-Atlantic video passings), and has marketed video
services to approximately 30,000 units (not including Mid-Atlantic video
passings). Through December 1998 the Company's Penetration Rate was 11.4% and
57.8%, respectively, for telephony and video. The Company primarily targets
new residents and believes that it will be able to achieve significantly
higher telephony Penetration Rates with respect to such residents, who are
introduced to the Company's services when moving in. The Company estimates
that overall Penetration Rates will lag behind new resident Penetration Rates
but will increase over time as a result of residential turnover. According to
data compiled by the National Multi-Housing Council, annual apartment turnover
rates average 35% to 40%.
The Company offers a wide range of services, including local telephony,
domestic and international long distance telephony and cable and DBS
television. The Company also enhanced its bundled product offerings by
offering high-speed Internet access service on a trial basis during 1998. The
Company currently delivers telephony services exclusively through resale of
services offered by ILECs and an IXC. Management believes
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that the Company's long distance resale cost position is superior to those of
other similarly sized CLECs as a result of the Company's affiliation with SBC.
During 1999, the Company expects to begin selectively replacing its resale
platform with higher margin facilities-based services as warranted by
subscriber traffic levels. Video services are delivered through SMATV or DBS
systems and point-to-point 18GHz microwave links. Management believes that the
Company's expanded use of DBS systems will reduce capital requirements and
expand the number of channels available.
Key Strategic Relationships
The Company has several relationships and agreements which management
believes offer significant advantages, including:
SBC. The terms of certain contracts pursuant to which SBC purchases
products and services are available to the Company and other entities in
which SBC has a sufficient equity interest. Accordingly, the Company has
been able to purchase a number of products and services from third parties
at prices lower than those that would otherwise be available to it. Through
such arrangements, OnePoint purchases long distance service from an IXC and
has leveraged SBC's procurement function to purchase telecommunications
equipment. As the Company invests selectively in a facilities-based
telephony strategy, management believes the Company may be able to obtain
further cost advantages in the purchase of telephony equipment based on
similar arrangements with vendors. Management believes that these
arrangements will enable the Company to provide a bundled communications
offering at a competitive price and provide opportunities for better
margins than competitors lacking such an affiliation can achieve. The
Company's ability to purchase services and equipment under these
arrangements is dependent upon (i) SBC's continued ownership of an equity
interest in the Company which meets or exceeds the definition of
"affiliate" in the underlying contracts and (ii) the continuation of the
current underlying SBC contracts or their replacement by SBC with contracts
having comparable terms. In addition, SBC has guaranteed the Company's
payment obligations under its $9 million Credit Facility with Northern
Trust and two of the Company's leases for office space.
Mid-Atlantic. In late 1997, the Company and Mid-Atlantic began joint
marketing of telephony and video services under the OnePoint brand name on
a building by building basis to the passings served by Mid-Atlantic in the
Washington/Baltimore/Philadelphia metropolitan area. The Company has also
partnered with Mid-Atlantic to develop integrated customer care and billing
capabilities designed to support both telephony and video services. The
principals of Mid-Atlantic own a minority interest in the Company's
telephony operations in the six-state Mid-Atlantic region.
Relationships with National REITs. Management estimates that the seven
national REITs, including Equity Residential Properties Trust and AIMCO,
with which the Company has entered into agreements providing for telephony
Rights of Entry control approximately 10% of the MDUs in the Company's
targeted markets. The Company seeks to obtain video and/or Internet Rights
of Entry for the buildings in which it has telephony Rights of Entry, and
believes its relationships with such REITs and other MDU Managers will be a
competitive advantage in winning video Rights of Entry (when existing
agreements expire or are otherwise terminated) and Internet Rights of
Entry. Management believes that the REIT industry is growing and
concentrating, and that the REITs with which it has relationships are
seeking to acquire additional properties and/or other REITs, which should
provide opportunities for the Company to obtain additional Rights of Entry.
Market Opportunity
MDUs comprise a wide variety of high density residential complexes,
including high and low-rise apartment buildings, condominiums and
cooperatives. According to the U.S. Census Bureau, over 24 million residential
housing units were included in these categories as of 1990 and an additional
1.3 million new apartments were completed from 1991 to 1997. Of the over 24
million units nationwide as of 1990, approximately 2.8 million were within the
Company's existing or targeted markets. The following table sets forth the
approximate MDU
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units currently subject to the Company's Rights of Entry and other marketing
opportunities in the Company's targeted markets as of March 31,1999.
<TABLE>
<CAPTION>
MDU Units
Other MDU Marketing Total MDU Actively
MDU Passings Opportunities Opportunities Marketed(1)
---------------- --------------------- ----------------- ----------------
Market Telephony Video Telephony(2) Video(3) Telephony Video Telephony Video
------ --------- ------ ------------ -------- --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Atlanta................. 32,800 800 300 32,300 33,100 33,100 28,300 800
Charlotte/Raleigh/
Durham................. 15,100 -- -- 15,100 15,100 15,100 10,300 --
Chicago................. 13,500 28,800 25,200 10,800 38,700 39,600 9,400 28,800
Denver.................. 17,000 -- -- 17,000 17,000 17,000 10,600 --
Phoenix................. 40,400 -- -- 40,400 40,400 40,400 26,000 --
Washington/Baltimore/
Philadelphia........... 100,500 -- 61,200 100,500 161,700 100,500 81,000 --
------- ------ ------ ------- ------- ------- ------- ------
Total................ 219,300 29,600 86,700 216,100 306,000 245,700 165,600 29,600
======= ====== ====== ======= ======= ======= ======= ======
</TABLE>
- --------
(1) Units in MDUs in which the Company had one or more subscribers as of March
31, 1999.
(2) MDU Units for which Mid-Atlantic has video Rights of Entry but for which
the Company does not currently have telephony Rights of Entry or does not
actively market telephony services.
(3) MDU Units for which the Company has telephony Rights of Entry, but does
not currently have video Rights of Entry.
The Company has targeted the markets listed above primarily because of their
high proportion of REIT-controlled MDUs, attractive growth rates, availability
of SBC-owned assets (currently in Chicago and Washington, D.C.) and sufficient
potential subscriber density to permit a subsequent move to a facilities-based
telephony platform. Pursuant to its "smart-build" strategy, the Company seeks
to utilize the most cost-effective means of providing services in a market,
and management believes that significant opportunities exist with respect to
underutilized facilities of other CLECs, many of which target business
customers.
Management believes that the MDU market is growing and consolidating. The
following table sets forth information regarding the estimated number of
apartments in each of the Company's targeted markets, and the projected growth
rate in apartments in such markets from 1997 to 2000. The table does not
include condominiums, townhouses, cooperatives and other types of MDUs.
<TABLE>
<CAPTION>
Estimated
Number of 1997-2000
Total MDU Estimated MDU
Market Units in 1997 Growth Rate
------ ------------- -------------
<S> <C> <C>
Atlanta....................................... 282,000 6.7%
Charlotte/Raleigh/Durham...................... 119,000 10.9%
Chicago....................................... 443,000 4.5%
Denver........................................ 125,000 11.2%
Phoenix....................................... 216,000 13.0%
Washington/Baltimore/Philadelphia............. 652,000 6.5%
</TABLE>
Source: The REIS Reports, Inc.
Business Strategy
OnePoint's objective is to be a leading provider of bundled telephony and
video services to MDU residents in selected markets. The key elements of the
Company's strategy are as follows:
. Focus on Dense Concentrations of Demographically Attractive Customers.
The Company targets high revenue potential "A" and "B" properties in
markets where it can aggregate at least 10,000 telephony and/or video
passings. Management believes that residents of such buildings tend to
have high demand for telephony and video services and will find the
Company's superior customer service, lower prices and the convenience of
"one point" of contact for multiple services attractive. High customer
density reduces per-unit capital costs and increases the efficiency of
the Company's sales, marketing, installation and repair efforts.
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. Utilize a "Smart-Build" Strategy to Expedite Customer Acquisition and
Minimize Initial Investment Risk. OnePoint seeks to minimize initial
investment risk by developing a subscriber base in its markets prior to
making significant investments in telephony switching, transport and
digital loop carrier equipment. Telephony services are currently
delivered through a resale platform. The Company plans to replace
selectively its resale platform with higher margin facilities-based
services as warranted by subscriber traffic levels and the availability
of alternative network facilities within each market. The Company plans
to move toward a network design based on Company-owned switches and
leased unbundled network elements ("UNEs"), including transmission
facilities, on an incremental basis. Management believes that this
approach balances the cost savings and capital expenditure requirements
associated with a facilities-based platform. Video services are provided
through SMATV and DBS systems and point-to-point 18GHz microwave links.
As a private cable operator, the Company is not required to serve any
particular customer base and generally does not incur capital costs to
build its video systems until it has obtained a Right of Entry for the
property. The Company expects to deploy digital DBS systems where
justified, based on subscriber demographics and demand. Management
believes that this "smart-build" strategy reduces up-front capital
expenditures, expedites entry into markets and MDUs and allows the
Company to take advantage of evolving regulatory and technical
developments.
. Leverage SBC Affiliation. The Company realizes significant benefits from
favorable costs on certain services and equipment made available to SBC
and its affiliates by third party vendors. The availability of these
favorable costs is dependent upon (i) SBC's continued ownership of an
equity interest in the Company which meets or exceeds the definition of
"affiliate" in the underlying contracts and (ii) the continuation of the
current underlying SBC contracts or their replacement by SBC with
contracts having comparable terms. Through such arrangements, the Company
currently purchases wholesale long distance telephony services at the
prices negotiated by SBC and has purchased telecommunications equipment.
The Company also benefits from SBC's technical and regulatory expertise
as well as access to personnel with specialized knowledge.
. Build Customer Base Through Long-Term Contracts. OnePoint enters into
long-term contracts with MDU Managers providing Rights of Entry for
telephony and video services. The Company's bundled telephony and video
services should benefit MDU Managers by differentiating their properties
and potentially raising rental values. OnePoint also provides revenue
sharing programs for property owners and commissions, and training and
support for on-site leasing consultants at the MDUs it serves. These
programs motivate the leasing consultants to serve as an effective face-
to-face sales channel to residents. The Company also seeks to become the
exclusive video service provider to the buildings in which it has
telephony Rights of Entry, and believes its relationships with MDU
Managers will be a competitive advantage in obtaining video Rights of
Entry (when existing agreements with other providers expire or are
otherwise terminated) and Internet Rights of Entry.
. Build Customer Base Through Acquisitions. The Company believes it can
further build its customer base by acquiring established private cable
television operators with MDU video Rights of Entry, or acquiring assets
from such operators. The Company believes it can cross-sell its local and
long distance telephony services to acquired video subscribers by
promoting the convenience of a single point of contact, integrated
billing and pricing incentives. In furtherance of its strategy, the
Company recently consummated the PCTV Acquisition and is engaged in
discussions with respect to additional acquisitions. See "Recent
Developments." In addition, in February 1998, the Company acquired
equipment and infrastructure and assumed telephony and video services
agreements in connection with two MDUs with a total of 964 passings
located in Atlanta, Georgia.
. Increase Revenue Through Bundling, Creative Marketing and Cross-
Promotions. OnePoint seeks to increase revenue by offering customers
incentives to purchase bundled services, such as discounted video
services for long-distance subscribers and all-in-one bundled prices for
local and long distance telephony and video services. To the extent
permitted under FCC rules, subscribers to each service receive
information about the Company's other services in their bill. Residents
can subscribe for available services by completing a single form when
leasing an apartment, can schedule a single installation visit for all
services, and thereafter receive a single integrated bill for all
services. Management believes the
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bundling of telephony and video services leverages sales, marketing and
servicing costs, increases market penetration, reduces churn and improves
account collections.
. Provide Superior Customer Care. The Company has developed an integrated
billing system and an advanced customer care facility, which opened in
June 1997. The Company seeks to provide customer care that is superior to
that of incumbent providers, including prompt, courteous repair service,
a single toll-free number for telephony and video customer service and
"hassle-free" installation, with a single installation service call for
all services that can be made on an expedited basis and without the
subscriber present. As a private cable television provider, the Company
can also provide customized programming in each building to match the
demographics and special interests of residents.
Management believes that OnePoint's MDU Manager relationships, its smart-
build approach and its favorable cost position due to its relationship with
SBC are significant competitive advantages. The Company's focus on MDU
customers enables it to concentrate its marketing, service and support
efforts, and requires lower capital costs per unit than targeting other
residential customer groups. The MDU focus also permits the Company to offer
programming and promotions targeted to the demographic characteristics of a
specific building. The Company's Rights of Entry give it the exclusive right
to market its services using the MDU's leasing staff as an on-site face-to-
face sales channel. The smart-build approach permits the Company to enter
markets quickly with a limited initial capital commitment, as compared to a
facilities-led approach which requires significant up-front capital
expenditures prior to providing service and gaining market share. In addition,
management believes that the Company currently has a favorable cost position
for long distance telephony services.
Management Expertise
OnePoint believes that its management and operations team is a critical
component of its initial success and will continue to be a key element of
differentiation for the Company. The Company has built an aggressive and
experienced management team with extensive prior experience at ILECs, CLECs,
IXCs and cable television companies, including MFS Communications Company, MCI
WorldCom, Sprint, and AT&T, among others. James A. Otterbeck, the Company's
Chairman and Chief Executive Officer has served as a Vice President of Gemini
Consulting, where he co-founded and managed the $100 million global
communications business unit of the firm. Mr. Otterbeck has also previously
worked for AT&T Bell Laboratories in product design and management positions
and has worked at IBM in sales and marketing positions. William F. Wallace,
the Company's President and Chief Operating Officer, served as the Chief
Operating Officer of Gemini Consulting, where he co-founded and built Gemini
Consulting's communications business unit with Mr. Otterbeck over a four year
period. See "Management."
Financing Strategy
The Company used approximately $80.5 million of the net proceeds from the
Initial Offering to fund the purchase of the Pledged Securities, which is
intended to provide funds sufficient to pay in full when due the first seven
scheduled interest payments on the Notes. Following the Company's open market
purchases of Notes, the trustee of the Pledged Securities released $26.7
million of such securities in February 1999 and an additional $11.5 million of
such securities in July 1999 relating to the repurchases of Notes in March and
June of 1999. The Pledged Securities are pledged as security for the repayment
of principal of and interest on the Notes, Liquidated Damages, if any, and all
other obligations under the Indenture. See "Use of Proceeds" and "Description
of the Exchange Notes--Interest Reserve." Other proceeds have been, or will
be, used to acquire private cable television operators or their assets, to
invest in video infrastructure, to invest selectively in a facilities-based
platform for telephony services, to repay borrowings under the Credit Facility
(which were reborrowed on December 14, 1998), to repurchase Notes, to fund
future capital calls by Mid-Atlantic, to fund working capital and for general
corporate purposes, including operating losses. The Company may require
additional capital if it achieves market penetration for its services
significantly different than, or at a different stage than current management
estimates, achieves lower than expected pricing for its services, enters
additional markets, locates additional or larger acquisition opportunities or
encounters higher than expected costs to
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purchase or upgrade telephony, cable or DBS services, equipment or facilities.
The Company also expects that it will require additional financing (or require
financing sooner than anticipated) if the Company's development plans or
projections change or prove to be inaccurate, or if the Company is unable to
continue to take advantage of the pricing provided for certain SBC-negotiated
contracts for any reason. There can be no assurance that the Company will be
successful in raising sufficient additional debt or equity capital, or of the
terms of any such capital. Failure to raise and generate sufficient funds may
require the Company to delay or abandon some of its planned future expansion
or expenditures, which could have a material adverse effect on the Company's
growth and its ability to compete in the telephony and video industry. See
"Risk Factors."
Recent Developments
In June 1998, the Company, through a wholly owned subsidiary, entered into a
definitive agreement to acquire substantially all of the assets used by
People's Choice TV Corp. and Preferred Entertainment, Inc. to provide video
service to MDUs in Chicago. Pursuant to the agreement, the Company acquired
approximately 27,800 video passings in 160 properties in July through October.
The financial statements of PCTV are attached hereto. Management expects to
invest in video reception and transmission equipment to upgrade the video
services offering for the acquired passings.
On November 6, 1998, the Warrants were separated from the Notes.
Between November 9, 1998 and June 10, 1999, the Company repurchased $92.25
million in principal amount of Notes in the open market for an aggregate total
cost of $47.9 million. The Company recognized extraordinary gains on the early
extinguishment of this debt of $19.8 million in the fourth quarter of 1998 and
$12.4 million in the first quarter of 1999. The Company expects to recognize
an extraordinary gain of $8.1 million in the second quarter of 1999. Pursuant
to the restricted securities agreement entered into in connection with the
issuance of the Senior Notes, upon request by the Company, the trustee of the
Pledged Securities released approximately $26.7 million of such securities in
February 1999 and an additional $11.5 million of such securities in July 1999.
The Company expects to request the release of an additional $11.3 million of
such securities.
On November 18, 1998, the Notes began accruing Liquidated Damages as a
result of the failure of the Exchange Offer Registration Statement to be
declared effective by the SEC.
In December 1998 the Company borrowed $8.75 million and a $250,000 letter of
credit was issued on its behalf under the Credit Agreement.
The Company is at various stages of discussion with respect to other
potential acquisitions in its targeted markets but it is not a party to a
purchase agreement or letter of intent with respect thereto. The Company is
also negotiating letters of intent with franchise cable television operators
in its targeted markets providing for co-marketing of local and long distance
telephony services to residents of the MDU passings served by these franchise
cable television operators.
Delivery Platform
Telephony Services
The Company currently delivers telephony services through the resale of
services provided by the ILECs and an IXC. The resale of telephony services is
less capital-intensive than providing facilities-based local and long distance
services and the Company believes resale will be more economically attractive
until a critical mass of customers is obtained. It also allows rapid service
deployment in any location that is served by the ILEC and does not require
service interruption, change in service of any significance or change in
telephone number for the customer. This platform ensures customers receive all
available services with the reliability and redundancy
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enjoyed by ILEC customers, and the Company and its customers further benefit
by having the ILEC manage a degree of operational risk and complexity for
services such as 911, directory and operator assistance. Resale can also be
migrated to a UNEs-based platform (where offered by the ILECs) by extending
the responsibilities of the Company and taking on the rebundling role that the
underlying carrier currently performs.
Commencing in 1999, the Company plans to invest selectively in a network
design based on Company-owned switches and leased UNEs, including transmission
facilities, on an incremental basis. Facilities deployment requires switching
equipment, dedicated trunking to each building and remote access nodes at each
building. The Company will make network deployment decisions based on the
availability of and prices for equipment, distribution facilities and UNEs
purchased from the ILEC, which will be driven by market and regulatory
developments. As it invests selectively in a facilities-based platform, the
Company will need to take on increased operational responsibilities, including
network design and engineering and the employment and retention of a highly
expert workforce to manage and maintain the network. The Company will also
need to negotiate interconnection agreements. See "--Network Deployment."
The Company is authorized as a CLEC and has obtained authority for the
resale of local exchange services in eleven states (Colorado, Delaware,
Florida, Georgia, Illinois, Maryland, North Carolina, Pennsylvania, South
Carolina, Tennessee and Virginia) and the District of Columbia. It has also
applied for CLEC status in Arizona and is permitted to provide
telecommunications services there while its application is pending. The
Company has also received authorization to resell domestic long distance
service in the United States and international long distance service.
Telephony services are provisioned through direct EDI interfaces with the
underlying carriers. The interfaces are integrated with the Company's customer
care and billing systems and were designed in conjunction with Beechwood Data
Systems and CSG. Other computer interfaces are utilized for pre-ordering and
trouble management. These systems are in use with Bell Atlantic Corporation
("Bell Atlantic"), Ameritech Corporation ("Ameritech"), BellSouth Corporation
("BellSouth") and Sprint.
Video Services
Video services are delivered through private cable systems that serve one or
more MDUs. Service is provided through SMATV systems or DBS systems and point-
to-point 18GHz microwave links. Private cable operators are not required to
serve any particular customer base and thereby have greater flexibility with
respect to programming, service provisioning and pricing than do franchise
cable operators. Management believes that the Company's expanded use of DBS
systems will reduce capital requirements and expand channel capacity. The DBS
delivery platform utilizes only one satellite that requires a single,
lightweight, 18-inch dish, eliminating the need for the traditional
configuration of two 3-meter dishes secured to a reinforced concrete base. DBS
headend equipment also costs less than the equivalent analog equipment it
replaces, and can be installed more quickly. In addition, where inside wiring
is of sufficient capacity, the Company's use of DBS systems may eliminate the
need for headend equipment. Video services are provisioned from the Company's
integrated customer care, provisioning, trouble management and billing system.
Through use of interdiction systems, customers can be activated, deactivated,
or have service altered remotely, which allows for more efficient use of the
technical field staff.
Internet
The Company is currently offering high speed Internet access service at a
limited number of properties on a trial basis. This service allows customers
high speed connectivity to the Internet and will be offered in conjunction
with other Internet-related services, including software, content and e-mail
service. During 1999 the Company expects to more broadly deploy high speed
access in viable properties based on size and demographics. The Company
intends to deliver connectivity and provide private label wholesale access
services by partnering with a Tier 1 or 2 Internet Service Provider ("ISP").
Each property will be connected to the ISP point of presence ("POP") through
wireline or wireless T1s. The Company will most likely utilize a combination
of end-user technologies including cable modem, Ethernet and a variety of
digital subscriber line (or "xDSL") technologies to broaden deployment
opportunities. Products will be offered at varying speeds and will be priced
accordingly. The Company entered into a memorandum of understanding with an
Internet service provider to test on a limited basis an MDU-specific Ethernet-
based application in up to ten MDUs during 1998.
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The Company's Services
The Company offers a wide range of telephony and video services, which it
tailors to meet the specific needs of the customers in its target markets. The
Company offers (or plans to offer) the following services:
Local Telephony Services. The Company offers a full range of local
telephony services including enhanced features such as call forwarding,
call waiting, dial back and caller ID in all of its target markets through
resale agreements with ILECs. Former ILEC customers who switch to
OnePoint's telephony services will in most cases be able to retain their
telephone number.
Long Distance Telephony Services. The Company offers domestic and
international long distance telephony services, including "1+" outbound
calling and inbound toll free service through a resale agreement with an
IXC.
Video Services. As a private cable operator, the Company offers multi-
channel television programming customized to the demographic profile and
special interests of residents. Depending on the system, the Company offers
from 50 to 80 channels, with basic video programming featuring major cable
and broadcast networks and premium services including HBO, Cinemax,
Showtime and The Movie Channel. In addition, where installed, DBS allows
the Company to deliver up to 175 channels of programming including
exclusive sports programming and up to 50 pay-per-view channels.
Internet Services. The Company plans to offer a range of options to MDU
Managers for high-speed Internet access, depending on resident demand and
demographics. The Company believes that high speed Internet access is a
value-added amenity which will be highly attractive to MDU Managers and
will enable the Company to increase per subscriber revenue. The Company is
evaluating and testing several technologies for providing this service,
including cable modems, Ethernet and xDSL.
Programming
The Company purchases video programming primarily from a programming
wholesaler and programming suppliers. The Company has generally obtained
programming on terms and conditions that it considers reasonable and has
obtained favorable pricing as a result of its relationship with Mid-Atlantic.
OnePoint's programming includes basic channels, premium channels including
pay-per-view movies and events, adult entertainment, electronic program guide
services and digital music services, as well as retransmission arrangements
for relevant network broadcasters.
The Company generally pays a monthly fee per subscriber per channel for
programming. Programming costs increase in the ordinary course of the
Company's business as a result of increases in the number of subscribers,
expansion of the number of channels provided to customers and contractual rate
increases from programming suppliers. The Company anticipates that its
programming costs, particularly for sports programming, will increase in the
future.
Marketing
The Company focuses on MDU customers in order to concentrate its marketing,
service and support efforts and reduce its capital costs. The Company's sales
and marketing approach is aimed at three key decision-makers: the MDU
Managers, the on-site leasing staff and the residential end-user. The
Company's bundled telephony and video services offer MDU Managers the
opportunity to earn additional income through revenue sharing arrangements and
also differentiate the property. Management believes that such differentiation
enables the MDU Manager to achieve greater occupancy rates and potentially
raises rental values. On-site leasing staff are an important part of the
Company's marketing strategy, because they are a direct face-to-face sales
channel to residents. The Company provides commissions to, trains and supports
on-site leasing consultants to promote the benefits of OnePoint's service
options. The Company's Residential Marketing Coordinators work with MDU
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Managers and leasing staff to increase subscription rates. The Residential
Marketing Coordinators also provide initial and ongoing training and marketing
materials and sponsor launch events to build product and brand awareness and
encourage residents to subscribe immediately. The financial incentive to
purchase bundled services is reinforced by face-to-face marketing by on-site
leasing consultants to existing residents and to new residents at the critical
move-in period. The Company is devoting considerable efforts to promoting the
OnePoint brand name among the MDU Manager community and within MDUs for which
it has Rights of Entry. Management believes that this value-driven strategy
will lead to increased penetration, subscriber loyalty, market share and
profitability and reduced subscriber churn.
The Company offers MDU residents bundled telephony and video services at
moderate to significant discounts to prices charged by ILECs, IXCs or
franchise cable providers with the convenience of "one point" of contact and a
single integrated bill for multiple services. OnePoint uses additional
marketing and discounts to encourage the subscriber to purchase a bundle of
services (including, when available, Internet service), or to purchase premium
or feature packages. Residents are offered a simple subscription process, with
all services installed at the time of move-in. They have a single toll-free
point of contact for all telephony and video services, including service
inquiries, billing inquiries and trouble reporting. The Company provides its
customers with a single integrated bill and the opportunity to write a single
check each month for all services. The Company's resale of telephony services
ensures customers the reliability and redundancy enjoyed by customers of ILECs
and other major carriers. As a private cable operator, the Company can offer
video programming customized to the demographic profile and special interests
of residents. The Company offers a diverse line-up of high quality basic,
premium and pay-per-view programming.
Telephony and Video Rights of Entry
Telephony Rights of Entry. Through March 1999, the Company had entered into
long term contracts with 7 national REITs (Equity Residential Properties
Trust, Charles E. Smith Residential Realty, Summit Properties, United Dominion
Realty Trust, Walden Residential Properties, Inc, AIMCO and AvalonBay) and
numerous other MDU Managers providing for approximately 219,300 telephony
passings in the Company's 6 targeted markets. Each of such REIT Right of Entry
agreements has terms of five to seven years. These agreements typically grant
the Company, on a property by property basis, and, in each case, to the extent
permitted under applicable law, (i) the right to provide specific
telecommunications services to the property (including the installation and
maintenance of necessary on-site equipment and the wiring of the building) and
(ii) the right to market local, long distance and other telephony services
directly to residents of the property, including the sole right to market such
services on the property. The Company's rights under such contracts do not
prohibit other telecommunications service providers from soliciting residents
to use telecommunications services other than through on-site solicitations,
nor do they restrict third parties from providing services to a resident at
the request of such resident. Services covered under the contracts vary, and
may or may not include dial-up Internet access. The Company's right to market
its services, subject to certain limitations, typically extends to advertising
within the building through use of signs, handbills and door-to-door visits.
The Company may also train, coordinate and provide incentives to property
management personnel to provide marketing materials and telephony service
agreements to potential lessees. Under these contracts, MDU Managers typically
receive volume-based financial incentives. MDU Managers are required to
promote generally the use of the Company's services and to use their best
efforts not to permit physical entry onto the property by any other party for
the purpose of marketing or providing the services covered under the contract;
however, the contracts do not prohibit other service providers from indirectly
soliciting residents through other legal means, such as direct mailings or
telemarketing, or providing any services specifically at the request of a
resident. To the extent the Company requires permits to market or provide
services covered by the contract, MDU Managers are obligated to cooperate and
use their best efforts to assist the Company in obtaining necessary permits.
Under these contracts, an MDU Manager may, but is not obligated to, offer
additional properties to the Company. To the extent existing conflicting
agreements would prohibit the Company from offering services to residents at
offered properties, MDU Managers are obligated to terminate such agreements as
soon as legally permissible under the terms of those agreements.
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Video Rights of Entry. Through March 1999, the Company had entered into
contracts with numerous MDU Managers providing for video Rights of Entry
covering approximately 29,600 passings in the Chicago and Atlanta markets.
These contracts typically grant the Company the sole right to install, own,
operate and maintain a private cable system on the property and to provide
private cable services to the residents of the property, but do not restrict
provision of such services by others where state, local or federal laws
require such other parties to have the right to provide such services. The
Company also is granted the sole license to solicit residents on-site to
subscribe to its private cable services. Except as otherwise required by
federal, state or local laws, MDU Managers agree to refrain from granting
access to the property and any rights relating to the marketing or provision
of video/cable services to any other person or entity for the duration of the
contract. Additionally, the contracts cannot prevent third party solicitations
of residents by mail, telephone or other indirect means outside of the MDU
Managers' control. MDU Managers agree to use their best efforts to promote the
use of private cable services, and the Company is permitted to train property
management personnel to promote the Company's services. To the extent the
Company requires permits to market or provide services covered by the
contract, an MDU Manager is obligated to cooperate and use its best efforts to
assist the Company in obtaining any necessary permits.
Customer Care and Billing
The Company has implemented a flexible, customer-service oriented approach
which it believes differentiates it from the mass-market strategy of incumbent
providers. The Company provides customer service from a central care center
located in Largo, Maryland. The customer care center is equipped with a toll-
free "888-ONE-POINT" line through which customers can coordinate all of their
service needs, including the initial service order, repair and billing
inquiries. The facility utilizes an operating support system that integrates
all customer information and can be accessed by activation, billing, customer
care and technical personnel. The Company's customer care professionals,
installers and technicians have been professionally trained to address both
telephony and video service needs. A single, integrated bill is distributed to
each customer for all of the services provided by the Company to that
customer, which management believes provides a competitive advantage in its
cross-marketing efforts. In certain properties where wiring and scrambling
does not preclude the theft of video signals, the Company relies upon periodic
field audits by its technicians to monitor and detect any piracy of video
signals. The Company relies upon the software algorithms utilized by the
wholesale provider of long distance telephony services to monitor potential
fraudulent calling patterns. Through this provider, pre-established controls
and procedures to disconnect service are in place to limit the exposure from
fraudulent long-distance and international telephony calling. The Company
depends upon the credit screening processes employed by the leasing staff in
determining the suitability of the prospective tenant. Service is suspended
for non-payment after 75 days at most properties.
Portions of the customer care facility are currently operated jointly with
Mid-Atlantic. The billing and operating support system is operated pursuant to
a contract between the Company and a third party, and Mid-Atlantic reimburses
the Company for a portion of the variable expenses related to the system,
based on usage. Both the Company and Mid-Atlantic utilize the facility to
perform services for their customers, and data relating to both companies'
customers are integrated into the billing and operating support systems. In
certain circumstances, the Company relies on Mid-Atlantic's employees to
answer the Company's inbound phone calls. The Company also reimburses Mid-
Atlantic for certain payroll and other expenses with respect to shared
employees. Any event that required the separation of Mid-Atlantic and OnePoint
customer care and billing operations could result in a disruption in the
Company's ability to provide adequate service to its customers.
Information Systems
OnePoint has invested significant resources to develop tailored information
systems and procedures that it believes provide a significant competitive
advantage in terms of cost, cross-marketing and customer care. These systems
are required to enter, schedule, provision and track a customer's order from
the point of sale to the
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installation and testing of service and also include or interface with trouble
management, inventory, billing, collection and customer care systems.
Telephony services are provisioned through direct EDI interfaces with the
underlying carriers, which currently include Bell Atlantic, Ameritech,
BellSouth and Sprint. The interfaces are integrated with the Company's
customer care and billing systems and were designed in conjunction with
Beechwood Data Systems and CSG. Other computer interfaces are utilized for
pre-ordering and trouble management. The Company's employees input customer
information into the systems and interface with the ILECs to provision
services; CSG processes, prints and mails the Company's billing statements.
Network Deployment
The Company plans to deploy switching, concentration and distribution
infrastructure where it achieves significant customer density in a target
market, i.e., in locations where in excess of 2,000 local customer lines in 12
or fewer MDUs can be served from a single central office. The actual size,
class and configuration of the switch deployed will be dependent on the
concentration of subscribers, the likelihood for further utilization and the
Company's ability to obtain SBC's favorable pricing terms from vendors. The
Company may also seek to negotiate agreements to partition capacity of
existing switching facilities from the ILEC, other CLECs, or in the
Washington, D.C. and Chicago markets, from SBC or its affiliates. After
evaluating the cost-effectiveness of UNEs, the Company may elect to lease
point-to-point local loops from either the ILEC or, if available, another CLEC
to span the "last mile." The Company may also elect to lease dedicated T1
facilities to connect large and proximate properties to its switching
equipment, and will then complete the connection with its customers by
installing digital loop carriers, or other concentrating equipment, at each
property. When the Company's local switching facilities are being utilized,
the Company will dedicate long distance traffic and provide transport via
dedicated facilities to an IXC POP, thereby bypassing the ILEC's tandem
switching. While management believes that deploying switches and other
equipment is a cost-effective approach for connecting properties covered by
long-term agreements, ongoing regulatory changes may alter management's view
in this respect by creating additional opportunities through UNEs which may
lead to alternative approaches for deploying leased unbundled facilities. The
Company will make network deployment decisions based on the availability of,
and prices for, equipment, distribution facilities and UNEs purchased from the
ILEC, which will be driven by market and regulatory developments. As it
invests selectively in a facilities-based platform, the Company will need to
take on increased operational responsibilities, including network design and
engineering and the employment and retention of a highly expert workforce to
manage and maintain the network. The Company will also need to negotiate,
among other things, facilities interconnection agreements with the ILECs as
well as reciprocal compensation arrangements and 911 handling arrangements.
See "Risk Factors--Significant Capital Requirements; Uncertainty of Additional
Financing" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The Recapitalization
The Company is the successor to OnePoint Communications, LLC. The
Predecessor was originally formed in 1996 by VIC and AMI2. Through a series of
transactions from the fourth quarter of 1997 through April 1998, VenCom,
L.L.C. acquired an equity interest in the Predecessor, and the Predecessor was
recapitalized and merged with the Company in order to become a corporation.
See "The Recapitalization."
Business--Mid-Atlantic Joint Venture
From February to June 1997, the Company made investments totalling
approximately $12 million to acquire a 50% ownership interest in Mid-Atlantic.
In late 1997, the Company and Mid-Atlantic began joint marketing of telephony
and video services under the OnePoint brand name in the areas served by Mid-
Atlantic in the Washington/Baltimore/Philadelphia metropolitan area. The
Company elected not to meet capital calls in February and June of 1998, and as
a result, it currently holds an approximately 41% equity interest in Mid-
Atlantic. As of December 31, 1997, the Company's equity in Mid-Atlantic
constituted a significant portion of its assets, accounting for $9.3 million
of the Company's $19.8 million in assets (based on book values). As of
December 31, 1998, Mid-Atlantic constituted $6.2 million of the Company's
$149.3 million in assets.
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Pursuant to the terms of Mid-Atlantic's operating agreement, the joint
venture is not managed by the Company and as a consequence, the Company has
limited ability to control Mid-Atlantic and may be unable to prevent actions
by Mid-Atlantic which might be adverse to the interests of the Company. The
Company's consent is required for a limited number of actions by Mid-Atlantic,
including entry into new lines of business, entry into a merger,
consolidation, recapitalization or reorganization transaction, making of
certain payments to members or entry into transactions with insiders on other
than an arm's length basis, entry into agreements in excess of $1 million
(other than cable operator acquisitions and contracts to provide cable
services), sales of assets other than in the ordinary course, and other
strategic sales of contracts with a fair market value not exceeding $500,000
in any 12-month period, and liquidation or dissolution.
On January 15, 1999, the Company, Mid-Atlantic and other related parties
entered into the Settlement Agreement which resolved certain disputes arising
out of an arbitration demand made by the Company on August 6, 1998. The
Settlement Agreement provides, among other things, that Mid-Atlantic would
provide the necessary financial information regarding Mid-Atlantic for the
Exchange Offer and the Company's periodic filings under the Securities
Exchange Act of 1934, as amended. Also, as part of the Settlement Agreement,
the parties agreed to the formation of a new holding company, Mid-Atlantic
Telcom Plus Holding, LLC, to own the membership interests of Mid-Atlantic. In
addition, the Settlement Agreement transferred the day-to-day operations of
Mid-Atlantic Telcom Plus Interactive, LLC ("MAC Interactive") to the Company.
On March 30, 1999, the Company filed a demand for arbitration seeking a
declaratory ruling on the equity ownership of VIC-RMTS-DC, LLC. The Company
believes that the value of the assets contributed by Mid-Atlantic RMTS
Holdings, LLC was sufficient to give Mid-Atlantic RMTS Holdings, LLC a 5%
interest based on capital contributions through December 31, 1998. The manager
of Mid-Atlantic RMTS Holdings, LLC has suggested that they are entitled to an
unspecified, but higher, equity interest in VIC-RMTS-DC, LLC. OnePoint will be
entitled only to that portion of any distributions made by VIC-RMTS-DC, LLC
corresponding to its percentage equity ownership therein. On April 5, 1999,
Mid-Atlantic Holdings filed its own demand for arbitration to resolve issues
of equity ownership of VIC-RMTS-DC, LLC.
MAC Interactive
In December 1997 OnePoint invested $750,000 to acquire a 50% equity interest
(with a preferred return) in MAC Interactive. In December 1997, MAC
Interactive entered into an agreement with ODS to acquire set top boxes and
marketing rights from ODS for its pari-mutuel horse racing wagering service
for an aggregate of $750,000. It was anticipated that MAC Interactive would
provide such set top boxes and market ODS services to Mid-Atlantic
subscribers. The other investors in MAC Interactive are the investors that
also own the equity interests in Mid-Atlantic which are not owned by the
Company. VIC was a limited partner of ODS until July 1998. Pursuant to the
Settlement Agreement, the Company and the other investors have agreed to
liquidate MAC Interactive.
Mid-Atlantic Joint Venture Non-Competition Agreements
In connection with the Mid-Atlantic joint venture, the Company, its co-joint
venturer and certain of their affiliates entered into a series of Non-
Competition Agreements. Such agreements restrict the rights of such parties
(other than Mid-Atlantic and VIC-RMTS-DC, LLC, the telephony joint venture
company controlled by the Company) to provide cable and telephony services,
respectively, under certain circumstances in either (i) the "D.C. Metro" area,
defined to include Washington D.C., Baltimore, Maryland and certain areas of
Virginia, or (ii) the "Territory," defined to include the States of Delaware,
Maryland, New Jersey, Pennsylvania, and Virginia and Washington, D.C.
The agreements restrict parties other than Mid-Atlantic from pursuing any
opportunity related to, or providing, any private cable service or any
franchise cable service with less than 75,000 dwelling units passed or
available to be passed anywhere in the Territory unless such opportunity has
been offered first to Mid-Atlantic,
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and then to VIC-RMTS-DC, LLC and, within the D.C. Metro area, only if Mid-
Atlantic has ceased to develop cable opportunities therein for not less than
six consecutive months.
The agreements restrict parties other than VIC-RMTS-DC, LLC from pursuing
any opportunity related to, or providing any, telephony services in the
Territory unless such opportunity has been offered first to VIC-RMTS-DC, LLC,
and then to Mid-Atlantic and, within the DC Metro area, only if VIC-RMTS-DC,
LLC has ceased to develop telephony opportunities therein for not less than
six consecutive months.
In the event that any proposed telephony or cable acquisition would provide
a legal or regulatory conflict for SBC such that neither VIC-RMTS-DC, LLC nor
Mid-Atlantic could pursue such acquisition, there is no offer requirement.
Each party to the agreements is restricted from providing a bundled service
offering consisting of telephony and cable services (other than pursuant to
the joint venture) within the D.C. Metro area. The agreements prohibit the
recruiting or solicitation of any employees, customers, subscribers or
suppliers of either of the joint venture companies who perform services in the
Territory. The duration of such agreements with respect to any party is
dependent on such party's continued equity ownership in the joint venture
entities, and the continued operation of the joint venture entities, but last
in no event longer than one year following the end of such party's affiliation
with the joint venture entities.
Federal Regulation
The Company's networks and the provision of telecommunications services are
subject to significant regulation at the federal, state and local levels.
General FCC Regulation
The FCC regulates interstate and international telecommunications services.
The Company provides service on a common carrier basis. The FCC imposes
certain regulations on common carriers such as the RBOCs that have some degree
of market power ("dominant carriers"). The FCC imposes less regulation on
common carriers without market power ("nondominant carriers") including, to
date, CLECs. Under the FCC's rules, the Company is a nondominant carrier and
as such does not need authorization to provide domestic services and can file
tariffs on one day's notice. The FCC requires common carriers to receive an
authorization to construct and operate telecommunications facilities, and to
provide or resell telecommunications services, between the United States and
international points.
ILEC and CLEC Obligations
The Telecommunications Act is intended to increase competition. The act
opens the local services market by requiring ILECs to permit interconnection
to their networks and establishing obligations with respect to:
Reciprocal Compensation. Requires all ILECs and CLECs to complete calls
originated by competing carriers under reciprocal arrangements. The prices
charged by ILECs for terminating calls originated on a CLEC's network must
be based on a reasonable approximation of additional cost or through mutual
exchange of traffic without explicit payment.
Resale. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or
conditions. In addition, ILECs are required to offer all retail
telecommunications services to other carriers for resale at discounted
rates, based on the costs avoided by the ILEC in such offering.
Interconnection. Requires all ILECs and CLECs to permit their competitors
to interconnect with their facilities. Requires all ILECs to permit
interconnection at any technically feasible point within their networks, on
nondiscriminatory terms, at prices based on cost (which may include a
reasonable profit). At
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the option of the carrier seeking interconnection, collocation of the
requesting carrier's equipment on the ILECs' premises must be offered,
except where an ILEC can demonstrate space limitations or other technical
impediments to collocation.
Unbundled Access. Requires all ILECs to provide nondiscriminatory access
to unbundled network elements (including network facilities, equipment,
features, functions, and capabilities) at any technically feasible point
within their networks, on nondiscriminatory terms, at prices based on cost
(which may include a reasonable profit). The Supreme Court's decision in
AT&T v. Iowa Utilities Board required the FCC to reconsider which elements
should be unbundled. The FCC has initiated a remand proceeding. In the
interim, ILECs have committed to continue offering existing UNEs.
Number Portability. Requires all ILECs and CLECs to permit users of
telecommunications services to retain existing telephone numbers without
impairment of quality, reliability or convenience when switching from one
local exchange carrier to another.
Dialing Parity. Requires all ILECs and CLECs to provide nondiscriminatory
access to telephone numbers, operator services, directory assistance, and
directory listing with no unreasonable dialing delays. They must also
provide dialing parity for interLATA services and for intraLATA toll
services. LECs that have not yet implemented dialing parity for intraLATA
toll services will be required to do so by the end of 1999.
Access to Rights-of-Way. Requires all ILECs and CLECs to permit competing
carriers access to poles, ducts, conduits and rights-of-way at reasonable
and nondiscriminatory rates, terms and conditions.
ILECs are required to negotiate in good faith with carriers requesting any
or all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Where
an agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunication regulatory
commissions.
In August 1996, the FCC released a decision (the "Interconnection Decision")
establishing rules implementing the Telecommunications Act requirements that
ILECs negotiate interconnection agreements and providing guidelines for review
of such agreements by state public utilities commissions. On July 18, 1997,
the Eighth Circuit vacated certain portions of the Interconnection Decision,
including provisions establishing a pricing methodology and a procedure
permitting new entrants to "pick and choose" among various provisions of
existing interconnection agreements between ILECs and their competitors. On
October 14, 1997, the Eighth Circuit issued a decision vacating additional FCC
rules. The Supreme Court has reversed the Eighth Circuit's decision on the
pricing and "pick and choose" rules. However, the Court also determined that
the FCC's standard to determine which unbundled element must be made available
by ILECs did not comply with the statute. The FCC has initiated a new
proceeding to reconsider what unbundled network elements should be made
available.
The Telecommunications Act also requires all telecommunications carriers to
ensure that their services are accessible to and usable by persons with
disabilities. In addition, the FCC's rules require that the Company contribute
to universal service funds, the Telecommunications Relay Services fund and the
North American Numbering Plan Administrator fund. See "--Federal Regulation--
Universal Service." The Company is also subject to other FCC filing
requirements. Compliance with these obligations, individually and in the
aggregate, may cause the Company to incur substantial expenses. There can be
no assurance that these expenses will not have a material adverse effect upon
the Company's results of operations and financial condition and its ability to
meet its obligations under the Notes. In addition, the Company might incur
significant expenses to assure that its networks comply with the requirements
of CALEA. Under CALEA, telecommunications carriers are required to: (i)
provide law enforcement officials with call content and call identifying
information pursuant to a valid electronic surveillance warrant ("assistance
capability requirements"); and (ii) reserve a sufficient number of circuits
for use by law enforcement officials in executing court authorized electronic
surveillance ("capacity
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requirements"). To the extent that the Company provides facilities-based
services, it may incur costs in meeting both of these requirements. In
particular, regarding the assistance capability requirements, the government
is only required to compensate carriers for the costs of making equipment
installed or deployed before January 1, 1995 CALEA-compliant. While the
telecommunications industry is attempting to negotiate legislative and
administrative changes to this reimbursement cut-off date, as it stands today,
the Company will be financially responsible for ensuring that its post-1995
equipment is in compliance. Regarding the capacity requirements, the
government will finance any necessary increases in capacity for equipment
installed or deployed prior to September 8, 1998, and the Company will be
responsible for paying for any necessary increases in capacity for equipment
installed or deployed after that date.
Tariffs and Pricing Requirements
In October 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as the Company maintain
tariffs on file with the FCC for domestic interstate services. This order
applies to all non-dominant interstate carriers. The order does not apply to
the switched and special access services of the RBOCs or other local exchange
providers. The FCC order was issued pursuant to authority granted to the FCC
in the Telecommunications Act to "forbear" from regulating any
telecommunications services provider under certain circumstances. After a
nine-month transition period, relationships between interstate carriers and
their customers will be set by contract. At that point, long distance
companies are prohibited from filing tariffs with the FCC for interstate,
domestic, interexchange services. Carriers have the option to immediately
cease filing tariffs. Several parties have filed notices for reconsideration
of the FCC order and other parties have appealed the decision. On February 13,
1997, the United States Court of Appeals for the District of Columbia Circuit
stayed the implementation of the FCC order pending its review of the order on
its merits. Currently, that stay remains in effect and interstate long
distance telephony companies are therefore still required to file tariffs.
If the stay is lifted and the FCC order becomes effective,
telecommunications carriers such as the Company will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms and conditions on which they offer their interstate
services. The obligation to provide non-discriminatory, just and reasonable
prices remains unchanged under the Communications Act. While tariffs provide
notice of prices, terms and conditions, the Company intends to rely primarily
on its sales force and direct marketing to provide such information to its
customers. Tariffs also allow the Company to limit its liability to its
customers, including in connection with service interruptions. If tariffs are
eliminated, the Company may become subject to significantly increased
liability risks, and there can be no assurance that such liabilities will not
have a material adverse effect on the Company's results of operations and
financial condition and ability to meet its obligations under the Notes. In
addition, the Company must obtain prior FCC authorization for installation and
operation of international facilities and the provision (including resale) of
international long distance services. There has been no proposal to detariff
international services and the Company has filed tariffs to offer those
services.
Pursuant to authority granted by the FCC, the Company will resell the
international telecommunications services of other common carriers between the
United States and international points.
With respect to its domestic service offerings, various subsidiaries of the
Company have filed tariffs with the FCC stating the rates, terms and
conditions for their interstate services. The Company's tariffs are generally
not subject to pre-effective review by the FCC, and can be amended on one
day's notice. The Company's interstate and intrastate toll services are
provided in competition with interexchange carriers (including ILECs in some
cases). The Company's access services are provided in competition with the
ILECs.
With limited exceptions, the current policy of the FCC for most interstate
access services dictates that ILECs charge all customers the same price for
the same service. Thus, the ILECs generally cannot lower prices to some
customers without also lowering charges for the same service to all similarly
situated customers in the same geographic area, including those whose
telecommunications requirements would not justify the use of such lower
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prices. The FCC may, however, alleviate this constraint on the ILECs and
permit them to offer special rate packages to certain customers, as it has
done in few cases, or permit other forms of rate flexibility.
CPNI
In February 1998, the FCC adopted rules implementing Section 222 of the
Communications Act, which governs the use of customer proprietary network
information ("CPNI") by telecommunications carriers. CPNI generally includes
any information regarding a subscriber's use of a telecommunications service,
where it is obtained by a carrier solely by virtue of the carrier-customer
relationship. CPNI does not include a subscriber's name, telephone number, and
address, if that information is published or accepted for publication in any
directory format. Under the FCC's rules, a carrier may only use a customer's
CPNI to market a service that is "necessary to, or used in," the provision of
a service that the carrier already provides to the customer, unless it
receives the customer's prior oral or written consent to use that information
to market other services. A number of parties have asked the FCC to modify
several of these rules. These requests remain pending. These rules, either as
adopted or as modified, may impede the Company's ability to effectively market
integrated packages of services and to expand existing customers' use of the
Company's services.
Universal Service
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and certain information
services provided to qualifying schools and libraries and for services
provided to rural health care providers. The FCC also expanded or revised the
federal subsidies for local exchange telephony services provided to low-income
consumers and consumers in high-cost areas. Providers of interstate
telecommunications services, such as the Company, as well as certain other
entities, must pay for these programs. The Company's share of these federal
subsidy funds will be calculated based on end-user revenues. For the schools
and libraries and rural health care support mechanisms, interstate,
international, and intrastate end-user revenues will be used. For the high
cost and low income support mechanisms, contributions will be based on
interstate and international end-user revenues. Currently, the FCC is
calculating assessments based on the prior year's revenues. With respect to
subsequent years, however, the Company is currently unable to quantify the
amount of subsidy payments that it will be required to make or the effect that
these required payments will have on its financial condition. In the May 8th
order, the FCC also announced that it would revise its rules for subsidizing
service provided to consumers in high cost areas. The FCC has recently adopted
the platform for the cost model which it will use to determine the subsidies
needed for high cost areas. The Commission will be making decisions regarding
the inputs for the model in 1999. It is unclear what impact these decisions
will have on the level of subsidies for the provision of service in high cost
areas. Several parties have appealed the May 8th order. Such appeals have been
consolidated and transferred to the United States Court of Appeals for the
Fifth Circuit where they are currently pending. Several petitions for
administrative reconsideration of the order are pending. The FCC has recently
initiated additional proceedings to address universal service issues.
Long Distance and InterLATA Internet Restrictions
The Telecommunications Act codifies the ILECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
Telecommunications Act also contains special provisions that eliminate the
AT&T Antitrust Consent Decree restricting the RBOCs from providing interLATA
services and engaging in telecommunications equipment manufacturing. The
Telecommunications Act permitted the RBOCs to enter the out-of-region long
distance and interLATA Internet services market immediately upon its
enactment. Further, provisions of the Telecommunications Act permit a RBOC to
enter the long distance and interLATA Internet services market in its
traditional service area if it satisfies several procedural and substantive
requirements, including obtaining FCC approval upon a showing that the RBOC
has entered into interconnection agreements (or, under some circumstances, has
offered to enter into such agreements) in those states in which it seeks long
distance relief, the interconnection agreements satisfy a 14-point "checklist"
of competitive requirements, and the FCC is satisfied that the RBOC's entry
into long distance markets is in the public interest. To date, several
petitions by RBOCs for such entry have been denied by the FCC, and none has
been granted.
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Due to SBC's indirect ownership of 19.7% of the sole stockholder of the
Company, the Company may considered to be an affiliate of SBC for regulatory
purposes, and may be therefore prohibited from providing long distance
telephony service to customers in the SBC Region. On May 11, 1998 SBC
announced that it had agreed to merge with Ameritech to create a
telecommunications company with a "national-local" focus to compete against
ILECs, CLECs, long distance companies and global competitors. SBC stated that
it hoped to complete the merger within a year, but noted that the merger is
subject to approval by stockholders, the public utilities commissions in the
Ameritech Region, other local regulators and the Federal Communications
Commission. The merger is also subject to review by the United States
Department of Justice. As potentially an affiliate of SBC for regulatory
purposes, the Company may be prohibited from providing long distance service
and interLATA Internet services to customers in the SBC Region, and if
Ameritech has not received approval to provide long distance service and
interLATA Internet services in Illinois prior to the consummation of the
merger, the Company could be prohibited from continuing to provide long
distance service in Chicago following consummation of the merger, and
similarly, if Ameritech has not received approval to provide long distance
service and interLATA Internet services in the other states in the Ameritech
Region, the Company could be prohibited from providing long distance service
and interLATA Internet services in such states following consummation of the
merger. In the event that the merger is consummated and Ameritech has not
received approval to provide long distance service by that time, the Company
believes that, under current regulatory conditions, it may be able to
restructure its Illinois operations in such a way that it would not be
prohibited from providing long distance service in Illinois, although such
restructuring could require amendments or consents under certain of the
Company's agreements, including the agreement pursuant to which it purchases
long distance service. There can be no assurance, however, that such an
approach would be successful. Such inability to provide long distance service
could 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. See "Risk Factors--Dependence on SBC Affiliation; Restrictions on
Ability to Provide Service in SBC Region."
The area which constitutes the SBC Region may change due to other
transactions entered into by SBC or regulatory changes. Expansion of the SBC
Region, through a business combination between SBC and another RBOC or
otherwise, could 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. There can be no assurance that the SBC Region, in which the
Company is currently prohibited from providing long distance telephony
service, or the Ameritech Region, in which the Company may be prohibited from
providing long distance telephony service, will not expand, or that any such
expansions will not include areas currently served, or targeted to be served,
by the Company.
Under the Telecommunications Act, any entity, including cable television
companies and electric and gas utilities, may enter any telecommunications
market, subject to reasonable state regulation of safety, quality and consumer
protection. Because implementation of the Telecommunications Act is subject to
numerous federal and state policy rulemaking proceedings and judicial review
there is still uncertainty as to what impact such legislation will have on the
Company.
Access Charges
To the extent the Company provides interexchange telecommunications service,
it is required to pay access charges to ILECs when it uses the facilities of
those companies to originate or terminate interexchange calls. Also, as a
CLEC, the Company provides access services to other interexchange service
providers. The interstate access charges of ILECs are subject to extensive
regulation by the FCC, while those of CLECs are subject to a lesser degree of
FCC regulation but remain subject to the requirement that all charges be just,
reasonable, and not unreasonably discriminatory. With limited exceptions, the
current policy of the FCC for most interstate access services dictates that
ILECs charge all customers the same price for the same service. Thus, the
ILECs generally cannot lower prices to some customers without also lowering
charges for the same service to all similarly situated customers in the same
geographic area. The FCC may, however, alleviate this constraint on the ILECs
and permit them to offer special rate packages to certain customers, as it has
done in a few cases, or
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permit other forms of rate flexibility. In two orders released on December 24,
1996, and May 16, 1997, the FCC made major changes in the interstate access
charge structure. In the December 24th order, the FCC removed restrictions on
ILECs' ability to lower access charges and relaxed the regulation of new
switched access services in those markets where there are other providers of
access services. The May 16th order increased the costs that price cap LECs
recover through monthly, non-traffic sensitive access charges and decreased
reliance on traffic-sensitive charges. In the May 16th order, the FCC also
announced its plan to bring interstate access rate levels more in line with
cost. Additional FCC action on access charge levels and ILEC pricing
flexibility is expected later this year.
Reciprocal Compensation
All ILECs and CLECs must complete calls originated by other carriers under
reciprocal compensation arrangements. That is, the LEC terminating a local
call is entitled to payment from the LEC originating a call. Charges assessed
by the ILECs for terminating calls originated on a CLEC's network must be
based on a reasonable approximation of additional cost or through mutual
exchange of traffic without explicit payment. The FCC recently determined that
Internet traffic is interstate in nature, not local, and has initiated a
proceeding to determine appropriate carrier-to-carrier compensation. At the
same time, the FCC declined to overturn a multitude of state decisions
requiring ILECs to pay CLECs compensation for delivering Internet traffic to
ISPs. The FCC's decision is on appeal, and ILECs are expected to ask states or
federal courts to reverse the existing state determinations.
Internet Regulation
The Company believes that it is not currently subject to direct regulation
by the FCC or any other governmental agency with respect to its Internet
access services, other than regulations applicable to businesses generally. To
date, the FCC has not actively sought to regulate the provision of Internet
access and related services. Under current law, operators of "enhanced" or
"information" services, which currently include Internet access services, are
exempt from FCC regulation, but operators of "basic" or "telecommunications"
services are not similarly exempt. The FCC recently announced its intention to
determine on a case-by-case basis whether to require Internet telephony
services to contribute financially to universal service support mechanisms,
which could also subject these services to other forms of regulation.
There are also a number of ongoing proceedings at the FCC regarding whether
the FCC should regulate the Internet. On April 10, 1998, the FCC reported to
Congress on the meaning of various provisions in the Telecommunications Act,
including whether the provision of Internet access is a "telecommunications"
service. In its report, the FCC concluded that Internet access service,
defined as a bundled offering combining various computer processing and
content applications, is an information service under the Telecommunications
Act and that the transmission capabilities provided over the facilities
underlying Internet access and other information service offerings constitute
"telecommunications" under the Telecommunications Act, where provided by a
common carrier or other party, and may be "telecommunications" if self-
provisioned by an Internet service provider. The FCC recently announced its
intention to determine in the future whether to require certain providers of
Internet services over their own facilities to contribute financially to
universal service support mechanisms, which could also subject them to other
forms of regulation. The FCC also noted that IP phone-to-phone telephony
appears to be a telecommunications service rather than an information service,
but a final conclusion was deferred to subsequent ad hoc proceedings.
Recently, US WEST filed a petition asking the FCC to declare that providers of
long distance service using IP technology must pay access charges. The
regulatory status of cable television system facilities used to provide
Internet access was specifically not addressed, and how universal service
funding obligations will apply may be the subject of a further proceeding. The
FCC has said it will monitor whether high-speed cable data transport should be
made available to all Internet access providers and bills may soon be
introduced in Congress to address this issue.
Due to the increase in Internet use and publicity, it is possible that new
laws and regulations may be adopted, and that changes in laws or regulations
may be made, with respect to the Internet, including laws
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regarding privacy, pricing, and characteristics of services or products.
Certain other legislative initiatives, including those involving taxation of
Internet services and transactions, and payment of access charges by Internet
providers have also been enacted or proposed. BellSouth has announced that it
will assess access charges on certain providers of IP-based telephony. Any
legislation regarding the Internet could impact adversely the Company's
ability to provide various services and could 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. The Company cannot predict the
impact, if any, that future laws or any legal changes may have on its
business.
The introduction of, or changes to, regulations that directly or indirectly
affect the regulatory status of Internet services, affect telecommunications
costs (including the application of reciprocal compensation requirements,
access charges or universal service contribution obligations to Internet
services), or increase the competition from regional telecommunications
companies or others, could 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. For instance, if the FCC determines, through any
one of the ongoing or future proceedings, that the Internet is subject to
regulation, the Company could be required to comply with a number of FCC
entry/exit regulations, reporting, fee, and record-keeping requirements,
marketing restrictions, access charge obligations, and universal service
contribution and other obligations, which could adversely impact the Company's
ability to provide various planned services and have a material adverse effect
on the Company's results of operations, financial condition and its ability to
meet its obligations under the Notes. The Company cannot predict the impact,
if any, that regulations or regulatory changes may have on its business. A
final determination by the FCC that providing Internet transport or telephony
services to customers over an IP-based network is subject to regulation also
could impact adversely the Company's ability to provide various planned
services and could 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.
Federal and state laws and regulations relating to the liability of online
services companies and Internet access providers for information carried on or
disseminated through their networks are currently unsettled. Several private
lawsuits seeking to impose such liability upon online services companies and
Internet access providers are currently pending. In addition, legislation has
been enacted and new legislation has been proposed that imposes liability for
the transmission of or prohibits the transmission of certain types of
information on the Internet, including sexually explicit and gambling
information. The imposition of potential liability on the Company and other
Internet access providers for information carried on or disseminated through
their systems could require the Company to implement measures to reduce its
exposure to such liability, which may require the Company to expend
substantial resources or to discontinue certain service or product offerings.
The increased attention to liability issues as a result of these lawsuits and
legislative actions and proposals could impact the growth of Internet use.
While the Company carries professional liability insurance, it may not be
adequate to compensate claimants or may not cover the Company in the event the
Company becomes liable for information carried on or disseminated through its
networks. Any costs not covered by insurance incurred as a result of such
liability or asserted liability could 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.
Video Regulation
A number of recent and on-going developments in Congress, at the FCC, and at
the United States Copyright Office are likely to have an impact on the extent
to which governmental regulations burden the entertainment component of the
Company's business and on its ability to compete with other MVPDs.
Access to Property. The Communications Act contains a provision affording
franchise cable operators access to public rights-of-way and certain private
easements. Because judicial interpretations generally limit the applicability
of this federal right of access to external easements, franchise cable
operators have not been successful in using it to gain access to internal
ducts or conduits of MDUs without consent of the landlord or management. Thus,
cable operators must rely on state or local access laws to obtain the right to
compete for
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MDU subscribers for which private cable systems hold exclusive rights. These
statutes, referred to as "mandatory access" provisions, typically empower only
franchise cable operators to gain access to an MDU in order to provide service
to the residents regardless of whether the MDU owner objects or has entered
into a contract with an alternative provider of video services such as the
Company. Thus, in jurisdictions where a mandatory access provision has been
enacted, a franchise operator might be able to access an MDU and provide
service in competition with the Company despite any exclusive Rights of Entry
contract that the Company might have entered into with the owner. The ability
of franchise operators to force access to an MDU may create additional
competition for a limited subscriber base and poses a potential threat to the
Company's operating margin at the property in question. A number of
jurisdictions in which the Company's targeted markets are located have enacted
mandatory access provisions, including the states of Illinois and Pennsylvania
and the District of Columbia. While the state of Virginia has not enacted a
mandatory access statute, its laws prohibit landlords from accepting payment
from a video services provider in exchange for access to an MDU. The inability
of video service providers such as the Company to include compensation
provisions in video Rights of Entry contracts for properties located in
Virginia may limit their ability to induce property owners to enter into these
contracts.
The Company's business depends upon its ability to obtain, capitalize and
renew Rights of Entry. The Company enters into long-term contracts with
national REITs and other MDU Managers providing telephony and video Rights of
Entry.
These rights may be affected by a proceeding in which the Commission is
considering whether it should adopt new rules that would cap or otherwise
limit the ability of MVPDs to enter into future exclusive contracts with MDU
Managers, address existing exclusive contracts, apply its rules concerning
wiring inside a customer's premises to all MVPDs, and require the sharing of
cable wiring by multiple providers. In a proceeding that remains pending at
the FCC, the agency examined the propriety of exclusive contracts entered into
between MVPDs and MDU Managers for the provision of multichannel video
services, such as cable service. In addition to numerous other proposals, the
Commission has proposed a "cap" on such contracts, limiting them to the amount
of time reasonably necessary for an MVPD to recover its specific capital costs
of providing service in that MDU. In particular, the FCC has sought comment on
the length of such a cap and whether it should establish a presumption that a
seven-year term is enforceable for all existing and future exclusivity
provisions.
In this proceeding, the FCC has sought comment on whether it can and should
take any specific actions regarding "perpetual" exclusive contracts, including
whether such contracts should be limited under any general rule on exclusive
contracts that the FCC adopts. The FCC is considering whether to allow MDU
Managers to elect to terminate (or take a "fresh look" at) existing
"perpetual" exclusive or other exclusive long-term contracts with incumbent
cable operators to give all competitive MVPDs the opportunity to compete for
MDU business that would otherwise be foreclosed to them because of an
exclusive contract. In addition, the comments filed in response to the
Commission's proposals are divided on the issue of exclusive and perpetual
contracts. For example, a number of incumbent providers have argued that the
Commission lacks statutory authority or a policy basis to apply its proposed
"fresh look" policy. A number of these parties also urge the FCC to adopt a
limit on the duration of future exclusive contracts, which in some cases is
shorter than the time period proposed by the FCC. On the other hand, several
new entrant MVPDs assert that a prospective limit on exclusive contracts
should not be adopted, while supporting a fresh look for existing contracts.
The arguments raised in the record and the alternative proposals advanced by a
number of parties may well affect the final outcome of the Commission's
determinations concerning both existing and future exclusive contracts.
If the FCC concludes that exclusive contracts should be limited, the
Company's ability to market its bundled services could be adversely affected,
which could have a material adverse effect on the Company's results of
operations and financial conditions and its ability to meet its obligations
under the Notes. If the FCC does not grant MDU Managers the rights to take a
"fresh look" at incumbent cable operator exclusive contracts, the addressable
market for the Company's services could be sharply diminished, which could
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.
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Inside Wiring. In late 1997, the FCC issued new rules to govern the
disposition of inside wiring by incumbent MVPDs in MDUs on termination of
service. These rules, which are intended to encourage competition by new
entrants offering franchised and private video service, impose conditions on
the sale, removal or abandonment of wiring and govern shared use of space by
competing providers. Petitions seeking administrative reconsideration of
certain aspects of these rules remain pending at the FCC, and at least one
judicial challenge to these rules has been filed in the U.S. Court of Appeals
for the Eighth Circuit. In some instances, a new provider such as the Company
faces difficulty in taking over a property because the ownership of the wiring
is uncertain or contested and the property owner is hesitant to allow
installation of additional wiring. The new rules address this issue and
facilitate competition from new providers by requiring the incumbent to choose
between sale, removal or abandonment of the wiring within certain time
constraints and allowing for shared use of space by competing providers in
certain circumstances.
Equipment Availability. As part of the Telecommunications Act of 1996, the
FCC adopted regulations to ensure the commercial availability of equipment
(such as converter boxes and interactive equipment) used to access services
offered over multichannel video programming distribution systems, from sources
that are unaffiliated with any MVPD. These regulations require that all MVPDs,
including OnePoint's systems, (1) allow customers to attach their own
equipment to their systems, (2) not prevent equipment that does not perform
security functions from being offered by retailers, manufacturers or other
unaffiliated vendors, (3) separate out security functions from non-security
functions of equipment by July 1, 2000 (not applicable to DBS or other systems
that operate throughout the U.S. if equipment is available from independent
sources), (4) not offer equipment with integrated security and non-security
functions after January 1, 2005, and (5) provide, upon request, technical
information concerning interface parameters needed to permit equipment to
operate with their systems. MVPDs are allowed to protect the security of their
systems and programming from unauthorized reception. The rules are subject to
sunset after the markets for MVPDs and equipment become fully competitive in a
particular geographic market. The FCC refused to adopt specific requirements
that equipment be made interoperable between different types of MVPDs. On
reconsideration, the FCC adopted a rule deferring the separation requirement
for equipment capable of providing access only to analog video programming
offered over an MVPD system. Judicial challenges to these rules have been
filed and remain pending.
Program Access and Exclusivity. In accordance with the Cable Television
Consumer Protection and Competition Act of 1992, the FCC adopted regulations
intended to facilitate access to programming by competing MVPDs. The rules
generally preclude programmers that share ownership ties with franchise cable
television operators ("vertically-integrated programmers") from granting
particular MVPDs the exclusive right to carry their programming. In addition,
the rules prohibit vertically-integrated programmers that deliver their
programming by satellite from engaging in other unfair or discriminatory
practices. The FCC is considering requests to expand restrictions on exclusive
contracting and other unfair or discriminatory practices to non-vertically-
integrated programmers and to programming that is distributed by terrestrial
means as well as by satellite. In addition, the FCC recently adopted new
procedures to make it easier for competing MVPDs to pursue complaints against
programmers that violate the rules.
Regulation of DBS Providers. Congress is considering several pieces of DBS
legislation that could facilitate the Company's ability to receive local and
network TV programming, on the one hand, and enhance the ability of DBS
providers to compete with traditional franchise cable systems or private cable
operators like the Company on the other. Although federal law currently does
not provide a compulsory license for DBS providers to distribute local TV
stations or network signals to viewers other than those living in so-called
"white areas" where over-the-air broadcast service is unavailable, Congress is
considering legislation which would allow DBS providers to distribute network
signals to all households. Pressure for Congressional action has intensified
as a result of recent federal court decisions that would require certain DBS
providers to discontinue delivery of network signals to thousands of
ineligible subscribers outside "white areas"; however, broadcasters and the
DBS providers affected by an injunction have agreed to stay enforcement for a
majority of subscribers until the end of 1999. In addition, a DBS provider is
seeking reconsideration of FCC action that could greatly expand so-called
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"white areas" where delivery of network signals via DBS is permissible.
Enactment of such legislation or FCC rules would facilitate delivery of
satellite network signals by Company facilities relying on DBS as a source of
programming. At the same time, removing restrictions from DBS providers could
strengthen DBS as a competitor to the Company's video distribution business.
Initial legislative steps also have been taken to establish competitive parity
between DBS providers and franchise or private cable operators by reducing the
higher license fees that DBS providers must pay for carrying broadcast
signals. Current FCC rules preempt any state or local restrictions that
"impair" a viewer's ability to receive video programming through devices
designed for over-the-air reception of television broadcast service, MMDS or
DBS. The rules also preempt laws, regulations, private covenants and
homeowners' association rules impairing reception to the extent they apply to
property within the exclusive control of the antenna user and where the user
has an ownership interest in the property. In addition, the FCC has adopted
rules prohibiting MDU Managers from imposing certain restrictions that might
impair reception by viewers who do not own the affected property, including
MDU residents. This could adversely affect the value of the Company's present
and future Rights of Entry, which could have a material effect on the
Company's results of operations and financial condition and its ability to
meet its obligations under the Notes.
Regulation of Franchise Cable Television Rates. Private cable operators are
not subject to FCC rate regulation; however, a complex regulatory scheme has
governed the rates that traditional franchise cable systems charge for basic
monthly service, expanded basic and certain customer premises equipment since
1992. Although, as a general rule, the FCC requires franchise cable systems to
charge uniform rates to all customers within a geographic area, the
regulations allow these operators to offer certain "bulk" discounts to MDU
customers, enabling franchise cable systems to be more competitive with
private cable providers. As a result of statutory language in the
Telecommunications Act, the FCC recently adopted revisions to the uniform rate
requirements that may affect the level of protection these provisions afford
private operators. For example, the statutory language currently prohibits
only "predatory" bulk discounts. The FCC has decided to define this term by
relying on federal antitrust law. This could make it more difficult to prove
that a bulk discount is predatory. The scope of rate regulation is limited in
other ways as well. The FCC rules, including its uniform pricing requirements,
do not apply when the franchise operator can demonstrate, pursuant to
procedures established by the FCC, that it is subject to "effective
competition" from providers of similar services in its franchise area. More
generally, the regulations do not prohibit discriminatory pricing for services
other than rate regulated services and associated installation and equipment
costs. In addition, the Telecommunications Act ended regulations currently
holding down the price franchise cable operators can charge for expanded basic
service on March 31, 1999.
Regulatory Status and Regulation of Private Cable Operations. Franchise
cable systems must comply with a host of FCC regulations including rate
regulation, substantial channel set-asides for mandatory carriage of local
television stations and for leasing by unaffiliated parties, provisions
governing content and presentation of advertising and of local cablecast
programming, customer service standards, technical testing and performance
standards and reporting requirements. Local franchising authorities play a
role in enforcing some of these provisions. See "--Regulation of Franchise
Cable Television Rates." In addition, local (and sometimes state) officials
issue traditional cable systems their chief operating authorization, the local
franchise, which frequently imposes requirements such as construction and
design standards, channel set-asides and production facilities for public,
educational and governmental use, and payment of annual franchise fees or
other "in kind" benefits to the community.
Pursuant to the Communications Act, wired MVPD facilities that serve
subscribers without using any public right-of-way (commonly known as "private
cable systems") are exempt from local franchise requirements and the majority
of FCC regulations applicable to franchise systems that do use public rights-
of-way. The FCC does not consider use of microwave relays instead of wires to
cross public right-of-way a "use of the public right-of-way" for
jurisdictional purposes. Thus, in order to avoid becoming subject to these
extensive governmental requirements, the Company must confine its wired plant
to private property and must rely on microwave transmission to cross public
rights-of-way. Use of certain frequencies commonly used in the microwave links
that connect properties is limited in areas in which certain Department of
Defense facilities are located by
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a recent FCC order establishing a local zone where, in order to protect
sensitive government operations, new facilities will not be authorized. The
use of these frequencies for microwave links nationwide also could be affected
generally by other FCC rulemakings investigating the introduction of new
services in the frequency band in question on a shared basis. For example,
private cable operators and other terrestrial fixed service operations
currently enjoy co-primary status exempting their operations from satellite
interference in a spectrum that spans two thousand megahertz within the 18 GHz
band. In September, 1998, the FCC issued a proposed rulemaking considering a
potential reallocation of portions of the 18 GHz band. Under this proposal,
which is still pending, all fixed service operators, including private cable
operators, will lose their co-primary status in two key portions of the 18 GHz
band and be relegated instead to secondary status. If enacted, private cable
operators will have little use for new licenses in these two "shared"
spectrums because their transmissions would be subject to satellite
interference. A grandfathering provision should allow the Company to retain
its current 18 GHz licenses in the "shared" spectrums without exposure to
satellite interference although the Company will not be able to expand or
change those existing licenses after the adoption of a final order in the
pending proceeding. Additionally, the FCC will allow private cable operators
to apply for new licenses not subject to satellite interference in one of the
"shared" spectrums up until the date the FCC issues a final rule, expected in
mid-1999. If the final FCC rule results in a reallocation, it is unclear what
substitute spectrum is or may be made available for private cable operators in
the future.
In a recent decision, the FCC clarified the law and held that another avenue
exists for private operators that will allow them to avoid the requirement for
a municipal franchise. The FCC held that under certain circumstances a private
operator does not need to receive a municipal franchise to provide its video
service to MDUs where the operator provides such service in part through
subscribing to a service offered by one of the telephone companies. Under the
telephone company's service, the video signal would travel through the
telephone company's facilities over the public streets and rights of way.
These facilities would connect to the private operator's facilities on private
property. The FCC limited its holding that a franchise is unnecessary to the
facts involved in the matter before it, which included (but were not limited
to) the following: (i) there was absolute separation of ownership between the
private operator and telephone company and there was nothing more than a
carrier-user relationship between them; (ii) the private operator's facilities
were located entirely on private property; (iii) the facilities primarily used
by the telephone company to provide service to the private operator were not
constructed at the private operator's request; (iv) there was capacity to
serve several other programming providers using the telephone companies'
fiber; and (v) the private operator had committed to make its drops available
to other programming providers. Several entities have appealed the FCC's
decision, which appeal is pending before the United States Court of Appeals
for the Seventh Circuit. The FCC's ruling, if upheld, may increase operating
efficiencies by enabling the Company to link facilities much more widely
dispersed throughout an area than it could using microwave links and still
remain largely unregulated. The FCC's conditions on the decision listed above,
however, and particularly the fifth condition, may limit the usefulness of the
decision to the Company.
Although private cable systems are exempt from the majority of federal
regulations, a few FCC rules apply. Among these are rules which, depending on
the configuration of the system and the ownership of TV reception equipment,
impose the obligation to obtain retransmission consent prior to delivering
certain television stations, limitations on radiation and interference, rules
governing equal employment opportunity and closed captioning requirements.
Copyright. Private cable systems must obtain copyright clearance for
programming and other copyrighted material they distribute to subscribers. For
satellite-delivered services, such clearance typically is obtained from the
program supplier. To obtain copyright clearance for broadcast signals they
retransmit, private cable systems must rely on a statutory blanket license
which they can obtain by filing semi-annual reports and making payments into a
federally-administered royalty pool. Recent action by the U.S. Copyright
Office affecting the method private cable operators use to calculate these
payments may increase copyright liability; however, copyright reform efforts
underway in Congress may further affect regulation of the Company in this area
by replacing the current payment formula with a flat fee that could result in
significant savings.
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State Regulation
The Telecommunications Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to
their networks and to provide access to unbundled network facilities, as well
as a number of other procompetitive measures. Because the implementation of
the Telecommunications Act is subject to rulemaking proceedings, arbitration
proceedings and other state regulatory proceedings on these issues, it is
currently difficult to predict how quickly full competition for local
services, including local dial tone, will be realized.
All states in which the Company operates require a certification or other
authorization from the state regulatory commission to offer intrastate
telecommunications services. Many of the states in which the Company operates
are in the process of addressing issues relating to the regulation of CLECs.
Some states may require authorization to provide enhanced services.
In a few states, existing state statutes, regulations or regulatory policy
may preclude some or all forms of local service competition. The
Telecommunications Act contains provisions that prohibit states and localities
from adopting or imposing any legal requirement that may prohibit, or have the
effect of prohibiting, the ability of any entity to provide any interstate or
intrastate telecommunications service. The FCC is required to preempt any such
state or local requirements to the extent necessary to enforce the
Telecommunications Act's open market entry requirements. States and localities
may, however, continue to regulate the provision of intrastate
telecommunications services and require carriers to obtain certificates or
licenses before providing service.
In states where the Company operates, rulemaking proceedings, arbitration
proceedings and other state regulatory proceedings may affect the Company's
ability to compete with ILECs are now underway or may be instituted in the
future. These proceedings involve a variety of telecommunications issues,
including but not limited to: pricing and pricing methodologies of local
exchange and intrastate interexchange services; development and approval of
resale agreements between ILECs and CLECs and among CLECs; terms and
conditions governing the provision of telecommunications services; customer
service and unauthorized changes in customer-selected telephone service
providers; complaints regarding anticompetitive practices and transactions
between affiliated telecommunications companies; denial of entry into
telecommunications markets; discount levels for resale of local exchange and
toll services; treatment of and compensation for calls to Internet service
providers; charges for access to ILEC networks; cost sharing and
implementation of interim and permanent number portability; dialing parity;
access to and responsibility for universal service funding; and review and
recommendation to the FCC concerning RBOC authorization to offer in-region
long distance service. To the extent the Company decides in the future to
install its own transmission facilities, rulemaking proceedings, arbitration
proceedings and other state regulatory proceedings may also affect the
Company's ability to compete with ILECs. These proceedings may involve issues
including but not limited to: collocation of ILEC and CLEC facilities;
interconnection agreements between ILECs and CLECs; and access to unbundled
and combined network elements of ILECs. In addition, states in which the
Company operates may consider legislation that involves issues including but
not limited to: any of the aforementioned issues in rulemaking proceedings,
arbitration proceedings and other state regulatory proceedings; alternative
forms of regulation; and limitations on the provision of competitive
telecommunications services.
The Company is an authorized CLEC, and has obtained authority for the resale
of local exchange services, in Colorado, Delaware, Florida, Georgia, Illinois,
Maryland, North Carolina, Pennsylvania, South Carolina, Tennessee and Virginia
and the District of Columbia. The Company is also authorized to resell long
distance telephone services in these jurisdictions. The Company has applied
for CLEC status and resale authority in Arizona and is permitted to provide
telecommunications services there while its application is pending. In
addition, the Company expects that it will offer more intrastate services,
including intrastate switched services, as its business expands. There can be
no assurances that the Company will receive the authorizations it now seeks or
may seek in the future to the extent it expands into other states or seeks
additional services from the aforementioned states. In most states, the
Company is required to file tariffs or price lists setting forth the terms,
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conditions and prices for services that are classified as intrastate. In all
states, the Company must comply with state regulations and policies regarding
service quality, reporting, auditing, customer service, and other matters.
Local Regulation
The Company's networks are subject to numerous local regulations such as
building codes and licensing. Such regulations vary on a city by city and
county by county basis. To the extent the Company decides in the future to
install its own transmission facilities, it will need to obtain rights-of-way
over private and publicly owned land. There can be no assurance that such
rights-of-way will be available to the Company on economically reasonable or
advantageous terms.
The foregoing discussion of regulatory factors does not describe all laws,
regulations, or restrictions that may apply to the Company. It also does not
review all laws or regulations under consideration by federal and state
governmental bodies that may affect the Company's operations. It is possible
that present and future laws and regulations not discussed here could 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.
Competition
Overview
OnePoint has a large number of competitors for each of the services that it
provides. The telephony and video services markets are highly competitive, and
management expects that competition will intensify in the future. In each of
the markets in which it offers services, OnePoint faces significant
competition from larger, better-financed ILECs, IXCs and cable companies, and
OnePoint competes directly with incumbent providers which have historically
dominated their respective local telephony, long distance telephony and cable
television markets. These incumbents have numerous advantages as a result of
their historic monopoly control of their respective markets. However, OnePoint
believes that most existing and potential competitors will, at least
initially, provide narrower service offerings due to regulatory constraints
(in the case of RBOCs) or slow or limited deployment (in the case of
facilities-based competitors such as RCN Corporation ("RCN") in Washington,
D.C. and 21st Century Telecom Group, Inc. ("21st Century") in Chicago), secure
fewer MDU Rights of Entry, adopt less focused MDU marketing and sales
approaches (not benefitting from preferential access to face-to-face sales
channels) and retain less flexible pricing and product bundling strategies. As
a result, management believes that OnePoint has an opportunity to achieve
important market penetration.
SBC has announced that in connection with its planned merger with Ameritech,
the Combined Company would provide an integrated mix of local, long distance,
Internet and high-speed data services to consumers and businesses in 30
additional U.S. markets outside of its region, including certain of the
Company's other currently targeted markets: Atlanta, Baltimore, Denver,
Philadelphia, Phoenix and Washington. Upon entry into these markets, the
Combined Company would be competing with OnePoint if it elected to target
residential customers residing in MDUs other than through a cooperation
arrangements or other agreement with the Company. While the Company believes
that opportunities may exist for the Company to utilize the Combined Company's
assets in such markets on favorable terms, the Company cannot predict the
effect on OnePoint of entry of the Combined Company into such markets,
including the effect on OnePoint's ability to compete in such markets and its
ability to continue to purchase certain services and equipment on favorable
terms pursuant to SBC agreements, and there can be no assurance that such
competition from the Combined Company would not 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. See "Risk Factors--Dependence on SBC
Affiliation for Favorable Contracts"; "--Restrictions on Ability to Provide
Service in SBC Region" and "--Competition."
With respect to local telephony services, OnePoint competes with the ILECs
and alternative service providers including CLECs. Commercial mobile radio
services providers, including cellular carriers (such as Bell Atlantic Mobile
Services), personal communications services ("PCS") carriers (such as Sprint
PCS) and
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enhanced specialized mobile radio ("ESMR") service providers (such as Nextel
Communications Inc.), may also become a source of competitive local and long
distance telephony service. AT&T, MCI WorldCom, Sprint and other IXCs have
also announced their intention to offer local services in major U.S. markets
using their existing infrastructure in combination with resale of ILEC
service, lease of unbundled local loops or other providers' services.
With respect to long distance telephony services, OnePoint faces, and
expects to continue to face, significant competition from IXCs, including
AT&T, Sprint and MCI WorldCom, which account for the majority of all long
distance revenue. The major long distance service providers benefit from
established market share and from brand names established through nationwide
advertising. The long distance business is highly competitive and prices have
declined substantially in recent years and are expected to continue to
decline. In addition, the long distance industry has historically had a high
average churn rate, and customers continue to change long distance providers
frequently, and, increasingly, to use multiple long distance providers in
response to rate offerings and promotional incentives.
In addition, under the Telecommunications Act and ensuing federal and state
regulatory initiatives, barriers to local exchange competition are being
removed. The introduction of such competition, however, also establishes the
prerequisites for the RBOCs to provide in-region interexchange long distance
services. Once the RBOCs are allowed to offer in-region long distance
services, they will also be in a position to offer single source local and
long distance service similar to that offered by OnePoint and proposed by the
three largest IXCs (AT&T, MCI WorldCom and Sprint).
All of the Company's video services face competition from alternative
methods of receiving and distributing television signals and from other
sources of news, information and entertainment such as off-air television
broadcast programming, newspapers, movie theaters, live sporting events,
interactive online computer services and home video products, including video
cassette recorders. Among the alternative video distribution technologies are
fiber distribution from companies like RCN in Washington, D.C. and 21st
Century in Chicago and home satellite dish earth stations ("HSDs") which
enable individual households to receive many of the satellite-delivered
program services formerly available only to cable subscribers. Furthermore,
the Cable Television Consumer Protection and Competition Act of 1992, as
amended (the "1992 Act") contains provisions, which the FCC has implemented
with regulations, to enhance the ability of cable competitors to purchase and
make available to HSD owners certain satellite-delivered cable programming at
competitive costs. The FCC and Congress have adopted policies providing a more
favorable operating environment for new and existing technologies that
provide, or have the potential to provide, substantial competition to the
Company's various video distribution systems. These technologies include,
among others, DBS service whereby signals are transmitted by satellite to
receiving facilities located on customer premises. The Company expects that
its video programming services will face growing competition from current and
new DBS service providers. OnePoint also competes with wireless program
distribution services such as MMDS which use low-power microwave frequencies
to transmit video programming over-the-air to subscribers. The Company is
unable to predict whether wireless video services will have a material impact
on its operations.
Internet competition is rapidly emerging and evolving. The Company's high-
speed Internet access service will compete directly with many types of ISPs,
offering both dial-up and dedicated access to the Internet at varying speeds.
Many of the technologies being deployed by competitors, such as cable modems
or xDSL, offer significantly increased speeds over traditional dial-up access.
Most larger IXC, ILEC and franchise video providers have developed high-speed
service offerings targeting the residential customer. With thousands of local
and regional ISPs emerging in recent years, significant industry consolidation
is well underway. Most of the existing providers offer a broad range of
services in addition to Internet access, including software, content and e-
mail services. Recently, major personal computer vendors and web portal sites
have become increasingly active in providing or jointly marketing these
services.
The FCC recently adopted rules that allow wireless cable (i.e.,
MDS/MMDS/ITFS) licensees to offer two-way digital services, including high-
speed and high capacity data transmission services, Internet service, and
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video-conferencing and various other telephony services. As a result of this
expanded authority granted to wireless cable operators, it is reasonable to
anticipate that the Company may experience greater competition from the
wireless cable sector in the areas of data transmission services, Internet
service, and various telephony services.
Other new technologies, including Internet-based services, may become
competitive with services that OnePoint can offer. Advances in communications
technology as well as changes in the marketplace and the regulatory and
legislative environment are constantly occurring. Thus, it is not possible to
predict the effect that ongoing or future developments might have on the video
services industry or on the operations of the Company.
OnePoint believes that among the existing competitors, the ILECs, IXCs,
incumbent cable providers and other CLECs provide the most direct competition
to OnePoint in the delivery of telephony and video services to residential
customers in concentrated communities.
ILECs
In each of its target markets, OnePoint faces, and expects to continue to
face, significant competition from the ILECs, which currently dominate their
local telephony markets. OnePoint competes with the ILECs in its markets for
local exchange services on the basis of product offerings (including the
ability to offer bundled local and long distance telephony and video services
today), MDU-focused marketing and sales (with preferential access to face-to-
face sales channels) and superior customer service, as well as price. OnePoint
believes that its MDU-focused approach will enable rapid gains in market
share. However, the ILECs have begun to enhance their networks and to prepare
to enter the long distance telephony service market and, in addition, have
long-standing relationships with their customers. ILECs other than RBOCs
already may provide in-region long distance telephony and information
services, and all ILECs may provide out-of-region long distance and
information telephony services.
In addition, under the Telecommunications Act, and ensuing federal and state
regulatory initiatives, barriers to local exchange competition are being
removed. The introduction of such competition, however, also establishes the
prerequisites for the RBOCs, such as Bell Atlantic, to provide in-region
interexchange long distance services. The RBOCs are currently allowed to offer
"incidental" long distance service in-region and to offer out-of-region long
distance service. Once the RBOCs are allowed to offer in-region long distance
services, they will also be in a position to offer single source local and
long distance service similar to that offered by OnePoint and proposed by the
three largest IXCs (AT&T, MCI WorldCom and Sprint). The Company expects that
the increased competition made possible by regulatory reform will result in
certain pricing and margin pressures in the telephony services business.
OnePoint has sought, and will continue to seek, to provide a full range of
local telephony services in competition with ILECs in its service areas. The
Company expects that competition for local telephony services will be based
primarily on service quality, customer service, response to customer needs,
bundled service features and price, and will not be based on any proprietary
technology. As a result of OnePoint's MDU-focused marketing and sales efforts,
and its low long distance cost position, OnePoint may have advantages over
ILECs, as well as the competitive advantage provided by the ability to deliver
a bundled telephony and video service.
The Telecommunications Act permits the ILECs and others to provide a wide
variety of video services directly to subscribers in competition with
OnePoint. Various ILECs currently are providing video services within and
outside their telephony service areas through a variety of distribution
methods, including both the deployment of broadband wired facilities and the
use of wireless transmission facilities. The Company cannot predict the
likelihood of success of video service ventures by ILECs or the impact on the
Company of such competitive ventures.
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CLECs and Other Competitors
OnePoint also faces, and expects to continue to face, competition from other
potential competitors in certain of the markets in which OnePoint offers its
services. Other CLECs compete in the local telephony services market. In
addition, potential competitors capable of offering private line and special
access services also include other smaller long distance carriers, cable
television companies, electric utilities, microwave carriers, wireless
telephony system operators and private networks built by large end-users.
Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environment are constantly occurring. In
addition, a continuing trend toward business combinations and alliances in the
telecommunications industry may also create significant new competitors to
OnePoint. Further, as a result of recent international treaties, FCC
regulations have been changed to facilitate entry by foreign
telecommunications companies and other entities into United States
telecommunications markets. The Company cannot predict whether competition
from such developing and future technologies or from such future competitors
will have a material impact on its operations.
Incumbent Video Service Providers
Certain of the Company's video service businesses compete with incumbent
wireline cable companies in their respective service areas. In particular,
OnePoint's wireless satellite systems (DBS and SMATV) compete for cable
subscribers with the major wireline cable operators such as Jones Intercable
Inc. and District Cablevision in the Washington, D.C. metropolitan area,
MediaOne Inc. in Atlanta, Tele-Communications Inc. in Chicago and Denver and
Cox Communications Inc. in Phoenix.
The Company also faces, and expects to continue to face, competition from
other potential competitors in certain of the markets in which the Company
offers its services. Companies such as RCN in Washington, D.C. and 21st
Century in Chicago are deploying advanced fiber optic networks to provide
bundled communication services to residents in MDUs and single-family homes.
OnePoint competes with these "fiber-led" competitors primarily by obtaining
MDU Rights of Entry, and through its preferential access to face-to-face
marketing and sales channels and low long distance telephony cost position.
See "Risk Factors--Dependence on Third Parties", "--Dependence on SBC
Affiliation for Favorable Contracts" and "--Restriction on Ability to Provide
Service in SBC Region."
Since cable television systems generally operate pursuant to franchises
granted on a non-exclusive basis, and the 1992 Act prohibits franchising
authorities from unreasonably denying requests for additional franchises and
permits franchising authorities to operate cable systems, well-financed
businesses from outside the cable industry (such as the public utilities that
own certain of the poles to which cable is attached) may become competitors
for franchises or providers of competing services.
Long Distance Carriers
The Company faces, and expects to continue to face, significant competition
from IXCs, including AT&T, Sprint, and MCI WorldCom, which account for the
majority of all long distance calls. Today the Company competes with IXCs
primarily for the long distance component of its service bundle. However,
AT&T, Sprint, and MCI WorldCom have each announced their intention to offer
local telephony services bundled with existing long distance services to
residences in major U.S. markets. These IXCs benefit from established market
share and brand names, as well as substantially greater resources available
for continued national advertising. They have not to date focused on securing
MDU rights of entry, nor have they developed bundled product and pricing
packages targeted at MDU residents, but the Company believes that IXCs will
ultimately enter the bundled communications business aimed at MDUs and present
formidable competition.
Internet-Related Competitors
The market for most Internet-related services is extremely competitive.
Currently there are four general types of entities providing the Internet-
related services that will compete with OnePoint: (i) traditional online
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service providers, including America Online, and the Microsoft Network, that
offer a combination of Internet access, content, and web hosting services via
the public switched telephone network; (ii) cable-delivered online service
providers, such as AtHome Corporation and Internet at Roadrunner, that offer
Internet access, content, and web hosting services via a coaxial
infrastructure; (iii) ISPs, including PSINet, Inc., NETCOM OnLine
Communications Services, Inc., and numerous regional providers, that offer
Internet access services without or with only a limited amount of the content
and web hosting services offered by online service providers; and (iv)
telecommunications providers, including IXCs, local exchange carriers, and
non-carrier telecommunications companies, using wireline, wireless, and
satellite technologies, that offer both traditional telecommunications
services such as voice telephone service, as well as many of the services
offered by the other identified competitors, including Internet access.
Most of these competitors have more experience than OnePoint in offering
Internet-related services, as well as superior engineering, marketing, and
personnel resources. Many of these competitors also have greater financial
resources than OnePoint and several competitors are among the largest
corporations in the world. These competitors may be able to use these superior
resources to develop their service offerings and infrastructures more rapidly
and more efficiently than OnePoint. They may be able to react more quickly and
more appropriately to changes in technology or the marketplace. Additionally,
these competitors may be able to improve their competitive position through
mergers and acquisitions.
The number of competitors in the Internet-related services market is likely
to increase steadily. There are few barriers to entry in many Internet-related
markets, and new competitors, such as computer hardware or software
manufacturers, other telecommunications providers, and foreign entities, may
enter the market with considerable resources. Furthermore, competitors
currently devoting only a small part of their resources to Internet-related
services may expand their presence in the marketplace. Regulatory changes may
allow telecommunications providers to improve their competitive position by
permitting service bundling that will create attractive new one-stop-shopping
marketing opportunities.
Changes in the business practices or market positions of competitors or
suppliers of OnePoint also may undermine OnePoint's ability to compete
effectively. For example, commenters that participated in the FCC's and
Department of Justice's review of the merger of MCI and WorldCom expressed
concern that the merger would give the merged entity a dominant position in
the Internet backbone market. In light of this concern, the Justice Department
(after consultation with the antitrust authorities of the European Union)
conditioned approval of the WorldCom/MCI merger on the sale of MCI's Internet
business to a third party (Cable & Wireless). The effectiveness of that sale
in ameliorating competitive concerns remain unclear. If MCI WorldCom has a
dominant position in the Internet backbone market notwithstanding the sale,
this dominance could be leveraged to undermine competition in other Internet-
related markets, to the detriment of OnePoint. The Company cannot predict
whether competition from existing entities, new entrants, or changes in
business practices or market positions of existing or new competitors will
have a material impact on its operations.
Employees
As of March 31, 1999, the Company had a total of 326 employees. The Company
believes that its future success will depend on its continued ability to
attract and retain highly skilled and qualified employees. None of the
Company's employees is currently represented by a collective bargaining
agreement. The Company believes that it enjoys good relationships with its
employees.
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.
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On August 6, 1998 OnePoint made a demand for arbitration of certain disputes
under the Mid-Atlantic operating agreement. The arbitration demand seeked the
resolution of several disputes between the parties, including among other
things, whether OnePoint was entitled to disclose Mid-Atlantic's financial
results in connection with the Exchange Offer. On January 15, 1999 the
Company, Mid-Atlantic and other related parties entered into the Settlement
Agreement which resolved the disputes covered by the arbitration demand.
The Settlement Agreement provides, among other things, that Mid-Atlantic
would provide the necessary financial information regarding Mid-Atlantic for
the Exchange Offer and the Company's periodic filings under the Securities
Exchange Act 1934, as amended and for the liquidation of MAC Interactive.
Also, as part of the Settlement Agreement, the parties agreed to the formation
of a new holding company, Mid-Atlantic Telcom Plus Holding, LLC, to own the
membership interests of Mid-Atlantic. In addition, the Settlement Agreement
transferred the day-to-day operations of MAC Interactive to the Company and
required its timely liquidation. There can be no assurances that further
disputes between the Company and Mid-Atlantic will not arise, or of the
effects of any such disputes on the Company's results of operations and
financial condition and its ability to meet its obligations on the Notes.
On March 30, 1999, the Company filed a demand for arbitration seeking a
declaratory ruling on the equity ownership of VIC-RMTS-DC, LLC. The Company
believes that the value of the assets contributed by Mid-Atlantic RMTS
Holdings, LLC was sufficient to give Mid-Atlantic RMTS Holdings, LLC an
approximate 5% interest based on capital contributions through December 31,
1998. The manager of Mid-Atlantic RMTS Holdings, LLC has suggested that they
are entitled to an unspecified, but higher, equity interest in VIC-RMTS-DC,
LLC and on April 5, 1999, Mid-Atlantic Holdings filed its own decree for
arbitration to resolve issues of equity ownership of VIC-RMTS-DC, LLC. The
Company will be entitled only to that portion of any distributions made by
VIC-RMTS-DC, LLC corresponding to its percentage equity ownership therein.
Facilities
The Company is headquartered in Bannockburn, Illinois and leases offices and
space in certain other locations. The table below lists the Company's current
leased facilities:
<TABLE>
<CAPTION>
Approximate
Location Lease Expiration Square Footage
-------- ------------------ --------------
<S> <C> <C>
Bannockburn, IL......................... December 31, 2002 21,600
Washington, D.C......................... April 30, 2008 8,600(1)
Largo, MD............................... February 28, 2007 18,500
Alpharetta, GA.......................... August 31, 2002 7,200
Atlanta, GA............................. December 31, 2004 20,000
Aurora, CO.............................. April 30, 2003 10,900
Chicago, IL............................. October 31, 2003 11,900
Phoenix, AZ............................. September 30, 2003 7,700
Herndon, VA............................. October 31, 2009 80,600
</TABLE>
- --------
(1) Does not include space used by Mid-Atlantic for which the Company is a co-
tenant with Mid-Atlantic under a single lease.
The Company believes that its leased facilities will be adequate to meet its
needs in its targeted markets and that additional facilities are available to
meet its development and expansion needs in such markets for the foreseeable
future. The Company's obligations under its leases for its Bannockburn,
Illinois and Alpharetta, Georgia offices are guaranteed by SBC.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning the directors
and officers, including the executive officers, of the Company and the
Subsidiary Guarantors, as of March 31, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
James A. Otterbeck 38 Chairman and Chief Executive Officer, Director
William F. Wallace 44 President and Chief Operating Officer, Director
Mark Fuller 43 President, Network Services
Jon D. Bergman 43 Executive Vice President, Operations Support
John D. Stavig 34 Chief Financial Officer, Director
Linda L. Pace 35 Director of the Company
Paul Dahlquist 50 Vice President, General Manager--Mid Atlantic
Region
Scott M. Martin 32 Vice President, General Manager--Western Region
Laurel A. Dent 34 Vice President, General Manager--South East Region
Mary M. Rodino 44 Vice President, National Accounts
Chantal L. Moore 29 Vice President, General Manager--Central Region
Marge Rodino 37 Vice President, Human Resources
Scott M. Seawell 36 Vice President, Marketing
William J. McMoil 34 Controller and Treasurer
</TABLE>
Mr. Otterbeck has served as Chairman and Chief Executive Officer since the
Company's inception in March 1996. Mr. Otterbeck has served as President of
The VenCom Group, Inc., a venture capital company focused on investing in
communications related companies, since he founded it in 1995. From 1988 to
1995, Mr. Otterbeck worked for Gemini Consulting, most recently as Vice
President of the firm's global communications practice. Mr. Otterbeck worked
for AT&T Bell Laboratories in product design and management positions from
1984 to 1987, and worked at IBM in sales and marketing positions from 1982 to
1984. Mr. Otterbeck received his B.B.A. from the University of Iowa and his
M.B.A. from the Kellogg Graduate School of Management at Northwestern
University.
Mr. Wallace has served as the President and Chief Operating Officer since
June of 1996. From 1980 to 1996 Mr. Wallace worked at Gemini Consulting, where
he served as the Chief Operating Officer from 1994 to 1996, and where he co-
founded and built a $100 million communications business unit. Mr. Wallace
brings over 15 years of experience in telecommunications. Mr. Wallace received
his B.A. from Harvard College and his M.B.A. from the Harvard Graduate School
of Business.
Mr. Fuller has served as the President of Network Services since January
1999. From 1994 to 1998 Mr. Fuller worked for E.Spire Communications in
various senior management positions, most recently as Vice President of
Platform Implementation. From 1993 to 1994 Mr. Fuller worked at Teleport
Communications Group where he served as Director of Sales. Between 1988 and
1993 Mr. Fuller worked with MCI as Market Support Manager. Prior to 1988 Mr.
Fuller served as an Officer with the United States Army. Mr. Fuller received
his B.S. from United States Military Academy, West Point.
Mr. Bergman has served as Executive Vice President, Operations Support since
October 1998. From 1995 to 1998 Mr. Bergman worked for American Management
Systems where he served as Senior Principal helping lead the development of
their strategic customer care and billing products and managing all strategic
vendor relationships for the $300 million telecommunications business unit.
From 1977 to 1995 Mr. Bergman held a variety of business and systems
development positions at GTE, Sprint, SAIC, and CSC. Mr. Bergman received his
B.S. from University of Maryland and his M.S. from George Washington
University.
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Mr. Stavig has served as Chief Financial Officer since March 1998. Mr.
Stavig has served as VenCom's Vice President since 1995. From 1995 to 1999, he
has also served as Chief Executive Officer and Chief Financial Officer for
ComPlus, L.P., a supplier of engineering services to telecommunications firms
which is 99% owned by Ventures in Communications, LLC, which also indirectly
owns 19.9% of the Company's common stock. From 1992 to 1995, he served as
Principal in the Communications practice of Gemini Consulting. Prior to 1992,
Mr. Stavig served as a consultant with Arthur Andersen & Co. Mr. Stavig
received his B.S. from the University of Minnesota and his M.B.A. from the
Wharton School of the University of Pennsylvania.
Ms. Pace has served as a Director Since June of 1998. Since 1989 Ms. Pace
has served as an Associate and Vice President of La Salle Partners, Inc. where
she has directed the management and disposition of commercial real estate
assets. Prior to 1987, Ms. Pace served as a Banking Officer in the Real Estate
Division of InterFirst Bank Dallas, N.A. Ms. Pace received her B.S. from the
University of Notre Dame and her M.B.A from the Kellogg Graduate School of
Management at Northwestern University.
Mr. Dahlquist has served as Vice President, General Manager--Mid Atlantic
Region since January 1997. Mr. Dahlquist came to OnePoint directly from the
shared tenant services industry. He served as General Manager of ICS
Communications from 1995 to January 1997. Mr. Dahlquist served with the United
States Navy from 1972 to 1995, achieving the rank of Captain and serving in a
variety of positions including Deputy Director for Operations/OASD (S&R) for
Peacekeeping and Peace Enforcement Policy at the Pentagon, Commanding Officer
of the USS Taylor (FFG-50) and Senior Fellow-Strategic Policy Analysis Group
for the Center for Naval Analysis. Mr. Dahlquist received his B.S. from the
U.S. Naval Academy and an M.A. from the U.S. Naval Post-Graduate School.
Mr. Martin has served as Vice President, General Manager--Western Region
since November 1998. Mr. Martin has over 13 years experience in the
telecommunications industry. From 1995 to 1998, he served as a General Manager
for AT&T, supporting Local market entry via both Total Service Resale and
Network facilities-based platforms. From 1985 to 1995, Mr. Martin held a
variety of sales, consulting, operations, information technology and project
management positions within AT&T, both domestically and internationally. Mr.
Martin received his B.B.A. from Kennesaw State University.
Ms. Dent has served as Vice President, General Manager--South East Region
since November 1997. Ms. Dent served as a Principal with VenCom from 1995 to
1997. From 1991 to 1995, Ms. Dent worked for Gemini Consulting's
communications practice, leading sales and marketing projects for several
major international telecommunications firms. She has also worked in sales and
marketing positions for the Marriott Corporation. Ms. Dent received her B.A.
from Pomona College and her M.B.A. from the Kellogg Graduate School of
Management at Northwestern University.
Ms. Mary Rodino has served as Vice President, National Accounts since July
1997. Ms. Rodino has over 15 years experience in the telecommunications
industry. From 1994 to 1997, she served as a General Manager for AT&T, and
from 1982 to 1994 Ms. Rodino held a variety of sales, operations, quality
management and consulting positions within AT&T. Ms. Rodino received her B.S.
from the University of Illinois Medical Center and her M.B.A. from the
University of Illinois. Ms. Rodino is the sister of Ms. Marge Rodino.
Ms. Moore has served as Vice President, General Manager--Central Region
since April 1999. From January 1997 to March 1999, she served as the Company's
Vice President, Network Planning. Ms. Moore joined OnePoint from VenCom, where
she served as an associate from 1995 to 1997. Ms. Moore served as a consultant
to British Telecom plc from 1993 to 1995. Prior to entering the
telecommunications industry, Ms. Moore conducted robotics research for NASA,
the U.S. Navy and the Getty Group. She has also designed and developed various
intelligent robotic systems for industrial applications, and is published in
the IEEE. Ms. Moore received her B.S. and M.S. from the Massachusetts
Institute of Technology.
Ms. Marge Rodino has served as Vice President, Human Resources since January
1998. Ms. Rodino joined OnePoint with over 13 years experience in Human
Resources. From 1995 to 1997 she served as Director, Human Resources with
WorldCom. During 1995, Ms. Rodino was a consultant with the Human Resources
practice of Deloitte & Touche, LLP. From 1990 to 1995, Ms. Rodino held a
variety of Human Resource management
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positions within the pharmaceutical division of BASF Corporation. Ms. Rodino
also worked for Harris Bank in Human Resources from 1984 to 1990, most
recently as an Assistant Vice President. Ms. Rodino received her B.S. from
Northern Illinois University. Ms. Rodino is the sister of Ms. Mary Rodino.
Mr. Seawell has served as Vice President, Marketing since October, 1998. Mr.
Seawell has over 14 years experience in the telecommunications industry. From
1995 to 1998, he served as Director/General Manager, Marketing and Sales for
Ameritech. From 1993 to 1995, he was an associate for Booz, Allen & Hamilton's
telecommunications management consulting practice concentrating on marketing
and sales engagements. From 1984 to 1993, Mr. Seawell held a variety of
positions with AT&T including product development in Bell Laboratories,
product marketing, and operations support. Mr. Seawell received his B.S. from
the University of Wisconsin-Eau Claire, his M.S. from Arizona State
University, and his M.B.A. from the Graduate School of Business at the
University of Chicago.
Mr. McMoil has served as Controller since January 1998 and Treasurer since
December of 1998. Mr. McMoil comes to OnePoint with 12 years of experience in
the fields of finance, planning and accounting for a number of businesses. Mr.
McMoil served as Controller for IoWave, Inc., a wireless telecommunications
equipment manufacturer from May to December 1997. From 1995 to 1997, Mr.
McMoil served as Director of Finance of Martin's Herend Imports, Inc. From
1991 to 1995, Mr. McMoil served as Regional Controller and Director of Finance
for Stewart Title, where he was responsible for extensive planning, startup,
acquisition, and joint-venture activity. He has also worked as financial
director of companies in the retail, wholesale/distribution and title
insurance industries. Mr. McMoil received his B.A. from Furman University and
his M.B.A. from George Mason University.
The following table summarizes the compensation paid by the Company and its
subsidiaries in and with respect to 1997 and 1998 to the Company's Chief
Executive Officer and four other most highly compensated executive officers at
December 31, 1997 and 1998 (collectively, the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------------- ------------
Other Annual Securities All Other
Compensation Underlying Compensation
Name and Principal Position Year Salary ($) Bonus ($) (1) Option/SARs ($) (2)
- --------------------------- ---- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James A. Otterbeck................ 1998 -- -- -- -- --
Chairman, Chief Executive Officer 1997 -- -- -- -- --
William F. Wallace................ 1998 375,000 125,000 5,492 -- 6,547
President, Chief Operating 1997 375,000 200,000 -- -- --
Officer
John D. Stavig.................... 1998 131,667 150,000 188 -- 523
Chief Financial Officer (3) 1997 -- -- -- -- --
Thomas W. DeCrosta................ 1998 185,000 -- 1,690 -- 2,757
Former Executive Vice President, 1997 150,312 70,000 -- -- --
Sales & Marketing (4)
Jon D. Bergman.................... 1998 57,704 55,000 346 -- 204
Executive Vice President, 1997 -- -- -- -- --
Operations Support (5)
</TABLE>
- --------
(1) Other Annual Compensation was not reportable.
(2) Reflects reimbursement of premiums for life insurance for William F.
Wallace, and Company contributions under a 401(k) plan for the other Named
Executive Officers.
(3) Salary reflects start date of March 15, 1998.
(4) Mr. DeCrosta resigned in January, 1999.
(5) Salary reflects start date of October 1, 1998.
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In August of 1998, the Company 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 EBITDA or a qualifying triggering event,
these rights are subject to vesting requirements and broad discretion of the
Compensation Committee of the Board of Directors.
The following table sets forth information with respect to all options
granted in fiscal 1998 to the Named Executive Officers.
SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Grant Date Value
----------------------- ----------------
Number of Percent of
Securities Total SARs
Underlying Granted to Exercise or Grant Date
SARs Employees in Base Price Expiration Present Value
Name Granted Fiscal Year ($/Sh) Date (1) ($)
- ---- ---------- ------------ ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
James A. Otterbeck 0 0% 67.50 1/1/08 $ 0
William F. Wallace 969 1.4% 67.50 1/1/08 $ 0
John D. Stavig 1,200 1.7% 67.50 1/1/08 $ 0
Thomas W. DeCrosta 10,000 14.1% 67.50 1/1/08 $ 0
Jon D. Bergman 1,250 1.8% 67.50 1/1/08 $ 0
</TABLE>
- --------
(1) The Company's estimation of the fair value of stock appreciation rights
granted during 1998 was estimated on the grant date using the Black-
Scholes option pricing model. The following assumptions were used for
grants made in 1998: no dividend yield, zero volatility, risk-free
interest rate of 6 percent, and an expected life of ten years.
Compensation of Directors
Directors who are employees of the Company or its subsidiaries are not
entitled to receive any fees for serving as directors. Non-employee directors
receive a fee $12,500 per year, are reimbursed for their expenses, and are
entitled to participate in the Company's Stock Appreciation Rights Plan and to
receive certain life insurance benefits.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SBC Affiliation and Related Contracts
The terms of certain contracts pursuant to which SBC purchases products and
services are available to the Company and other entities in which SBC has a
sufficient equity interest. Through such arrangements, OnePoint purchases long
distance service from an IXC and has leveraged SBC's procurement function to
purchase telecommunications equipment, in each case at prices lower than those
that would otherwise be available to it. The Company's ability to purchase
services and equipment pursuant to SBC-negotiated contracts is dependent upon
SBC's continued ownership, directly or indirectly, of an equity interest in
the Company which meets or exceeds the definition of "affiliate" in any SBC
contract and whether such contract provides SBC "affiliates" opportunities to
purchase thereunder. The definition of "affiliate" varies in such contracts.
Although SBC has an incentive to keep the definition broad, its negotiation of
vendor contracts is typically based on considerations other than the
inclusiveness of the definition of affiliate and the interests of potential
affiliates in the availability of such contracts. There can be no assurance
that future SBC contracts or amendments or renewals of existing SBC contracts
will contain provisions which have the effect of permitting the Company to
purchase services or equipment pursuant thereto. Moreover, the Company has
received no indication or assurance from SBC that it will retain its indirect
ownership interest in the Company for any period of time. SBC currently holds,
through wholly owned subsidiaries, a 19.7% equity ownership interest in the
sole stockholder of OnePoint. See "Risk Factors--Dependence on SBC Affiliation
for Favorable Contracts" and "--Restrictions on Ability to Provide Service in
SBC Region."
From time to time, at the Company's request, SBC has provided material
assistance to the Company with regard to systems evaluation and procurement,
technical due diligence, corporate development and regulatory filings and
other matters. In addition, SBC has seconded employees to the Company, in some
cases for extended periods of time. The Company reimburses SBC for such
services based on SBC's costs of providing such services. At December 31, 1997
the Company had accrued $203,000 in accounts payable due to SBC in respect of
such services.
Affiliate Loans and Guarantees
Pursuant to the Recapitalization in October 1997, the Predecessor issued the
Predecessor Note to VIC. The Predecessor Note had a principal amount of $1.5
million and matured on October 15, 2007. It provided for interest at a rate of
10% per annum. No interest in respect of the Predecessor Note was paid during
1997. Pursuant to the Recapitalization, the Predecessor Note was exchanged for
membership units of VIC2 and subsequently converted into the right to receive
common and preferred stock of the Company.
The Company's payment obligations under the Credit Facility are guaranteed
by SBC. See "Description of Certain Indebtedness." The Company's payment
obligations under two of its leases for office space are also guaranteed by
SBC. See "Business--Facilities."
The Recapitalization
Through a series of transactions from the fourth quarter of 1997 through
April 1998, VenCom, L.L.C. acquired an equity interest in the Predecessor, and
the Predecessor was recapitalized and merged with the Company in order to
become a corporation. See "The Recapitalization."
The Operating Agreement of VIC2 entered into in April 1998 in connection
with the Recapitalization (i) imposes certain restrictions on the transfer of
VIC2's membership units; (ii) grants certain participation rights in
connection with a sale of membership units by a member; (iii) grants VIC
certain preemptive rights with respect to VIC2 membership units in connection
with issuances by VIC2 of membership units or issuances by the Company of
Common Stock; (iv) grants VIC the right to require VenCom, L.L.C. to purchase
all or any portion of the VIC2 membership units held by VIC; (v) grants a
first refusal right to the members in connection with a
92
<PAGE>
transfer of VIC2 membership units and shares of the Company's Common Stock;
(vi) requires the members to take certain actions in the event of an initial
public offering by VIC2; and (vii) grants VIC the right to require VIC2 to
exercise its demand and piggyback registration rights and to require VIC2 to
distribute the proceeds of the resulting offering.
Registration Agreement
In April 1998 the Company and VIC2 entered into a Registration Agreement
pursuant to which VIC2 has the right in certain circumstances, and subject to
certain conditions, to require the Company to register the shares of the
Company's Common Stock held by it under the Securities Act.
Executive Non-Competition Agreements
Mr. Wallace has entered into non-disclosure and non-competition agreements
with the Company which provide that the executive will not: (i) during the
term of such executive's employment and for 18 months thereafter, use or
distribute confidential information about the Company, without authorization;
(ii) for six months following the termination of executive's employment with
the Company, own an interest in, be employed by or provide assistance to any
business engaged in the provision of bundled telecommunications services to
residential MDUs on a similar basis as the Company within any metropolitan
area then served by the Company or its affiliates; (iii) during the term of
such executive's employment and for twelve months thereafter, entice or induce
in any manner or influence any person who is or shall be in the employ or
service of the Company to leave such employ or service for the purpose of
engaging in any other business.
Mid-Atlantic Joint Venture Non-Competition Agreements
In connection with the Mid-Atlantic joint venture, the Company, its co-joint
venturer and certain of their affiliates entered into a series of Non-
Competition Agreements. Such agreements restrict the rights of such parties
(other than Mid-Atlantic and VIC-RMTS-DC, LLC, the telephony joint venture
company controlled by the Company) to provide cable and telephony services,
respectively, under certain circumstances in either (i) the "D.C. Metro" area,
defined to include Washington D.C., Baltimore, Maryland and certain areas of
Virginia, or (ii) the "Territory," defined to include the states of Delaware,
Maryland, New Jersey, Pennsylvania, and Virginia and Washington D.C. See "Risk
Factors--Risks Related to the Mid-Atlantic Joint Venture Non-Competition
Agreements."
Professional Services Agreement
The Company entered into a Professional Services Agreement with The VenCom
Group, Inc. in April 1998, pursuant to which The VenCom Group, Inc. provides
financial and management consulting services and manages the Company's
relationships with VIC2 and SBC. Under this agreement VenCom receives an
annual management fee of $750,000 and a fee of 2% of the amount of any capital
raising activity or acquisition activity of the Company (without duplication)
(the "Transaction Fee"), including debt and equity placements, for its
assistance in raising such capital. Fees payable under the agreement are
subject to an annual cap of $900,000, provided that if the amount paid in any
calendar year is less than $900,000, the annual cap in the next calendar year
shall be equal to the difference between $1.8 million and the amount paid in
the previous calendar year and further provided that amounts owed in excess of
the cap in any year may be paid in one or more subsequent years if and to the
extent they are within the cap in such years. The Company has no basis on
which to conclude whether the management agreement is on terms no less
favorable than terms that could have been negotiated with unaffiliated third
parties. The Company did not conduct negotiations with unaffiliated third
parties regarding management services at the time it entered into the
management agreement and believes the services provided under the agreement
are not of a type readily available from unaffiliated third parties.
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<PAGE>
MAC Interactive
In December 1997 OnePoint invested $750,000 to acquire a 50% equity interest
(with a preferred return) in MAC Interactive. In December 1997, MAC
Interactive entered into an agreement with ODS to acquire set top boxes and
marketing rights from ODS for its pari-mutuel horse racing wagering service
for an aggregate of $750,000. It was anticipated that MAC Interactive would
provide such set top boxes and market ODS services to Mid-Atlantic
subscribers. The other investors in MAC Interactive are the investors that
also own the equity interests in Mid-Atlantic which are not owned by the
Company. VIC was a limited partner of ODS until July 1998. Pursuant to the
Settlement Agreement, the Company and the other investors have agreed to
liquidate MAC Interactive.
Programming Services
The Company has entered into an agreement for the purchase of video
programming with a programming wholesaler. The Company has in the past
purchased programming on the terms of Mid-Atlantic's contracts with such
programming wholesaler and individual programming providers, although the
Company was not a party to Mid-Atlantic's contracts.
Customer Care Facility
Portions of the customer care facility are currently operated jointly with
Mid-Atlantic. The billing and operating support system is operated pursuant to
a contract between the Company and a third party, and Mid-Atlantic reimburses
the Company for a portion of the variable expenses related to the system,
based on usage. Both the Company and Mid-Atlantic utilize the facility to
perform services for their customers, and data relating to both companies'
customers are integrated into the billing and operating support systems. In
certain circumstances, the Company relies on Mid-Atlantic's employees to
answer the Company's inbound phone calls. The Company also reimburses Mid-
Atlantic for rent, for certain payroll and other expenses with respect to
shared employees. The amounts payable to Mid-Atlantic vary each month, but the
total amount payable during 1998 was $836,000. Such amounts are offset by
amounts owed by Mid-Atlantic to the Company with respect to billing and
processing charges under the Company's contract with CSG. In addition, the
Company is a co-tenant with Mid-Atlantic with respect to both companies'
offices in Washington, D.C., and is jointly and severally liable for lease
payments with respect to space used by Mid-Atlantic.
Affiliate Receivables
At the end of 1997, the Company's receivables from The VenCom Group, Inc.
and its sole stockholder, Mr. Otterbeck related to equity capital
contributions and expense reimbursement totalled approximately $81,000. This
amount was paid during 1998.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 1, 1999 by (i) each owner
of more than 5% of the Company's Common Stock, (ii) each director and Named
Executive Officer of the Company and (iii) all directors and executive
officers of the Company as a group. Except as otherwise indicated below, each
of the persons named in the table has sole voting and investment power with
respect to the securities beneficially owned by it or him as set forth
opposite its or his name. Unless otherwise noted, the address for each
director and executive officer of the Company is c/o the Company, 2201
Waukegan Road, Suite E200, Bannockburn, Illinois 60015.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------- --------------------
Name of Beneficial Owner Number(1) Percent(2) Number(1) Percent(2)
------------------------ --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Ventures in Communications II,
LLC........................... 1,000,000 90.0% 35,000 100.0%
SBC Communications Inc. (3).... 295,020 26.6 -- --
James A. Otterbeck (4)......... 704,980 63.4 -- --
William F. Wallace............. -- -- -- --
Linda L. Pace.................. -- -- -- --
John D. Stavig................. -- -- -- --
All executive officers and
directors
as a group (4 persons)........ 704,980 63.4 -- --
</TABLE>
- --------
(1) Includes rights to acquire shares of Common Stock which are exercisable
within 60 days of March 1, 1999.
(2) Rights to acquire shares of Common Stock which are exercisable within 60
days of September 15, 1998 are considered outstanding for the purpose of
determining the percent of the class held by the holder of such rights,
but not for the purpose of computing the percentage held by others.
(3) Through certain wholly owned subsidiaries, SBC owns 99% of the common
membership units of VIC, which in turn owns 19.9% of the equity interests
of VIC2, thus resulting in SBC's indirect ownership of 19.7% of the equity
interests of the Company. VIC owns a warrant to purchase 9.9% of the
membership units of VIC2, and after giving effect to the exercise of such
warrant, SBC would indirectly own 29.5% of the membership units of VIC2.
Pursuant to the terms of the VIC and VIC2 Operating Agreements, SBC shares
voting and dispositive power with respect to the securities owned by VIC2
with VenCom, L.L.C. and The VenCom Group, Inc. (both of which are owned by
Mr. Otterbeck) until such time as the preferred return on membership units
of VIC2 held by VIC has been paid in full. SBC disclaims beneficial
ownership of the securities held by VIC2 except to the extent of its
pecuniary interest therein. The business address of SBC is 175 East
Houston, San Antonio, Texas 78205.
(4) Mr. Otterbeck is the Manager of VIC2 and is the sole member of VenCom,
L.L.C., which owns 80.1% of the common membership units of VIC2 (or 70.5%
upon exercise of VIC's warrant). The VenCom Group, Inc., of which Mr.
Otterbeck is the sole stockholder, is the Manager of VIC. Pursuant to the
terms of the VIC and VIC2 Operating Agreements, Mr. Otterbeck shares
voting and dispositive power with SBC with respect to the securities owned
by VIC2 until such time as the preferred return on membership units of
VIC2 held by VIC is paid in full, at which time he will have sole voting
and dispositive power with respect to such securities. In June 1999, The
VenCom Group, Inc. purchased in the open market warrants to purchase
12,065 shares of Common Stock.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
In March 1998, the Company entered into a secured Credit Facility with
Northern Trust, which was amended in April 1998 in connection with the
Recapitalization. The Credit Facility permits the Company to borrow up to $9
million and matures on January 1, 2003. Amounts outstanding under the Credit
Facility on December 15, 1998 are converted into a term loan which is payable
in quarterly installments beginning January 1, 1999, with quarterly payments
of $62,500 in the first year, $125,000 in the second year, $562,000 in the
third year and $875,000 in the fourth year, with the balance payable at
maturity. No advances will be made under the Credit Facility after December
15, 1998. Payment of amounts owed under the Credit Facility has been
guaranteed by SBC.
The Credit Facility does not require Northern Trust to advance funds to the
Company if, in Northern Trust's good faith determination, there has occurred
an adverse change in the assets, condition or prospects of the Company or SBC.
In addition, the Credit Facility is revocable upon 48 hours written notice to
the Company as to further advances, notwithstanding any payment of any fees or
maintenance of any account balances.
Borrowings under the Credit Facility are secured by a first priority
security interest in certain of the Company's assets, including its accounts,
leases, contract rights, general intangibles (including intellectual property
rights), inventory, goods, equipment, vehicles, leasehold improvements,
fixtures, deposits at Northern Trust, books and records, documents of title
and the proceeds and products of the foregoing.
The interest rate on borrowings under the Credit Facility will be, at the
Company's election: (i) Northern Trust's prime rate less 3/4 of 1%; (ii) LIBOR
plus 50 basis points; or (iii) the federal funds rate (as defined) plus 50
basis points.
The Credit Facility contains customary covenants, including covenants
requiring the Company to notify Northern Trust of changes in its name or the
locations of the collateral, maintain insurance, defend the collateral from
claims of others, execute financing statements and other necessary documents,
deliver certificates or 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
Northern Trust's interest in the collateral, and notify Northern Trust of any
material loss or depreciation in the value of the collateral. The Credit
Facility also prevents the Company from selling, transferring or otherwise
disposing of collateral without Northern Trust's consent.
The Credit Facility contains customary events of default. Upon the
occurrence of an event of default, Northern Trust may accelerate outstanding
loans and exercise its rights with respect to the collateral, as well as all
other rights and remedies available to it at law or in equity. Events of
default under the Credit Facility include (i) payment and covenant defaults,
(ii) cross defaults to any other indebtedness of the Company, VenCom, L.L.C.,
VIC2 and VIC, (iii) misrepresentations, (iv) repudiation or unenforceability
of SBC's guaranty, (v) failure to maintain existence in good standing, (vi)
dissolution, merger, consolidation or cessation of existence of the Company, a
subsidiary, VIC2, VIC, VenCom, L.L.C. or SBC (vii), bankruptcy and judgment
defaults with respect to the Company, a subsidiary, VIC2, VIC, VenCom, L.L.C.
or SBC, (viii), the existence of a security interest of another person in the
collateral, (ix) material loss or depreciation of value of the collateral or
Northern Trust's otherwise deeming itself insecure, and a (x) change of
control. A change of control is defined in the Credit Facility as the
occurrence of any person or entity not in control of the Company, VIC2, VIC,
VenCom, L.L.C., or SBC obtaining control directly or indirectly of the
Company, VIC2, VIC, VenCom, L.L.C., or SBC, whether by purchase or gift of
stock or assets, by contract or otherwise.
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<PAGE>
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The Old Notes were originally sold by the Company on May 21, 1998 to the
Initial Purchasers as part of the Units pursuant to the Purchase Agreement.
The Initial Purchasers subsequently resold the Units, including the Old Notes,
to qualified institutional buyers in reliance on Rule 144A under the
Securities Act. As a condition of the Purchase Agreement, the Company and the
Subsidiary Guarantors entered into the Registration Rights Agreement with the
Initial Purchasers pursuant to which the Company and the Subsidiary Guarantors
agreed, for the benefit of the holders of the Old Notes, at the Company's
cost, to use their best efforts to (i) file the Exchange Offer Registration
Statement within 120 days after the date of the original issue of the Old
Notes with the Commission with respect to the Exchange Offer for the Exchange
Notes: (ii) use their best efforts to cause the Exchange Offer Registration
Statement to be declared effective under the Securities Act within 180 days
after the date of the original issuance of the Old Notes and (iii) use their
best efforts to consummate the Exchange Offer on or prior to 30 business days
after the date on which the Exchange Offer Registration Statement was declared
effective by the Commission. Upon the Exchange Offer Registration Statement
being declared effective, the Company will offer the Exchange Notes in
exchange for surrender of the Old Notes. The Company will keep the Exchange
Offer open for not less than 20 business days (or longer if required by
applicable law) after the date on which notice of the Exchange Offer is mailed
to the holders of the Old Notes. For each Old Note surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Note will receive an
Exchange Note having a principal amount equal to that of the surrendered Old
Note. Interest on each Old Note will accrue from the last interest payment
date on which interest was paid on the Old Note surrendered in exchange
therefor or, if no interest has been paid on such Old Note, from the date of
its original issue. Interest on each Exchange Note will accrue from the date
of its original issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes will in general
be freely tradeable after the Exchange Offer without further registration
under the Securities Act. However, any purchaser of Old Notes who is an
"affiliate" of the Company or who intends to participate in the Exchange Offer
for the purpose of distributing the Exchange Notes (i) will not be able to
rely on the interpretation of the staff of the Commission, (ii) will not be
able to tender its Old Notes in the Exchange Offer and (iii) must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the Exchange Notes are to
be acquired by the holder or the person receiving such Exchange Notes, whether
or not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in distribution
of the Exchange Notes, (iii) the holder or any such other person has no
arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company or any of the Subsidiary Guarantors
within the meaning of Rule 405 under the Securities Act, and (v) the holder or
any such other person acknowledges that if such holder or any other person
participates in the Exchange Offer for the purpose of distributing the
Exchange Notes it must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the
Exchange Notes and cannot rely on those no-action letters. As indicated above,
each Participating Broker-Dealer that receives a New Note for its own account
in exchange for Old Notes must acknowledge that it (i) acquired the Old Notes
for its own account as a result of market-making activities or other trading
activities, (ii) has not entered into any arrangement or understanding with
the Company or any "affiliate" of the Company or any of the Subsidiary
Guarantors (within the meaning of Rule 405 under the Securities Act) to
distribute the Exchange Notes to be received in the Exchange Offer and (iii)
will deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. For a description of the
procedures for resales by Participant Broker-Dealers, see "Plan of
Distribution."
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<PAGE>
Registration Rights; Liquidated Damages
Pursuant to the Registration Rights Agreement, the Company and the
Subsidiary Guarantors agreed to file with the Commission the Exchange Offer
Registration Statement on the appropriate form under the Securities Act with
respect to the Exchange Offer. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the holders of Transfer
Restricted Securities who are able to make certain representations the
opportunity to exchange their Transfer Restricted Securities for Exchange
Notes pursuant to the Exchange Offer. If (i) the Company or the Subsidiary
Guarantors are not required to file the Exchange Offer Registration Statement
or permitted to consummate the Exchange Offer because the Exchange Offer is
not permitted by applicable law or Commission policy or (ii) any holder of
Transfer Restricted Securities notifies the Company prior to the 20th day
following consummation of the Exchange Offer that (a) it is prohibited by law
or Commission policy from participating in the Exchange Offer or (b) that it
may not resell the Exchange Notes acquired by it in the Exchange Offer to the
public without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not appropriate or available for such
resales or (c) that it is a broker-dealer and owns Notes acquired directly
from the Company, the Subsidiary Guarantors or an affiliate thereof, the
Company and the Subsidiary Guarantors will file with the Commission a Shelf
Registration Statement to cover resales of the Notes by the holders thereof
who satisfy certain conditions relating to the provision of information in
connection with the Shelf Registration Statement. For purposes of the
foregoing, "Transfer Restricted Securities" means each Note until (i) the date
on which such Note has been exchanged by a person other than a broker-dealer
for an Exchange Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of a Note for an Exchange Note, the date
on which such Exchange Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on
which such Note has been effectively registered under the Securities Act and
disposed of in accordance with the Shelf Registration Statement or (iv) the
date on which such Note is distributed to the public pursuant to Rule 144
under the Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 120
days after the date upon which the Notes were first issued (the "Issue Date"),
(ii) the Company and the Subsidiary Guarantors will use their best efforts to
have the Exchange Offer Registration Statement declared effective by the
Commission on or prior to 180 days after the Issue Date, (iii) unless the
Exchange Offer would not be permitted by applicable law or Commission policy,
the Company will commence the Exchange Offer and use its best efforts to
issue, on or prior to 30 business days after the date on which the Exchange
Offer Registration Statement was declared effective by the Commission,
Exchange Notes in exchange for all Notes tendered prior thereto in the
Exchange Offer and (iv) if obligated to file the Shelf Registration Statement,
the Company will use its best efforts to file the Shelf Registration Statement
with the Commission on or prior to 30 days after such filing obligation arises
and to cause the Shelf Registration to be declared effective by the Commission
on or prior to 120 days after such obligation arises. If (a) the Company and
the Subsidiary Guarantors fail to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (the "Effectiveness Target Date"), (c) the Company fails to
consummate the Exchange Offer within 30 business days of the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement, or (d)
the Shelf Registration Statement or the Exchange Offer Registration Statement
is declared effective but thereafter ceases to be effective or usable in
connection with resales of transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), then the Company will
pay Liquidated Damages to each holder of Notes, with respect to the first 90-
day period immediately following the occurrence of the first Registration
Default in an amount equal to $.05 per week per $1,000 principal amount of
Notes held by such holder. The amount of the Liquidated Damages will increase
by an additional $.05 per week per $1,000 principal amount of Notes with
respect to each subsequent 90-day period until all Registration Defaults have
been cured, up to a maximum amount of Liquidated Damages for all Registration
Defaults of $.50 per week per $1,000 principal amount of Notes. All accrued
Liquidated Damages will be paid by the Company on each Damages Payment Date to
the Global Note holder by wire transfer of immediately available funds or by
federal funds check and to holders of Certificated Securities
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by wire transfer to the accounts specified by them or by mailing checks to
their registered addresses if no such accounts have been specified. Following
the cure of all Registration Defaults, the accrual of Liquidated Damages will
cease.
Holders of Old Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the time periods set forth
in the Registration Rights Agreement in order to have their Old Notes included
in the Shelf Registration Statement and benefit from the provisions regarding
Additional Interest set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which is filed as an exhibit to the Exchange Offer Registration
Statement of which this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Old Notes
who were eligible to participate in the Exchange Offer but who did not tender
their Old Notes will not have any further registration rights and such Old
Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Old Notes accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer. However, Old Notes may be
tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Old Notes except that (i) the Exchange Notes bear a Series B
designation and a different CUSIP Number from the Old Notes, (ii) the Exchange
Notes have been registered under the Securities Act and hence will not bear
legends restricting the transfer thereof and (iii) the holders of the Exchange
Notes will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for an increase in the interest
rate on the Old Notes in certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
consummated. The Exchange Notes will evidence the same debt as the Old Notes
and will be entitled to the benefits of the Indentures.
As of the date of this Prospectus, $82,750,000 aggregate principal amount of
Old Notes were outstanding. The Company has fixed the close of business on
August 6, 1999 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware, or the Indentures in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Company.
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If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Old Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
Expiration Date; Extensions; Amendments
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 10, 1999, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
Interest on the Exchange Notes
The Exchange Notes will bear interest from their date of issuance. Holders
of Old Notes that are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the date of issuance of the Exchange
Notes. Such interest will be paid with the first interest payment on the
Exchange Notes on December 1, 1999. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on each June 1 and
December 1, commencing on December 1, 1999.
Procedures for Tendering
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal or submit an Agent's
Message in connection with a book-entry transfer, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. To be tendered effectively,
the Old Notes, Letter of Transmittal or Agent's Message and other required
documents must be completed and received by the Exchange Agent at the address
set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time,
on the Expiration Date. Delivery of the Old Notes may be made by book-entry
transfer in accordance with the procedures described below. Confirmation of
such book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date.
The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent forming a part of a
confirmation of a book-entry, which states that such book-entry transfer
facility has received an express acknowledgment from the participant in such
book-entry transfer
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facility tendering the Old Notes that such participant has received and
agrees: (i) to participate in the Automated Tender Option Program ("ATOP");
(ii) to be bound by the terms of the Letter of Transmittal; and (iii) that the
Company may enforce such agreement against such participant.
By executing the Letter of Transmittal or Agent's Message, each holder will
make to the Company the representations set forth above in the third paragraph
under the heading "--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal or Agent's Message.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL OR AGENT'S
MESSAGE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE
ELECTION AND SOLE RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL,
HOLDERS MAY WISH TO CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of the Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Old Notes at the book-entry transfer facility, The Depository Trust Company
(the "Book-Entry Transfer Facility"), for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility unless an Agent's Message is received by the
Exchange Agent in compliance with ATOP, an appropriate Letter of Transmittal
properly completed and duly executed with any required signature guarantee and
all other required
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documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right in its sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Old Notes. The Company's interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be
cured within such time as the Issuer shall determine. Although the Company
intends to notify holders of defects or irregularities with respect to tenders
of Old Notes, neither the Issuer, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) (or, in the case of a book-entry
transfer, an Agent's Message) together with the certificate(s) representing
the Old Notes (or a confirmation of book-entry transfer of such Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility), and any
other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the Book-
Entry Transfer Facility), together with a Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees (or, in the case of a book-entry transfer, an Agent's
Message) and all other documents required by the Letter of Transmittal are
received by the Exchange Agent upon five New York Stock Exchange trading
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
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To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number(s) and principal amount of such Old Notes, or, in the case
of Old Notes transferred by book-entry transfer, the name and number of the
account at the Book-Entry Transfer Facility to be credited), (iii) be signed
by the holder in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Old Notes register the transfer of such
Old Notes into the name of the person withdrawing the tender and (iv) specify
the name in which any such Old Notes are to be registered, if different from
that of the Depositor. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Old Notes so withdrawn are validly retendered. Any Old Notes which
have been tendered but which are not accepted for exchange will be returned to
the holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Old Notes may be retendered by following one of the procedures
described above under "--Procedures for Tendering" at any time prior to the
Expiration Date.
Conditions
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Old
Notes, and may terminate or amend the Exchange Offer as provided herein prior
to the Expiration Date, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Company, might materially impair
the ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied prior to the Expiration Date, the Company may (i)
refuse to accept any Old Notes and return all tendered Old Notes to the
tendering holders, (ii) extend the Exchange Offer and retain all Old Notes
tendered prior to the expiration of the Exchange Offer, subject, however, to
the rights of holders to withdraw such Old Notes (see "--Withdrawal of
Tenders") or (iii) waive such unsatisfied conditions with respect to the
Exchange Offer and accept all properly tendered Old Notes which have not been
withdrawn.
Exchange Agent
Harris Trust and Savings Bank has been appointed as Exchange Agent for the
exchange of Exchange Notes for Old Notes pursuant to the Exchange Offer.
Questions and requests for assistance, requests for additional
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copies of this Prospectus or of the Letter of Transmittal and requests for
Notice of Guaranteed Delivery should be directed to the Exchange Agent
addressed as follows:
HARRIS TRUST AND SAVINGS BANK, DEPOSITARY
c/o Harris Trust Company of New York
By Mail: Overnight Courier:
Wall Street Station
P.O. Box 1023 88 Pine Street, 19th Floor
New York, NY 10005
New York, NY 10268-1023 Attention: Reorganization Dept.
Attention: Reorganization Dept.
By Hand: Facsimile Transmission:
Receive Window (for Eligible Institutions Only)
(212) 701-7636 or 7637
88 Pine Street, 19th Floor
Attention: Reorganization Dept.
Confirm by Telephone:
(212) 701-7624
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
Accounting Treatment
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, which is face value, as reflected in the Company's accounting records
on the date of exchange. Accordingly, no gain or loss for accounting purposes
will be recognized by the Company. The expenses of the Exchange Offer will be
expensed over the term of the Exchange Notes.
Consequences of Failure to Exchange
The Old Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may be resold only (i) to the Company (upon redemption thereof or otherwise),
(ii) so long as the Old Notes are eligible for resale pursuant to Rule 144A,
to a person inside the United States whom the seller reasonably believes is a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, in
accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Company), (iii)
outside
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the United States to a foreign person in a transaction meeting the
requirements of Rule 904 under the Securities Act, or (iv) pursuant to an
effective registration statement under the Securities Act, in each case in
accordance with any applicable securities laws of any state of the United
States.
Resale of the Exchange Notes
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third
parties, the Company believes that a holder or other person who receives
Exchange Notes, whether or not such person is the holder (other than a person
that is an "affiliate" of the Company or any Subsidiary Guarantor within the
meaning of Rule 405 under the Securities Act) who receives Exchange Notes in
exchange for Old Notes in the ordinary course of business and who is not
participating, does not intend to participate, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes, will be allowed to resell the Exchange Notes to the public
without further registration under the Securities Act and without delivering
to the purchasers of the Exchange Notes a prospectus that satisfies the
requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing
or participating in a distribution of the Exchange Notes, such holder cannot
rely on the position of the staff of the Commission enunciated in such no-
action letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration
is otherwise available. Further, each Participating Broker-Dealer that
receives Exchange Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such Participating Broker-Dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the Exchange Notes are to
be acquired by the holder or the person receiving such Exchange Notes, whether
or not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act, and (v) the holder or any such other person acknowledges
that if such holder or other person participates in the Exchange Offer for the
purpose of distributing the Exchange Notes it must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Exchange Notes and cannot rely on those no-
action letters. As indicated above, each Participating Broker-Dealer that
receives Exchange Notes for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. For a description of the procedures for such resales by
Participating Broker-Dealers, see "Plan of Distribution."
DESCRIPTION OF NOTES
General
The Notes are issued pursuant to an Indenture (the "Indenture") between the
Company and Harris Trust and Savings Bank, as trustee (the "Trustee"), in a
private transaction that is not subject to the registration requirements of
the Securities Act. The terms of the Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The Notes are subject to
all such terms, and holders of Notes are referred to the Indenture and the
Trust Indenture Act for a statement thereof. The form and terms of the
Exchange Notes are the same as the form and terms of the Old Notes (which they
replace) except that (i) the Exchange Notes bear a Series B designation and
have a different CUSIP number than the Old Notes, (ii) the Exchange Notes have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof, and (iii) the holders of Exchange Notes will
not be entitled to certain rights under the Registration Rights Agreement,
including the provisions providing for an
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increase in the interest rate on the Old Notes in certain circumstances
relating to the timing of the Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. The following summary of the material
provisions of the Indenture, the Pledge Agreement and the Registration Rights
Agreement does not purport to be complete and is qualified in its entirety by
reference to such agreements, including the definitions therein of certain
terms used below. Copies of the proposed form of such agreements are available
as set forth below under "--Additional Information." The definitions of
certain terms used in the following summary are set forth below under "--
Certain Definitions." For purposes of this summary, the term "Company" refers
only to OnePoint Communications Corp. and not to any of its Subsidiaries.
The Notes are general obligations of the Company and will rank pari passu in
right of payment with any existing or future unsubordinated Indebtedness of
the Company and senior in right of payment to any subordinated Indebtedness of
the Company. The Company's obligations under the Notes are guaranteed, fully
and unconditionally, (the "Subsidiary Guarantees") by all of the Company's
Restricted Subsidiaries. In addition, a portion of the Company's obligations
on the Notes are secured by a first priority pledge to the Trustee for the
benefit of the holders of the Notes of the Pledged Securities, which will be
held in the Escrow Account pursuant to the Pledge Agreement. The proceeds from
the Pledged Securities will be used to pay the first seven interest payments
on the Notes. See "--Interest Reserve" and "--Subsidiary Guarantees."
The operations of the Company are conducted in large part through its
Subsidiaries and, therefore, the Company is dependent upon the cash flow of
its Subsidiaries to meet its obligations, including its obligations under the
Notes. See "Risk Factors--The Company Has No Operations and is Dependent Upon
Funds From Its Subsidiaries."
Under certain circumstances, the Company will be able to designate
Subsidiaries of the Company, including Subsidiaries that it creates or
acquires in the future, to be Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants set
forth in the Indenture. See "--Certain Covenants--Restricted Payments."
Subsidiary Guarantees
The Company's payment obligations under the Notes are jointly and severally
guaranteed, fully and unconditionally, (the "Subsidiary Guarantees") by the
Subsidiary Guarantors. The obligations of each Subsidiary Guarantor under its
Subsidiary Guarantee will be limited so as not to constitute a fraudulent
conveyance under applicable law. See, however, "Risk Factors--Fraudulent
Conveyance Risks."
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person) another corporation, Person or entity whether or not affiliated with
such Subsidiary Guarantor unless (i) subject to the provisions of the
following paragraph, the Person formed by or surviving any such consolidation
or merger (if other than such Subsidiary Guarantor) assumes all the
obligations of such Subsidiary Guarantor pursuant to a supplemental indenture
in form and substance reasonably satisfactory to the Trustee, under the Notes,
the Indenture, the Pledge Agreement and the Registration Rights Agreement;
(ii) immediately after giving effect to such transaction, no Default or Event
of Default exists; and (iii) except in the case of any such merger or
consolidation with the Company or another Subsidiary Guarantor, the Company
would, on a pro forma basis, immediately after giving effect to such
transaction, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Debt to Cash Flow Ratio test set forth in the covenant
described below under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Disqualified Stock."
The Indenture provides that in the event of a sale or other disposition of
all of the assets of any Subsidiary Guarantor, by way of merger, consolidation
or otherwise, or a sale or other disposition of all of the capital stock of
any Subsidiary Guarantor, then such Subsidiary Guarantor (in the event of a
sale or other disposition, by way of such a merger, consolidation or
otherwise, of all of the capital stock of such Subsidiary Guarantor) or the
corporation acquiring the property (in the event of a sale or other
disposition of all of the assets of such Subsidiary Guarantor) will be
released and relieved of any obligations under its Subsidiary Guarantee;
provided
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that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "--Repurchase
at Option of Holders--Asset Sales."
Principal, Maturity and Interest
The Notes are limited in aggregate principal amount to $82.75 million. The
Notes will mature on June 1, 2008. Interest on the Notes will accrue at the
rate of 14 1/2% per annum and will be payable semi-annually in arrears on June
1 and December 1 of each year (each, an "Interest Payment Date"), commencing
on December 1, 1999, to holders of record on the immediately preceding May 15
and November 15. Interest on the Notes accrues from the most recent date to
which interest has been paid or, if no interest has been paid, from the date
of original issuance. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal of and premium, interest and
Liquidated Damages, if any, on the Notes is payable at the office or agency of
the Company maintained for such purpose or, at the option of the Company,
payment of interest and Liquidated Damages may be made by check mailed to the
holders of the Notes at their respective addresses set forth in the register
of holders of Notes; provided that all payments of principal, premium,
interest and Liquidated Damages with respect to Notes the holders of which
have given wire transfer instructions to the Company will be required to be
made by wire transfer of immediately available funds to the accounts specified
by the holders thereof. Until otherwise designated by the Company, the
Company's office or agency will be the office of the Trustee maintained for
such purpose. The Notes are issued in denominations of $1,000 and integral
multiples thereof.
Interest Reserve
A portion of the Company's obligations under the Notes will be secured
pending disbursement pursuant to the Pledge Agreement by a pledge of the
Pledged Securities. Upon the consummation of the Initial Offering, the Company
used approximately $80.5 million of the net proceeds of such offering to
purchase, and pledged to the Trustee, for the benefit of the holders of the
Notes, the Pledged Securities, which are in an amount intended to be
sufficient upon receipt of scheduled interest and principal payments, to
provide for payment in full when due of the first seven scheduled interest
payments on the Notes. The Pledged Securities are pledged as security for the
payment of the principal of and interest on the Notes, Liquidated Damages, if
any, and all other Obligations of the Company under the Indenture and the
Notes. When each of the first seven interest payments is due, the Trustee will
apply the proceeds of a sufficient amount of Pledged Securities to pay the
interest then due.
Upon the acceleration of the maturity of the Notes or upon certain
redemptions and repurchases of the Notes, the Pledge Agreement provides that
the Trustee will apply the proceeds of a sufficient amount of Pledged
Securities to pay the amounts owed by the Company to holders of the Notes at
such time. Immediately following the earlier of (i) the payment in full of the
seventh scheduled interest payment on the Notes and (ii) the day on which all
of the Notes have been repurchased, redeemed or defeased, if no Default or
Event of Default is then continuing, the remaining Pledged Securities, if any,
will be released from the Pledge and the outstanding Notes (if any) will be
unsecured obligations of the Company. The ability of holders of the Notes to
realize upon any such funds or receive payment from the proceeds of the
Pledged Securities may be subject to certain bankruptcy law limitations in the
event of a bankruptcy of the Company.
Optional Redemption
The Notes will not be redeemable at the Company's option 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, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the applicable redemption date, if
redeemed during the twelve-month period beginning on June 1 of the years
indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003.......................... 107.250%
2004.......................... 104.833%
2005.......................... 102.417%
2006 and thereafter........... 100.000%
</TABLE>
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Notwithstanding the foregoing, on or prior to June 1, 2001, the Company may
redeem up to 35.0% or approximately $61,250,000 of the aggregate principal
amount of Notes issued under the Indenture at a redemption price of 114.5% of
the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the redemption date, with the net cash proceeds of
one or more public or private offerings of Common Stock generating net cash
proceeds to the Company in excess of $20.0 million; provided that at least
65.0% of the aggregate principal amount of Notes issued on the Closing Date
remains outstanding immediately after the occurrence of such redemption.
Selection and Notice
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each holder of Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note. Notes called for redemption become due on the date fixed
for redemption. On and after the redemption date, interest ceases to accrue on
Notes or portions of them called for redemption.
Mandatory Redemption
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
Repurchase at the Option of Holders
Change of Control
Upon the occurrence of a Change of Control, the Indenture requires the
Company to make an offer to each holder of Notes to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof,
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to
the date of purchase (the "Change of Control Payment"). Within ten business
days following any Change of Control, the Company will mail a notice to each
holder describing the transaction or transactions that constitute the Change
of Control and offering to repurchase Notes on the date specified in such
notice, which date shall be no earlier than 30 days and no later than 60 days
from the date such notice is mailed (the "Change of Control Payment Date"),
pursuant to the procedures required by the Indenture and described in such
notice. The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
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The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
There is no assurance that, in the event of a Change of Control, the Company
will have or have access to adequate funds to repurchase the Notes.
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 80% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of cash or Cash Equivalents; provided that the amount of (a)
any liabilities (as shown on the Company's or such Restricted Subsidiary's
most recent balance sheet) of the Company or such Restricted Subsidiary (other
than contingent liabilities and liabilities that are by their terms
subordinated to the Notes or any guarantee thereof) that are assumed by the
transferee of any such assets pursuant to a customary novation agreement that
releases the Company or such Restricted Subsidiary from further liability and
(b) any securities, notes or other obligations received by the Company or such
Restricted Subsidiary from such transferee that are contemporaneously (subject
to ordinary settlement periods) converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to
be cash for purposes of this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may, subject to the provisions of the Indenture described under
"--Certain Covenants--Restricted Payments," (a) apply such Net Proceeds to the
permanent repayment of any Indebtedness that is pari passu with the Notes or
(b) (i) apply such Net Proceeds to the acquisition of the assets or a majority
of the voting equity interests of another Person, the making of capital
expenditures, or the acquisition of other long-term assets, in each case, in
or used or useful in the Telecommunications Business or (ii) enter into a
binding commitment to apply, within 120 days of the date of such commitment,
such Net Proceeds as described in clause (i) above. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce
revolving credit borrowings or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $5.0 million, the Company will be
required to make an offer to all holders of Notes (an "Asset Sale Offer") to
repurchase the maximum principal amount of Notes that may be purchased out of
the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the repurchase date, in accordance with the
procedures set forth in the Indenture. To the extent that any Excess Proceeds
remain after consummation of an Asset Sale Offer, the Company may use such
Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If
the aggregate principal amount of Notes tendered pursuant to such Asset Sale
Offer exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes to be purchased on a pro rata basis. Upon completion of such offer to
purchase, the amount of Excess Proceeds shall be reset at zero.
Certain Covenants
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of
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the Company's or any of its Restricted Subsidiaries' Equity Interests
(including, without limitation, any payment in connection with any merger or
consolidation involving the Company or any of its Restricted Subsidiaries) or
to the direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than dividends
or distributions payable in Equity Interests (other than Disqualified Stock)
of the Company or to the Company or a Restricted Subsidiary of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving
the Company) any Equity Interests of the Company or any direct or indirect
parent of the Company (other than any such Equity Interests owned by the
Company or any Restricted Subsidiary of the Company); (iii) make any payment
on or with respect to, or purchase, redeem, defease or otherwise acquire or
retire for value, any Indebtedness that is subordinated to the Notes, except a
payment of interest or principal at Stated Maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Debt to
Cash Flow Ratio test set forth in the first paragraph of the covenant
described below under caption "--Incurrence of Indebtedness and Issuance of
Disqualified Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Closing Date (excluding Restricted Payments
permitted by clauses (ii), (iii) and (iv) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) (A)
Cumulative Consolidated Cash Flow minus (B) the product of 1.75 and
Cumulative Interest Expense, in each case as of the date of such Restricted
Payment, plus (ii) 100% of the aggregate net cash proceeds received by the
Company since the Closing Date as a contribution to its common equity
capital or from the issue or sale of Equity Interests of the Company (other
than Disqualified Stock) or from the issue or sale of Disqualified Stock or
debt securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company), plus
(iii) to the extent that any Restricted Investment that was made after the
date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (iv) in the event the
Company or any Restricted Subsidiary makes an Investment in a Person that,
as a result of or in connection with such Investment, becomes a Restricted
Subsidiary, an amount equal to the lesser of (A) the fair market value of
such Person at the time it becomes a Restricted Subsidiary as evidenced by
a resolution of the Board of Directors set forth in an officers'
certificate delivered to the Trustee or (B) the net amount of Restricted
Investments made in such Person prior to its becoming a Restricted
Subsidiary.
So long as no Default has occurred and is continuing or would be caused
thereby, the foregoing provisions will not prohibit: (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of, other Equity
Interests of the Company (other than any Disqualified Stock); provided that
the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (iii) the defeasance,
redemption, repurchase or other acquisition of subordinated Indebtedness with
the net cash proceeds from an incurrence of Permitted Refinancing
Indebtedness; (iv) the payment of any dividend by a Restricted Subsidiary of
the Company to the holders of its common Equity Interests on a pro rata basis;
(v) the payment of cash in lieu of fractional shares of Common Stock pursuant
to the Warrant Agreement; and (vi) the
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repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any Restricted Subsidiary of the Company
held by any member of the Company's or any of its Restricted Subsidiaries'
management; provided that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $250,000 in
any twelve-month period.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be
valued by this covenant shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the Trustee, such
determination to be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if such
fair market value exceeds $5.0 million. Not later than the date of making any
Restricted Payment, the Company shall deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting
forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed, together with a copy of any fairness
opinion or appraisal required by the Indenture.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation and will reduce the amount available for
Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the fair market value of such Investments at the time of such
designation. Such designation will only be permitted if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
"Restricted Payments" covenant.
If, at any time, any Unrestricted Subsidiary would fail to meet the
definition of an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption "--
Incurrence of Indebtedness and Issuance of Disqualified Stock," the Company
shall be in default of such covenant).
The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i)
such Indebtedness is permitted under the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Disqualified Stock," calculated
on a pro forma basis as if such designation had occurred at the beginning of
the four-quarter reference period, and (ii) no Default or Event of Default
would be in existence following such designation.
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) or issue any Disqualified Stock;
provided, however, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock if the Company's Debt to Cash Flow
Ratio is greater than zero and less than or equal to (a) 5.0 to 1, if such
incurrence is on or prior to June 1, 2001, and (b) 4.5 to 1, if such
incurrence of issuance is after June 1, 2001, in each case determined on a pro
forma basis (including a pro forma application of the net proceeds therefrom)
as if the additional Indebtedness had been incurred at the beginning of
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the Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred. Notwithstanding the foregoing,
neither the Company nor any of its Restricted Subsidiaries may incur any
Indebtedness that is contractually subordinated in right of payment to any
other Indebtedness of the Company or such Restricted Subsidiary unless such
Indebtedness is also contractually subordinated in right of payment to the
Notes on substantially identical terms; provided, however, that no
Indebtedness of the Company or any Restricted Subsidiary shall be deemed to be
contractually subordinated in right of payment to any other Indebtedness of
the Company or such Restricted Subsidiary solely by virtue of being unsecured.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company of Indebtedness from a bank or other
financial institution in an aggregate amount at any one time outstanding
not to exceed the greater of (a) $25 million and (b) 80% of the face amount
of all accounts receivable owned by the Company as of such date that are
not more than 90 days past due;
(ii) the incurrence by the Company and its Restricted Subsidiaries of
Existing Indebtedness;
(iii) the incurrence by the Company and its Restricted Subsidiaries of
Indebtedness represented by the Notes and the Subsidiary Guarantees;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be
incurred under the first paragraph hereof or clauses (ii), (iii), (vi) or
(vii) of this paragraph;
(v) the incurrence by the Company of Indebtedness in an aggregate
principal amount at any one time outstanding, not to exceed 2.0 times the
sum of the net cash proceeds received by the Company after the Closing Date
as a capital contribution or from the issuance and sale of Equity Interests
(other than Disqualified Stock) to a Person that is not a Subsidiary of the
Company to the extent that such net cash proceeds have not been used to
make Restricted Payments pursuant to clause (c)(ii) of the first paragraph
or clauses (ii), (iii) or (vi) of the second paragraph of the covenant
described under the caption "--Restricted Payments" or Investments
described under clause (vi) of the definition of Permitted Investments;
provided that such Indebtedness does not mature prior to the Notes and has
a Weighted Average Life to Maturity greater than that of the Notes;
(vi) the incurrence by the Company and its Restricted Subsidiaries of
Vendor Debt; provided that the aggregate amount of such Vendor Debt does
not exceed the sum of (a) 100% of the total cost of any digital loop
carriers or switches acquired therewith and (b) 80% of the total cost of
any other Telecommunications Equipment or Telecommunications Related Assets
acquired therewith;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in connection with the acquisition of (a) a Person engaged
in a Telecommunications Business or (b) Telecommunications Related Assets,
which include contractual rights of entry, in each case in an aggregate
amount not to exceed the product of $650 and the number of acquired
telephony or video subscribers (as stated in an Officers' Certificate
delivered to the Trustee);
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness; provided, however, that (a) any
subsequent issuance or transfer of Equity Interests that results in any
such Indebtedness being held by a Person other than the Company or a
Restricted Subsidiary of the Company and (b) any sale or other transfer of
any such Indebtedness to a Person that is not either the Company or a
Restricted Subsidiary of the Company shall be deemed, in each case, to
constitute an incurrence of such Indebtedness by the Company or such
Restricted Subsidiary, as the case may be, that was not permitted by this
clause (viii);
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(ix) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of this Indenture to be outstanding; and
(x) the Guarantee by the Company or any of its Restricted Subsidiaries of
Indebtedness of the Company or any of its Restricted Subsidiaries permitted
to be incurred pursuant to the Debt to Cash Flow Ratio test set forth in
the first paragraph of this covenant or pursuant to any of clauses (i)
through (v) or (vii) through (ix) of this covenant, which guarantee has the
same ranking relative to the Notes and the Guarantees as the guaranteed
Indebtedness does.
For purposes of determining compliance with this covenant, in the event that
an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (ix) above as of
the date of incurrence thereof or is entitled to be incurred pursuant to the
first paragraph of this covenant as of the date of incurrence thereof, the
Company shall, in its sole discretion, classify such item of Indebtedness on
the date of its incurrence in any manner that complies with this covenant.
Accrual of interest and accretion or amortization of original issue discount
will not be deemed to be an incurrence of Indebtedness for purposes of this
covenant.
Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien of any kind on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any Indebtedness owed to the Company
or any of its Restricted Subsidiaries, (ii) make loans or advances to the
Company or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries.
However, the foregoing restrictions do not apply to encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the Closing Date, (b) the Indenture and the Notes, (c) applicable
law, (d) any instrument governing Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Restricted Subsidiaries as in effect at
the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties
or assets of any Person, other than the Person, or the property or assets of
the Person, so acquired, provided that, in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred, (e)
customary non-assignment provisions in contracts entered into in the ordinary
course of business, (f) purchase money obligations for property acquired in
the ordinary course of business that impose restrictions of the nature
described in clause (iii) above on the property so acquired, (g) any agreement
for the sale of a Subsidiary that restricts distributions by that Subsidiary
pending its sale, (h) Permitted Refinancing Indebtedness, provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those contained
in the agreements governing the Indebtedness being refinanced, (i) secured
Indebtedness otherwise permitted to be incurred pursuant to the provisions of
the covenant described above under the caption "--Liens" that limits the right
of the debtor to dispose of the assets securing such Indebtedness, (j)
provisions with respect to the disposition or distribution of assets or
property in joint venture agreements and other similar agreements entered into
in the ordinary course of business and (k) restrictions on cash or other
deposits or net worth imposed by customers under contracts entered into in the
ordinary course of business.
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Merger, Consolidation, or Sale of Assets
The Indenture provides that neither the Company nor any of its Restricted
Subsidiaries may consolidate or merge with or into (whether or not the Company
or such Restricted Subsidiary is the surviving corporation), or sell, assign,
transfer, convey or otherwise dispose of all or substantially all of its
properties or assets in one or more related transactions, to another Person
unless (i) the Company is the surviving corporation or such Restricted
Subsidiary is the surviving entity, as the case may be, or the Person formed
by or surviving any such consolidation or merger (if other than the Company or
such Restricted Subsidiary) or to which such sale, assignment, transfer,
conveyance or other disposition shall have been made is a corporation (in the
case of the Company) or a corporation or other entity (in the case of such
Restricted Subsidiary) organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the Person formed
by or surviving any such consolidation or merger (if other than the Company or
such Restricted Subsidiary) or the Person to which such sale, assignment,
transfer, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Notes, the Indenture, the Pledge
Agreement and the Registration Rights Agreement, or of such Restricted
Subsidiary under its Subsidiary Guarantee, as the case may be, pursuant to a
supplemental indenture in a form reasonably satisfactory to the Trustee; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) except in the case of a merger of the Company with or into a Wholly Owned
Restricted Subsidiary of the Company, the Company or the Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, conveyance or other disposition shall
have been made (a) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of the Company
immediately preceding the transaction and (b) will, immediately after such
transaction after giving pro forma effect thereto and to any related financing
transactions as if the same had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Debt to Cash Flow Ratio test set forth in the
first paragraph of the covenant described above under the caption "--
Incurrence of Indebtedness and Issuance of Disqualified Stock." The Indenture
also provides that neither the Company nor any of its Restricted Subsidiaries
may, directly or indirectly, lease all or substantially all of its properties
or assets, in one or more related transactions, to any other Person. The
provisions of this covenant are not applicable to a sale, assignment,
transfer, conveyance or other disposition of assets between or among the
Company and any of its Restricted Subsidiaries.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or such Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers
to the Trustee (a) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$1.0 million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause
(i) above and that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors and (b) with respect to
any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $10.0 million (or if no member
of the Board of Directors is an Independent Director, $1.0 million), an
opinion as to the fairness to the holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or investment
banking firm of national standing. Notwithstanding the foregoing, the
following items shall not be deemed to be Affiliate Transactions: (i) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business; (ii) transactions between or
among the Company and/or its Restricted Subsidiaries; (iii) payment of
reasonable directors fees to Persons who are not otherwise Affiliates of the
Company; (iv) provisioning or other agreements with SBC Communications, Inc.
or any Affiliate thereof, and under any amendment or extension thereof so long
as such agreement,
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amendment or extension is not disadvantageous to the holders of the Notes in
any material respect; (v) payment of management and advisory fees to The
VenCom Group, Inc. or any Affiliate thereof in an amount during any calendar
year period not to exceed $900,000, provided, that if the amount paid in any
calendar year is less than $900,000, the annual cap in the next calendar year
shall be equal to the difference between $1.8 million and the amount paid in
the previous calendar year and further provided that amounts owed in excess of
the cap in any year may be paid in one or more subsequent years if and to the
extent that they are within the cap in such years; (vi) any sale or other
issuance of equity interests (other than Disqualified Stock) of the Company;
(vii) reasonable indemnity provided to officers, directors, employees,
consultants or agents of the Company and its Restricted Subsidiaries as
determined in good faith by the Company's Board of Directors and as permitted
by the Company's governing documents and applicable law; (viii) any
transactions undertaken pursuant to any contractual obligations or rights in
existence on the Closing Date, and (ix) Restricted Payments that are permitted
by the provisions of the Indenture described above under the caption "--
Restricted Payments."
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries creates or acquires another Restricted Subsidiary, then the
Company shall cause such Restricted Subsidiary to execute a guarantee of the
Notes in the form set forth in the Indenture; provided that the Guarantee of
any Restricted Subsidiary will be released if the Company (i) designates such
Restricted Subsidiary to be an Unrestricted Subsidiary in accordance with the
covenant described under the caption "--Restricted Payments" or (ii) sells all
of the Capital Stock of such Restricted Subsidiary in compliance with the
provisions of the Indenture relating to Asset Sales.
Issuances and Sales of Equity Interests in Wholly Owned Restricted
Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any of its Wholly Owned Restricted Subsidiaries to, transfer, convey, sell,
lease or otherwise dispose of any Equity Interests in any Wholly Owned
Restricted Subsidiary of the Company to any Person (other than the Company or
another Wholly Owned Restricted Subsidiary, unless (a) such transfer,
conveyance, sale, lease or other disposition is of all of the Equity Interests
in such Wholly Owned Restricted Subsidiary and (b) the Net Proceeds from such
transfer, conveyance, sale, lease or other disposition are applied in
accordance with the covenant described above under the caption "--Repurchase
at the Option of Holders--Asset Sales," and (ii) will not permit any Wholly
Owned Restricted Subsidiary of the Company to issue any of its Equity
Interests (other than, if necessary, shares of its Capital Stock constituting
directors' qualifying shares) to any Person other than to the Company or
another Wholly Owned Restricted Subsidiary.
Business Activities
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, engage in any business other than the
Telecommunications Business.
Limitations on Sale and Leaseback Transactions
The Indenture provides that the Company and its Restricted Subsidiaries may
not, directly or indirectly, enter into, assume, Guarantee or otherwise become
liable with respect to any Sale and Leaseback Transactions, provided that the
Company or any Restricted Subsidiary of the Company may enter into any such
transaction if (i) the Company or such Restricted Subsidiary would be
permitted under the covenants described above under "--Incurrence of
Indebtedness and Issuance of Disqualified Stock" and "--Liens" to incur
secured Indebtedness in an amount equal to the Attributable Debt with respect
to such transaction, (ii) the consideration received by the Company or such
Restricted Subsidiary from such transaction is at least equal to the Fair
Market Value of the property being transferred and (iii) the Net Proceeds
received by the Company or such Restricted Subsidiary from such transaction
are applied in accordance with the covenant described above under the caption
"Repurchase at the Option of Holders--Asset Sales."
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Payments for Consent
The Indenture provides that neither the Company nor any of its Affiliates
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any holder of any Notes for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of the Indenture or the Notes unless such consideration is offered
to be paid or agreed to be paid to all holders of the Notes that consent,
waive or agree to amend in the time frame and on the terms and conditions set
forth in the solicitation documents relating to such consent, waiver or
agreement.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file
such Forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition
and results of operations of the Company and its consolidated Subsidiaries
(showing in reasonable detail, either on the face of the financial statements
or in the footnotes thereto and in Management's Discussion and Analysis of
Financial Condition and Results of Operations, the financial condition and
results of operations of the Company and its Restricted Subsidiaries separate
from the financial condition and results of operations of the Unrestricted
Subsidiaries of the Company) and, with respect to the annual information only,
a report thereon by the Company's certified independent accountants and (ii)
all current reports that would be required to be filed with the Commission on
Form 8-K if the Company were required to file such reports, in each case
within the time periods specified in the Commission's rules and regulations.
In addition, whether or not required by the rules or regulations of the
Commission, the Company will file a copy of all such information and reports
with the Commission (unless the Commission will not accept such a filing) and
make such information and reports available to securities analysts and
prospective investors upon request. In addition, for so long as any Notes are
outstanding, the Company will furnish to the holders and to securities
analysts and prospective investors, upon their request, the information
required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Events of Default and Remedies
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes; (ii) default in payment when
due of the principal of or premium, if any, on the Notes; (iii) failure by the
Company or any of its Restricted Subsidiaries to comply with the provisions
described under the captions "--Repurchase at the Option of Holders--Change of
Control," "--Repurchase at the Option of Holders--Asset Sales," "--Certain
Covenants--Restricted Payments," "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Disqualified Stock" or "--Certain Covenants--
Merger, Consolidation, or Sale of Assets;" (iv) failure by the Company or any
of its Restricted Subsidiaries for 30 days after notice to comply with any of
its other agreements in the Indenture or the Notes; (v) default under any
mortgage, indenture or instrument under which there may be issued or by which
there may be secured or evidenced any Indebtedness for money borrowed by the
Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries), whether such
Indebtedness or guarantee now exists or is created after the Closing Date,
which default (a) is caused by a failure to pay principal of or premium, if
any, or interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness on the date of such default (a "Payment
Default") or (b) results in the acceleration of such Indebtedness prior to its
express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $1.5 million or more; (vi) failure
by the Company or any of its Restricted Subsidiaries to pay final judgments
(other than any judgment or portion thereof as to which an insurance carrier
rated at least A by Standard & Poor's Corporation or A2 by Moody's Investors
Service, Inc. has accepted liability in writing) aggregating in excess of $3.0
million, which judgments are not paid, discharged or stayed for a period of 60
days; (vii) default by the
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Company in the performance of any covenant set forth in the Pledge Agreement,
or repudiation by the Company of its obligations under the Pledge Agreement,
or the unenforceability of the Pledge Agreement against the Company or any of
its Restricted Subsidiaries for any reason; (viii) default by any Restricted
Subsidiary of the Company in the performance of any obligation under its
Subsidiary Guarantee, or repudiation by any of Restricted Subsidiary of the
Company of its obligations under its Subsidiary Guarantee, or the
unenforceability of any Subsidiary Guarantee against any Restricted Subsidiary
of the Company for any reason; (ix) the failure for any reason for the Company
to retain all material licenses necessary to conduct its business; and (x)
certain events of bankruptcy or insolvency with respect to the Company or any
of its Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company, any Significant
Subsidiary or any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary, all outstanding Notes will become due and
payable without further action or notice. Holders of the Notes may not enforce
the Indenture or the Notes except as provided in the Indenture. Subject to
certain limitations, holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
June 1, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to such date, then the premium
specified in the Indenture shall also become immediately due and payable to
the extent permitted by law upon the acceleration of the Notes.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture except a continuing Default or Event of Default in the
payment of interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part
of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have all of its
obligations under the Notes and all obligations of its Restricted Subsidiaries
under the Subsidiary Guarantees discharged ("Legal Defeasance") except for (i)
the rights of holders of outstanding Notes to receive payments in respect of
the principal of and
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premium, interest and Liquidated Damages, if any, on such Notes when such
payments are due from the trust referred to below, (ii) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith, and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "--Events of Default and Remedies" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of and premium, interest and Liquidated
Damages, if any, on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date; (ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (a) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (b)
since the date of the Indenture, there has been a change in the applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion of counsel shall confirm that, the holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of
funds to be applied to such deposit) or insofar as Events of Default from
bankruptcy or insolvency events are concerned, at any time in the period
ending on the 91st day after the date of deposit; (v) such Legal Defeasance or
Covenant Defeasance will not result in a breach or violation of, or constitute
a default under any material agreement or instrument (other than the
Indenture) to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company must
have delivered to the Trustee an opinion of counsel to the effect that after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; (vii) the Company must deliver to
the Trustee an Officers' Certificate stating that the deposit was not made by
the Company with the intent of preferring the holders of Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
Transfer and Exchange
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
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The registered holder of a Note will be treated as the owner of it for all
purposes.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture, the
Notes or the Subsidiary Guarantees may be amended or supplemented with the
consent of the holders of at least a majority in principal amount of the Notes
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes),
and any existing default or compliance with any provision of the Indenture,
the Notes or the Subsidiary Guarantees may be waived with the consent of the
holders of a majority in principal amount of the then outstanding Notes
(including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder): (i) reduce the
principal amount of Notes whose holders must consent to an amendment,
supplement or waiver; (ii) reduce the principal of or change the fixed
maturity of any Note or alter the provisions with respect to the redemption of
the Notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the Option of Holders"); (iii) reduce the
rate of or change the time for payment of interest on any Note; (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Notes (except a rescission of acceleration of the Notes by
the holders of at least a majority in aggregate principal amount of the Notes
and a waiver of the payment default that resulted from such acceleration); (v)
make any Note payable in money other than that stated in the Notes; (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of holders of Notes to receive payments of principal of
or premium, if any, interest or Liquidated Damages, if any, on the Notes;
(vii) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders"); (viii) amend the Pledge Agreement in a
manner that adversely affects the holders of the Notes; or (ix) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture, the Notes
or the Subsidiary Guarantees to cure any ambiguity, defect or inconsistency,
to provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to holders
of Notes in the case of a merger or consolidation or sale of all or
substantially all of the Company's assets, to make any change that would
provide any additional rights or benefits to the holders of Notes or that does
not adversely affect the legal rights under the Indenture of any such holder,
to provide for additional Subsidiary Guarantors, or to comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
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Book-Entry, Delivery and Form
The Exchange Notes will be represented in registered, global form by one or
more Global Notes (the "Global Notes") . The Global Notes will be deposited
upon issuance with the Trustee as custodian for The Depository Trust Company
("DTC"), in New York, New York, and registered in the name of DTC or its
nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
Notes in certificated form except in the limited circumstances described
below. See "--Exchange of Book-Entry Securities for Certificated Securities."
Except in the limited circumstances described below, owners of beneficial
interests in the Global Notes will not be entitled to receive physical
delivery of Certificated Securities (as defined below). Transfers of
beneficial interests in the Global Notes will be subject to the applicable
rules and procedures of DTC and its direct or indirect participants, which may
change from time to time.
Initially, the Trustee will act as Paying Agent and Registrar with respect
to the Notes. The Notes may be presented for registration of transfer and
exchange at the offices of the Registrar.
Depository Procedures
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures
are solely within the control of DTC and are subject to changes by it from
time to time. The Company takes no responsibility for these operations and
procedures and urges investors to contact DTC or its participants directly to
discuss these matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it, (i) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Notes and (ii) ownership of such interests in
the Global Notes will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interest in the Global Notes).
Investors in the Global Notes may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations which are Participants in such system. All interests in a Global
Note may be subject to the procedures and requirements of DTC. The laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
beneficial interests in a Global Note to such persons will be limited to that
extent. Because DTC can act only on behalf of Participants, which in turn act
on behalf of Indirect Participants and certain banks, the ability of a person
having beneficial interests in a Global Note to pledge such interests to
persons or entities that do not
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participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing
such interests.
Except as described below, owners of interest in the Global Notes will not
have Notes registered in their names, will not receive physical delivery of
the Notes in certificated form and will not be considered the registered
owners or "holders" thereof under the Indenture for any purpose.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global Note registered in the name of DTC
or its nominee will be payable to DTC in its capacity as the registered holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Global Notes, are registered
as the owners thereof for the purpose of receiving such payments and for any
and all other purposes whatsoever. Consequently, neither the Company, the
Trustee, nor any agent of the Company, or the Trustee has or will have any
responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made
on account of beneficial ownership interest in the Global Notes, or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Notes or (ii) any other matter relating to
the actions and practices of DTC or any of its Participants or Indirect
Participants. DTC has advised the Company that its current practice, upon
receipt of any payment in respect of securities, is to credit the accounts of
the relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings in the principal amount of
beneficial interest in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date. Payments by the Participants and the Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, the Trustee,
or the Company. Neither the Company nor the Trustee will be liable for any
delay by DTC or any of its Participants in identifying the beneficial owners
of the Notes, and the Company and the Trustee, as the case may be, may
conclusively rely on and will be protected in relying on instructions from DTC
or its nominee for all purposes.
Interests in the Global Notes are expected to be eligible to trade in DTC's
Same-Day Funds Settlement System and secondary market trading activity in such
interests will, therefore, settle in immediately available funds, subject in
all cases to the rules and procedures of DTC and its Participants. See "--Same
Day Settlement and Payment."
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Securities only at the direction of one or more
Participants to whose account DTC has credited the interests in the Global
Notes and only in respect of such portion of the amount of the Notes as to
which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Notes, DTC reserves the
right to exchange the Global Notes for legended Notes in certificated form,
and to distribute such Notes to its Participants.
Exchange of Book-Entry Notes for Certificated Notes
A Global Note is exchangeable for definitive Notes in registered
certificated form ("Certificated Notes") if (i) DTC (x) notifies the Company
that it is unwilling or unable to continue as depositary for the Global Notes
and the Company thereupon fails to appoint a successor depositary or (y) has
ceased to be a clearing agency registered under the Exchange Act, (ii) the
Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of the Certificated Notes or (iii) there shall have
occurred and be continuing a Default or Event of Default with respect to the
Securities. In addition, beneficial interests in Global Notes may be exchanged
for Certificated Notes upon request but only upon prior written notice given
to the Trustee or the Warrant Agent, as the case may be, by or on behalf of
DTC in accordance with the Indenture Notes. In all cases, Certificated
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Notes delivered in exchange for any Global Notes or beneficial interests
therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures).
Exchange of Certificated Notes for Book-Entry Notes
Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Notes unless the transferor first delivers to the
Trustee, as the case may be, a written certificate (in the form provided in
the Indenture to the effect that such transfer will comply with any transfer
restrictions applicable to such Notes.
Same Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note holder. With respect to
Notes in certificated form, the Company will make all payments of principal,
premium, if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available funds to the accounts specified by the holders thereof
or, if no such account is specified, by mailing a check to each such holder's
registered address. The securities represented by the Global Notes are
expected to be eligible to trade in the PORTAL market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Securities will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in any certificated Notes will also be settled in
immediately available funds.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified
Person, including, without limitation, Indebtedness incurred in connection
with, or in contemplation of, such other Person merging with or into or
becoming a Restricted Subsidiary of such specified Person, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person, in each case to the extent not repaid within five days after
the date of the acquisition.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Equity
Interests of a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of services in the ordinary course of business
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole will be governed by the provisions of the Indenture described
above under the caption "--Repurchase at the Option of Holders--Change of
Control" and/or the provisions described above under the caption "--Certain
Covenants--Merger, Consolidation or Sale of Assets" and not by the provisions
of the Asset Sale covenant), and (ii) the issue or sale by the Company or any
of its
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Restricted Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following shall not be deemed to
be Asset Sales: (i) a transfer of assets by the Company to a Restricted
Subsidiary or by a Restricted Subsidiary to the Company or to another
Restricted Subsidiary; (ii) an issuance of Equity Interests by a Restricted
Subsidiary to the Company or to a Wholly Owned Restricted Subsidiary; (iii) a
Restricted Payment that is permitted by the covenant described above under the
caption "--Certain Covenants--Restricted Payments;" (iv) disposals or
replacements of obsolete, uneconomical, negligible, worn-out or surplus
property in the ordinary course of business; (v) the creation of a Lien not
prohibited by the covenant described above under the caption "--Certain
Covenants-- Liens" and (vi) the conversion of Cash Equivalents into cash.
"Attributable Debt" means, with respect to any Sale and Leaseback
Transaction, the present value of the time of determination (discounted at a
rate consistent with accounting guidelines, as determined in good faith by the
Company) of the payments during the remaining term of the lease (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended) or until the earliest date on which the lessee may
terminate such lease without penalty or upon payment of a penalty (in which
case the rental payments shall include such penalty), after excluding all
amounts required to be paid on account of maintenance and repairs, insurance,
taxes, assessments, water, utilities and similar charges.
"Beneficial Owner" means a beneficial owner as defined in Rules 13d-3 and
13d-5 under the Exchange Act (or any successor rules), including the provision
of such Rules that a Person shall be deemed to have beneficial ownership of
all securities that such Person has a right to acquire within 60 days;
provided that a Person will not be deemed a beneficial owner of, or to own
beneficially, any securities if such beneficial ownership (1) arises solely as
a result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to, and in accordance with, the Exchange Act and
(2) is not also then reportable on Schedule 13D or Schedule 13G (or any
successor schedule) under the Exchange Act.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less
from the date of acquisition, bankers' acceptances with maturities not
exceeding six months and overnight bank deposits, in each case with any
domestic commercial bank having capital and surplus in excess of $500 million
and a Thompson Bank Watch Rating of "B" or better, (iv) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above, (v)
commercial paper having the highest rating obtainable from Moody's Investors
Service, Inc. or Standard & Poor's Corporation and in each case maturing
within six months after the date of acquisition and (vi) money market funds at
least 95% of the assets of which constitute Cash Equivalents of the kinds
described in clauses (i)-(v) of this definition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the Company
and its Restricted Subsidiaries, taken as a whole, to any Person or group (as
such term is used in
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Section 13(d)(3) and 14(d)(2) of the Exchange Act) other than a Permitted
Holder, (ii) the adoption of a plan relating to the liquidation or dissolution
of the Company, (iii) any Person or group (as defined above) other than the
Permitted Holders is or becomes the Beneficial Owner, directly or indirectly,
of more than 50% of the total Voting Stock of the Company (measured by voting
power rather than number of shares), including by way of merger, consolidation
or otherwise, (iv) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors, (v) the first
day on which SBC Communications, Inc. fails to hold, whether directly or
indirectly, 9.9% or more of the total Voting Stock (measured by voting power
rather than the number of shares) of the Company or (vi) the first day on
which the Company's existing long distance telephony contract (or any
replacement thereof) terminates and is not replaced by a contract having no
less favorable economic terms than the Company's long distance telephony
contract in existence as of the Closing Date, and a term (assuming exercise of
any renewal options) ending after the final maturity date of the Notes.
"Closing Date" shall mean the first date on which Notes are issued by the
Company.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing
Consolidated Net Income) plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Restricted Subsidiaries for
such period to the extent that such depreciation, amortization and other non-
cash expenses were deducted in computing such Consolidated Net Income, minus
(v) non-cash items increasing such Consolidated Net Income for such period, in
each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes on the income or
profits of, and the depreciation and amortization and other non-cash expenses
of, a Restricted Subsidiary of the Company shall be added to Consolidated Net
Income to compute Consolidated Cash Flow of the Company only to the extent
that a corresponding amount would be permitted at the date of determination to
be dividended to the Company by such Restricted Subsidiary without prior
governmental approval (that has not been obtained), and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Subsidiary or its stockholders.
"Consolidated Indebtedness" means, with respect to any Person as of any date
of determination, the sum, without duplication, of (i) the total amount of
Indebtedness of such Person and its Restricted Subsidiaries, plus (ii) the
total amount of Indebtedness of any other Person, to the extent that such
Indebtedness has been Guaranteed by the referent Person or one or more of its
Restricted Subsidiaries, plus (iii) the aggregate liquidation value of all
preferred stock of Restricted Subsidiaries of such Person, in each case,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, for any Person, for any period, the
aggregate of the following for such Person and its Restricted Subsidiaries for
such period determined on a consolidated basis in accordance with GAAP: (a)
the amount of interest in respect of Indebtedness (including amortization of
original issue discount, amortization of debt issuance costs, and non-cash
interest payments on any Indebtedness and the
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interest portion of any deferred payment obligation), (b) the interest
component of rentals in respect of any Capital Lease Obligation paid, in each
case whether accrued or scheduled to be paid or accrued by such Person during
such period to the extent such amounts were deducted in computing Consolidated
Net Income, determined on a consolidated basis in accordance with GAAP and (c)
the product of (i) all dividend payments, whether or not in cash, on any
series of preferred stock or Disqualified Stock of such Person or any of its
Subsidiaries, other than dividend payments on Equity Interests payable solely
in Equity Interests of the Company (other than Disqualified Stock) or to the
Company or a Subsidiary of the Company, times (ii) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP. For purposes of this definition, interest on a Capital Lease Obligation
shall be deemed to accrue at an interest rate reasonably determined by such
Person to be the rate of interest implicit in such Capital Lease Obligation in
accordance with GAAP consistently applied.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms
of its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to such Restricted Subsidiary or
its equity holders, (iii) the Net Income of any Person acquired in a pooling
of interests transaction for any period prior to the date of such acquisition
shall be excluded and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (ii)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (a) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the Closing Date
in the book value of any asset owned by such Person or a consolidated
Restricted Subsidiary of such Person, (b) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Restricted
Subsidiaries and (c) all unamortized debt discount and expense and unamortized
deferred charges as of such date, all of the foregoing determined in
accordance with GAAP.
"Continuing Director" means as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Cumulative Consolidated Cash Flow" means the cumulative Consolidated Cash
Flow of the Company from and after the first day of the first fiscal quarter
beginning after the date of the Indenture to the end of the fiscal quarter
immediately preceding the date of a proposed Restricted Payment, or, if such
cumulative Consolidated Cash Flow for such period is negative, minus the
amount by which such cumulative Consolidated Cash Flow is less than zero.
"Cumulative Interest Expense" means the aggregate amount of Consolidated
Interest Expense of the Company paid or accrued by the Company from and after
the first day of the first fiscal quarter beginning after
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the Closing Date to the end of the fiscal quarter immediately preceding a
proposed Restricted Payment, determined on a consolidated basis in accordance
with GAAP.
"Debt to Cash Flow Ratio" means, as of any date of determination (the
"Calculation Date"), the ratio of (a) the Consolidated Indebtedness of the
Company as of such date to (b) the Consolidated Cash Flow of the Company for
the four most recent full fiscal quarters ending immediately prior to such
date for which internal financial statements are available, determined on a
pro forma basis after giving effect to all acquisitions or dispositions of
assets made by the Company and its Restricted Subsidiaries from the beginning
of such four-quarter period through and including such date of determination
(including any related financing transactions) as if such acquisitions and
dispositions had occurred at the beginning of such four-quarter period. In
addition, for purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter
reference period and Consolidated Cash Flow for such reference period shall be
calculated without giving effect to clause (iii) of the proviso set forth in
the definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of prior to the Calculation Date,
shall be excluded.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Escrow Account" means an account established with the Collateral Agent
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities purchased by the Company with a portion of the proceeds from the
sale of the Notes.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or any
successor act), and the rules and regulations thereunder.
"Existing Indebtedness" Indebtedness of the Company and its Restricted
Subsidiaries in existence on the Closing Date, until such amounts are repaid.
"Fair Market Value" means with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Closing Date.
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"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such
Indebtedness is assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other
Person. The amount of any Indebtedness outstanding as of any date shall be (i)
the accreted value thereof, in the case of any Indebtedness issued with
original issue discount and (ii) the principal amount thereof, together with
any interest thereon that is more than 30 days past due, in the case of any
other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Subsidiary of the Company, the Company
shall be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or
loss, together with any related provision for taxes on such gain or loss,
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary gain or loss,
together with any related provision for taxes on such extraordinary gain or
loss.
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"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness secured by a Lien on the asset or assets that
were the subject of such Asset Sale, and any reserve for adjustment in respect
of the sale price of such asset or assets established in accordance with GAAP;
provided, however, that the reversal of any such reserve shall be deemed a
receipt of Net Proceeds by the Company in the amount and on the date of such
reversal.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise) or (c) constitutes the lender; (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity; and (iii) as to which the lenders have been
notified in writing that they will not have any recourse to the stock or
assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officers' Certificate" means a certificate signed by (i) the Chairman of
the Board, a Vice Chairman of the Board, the President, the Chief Executive
Officer or a Vice President, and (ii) the Chief Financial Officer, the Chief
Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary of the Company and delivered to the Trustee, which shall
comply with the Indenture.
"Permitted Holder" means (i) SBC Communications, Inc., (ii) James Otterbeck,
or (iii) Ventures in Communications II, LLC; whether acting in their own name
or as a majority of persons having the power to exercise the voting rights
attached to, or having investment power over, equity interests held by others,
any trust principally for the benefit of one or more members of such persons
and any charitable foundation the majority of whose members, trustees or
directors, as the case may be, are any of such persons.
"Permitted Investments" means (i) any Investment in the Company or in any
Restricted Subsidiary of the Company; (ii) any Investment in Cash Equivalents;
(iii) any Investment by the Company or any Restricted Subsidiary of the
Company in a Person if, as a result of such Investment, (a) such Person
becomes a Restricted Subsidiary of the Company or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company, (iv) any Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales;" (v) any
acquisition of assets to the extent acquired in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company and (vi) any
Investment by the Company in one or more Permitted Telecommunications Joint
Ventures, provided, however, that the aggregate fair market value (measured on
the date such Investment was made and without giving effect to any subsequent
changes in value) of outstanding Investments made pursuant to this clause (vi)
shall not at any time exceed $10.0 million.
"Permitted Liens" means (i) Liens in favor of the Company, Restricted
Subsidiaries or holders of the Notes; (ii) Liens on property of a Person
existing at the time such Person is merged into or consolidated with the
Company or any Restricted Subsidiary of the Company; provided that such Liens
were in existence prior to the contemplation of such merger or consolidation
and do not extend to any assets other than those of the Person
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merged into or consolidated with the Company; (iii) Liens on property existing
at the time of acquisition thereof by the Company or any Restricted Subsidiary
of the Company, provided that such Liens were in existence prior to the
contemplation of such acquisition; (iv) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (v)
Liens existing on the Closing Date; (vi) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(vii) Liens on accounts receivable owned by the Company and securing
Indebtedness permitted by the Indenture; (viii) Liens securing Vendor Debt
permitted by the Indenture on the acquired property together with proceeds,
product, accessions, substitutions and replacements thereof; (ix) Liens
incurred in the ordinary course of business of the Company or any Restricted
Subsidiary of the Company with respect to obligations that do not exceed $2.0
million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary; and (x) Liens to secure any refinancings, renewals,
extensions, modifications or replacements (collectively, "refinancings") or
successive refinancings, in whole or in part, of any Indebtedness secured by
Liens referred to in clauses (ii), (iii) and (v) above, so long as such Lien
does not extend to any other property (other than improvements thereto) and is
otherwise no more burdensome than the Lien it replaces.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or such Restricted Subsidiary (other
than intercompany Indebtedness); provided that: (i) the principal amount (or
accreted value, if applicable) of such Permitted Refinancing Indebtedness does
not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and (iv) such Indebtedness is incurred either by the
Company or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded.
"Permitted Telecommunications Joint Venture" means a corporation,
partnership, limited liability company or other entity engaged in one or more
Telecommunications Businesses in which the Company owns, directly or
indirectly, an equity interest.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, business
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Pledge Agreement" means the Pledge Agreement dated as of the date of the
Indenture between the Company and the Trustee, as amended from time to time.
"Pledged Securities" means the securities purchased by the Company with a
portion of the proceeds from the sale of the Notes, which shall consist of
Government Securities, to be pledged to the Trustee for the benefit of holders
of the Notes and deposited in the Escrow Account.
"Restricted Investment" means an Investment other than a Permitted
Investment.
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"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which any property (other than
Capital Stock) is sold by such Person or a Subsidiary, or, in the case of the
Company, a Restricted Subsidiary of such Person and is thereafter leased back
from the purchaser or transferee thereof by such Person or one of its
Subsidiaries or, in the case of the Company, one of its Restricted
Subsidiaries.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the
Closing Date.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Subsidiary Guarantors" means (i) each existing Subsidiary of the Company
and (ii) any other Subsidiary of the Company that executes a Subsidiary
Guarantee in accordance with the provisions of the Indenture, and their
respective successors and assigns.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities (ii) reselling voice, video or
data services and (iii) creating, developing or marketing communications
related network equipment, software and other devices for use in a
Telecommunications Business.
"Telecommunications Equipment" means video reception, processing,
modulating, transmission and distribution equipment and telecommunication
switching, distribution and transmission equipment and inventory, including,
without limitation, all remote switching nodes, digital loop carriers,
switches, line cards and other equipment, software or hardware necessary to
install, monitor, operate and maintain a video and/or telecommunications
network.
"Telecommunications Related Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, real or personal,
used or to be used, in connection with a Telecommunications Business.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary: (i) has no
Indebtedness other than Non-Recourse Debt; (ii) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (iii) is a Person with respect
to which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (a) to subscribe for additional Equity Interests
or (b) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (iv) has not
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guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (v) has
at least one director on its board of directors (or one individual in an
equivalent position if the entity is not a corporation) that is not a director
or executive officer of the Company or any of its Restricted Subsidiaries and
has at least one executive officer that is not a director or executive officer
of the Company or any of its Restricted Subsidiaries.
"Vendor Debt" means any Indebtedness of the Company or its Restricted
Subsidiaries incurred in connection with the acquisition or construction
within 90 days of the incurrence of such Indebtedness of Telecommunications
Equipment or Telecommunications Related Assets.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or Persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
DESCRIPTION OF WARRANTS
On May 21, 1998, the Company issued the Warrants as part of the Units
pursuant to the Warrant Agreement between the Company and Harris Trust and
Savings Bank, as warrant agent (the "Warrant Agent") in a private transaction
that is not subject to the registration requirements of the Securities Act.
The following summary of certain provisions of the Warrant Agreement and the
Warrant Registration Rights Agreement does not purport to be complete and is
qualified in its entirety by reference to the Warrant Agreement, the Warrants
and the Warrant Registration Rights Agreement, including the definitions
therein of certain terms. A copy of the Warrant Agreement is filed as an
exhibit to the Exchange Offer Registration Statement of which this Prospectus
forms a part.
General
Each Warrant, when exercised, entitles the holder thereof to purchase 0.635
shares of Common Stock of the Company at an exercise price of $0.01 per share
(the "Exercise Price"). The Exercise Price and the number of Warrant Shares
issuable on exercise of a Warrant are both subject to adjustment in certain
cases referred to below. The Warrants became exercisable on November 6, 1998.
Unless exercised, the Warrants will automatically expire on June 1, 2008 (the
"Expiration Date"). The Warrants entitle the holders thereof to purchase in
the aggregate approximately 10.0% of the outstanding Common Stock of the
Company on a fully diluted basis as of the date of issuance of the Warrants
after giving effect to the (i) consummation of the Offering and (ii) exercise
as of the date of original issuance of the Warrants of all outstanding options
and rights issued by the Company. The Company will give notice of expiration
not less than 90 nor more than 120 days prior to the Expiration Date to the
registered holders of the then outstanding Warrants. If the Company fails to
give this notice, the Warrants will not expire until 90 days after the Company
gives such notice. In no event will holders be entitled to any damages or
other remedy for the Company's failure to give such notice other than any such
extension.
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The Warrants may be exercised by surrendering to the Company the Warrant
certificates evidencing such Warrants, if any, with the accompanying form of
election to purchase, properly completed and executed together with payment of
the Exercise Price. Payment of the Exercise Price may be made in the form of
cash or a certified or official bank check, payable to the order of the
Company, or by surrender of additional Warrants. Upon surrender of the Warrant
certificate and payment of the Exercise Price, the Warrant Agent will deliver
or cause to be delivered, to or upon the written order of such holder, stock
certificates representing the number of whole Warrant Shares or other
securities or property to which such holder is entitled under the Warrants and
Warrant Agreement, including without limitation any cash payment to adjust for
fractional interests in Warrant Shares issuable upon such exercise. If less
than all of the Warrants evidenced by a Warrant certificate are exercised, a
new Warrant certificate will be issued for the remaining number of Warrants.
No fractional Warrant Share will be issued upon exercise of the Warrants. If
any fraction of a Warrant Share would, except for the foregoing provision, be
issuable on the exercise of any Warrants (or specified portion thereof), the
Company must pay to the holder an amount in cash equal to the current market
price per Warrant Share, as determined on the day immediately preceding the
date the Warrant is presented for exercise, multiplied by such fraction,
computed to the nearest whole cent.
Certificates for Warrants will be issued in registered form only, and no
service charge will be made of registration or transfer or exchange upon
surrender of any Warrant certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration or transfer or exchange of Warrant
certificates.
The holders of the Warrants have no right to vote on matters submitted to
the stockholders of the Company and have no right to receive dividends, except
as provided below. The holders of the Warrants are not entitled to share in
the assets of the Company in the event of the liquidation, dissolution or
winding up of the Company's affairs.
Adjustments
Both the number of Warrant Shares purchasable upon the exercise of the
Warrants and the Exercise Price will be subject to adjustment in certain
events including (i) the payment by the Company of dividends (or other
distributions) on Common Stock of the Company payable in Common Stock of the
Company or other shares of the Company's capital stock, (ii) subdivisions,
combinations and reclassifications of Common Stock of the Company, (iii) the
issuance to all holders of Common Stock of the Company of rights, options or
warrants entitling them to subscribe for Common Stock of the Company, or for
securities convertible into or exchangeable for shares of Common Stock of the
Company, in either case for a consideration per share of Common Stock which is
less than the current market price per share (as defined in the Warrant
Agreement) of Common Stock of the Company, and (iv) the distribution to all
holders of Common Stock of the Company of any of the Company's assets, debt
securities or any rights or warrants to purchase securities (excluding those
rights and warrants referred to in clause (iii) above and excluding cash
dividends or other cash distributions from current or retained earnings).
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the
Exercise Price; provided, however, that any adjustment which is not made will
be carried forward and taken into account in any subsequent adjustment.
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another corporation,
each Warrant shall thereafter be exercisable for the right to receive the kind
and amount of shares of stock or other securities or property to which such
holder would have been entitled as a result of such consolidation, merger or
sale had the Warrant been exercised immediately prior thereto.
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Reservation of Shares
The Company has authorized and reserved for issuance such number of shares
of Common Stock as will be issuable upon the exercise of all outstanding
Warrants. Such shares of Common Stock, when paid for and issued, will be duly
and validly issued, fully paid and non-assessable, free of preemptive rights
and free from all taxes, liens, charges and security interests with respect to
the issue thereof.
Amendment
From time to time, the Company and the Warrant Agent, without consent of the
holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing defects or inconsistencies or making change
that do not materially adversely affect the rights of any holder. Any
amendment or supplement to the Warrant Agreement that has a material adverse
effect on the interests of the holders of the Warrants requires the written
consent of the holders of a majority of the then outstanding Warrants. The
consent of each holder of the Warrants affected is required for any amendment
pursuant to which the Exercise Price would be increased or the number of
Warrant Shares purchasable upon exercisable of Warrants would be decreased
(other than pursuant to adjustments provided for in the Warrant Agreement as
generally described above).
Reports
Whether or not required by the rules and regulations of the Commission, so
long as any of the Warrants remain outstanding, the Company shall cause copies
of the SEC Reports described under "--Certain Covenants--Reports" to be filed
with the Warrant Agent and mailed to the holders at their addresses appearing
in the register of Warrants maintained by the Warrant Agent.
Registration Rights
After the earlier to occur of June 1, 2003 or the occurrence of a Triggering
Event, the holders of one-quarter or more of the Warrants and the Warrant
Shares will be entitled to require the Company to effect one registration (a
"Demand Registration") under the Securities Act of the Warrant Shares, subject
to certain limitations. Upon a demand, the Company will (a) notify the holders
of all Warrants and Warrant Shares that a demand registration has been
requested, (b) prepare, file and use its best efforts to cause to become
effective within 120 days of such demand a registration statement in respect
of all of the Warrant Shares which holders request, no later than 30 days
after the date of such notice, to have included therein (the "Included
Securities"); provided, that if such demand occurs during the "lock up" or
"black out" period (not to exceed 180 days) imposed on the Company pursuant to
any underwriting or purchase agreement relating to an underwritten Rule 144A
or registered public offering of Common Stock or securities convertible into
or exchangeable or exercisable for Common Stock, the Company shall not be
required to so notify holders of Warrants and Warrant Shares and file such
demand registration statement prior to the end of such "lock up" or "black
out" period, in which event the Company will use its best efforts to cause
such Demand Registration statement to become effective no later than 30 days
after the end of such "lock up" or "black out" period and (c) keep such
registration statement continuously effective for the shorter of (i) 180 days
(the "Effectiveness Period") and (ii) such period of time as all of the
Warrant Shares included in such registration statement shall have been sold
thereunder; provided, that the Company may postpone the filing period, suspend
the effectiveness of any registration statement, suspend the use of any
prospectus and shall not be required to amend or supplement the registration
statement, any related prospectus or any document incorporated therein by
reference (other than an effective registration statement being used for an
underwritten offering) in the event that, and for a period (a "Black Out
Period") not to exceed an aggregate of 45 days with respect to a Demand
Registration, (i) an event or circumstance occurs and is continuing as a
result of which the registration statement, any related prospectus or any
document incorporated therein by reference as then amended or supplemented
would, in the Company's good faith judgment, contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and (ii)(A) the Company
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determines in its good faith judgment that the disclosure of such an event at
such time would have a material adverse effect on the business, operations or
prospects of the Company or (B) the disclosure otherwise relates to a material
business transaction which has not yet been publicly disclosed; provided
further, that the Effectiveness Period shall be extended by the number of days
in any Black Out Period. In the event of any "lock up" or "black out" period
in any underwriting or purchase agreement, the Company will so notify the
holders of Warrants and Warrant Shares.
Holders of Warrants and Warrant Shares will also have the right to include
the Warrant Shares in any registration statement under the Securities Act
filed by the Company for its own account or for the account of any of its
security holders covering the sale of Common Stock (other than (a) a
registration statement on Form S-4 or S-8 or (b) a registration statement
filed in connection with an offer of securities solely to existing security
holders or (c) a Demand Registration) for sale on the same terms and
conditions as the securities of the Company or any other selling security
holder included therein (a "Piggy-Back Registration") if and whenever any such
registration statement is filed under the Securities Act, except that the
Piggy-Back Registration right of holders of Warrants and Warrant Shares shall
not apply to any Equity Offering that is the initial Equity Offering of the
Company unless the securities of other selling security holders are to be
included therein. In the case of a Piggy-Back Registration, the number of
Warrant Shares requested to be included therein is subject to pro rata
reduction (a "Cut Back") based upon the number of Warrant Shares and other
securities requested to be registered by each holder of Warrants and Warrant
Shares and any other security holders exercising piggy-back registration
rights to the extent that the Company is advised by the managing underwriter,
if any, therefor that the total number or type of Warrant Shares or other
securities to be included therein is such as to materially and adversely
affect the success of the offering.
If the Company has complied with all its obligations with respect to a
Demand Registration or a Piggy-Back Registration relating to an underwritten
public offering, all holders of Warrants and Warrant Shares, upon request of
the lead managing underwriter with respect to such underwritten public
offering, will be required not to sell or otherwise dispose of any Warrants
and Warrant Shares owned by them for a period not to exceed 180 days from the
consummation of such underwritten public offering, provided, that such
requirement shall apply to Warrant Shares not sold in a Demand Registration or
Piggy-Back Registration due to a Cut Back for a period not to exceed 90 days
from such date of consummation.
As used herein, "Triggering Event" means the occurrence of any of the
following events: (i) the day immediately prior to a Change of Control, (ii)
the 180th day (or such earlier date as determined by the Company in its sole
discretion) following the initial Equity Offering of the Company or (iii)
other than as a result of the initial Equity Offering of the Company, the day
on which a class of common equity securities of the Company is listed on a
national securities exchange or authorized for quotation on the Nasdaq
National Market System or is otherwise subject to registration under the
Exchange Act.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and it is qualified in its entirety by reference to the
actual terms of the capital stock contained in the Company's Certificate of
Incorporation and Bylaws and by the provisions of applicable law.
The Company's authorized capital stock consists of 2,000,000 shares of
Common Stock, par value $0.01 per share and 35,000 shares of Preferred Stock,
par value $1.00 per share (the "Preferred Stock"). At January 1, 1999, there
were 1,000,000 shares of Common Stock and 35,000 shares of Preferred Stock
outstanding.
Common Stock
The issued and outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. Subject to the prior rights of the holders of
Preferred Stock, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
time and in such amounts as the Board of Directors may from time to time
determine. The Indenture will restrict the ability of the Company to pay
dividends on the Common Stock. The shares of Common Stock are not redeemable
or convertible, and the holders thereof have no preemptive or subscription
rights to purchase any securities of the Company. 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 then
outstanding. Each outstanding share of Common Stock is entitled to vote on all
matters submitted to a vote of stockholders. At present, there is no
established trading market for the Common Stock.
Preferred Stock
Upon any liquidation, dissolution or winding up of the Company (whether
voluntary or involuntary), 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. "Liquidation Value" for any share of
Preferred Stock is equal to the initial price paid to the Company for such
share on its date of issuance. The Preferred Stock does not accrue dividends,
and is not convertible into any other class of capital stock of the Company.
The Preferred Stock may be redeemed by the Company, in whole or in part, at
any time, but is not subject to mandatory redemption.
Certain Provisions of Delaware Law
The Company has elected not to be governed by the provisions of Section 203
of the Delaware General Corporation Law. In general, the law prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business
combination" includes mergers, asset sales and other transactions resulting in
a financial benefit to the stockholder. An "interested stockholder" is a
person who, together with affiliates and associates, owns (or within three
years, did own) 15% or more of the corporation's voting stock.
Limitations on Liability and Indemnification of Officers and Directors
The Company's Certificate of Incorporation will limit the liability of
directors to the fullest extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, including
gross negligence, except liability for: (i) breach of the director's duty of
loyalty; (ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law; (iii) the unlawful payment of a
dividend or unlawful stock purchase or redemption; and (iv) any transaction
from which the director derives an improper personal benefit. This provision
of the Company's Certificate of Incorporation has no effect on the
availability of equitable remedies such as injunction or rescission.
Additionally, this provision will not limit liability under state or federal
securities laws. The Certificate of Incorporation also provides that the
Company shall indemnify directors and officers of the Company to the fullest
extent permitted by such law. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve
as directors.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following general discussion summarizes certain of the material United
States federal income tax consequences of an exchange of Old Notes for
Exchange Notes and the ownership, and disposition of the Exchange Notes to
initial purchasers thereof. This discussion is a summary for general
information only and does not consider all aspects of United States federal
income taxation that may be relevant to a prospective investor in light of
that investor's particular circumstances. This discussion also deals only with
Notes held by a holder as capital assets within the meaning of Section 1221 of
the United States Internal Revenue Code of 1986, as amended to the date hereof
(the "Code"). This summary does not address all of the tax consequences that
may be relevant to a holder of Notes, nor does it address the federal income
tax consequences to holders subject to special treatment under the federal
income tax laws, such as brokers or dealers in securities or currencies,
certain securities traders, tax-exempt entities, banks, thrifts, insurance
companies, other financial institutions, persons that hold the Notes, Warrants
or Common Stock as a position in a "straddle" or as part of a "synthetic
security," "hedging," "conversion" or other integrated instrument, persons
that have a "functional currency" other than the United States dollar, persons
that acquire Notes in connection with the performance of services, investors
in pass-through entities and certain United States expatriates. Further, this
summary does not address (i) the income tax consequences to shareholders in,
or partners or beneficiaries of, a holder of the Notes (ii) the United States
federal alternative minimum tax consequences of the purchase, ownership or
disposition of the Notes, or (iii) any state, local or foreign tax
consequences of the purchase, ownership or disposition of the Notes.
The Company recommends that each holder consult such holder's own tax
advisor as to the particular tax consequences of exchanging such holder's Old
Notes for Exchange Notes, including the applicability and effect of any state,
local or foreign tax laws.
The Company believes that the exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer will not be treated as an "exchange" for
federal income tax purposes because the Exchange Notes will not be considered
to differ materially in kind or extent from the Old Notes. Rather, the
Exchange Notes received by a holder will be treated as a continuation of the
Old Notes in the hands of such holder. As a result, there will be no federal
income tax consequences to holders exchanging Old Notes for Exchange Notes
pursuant to the Exchange Offer.
Persons considering the purchase of Notes should consult their own tax
advisors concerning the application of federal income taxes laws, as well as
the laws of any state, local, or foreign taxing jurisdiction, to their
particular situations.
U.S. Holders
For purposes of this discussion, "U.S. Holder" generally means (i) a citizen
or resident of the United States, (ii) a corporation or partnership created or
organized in the United States or under the laws of the United States or any
state, (iii) an estate the income of which is includible in its gross income
for United States federal income tax purposes without regard to its source, or
(iv) a trust if a court within the United States is able to exercise primary
supervision over its administration and one or more United States persons have
the authority to control all substantial decisions of the trust. Certain
United States federal income consequences relevant to a holder other than a
U.S. Holder (a "Non-U.S. Holder") are discussed separately below.
Payments of Interest
Stated interest paid or accrued on the Notes will constitute qualified
stated interest and will be taxable to a U.S. Holder as ordinary income in
accordance with the holder's method of accounting for federal income tax
purposes. Alternatively, a U.S. Holder may elect to include stated interest on
the Notes (as well as original issue discount ("OID") and, if any, market
discount, de minimis market discount and unstated interest on the Notes, as
adjusted by any amortizable bond premium or acquisition premium) in gross
income on a constant-yield basis. The mechanics and implications of such an
election are beyond the scope of this discussion and, as a result, U.S.
Holders should consult their own tax advisors regarding the advisability of
making such an election.
136
<PAGE>
Original Issue Discount
The Old Notes have OID for federal tax purposes, and accordingly U.S.
Holders of Old Notes and Exchange Notes (which for tax purposes are treated as
a continuation of the Old Notes) will be subject to special tax accounting
rules, as described in greater detail below. U.S. Holders of Notes should be
aware that they generally must include OID in gross income for U.S. federal
income tax purposes on an annual basis under a constant yield accrual method
regardless of their regular method of tax accounting. As a result, U.S.
Holders will include OID in income in advance of the receipt of cash
attributable to such income. However, U.S. Holders of the Notes generally will
not be required to include separately in income cash payments received on such
Notes, even if denominated as interest, to the extent such payments constitute
payments of previously accrued OID.
The Notes will be treated as issued with OID equal to the excess of the
"stated redemption price at maturity" of a Note over its "issue price." The
stated redemption price at maturity of a Note is the total of all payments on
the Note that are not payments of "qualified stated interest." A qualified
stated interest payment is a payment of stated interest unconditionally
payable, in cash or property (other than debt instruments of the issuer), at
least annually at a single fixed rate during the entire term of the Note that
appropriately takes into account the length of intervals between payments.
Stated interest on the Notes will be treated as qualified stated interest.
The amount of OID includible in income by an initial U.S. Holder of a Note
is the sum of the "daily portions" of OID with respect to the Note for each
day during the taxable year or portion thereof in which such U.S. Holder holds
such Note ("accrued OID"). The daily portion is determined by allocating to
each day in any "accrual period" a pro-rata portion of the OID that accrued in
such period. The "accrual period" of a Note may be of any length and may vary
in length over the term of an OID note, provided that each accrual period is
no longer than one year and each scheduled payment of principal or interest
occurs either on the first or last day of an accrual period. The amount of OID
that accrues with respect to any accrual period is the excess of (a) the
product of the Note's adjusted issue price at the beginning of such accrual
period and its yield to maturity, determined on the basis of compounding at
the close of each accrual period and properly adjusted for the length of such
period, over (b) the amount of qualified stated interest allocable to such
accrual period. The "adjusted issue price" of a Note at the start of any
accrual period is equal to its issue price increased by the accrued OID for
each prior accrual period and reduced by any prior payments made on such Note
(other than payments of qualified stated interest).
If the Company is required to pay Liquidated Damages with respect to the
Notes as described under "Description of Notes--Registration Rights;
Liquidated Damages," such payment would result in ordinary income to a U.S.
Holder. Although not free from doubt, the Company believes that, as of the
date the Old Notes were originally issued, the likelihood that Liquidated
Damages would be paid was "remote" for purposes of Treasury Regulation 1.1275-
2(h)(2) and intends to treat any such payments as additional interest payable
on the Notes which should be taxable to a U.S. Holder at the time it accrues
or is received in accordance with such holder's regular method of accounting.
If such treatment is not respected, in the event of a Registration Default the
Notes may be treated as reissued for OID purposes, which may affect the
calculation of OID and the timing of income inclusion for a U.S. Holder.
Impact of Applicable High Yield Discount Obligation Rules
The "yield to maturity" on the Notes exceeds the sum of 5% and the
"applicable federal rate" (for May 1998, the "applicable federal rate" is
5.85% assuming semi-annual compounding) in effect for the month in which the
Old Notes were originally issued. Accordingly, if the Notes have "significant"
OID, the Notes will be considered "applicable high yield discount obligations"
("AHYDOs"). A debt instrument has "significant" OID if the aggregate amount of
unpaid interest (including OID) as of the close of any accrual period ending
after the date five years after the date of issue exceeds the product of the
issue price of such instrument and its yield to maturity.
137
<PAGE>
If the Notes are AHYDOs, the Company will not be permitted to deduct for
United States federal income tax purposes OID accrued on the Notes until such
time as the Company actually pays such OID in cash or in property other than
stock or debt of the Company (or persons related to the Company). Moreover, to
the extent that the yield to maturity of the Notes exceeds the sum of 6% and
the applicable federal rate, such excess (the "Dividend-Equivalent Interest")
will not be deductible at any time by the Company for United States federal
income tax purposes (regardless of whether the Company actually pays such
Dividend-Equivalent Interest in cash or in other property). Such Dividend-
Equivalent Interest would be treated as a dividend to the extent it is deemed
to have been paid out of the Company's current or accumulated earnings and
profits. Accordingly, a U.S. Holder that is a domestic corporation may be
entitled to take a dividends-received deduction with respect to any Dividend-
Equivalent Interest received by such corporate U.S. Holder on the Note.
Sale or Redemption of the Notes
Upon the disposition of a Note by sale, exchange or redemption, a U.S.
Holder generally will recognize gain or loss equal to the difference, if any,
between (i) the amount realized on the disposition (other than amounts
attributable to accrued and unpaid interest) and (ii) the U.S. Holder's tax
basis in the Note. A U.S. Holder's tax basis in a Note generally will equal
the cost of the Note to the U.S. Holder, increased by OID previously included
(or currently includible) in such holder's gross income to the date of
disposition, and reduced by any payments other than payments of qualified
stated interest made on such Note. When a Note is sold, disposed of or
redeemed between interest payment dates, the portion of the amount realized on
the disposition that is attributable to interest accrued to the date of sale
must be reported as interest income by a cash method investor and an accrual
method investor that has not included the interest in income as it accrued.
Assuming the Note is held as a capital asset, such gain or loss will
generally constitute capital gain or loss and will be long-term capital gain
or loss if the U.S. Holder has held such Note for longer than one year. The
maximum Federal income tax rate on long-term capital gain received by
noncorporate taxpayers is currently 20%.
Non-U.S. Holders
The following discussion summarizes certain United States federal income tax
consequences relevant to a Non-U.S. Holder of a Note.
This discussion does not deal with all aspects of United States federal
income taxation that may be relevant to any particular Non-U.S. Holder in
light of that holder's personal circumstances with respect to such holder's
purchase, ownership or disposition of the Notes, including such holder holding
the Notes through a partnership. For example, persons who are partners in
foreign partnerships and beneficiaries of foreign trusts or estates who are
subject to United States federal income tax because of their own status, such
as United States residents or foreign persons engaged in a trade or business
in the United States, may be subject to United States federal income tax even
though the entity which holds the Note is not subject to such tax.
Stated Interest and OID on the Notes
Under current United States federal income tax law, payments of stated
interest or OID on a Note by the Company or any paying agent to a holder that
is a Non-U.S. Holder will not be subject to withholding of United States
federal income tax if (i) such payment is effectively connected with a trade
or business within the United States by such Non-U.S. Holder, or (ii) both (a)
the holder does not actually or constructively own 10 percent or more of the
combined voting power of all classes of stock of the Company and is not a
controlled foreign corporation related to the Company through stock ownership
and (b) the beneficial owner provides a statement signed under penalties of
perjury that includes its name and address and certifies (on an IRS Form W-8
or a substantially similar substitute form) that it is a Non-U.S. Holder in
compliance with applicable requirements.
138
<PAGE>
Interest on a Note that is effectively connected with the conduct of a trade
or business in the United States by a Non-U.S. Holder, although exempt from
the withholding tax (assuming appropriate certification is provided), may be
subject to graduated United States federal income tax on a net income basis
and, in the case of a corporation, also an additional branch profits tax of
30% (or a lower rate provided in an applicable treaty) as if such amounts were
earned by a U.S. Holder.
Sale or Redemption of Notes
Except as described below and subject to the discussion concerning backup
withholding, a Non-U.S. Holder generally will not be subject to withholding of
United States federal income tax with respect to any gain realized upon the
sale or redemption of Notes. Further, a Non-U.S. Holder generally will not be
subject to United States federal income tax with respect to any such gain
unless (i) the gain is effectively connected with a United States trade or
business of such Non-U.S. Holder, (ii) subject to certain exceptions, the Non-
U.S. Holder is an individual who holds such Notes as a capital asset and is
present in the United States for 183 days or more in the taxable year of the
disposition, or (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of United States tax law applicable to certain United States
expatriates.
Information Reporting and Backup Withholding
In general, information reporting requirements will apply to payments made
on, and proceeds from the sale of, the Notes held by a noncorporate U.S.
Holder within the United States. In addition, payments made on, and payments
of proceeds from the sale of, such Notes to or through the United States
office of a broker are subject to information reporting unless the holder
thereof certifies as to its non-U.S. status or otherwise establishes an
exemption from information reporting and backup withholding.
Payments made on, and proceeds from the sale of the Notes may be subject to
a "backup" withholding tax of 31% unless the holder complies with certain
identification or exemption requirements. Any amounts so withheld will be
allowed as a credit against the holder's income tax liability, or refunded,
provided the required information is provided to the IRS.
In October 1997, the IRS issued final regulations relating to withholding,
backup withholding and information reporting with respect to payments made to
Non-U.S. Holders. The regulations generally apply to payments made after
December 31, 1999.
When effective, the new regulations will streamline and, in some cases,
alter the type of statements and information that must be furnished to claim a
reduced rate of withholding. While various IRS forms (such as IRS Forms 1001
and 4224) currently are used to claim exemption from withholding or a reduced
withholding rate, the preamble to the regulations states that the IRS intends
most certifications to be made on revised Form W-8. The regulations also
clarify the duties of United States payors making payments to foreign persons
and modify the rules concerning withholding on payments made to Non-U.S.
Holders through foreign intermediaries. With some exceptions, the new
regulations treat a payment to a foreign partnership as a payment directly to
the partners. The regulations also eliminate the address rule under which
dividends paid to a foreign address were presumed to be paid to a resident at
that address and therefore eligible for the benefit of any applicable tax
treaty and require a foreign holder who wishes to claim the benefit of an
applicable treaty rate to satisfy certain certification and other
requirements.
139
<PAGE>
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired as
a result of market-making activities or other trading activities. The Company
has agreed that for a period of 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any
Participating Broker-Dealer for use in connection with any such resale. In
addition, until November 8, 1999 or 90 days after the commencement of the
Exchange Offer, all dealers effecting transactions in the Exchange Notes may
be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker Dealers. Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-
Dealer and/or the purchasers of any such Exchange Notes. Any Participating
Broker-Dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any Participating Broker-Dealer that requests such
documents in the Letter of Transmittal.
EXPERTS
The Consolidated Financial Statements of OnePoint Communications Corp. as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, comprehensive income, unitholders'/stockholder's equity (deficit)
and cash flows for the period from May 14, 1996 (inception) to December 31,
1996 and each of the years ended December 31, 1997 and 1998 appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as stated in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
The financial statements of Mid-Atlantic Telcom Plus, LLC as of December 31,
1998 and 1997, and for the years then ended, and the consolidated and combined
financial statements of Mid-Atlantic Cable Companies as of December 31, 1996,
and for the year then ended, appearing in this Prospectus have been audited by
Beers & Cutler PLLC, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of VIC-RMTS-DC, LLC as of December 31, 1997 and
1998, and the related statements of operations, unitholders' equity and cash
flows for the period from November 6, 1996 (inception) to December 31, 1996
and each of the years ended December 31, 1997 and 1998 appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as stated in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
140
<PAGE>
The statements of certain assets and liabilities of Preferred Entertainment,
Inc. as of December 31, 1997 and 1996 and the statements of related revenues
and expenses for the years ended December 31, 1997 and 1996 included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
The appraised value of the Warrants included in this propectus has been
prepared by Sturgill & Associates LLP and is included herein to reliance upon
the authority of such firm as experts in business valuation.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Kirkland & Ellis (partnerships including professional
corporations), Chicago, Illinois.
141
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OnePoint Communications Corp.
<TABLE>
<S> <C>
Unaudited Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998........................................... F-3
Unaudited Consolidated Balance Sheets as of March 31, 1999 and 1998...... F-4
Unaudited Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998........................................... F-5
Notes to Unaudited Consolidated Financial Statements..................... F-6
Report of Independent Accountants........................................ F-9
Consolidated Statements of Operations for the periods ended December 31,
1996, 1997 and 1998..................................................... F-10
Consolidated Statements of Comprehensive Income for the periods ended
December 31, 1996, 1997 and 1998........................................ F-11
Consolidated Balance Sheets as of December 31, 1997 and 1998............. F-12
Consolidated Statements of Changes in Unitholders'/Stockholders'
Equity/(Deficit) for the periods ended December 31, 1996, 1997 and 1998. F-13
Consolidated Statements of Cash Flows for the periods ended December 31,
1996, 1997 and 1998..................................................... F-14
Notes to Consolidated Financial Statements............................... F-15
</TABLE>
Mid-Atlantic Telcom Plus, LLC
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-33
Balance Sheets as of December 31, 1997 and 1998........................... F-34
Statements of Operations for the years ended December 31, 1997 and 1998... F-35
Statements of Changes in Members' Equity for the years ended December 31,
1997 and 1998............................................................ F-36
Statement of Cash Flows for the years ended December 31, 1997 and 1998.... F-37
Notes to Financial Statements............................................. F-38
Mid-Atlantic Cable Companies
Independent Auditors' Report.............................................. F-44
Consolidated and Combined Balance Sheet................................... F-45
Consolidated and Combined Statement of Operations......................... F-46
Consolidated and Combined Statement of Changes in Owners' Equity
(Deficit)................................................................ F-47
Consolidated and Combined Statement of Cash Flows......................... F-48
Notes to the Consolidated and Combined Financial Statements............... F-49
</TABLE>
F-1
<PAGE>
VIC-RMTS-DC, LLC
<TABLE>
<S> <C>
Unaudited Statements of Operations for the three months ended March 31,
1999 and 1998........................................................... F-55
Unaudited Balance Sheets as of March 31, 1999 and 1998................... F-56
Unaudited Statements of Cash Flows for the three months ended March 31,
1999 and 1998........................................................... F-57
Notes to Unaudited Consolidated Financial Statements..................... F-58
Report of Independent Accountants........................................ F-60
Statements of Operations for the periods ended December 31, 1996, 1997,
and 1998................................................................ F-61
Balance Sheets as of December 31, 1997 and 1998.......................... F-62
Statements of Changes in Unitholders' Equity for the periods ended
December 31, 1996, 1997 and 1998........................................ F-63
Statements of Cash Flows for the periods ended December 31, 1996, 1997
and 1998 ............................................................... F-64
Notes to Financial Statements............................................ F-65
People's Choice TV Corp.
Report of Independent Public Accountants................................. F-70
Statements of Certain Assets and Liabilities of Preferred Entertainment,
Inc. to be Sold......................................................... F-71
Statements of Revenues and Expenses Related to Certain Assets and
Liabilities of Preferred Entertainment, Inc. to be Sold................. F-72
Notes to Statements of Certain Assets and Liabilities and Related
Revenues and Expenses of Preferred Entertainment, Inc................... F-73
</TABLE>
The Company has not provided individual financial statements for its
subsidiary guarantors (other than VIC- RMTS-DC, LLC), in accordance with Staff
Accounting Bulletin Topic 1. H., as the Company has provided the Audited
Consolidated Financial Statements of OnePoint Communications Corp., which
include all guarantors. The guarantors are wholly-owned (other than VIC-RMTS-
DC, LLC, which is majority-owned). All of the Company's subsidiaries are
guarantors. The guarantees are full, unconditional and joint and several; and
separate financial statements of the guarantors (other than VIC-RMTS-DC, LLC)
are not presented because the Company has determined such financial statements
would not be material to investors.
F-2
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenue.................................................. $ 4,419 $ 124
Cost of revenue.......................................... 4,177 545
--------- ---------
242 (421)
--------- ---------
Expenses:
Selling, general and administrative.................... 10,118 3,169
Depreciation and amortization.......................... 587 111
--------- ---------
Loss from operations..................................... (10,463) (3,701)
Other income (expense)
Interest income........................................ 939 44
Interest expense....................................... (4,242) --
Other.................................................. (466) --
--------- ---------
(3,769) 44
--------- ---------
Equity in losses of unconsolidated subsidiaries.......... (870) (474)
--------- ---------
Loss before extraordinary item........................... (15,102) (4,131)
Extraordinary gain on bond repurchases................... 12,427 --
--------- ---------
Net loss................................................. $ (2,675) $ (4,131)
========= =========
Basic Earnings Per Share:
(Loss) before extraordinary item....................... $ (15.10) $ (4.13)
Extraordinary item..................................... 12.42 --
--------- ---------
Net (loss)............................................. $ (2.68) $ (4.13)
========= =========
Shares used in computing loss per share:
Weighted average common shares--basic.................. 1,000,000 1,000,000
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March
31, December 31,
1999 1998 (*)
-------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................. $ 6,013 $ 5,730
Restricted cash....................................... 129 5,199
Investment in marketable securities, current.......... 19,333 13,118
Accounts receivable, net.............................. 2,733 2,277
Affiliate receivable.................................. 159 653
Prepaid expenses...................................... 1,588 898
-------- --------
Total current assets................................ 29,955 27,875
Investment in marketable securities, non-current
($46,792 and $73,377, restricted
at March 31, 1999 and December 31, 1998, respectively). 53,453 86,705
Investments in unconsolidated subsidiaries.............. 5,493 6,283
Property and equipment, net............................. 13,047 10,923
Intangible assets, net.................................. 9,231 11,549
Other assets............................................ 5,875 5,972
-------- --------
Total assets........................................ $117,054 $149,307
======== ========
Liabilities, Redeemable Preferred Stock and
Stockholder's Equity/(Deficit)
Current liabilities:
Accounts payable and accrued expense.................. $ 6,380 $ 7,167
Affiliate payable..................................... 3,537 3,558
Accrued interest payable.............................. 4,882 1,701
Current portion of long term debt..................... 250 250
-------- --------
Total current liabilities........................... 15,049 12,676
Long term debt--affiliate............................... -- --
Long term debt.......................................... 107,233 138,503
Redeemable preferred stock, $1.00 par value, 35,000
shares authorized, 35,000 shares issued and outstanding
at redemption value.................................... 35,000 35,000
Stockholder's deficit:
Common stock, $0.01 par value, 2,000,000 shares
authorized, 1,000,000 shares issued and outstanding
at March 31, 1999 and December 31, 1998.............. 10 10
Additional capital.................................... 6,870 6,870
Note receivable--stockholder.......................... (1,500) (1,500)
Accumulated deficit................................... (45,628) (42,953)
Other comprehensive income (loss)..................... 20 701
-------- --------
Total stockholder's (deficit)....................... (40,228) (36,872)
-------- --------
Total liabilities, redeemable preferred stock and
stockholder's equity/ (deficit).................... $117,054 $149,307
======== ========
</TABLE>
- --------
(*) The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
F-4
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Operating activities
Net loss..................................................... $ (2,675) $(4,131)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.............................. 587 111
Amortization of premium (discount) of securities acquired
included in interest income............................. (523) --
Amortization of debt discount issuance cost and warrants
included in interest expense............................ 245 --
Amortization of developer payments included in reselling
costs................................................... 472 324
Losses in equity of interest of unconsolidated investments... 870 474
Extraordinary gain on bond repurchases....................... (12,427) --
Unrealized loss on investments in marketable securities...... 459 --
Change in allowance for doubtful accounts.................... 64 5
Changes in operating assets and liabilities:
Accounts receivable........................................ (521) (59)
Prepaid expenses........................................... (1,056) (302)
Other assets............................................... -- (137)
Affiliates payable......................................... (20) 66
Affiliates receivable...................................... 494 (195)
Accounts payable and accrued expenses...................... (789) (781)
Accrued interest........................................... 3,181 (446)
-------- -------
Net cash used in operating activities...................... (11,639) (5,071)
Investing activities
Restricted cash, net......................................... 5,070 --
Acquisition of intangible assets............................. -- (30)
Proceeds from sale of marketable securities.................. 33,801 --
Purchase of marketable securities............................ (6,223) --
Acquisition of property and equipment........................ (2,619) (870)
-------- -------
Net cash provided by (used in) investing activities.......... 30,029 (900)
Financing activities
Proceeds from issuance of long-term debt..................... -- 1,000
Repayment of long-term debt.................................. (18,107) --
-------- -------
Net cash (used in) provided by financing activities.......... (18,107) 1,000
-------- -------
Net increase (decrease) in cash.............................. 283 (4,971)
Cash at the beginning of period.............................. 5,730 5,463
-------- -------
Cash at the end of period.................................... $ 6,013 $ 492
======== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 1--Basis of Presentation
The financial statements for the three months ended March 31, 1999, and 1998
and the related footnote information are unaudited and have been prepared on a
basis consistent with the audited consolidated financial statements of
OnePoint Communications Corp., and subsidiaries as of and for the year ended
December 31, 1998 included in Registration Statement on Form S-4, filed with
the Securities and Exchange Commission on April 30, 1999 (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 OnePoint Communications Corp. as of and for the year
ended December 31, 1998 and the Financial Statements of OnePoint
Communications, L.L.C., (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 March 31, 1999 and the results of their operations and their
cash flows for the quarters ended March 31, 1999 and 1998.
Note 2--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
March 31,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Condensed Operating Information
Net sales........................................ $ 4,776 $ 3,540
Income from operations........................... 1,322 934
--------- ---------
Net loss......................................... $ (1,930) $ (1,520)
========= =========
</TABLE>
Note 3--Unit Offering
From January 8, 1999 through March 5, 1999, the Company completed open
market purchases of its 14 1/2% Senior Notes due 2008 (the "Senior Notes")
having an aggregate principal amount of $32,250 at various prices for an
aggregate cost of approximately $18,107, including accrued interest and
transaction fees. As of March 31, 1999, there was $101,750 in principal amount
of Senior Notes outstanding. The Company recognized an extraordinary gain on
the early extinquishment of this debt of approximately $12,427 in the first
quarter of 1999. Pursuant to the terms of the indenture governing the Senior
Notes, the Company used a portion of the proceeds from the Senior Note
offering to purchase government securities in an amount intended to be
sufficient upon receipt of scheduled interest and principal payments to
provide for payment of the first seven interest payments on the Senior Notes.
These government securities (the "Pledged Securities") were pledged to the
trustee for the benefit of the holders of the Senior Notes. In connection with
the Company's repurchase of Senior Notes, and pursuant to the terms of the
agreement governing the Pledged Securities, the trustee released approximately
$26,651 on February 26, 1999 to the Company.
Under the terms of the indenture governing the Senior Notes, 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.
In connection with the May 1998 offering of Senior Notes and Warrants, 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 Senior Notes for substantially identical notes which are not
subject to restrictions on transfer. 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
F-6
<PAGE>
ONEPOINT COMMUNICATIONS, CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
effective by the Securities and Exchange Commission on or before November 17,
1998, then liquidated damages will accrue with respect to the Senior Notes.
Such liquidated damages accrue at a rate of $0.05 per week per $1 principal
amount of Senior Notes for the first 90 days beyond November 17, 1998, and
thereafter increase by $0.05 per week per $1 outstanding principal amount of
the Senior Notes each 90 day period, up to a maximum of $0.50 per week per $1
principal amount of Senior Notes. Liquidated damages cease to accrue when the
registration statement is declared effective. As the registration statement
has not yet been declared effective, the Company accrued approximately $103
through March 31, 1999.
Note 4--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 months ended March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
--------------
1999 1998
------- -----
<S> <C> <C>
Net Loss.................................................... $(2,675) $(474)
Unrealized gain on securities............................... 20 --
------- -----
Changes in non-owner equity................................. $(2,655) $(474)
======= =====
</TABLE>
Note 5--Loss Per Share
The Company's basic loss per share calculations is based upon the weighted
average shares of common stock outstanding. The dilutive effect of stock
appreciation rights and warrants outstanding are included for purposes of
calculating diluted earnings per share, except for periods when the Company
reported a net loss, in which case the inclusion of stock appreciation rights
and warrants outstanding would be anti-dilutive. Diluted loss per share is not
presented for the periods ended March 31, 1999 and 1998 as the effects of
potentially dilutive instruments are anti-dilutive.
Note 6--Supplemental Cash Flow Data
The Company made cash payments of $800 and $0 for interest and $0 for income
taxes during the three months ended March 31, 1999 and 1998, respectively.
Note 7--Arbitration Proceedings
On March 30, 1999, the Company filed a demand for arbitration seeking a
declaratory ruling on the equity ownership of VIC-RMTS-DC, LLC. The Company
believes that the value of the assets contributed by Mid-Atlantic RMTS
Holdings, LLC was sufficient to give Mid-Atlantic RMTS Holdings, LLC a 5%
interest based on capital contributions though December 31, 1998. The manager
of Mid-Atlantic RMTS Holdings, LLC has suggested that they are entitled to an
unspecified, but higher, equity interest in VIC-RMTS-DC, LLC. OnePoint will be
entitled only to that portion of any distributions made by VIC-RMTS-DC, LLC
corresponding to its percentage equity ownership therein. On April 5, 1999,
Mid-Atlantic Holdings filed its own demand for arbitration to resolve issues
of equity ownership of VIC-RMTS-DC, LLC.
Note 8--Segment Information
The Company's reportable segments are segregated into business units that
offer services to four distinct geographic regions; (i) Atlanta, Georgia and
Charlotte/Raleigh/Durham, North Carolina (the "Southeast Region"), (ii)
Chicago, Illinois (the "Central Region"), (iii) Denver, Colorado and Phoenix,
Arizona (the "Western Region"), and (iv) Washington, DC/Baltimore,
MD/Philadelphia, PA (the "Mid-Atlantic Region"). The Company's services to
each segment include a combination of telephony, video and/or high-speed
Internet access services.
F-7
<PAGE>
ONEPOINT COMMUNICATIONS, CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company evaluates performance and allocates resources based on operating
profit or loss. The accounting policies of the reportable segments are the same
as those described in the summary of significant accounting policies. The
Company and its subsidiaries carry their investments in affiliates on the
equity method of accounting. Accordingly, certain segments have recognized
equity in the earnings of other segments and their proportionate share of the
assets and liabilities of investments in affiliates. All inter-segment
investment amounts have been excluded in the reported financial information for
the business segments. The Company's segments do not provide services to each
other; therefore, there were no inter-segment sales or related cost of sales
during the periods presented.
The following table provides certain financial information for each business
segment:
<TABLE>
<CAPTION>
March 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Revenues:
Central Region....................................... $ 1,446 $ 6
Mid-Atlantic Region.................................. 902 107
Southeast Region..................................... 1,266 5
Western Region....................................... 796 --
Other................................................ 9 6
-------- -------
$ 4,419 $ 124
======== =======
Loss from operations:
Central Region....................................... $ (2,878) $ (642)
Mid-Atlantic Region.................................. (3,102) (1,792)
Southeast Region..................................... (2,006) (639)
Western Region....................................... (1,875) (561)
Other................................................ (602) (67)
-------- -------
$(10,463) $(3,701)
======== =======
Identifiable assets:
Central Region....................................... $ 17,087 $ 1,090
Mid-Atlantic Region.................................. 4,924 2,929
Southeast Region..................................... 2,767 1,218
Western Region....................................... 1,382 501
Other................................................ 90,894 9,664
-------- -------
$117,054 $15,402
======== =======
</TABLE>
The following table provides gross revenues on a service line basis:
<TABLE>
<CAPTION>
March 31,
-----------
1998 1999
---- ------
<S> <C> <C>
Revenues:
Telephony................................................... $124 $3,286
Video....................................................... -- 1,125
High-speed Internet......................................... -- 8
---- ------
$124 $4,419
==== ======
</TABLE>
Note 9--Related Party Transactions
At March 31, 1999, the Company had accrued $33 in accounts payable related to
reimbursement for seconded personnel provided by SBC Communications Inc.
("SBC") which indirectly owns 19.7% of the common stock of the Company.
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholder
OnePoint Communications Corp.
We have audited the accompanying consolidated balance sheets of OnePoint
Communications Corp. as of December 31, 1997 and 1998, and the related
consolidated statements of operations, comprehensive income,
unitholders'/stockholder's equity (deficit) and cash flows for the period from
March 14, 1996 (inception) to December 31, 1996 and each of the years ended
December 31, 1997 and 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements of Mid-Atlantic Telcom Plus, LLC, an investment in a 41.4% owned
unconsolidated subsidiary, which statements reflect total assets of $48.0
million and $57.2 million as of December 31, 1997 and 1998, respectively, and
total revenues of $14.0 million and $16.5 million for the years then ended.
Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
Mid-Atlantic Telcom Plus, LLC, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principals used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
aspects, the consolidated financial position of OnePoint Communications Corp.
at December 31, 1997 and 1998, and the results of its operations and cash
flows for the period from March 14, 1996 (inception) to December 31, 1996, and
for the years ended December 31, 1997 and 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young, LLP
February 12, 1999, except for the
fourth paragraph of Note 10 as to
which the date is March 5, 1999
and Note 21 as to which the date
is March 30, 1999.
Vienna, Virginia
F-9
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Period from
March 14, 1996
(inception) Year Ended December 31,
to December 31, ------------------------
1996 1997 1998
--------------- ----------- -----------
<S> <C> <C> <C>
Revenue.............................. $ -- $ 43 $ 6,953
Cost of revenue...................... -- 83 8,765
-------- ----------- -----------
Gross margin loss.................... -- (40) (1,812)
Expenses:
Selling, general and
administrative.................... 2,021 12,788 27,873
Depreciation and amortization...... 19 235 1,455
-------- ----------- -----------
Loss from operations................. (2,040) (13,063) (31,140)
Other income (expense)
Interest income.................... 4 72 6,042
Interest expense................... -- (11) (15,846)
Other income (loss)................ -- (17) 17
-------- ----------- -----------
4 44 (9,787)
-------- ----------- -----------
(2,036) (13,019) (40,927)
Equity in losses of unconsolidated
subsidiaries........................ -- (3,072) (3,698)
-------- ----------- -----------
Loss before extraordinary item....... (2,036) (16,091) (44,625)
Extraordinary item gain on bond
repurchases......................... -- -- 19,799
-------- ----------- -----------
Net loss............................. $ (2,036) $ (16,091) $ (24,826)
======== =========== ===========
Basic Earnings Per Share:
(Loss) before extraordinary item... $(203.60) $ (16.09) $ (44.62)
Extraordinary item................. -- -- 19.80
-------- ----------- -----------
Net (loss)......................... $(203.60) $ (16.09) $ (24.82)
======== =========== ===========
Shares used in computing loss per
share:
Weighted average common shares--
basic............................. 10,000 1,000,000 1,000,000
======== =========== ===========
</TABLE>
See accompanying notes.
F-10
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
STATEMENTS OF COMPREHENSIVE INCOME
For the Period from March 14, 1996 (Inception) to December 31, 1996 and
Years Ended December 31, 1997 and 1998
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Period from
March 14, 1996
(Inception) to Years Ended December 31,
December 31, ------------------------
1996 1997 1998
-------------- ------------ ------------
<S> <C> <C> <C>
Net loss............................. $(2,036) $ (16,091) $ (24,826)
Other comprehensive income, net of
tax:
Unrealized gain arising during the
year on securities................ -- -- 701
------- ------------ ------------
Comprehensive loss................... $(2,036) $ (16,091) $ (24,125)
======= ============ ============
</TABLE>
See accompanying notes.
F-11
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................................... $ 5,463 $ 5,730
Restricted cash............................................... -- 5,199
Investment in marketable securities, current.................. -- 13,118
Accounts receivable, net...................................... 32 2,277
Affiliate receivable.......................................... 33 653
Prepaid expenses.............................................. 1,131 898
------- --------
Total current assets........................................ 6,659 27,875
Investment in marketable securities, non-current ($ 73,377
restricted).................................................... -- 86,705
Investments in unconsolidated subsidiaries...................... 10,061 6,283
Property and equipment, net..................................... 2,704 10,923
Intangible assets, net.......................................... -- 11,549
Other assets.................................................... 257 5,972
------- --------
Total assets................................................ $19,681 $149,307
======= ========
Liabilities, Redeemable Preferred Stock and
Unitholders'/Stockholder's Equity/(Deficit)
Current liabilities:
Accounts payable and accrued expense.......................... $ 2,797 $ 7,167
Affiliate payable............................................. -- 3,558
Accrued interest payable...................................... 11 1,701
Current portion of long term debt............................. -- 250
------- --------
Total current liabilities................................... 2,808 12,676
Long term debt--affiliate....................................... 1,500 --
Long term debt.................................................. -- 138,503
Redeemable preferred stock, $1.00 par value, 35,000 shares
authorized, 35,000 shares issued and outstanding at redemption
value.......................................................... -- 35,000
Unitholders'/Stockholder'sEquity/(Deficit):
Unitholders' equity:
Preferred units.............................................. 33,500 --
Founder units................................................ 1,580 --
Notes receivable--unitholder................................. (1,580) --
Stockholder's deficit:
Common stock, $0.01 par value, 2,000,000 shares authorized,
1,000,000 shares issued and outstanding at December 31,
1998........................................................ -- 10
Additional capital........................................... -- 6,870
Note receivable--stockholder................................. -- (1,500)
Accumulated deficit.......................................... (18,127) (42,953)
Other comprehensive income................................... -- 701
------- --------
Total unitholders'/stockholder's equity/(deficit)........... 15,373 (36,872)
------- --------
Total liabilities, redeemable preferred stock and
unitholders'/stockholder's equity/(deficit)................ $19,681 $149,307
======= ========
</TABLE>
See accompanying notes.
F-12
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS'/STOCKHOLDER'S
EQUITY/(DEFICIT)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Member Units
------------------------------------
Redeemable Units Founders Units Notes Accumulative Accumulated
----------------- ----------------- Receivable Common Additional Amount Comprehensive Total
Units Amount Units Amount Unitholder Stock Capital Deficit Income Equity
-------- ------- -------- ------- ---------- ------ ---------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 13, 1996... -- $ -- -- $ -- $ -- $-- $ -- $ -- $-- $ --
Initial
capitalization.. -- -- 10,000 1,640 -- -- -- -- -- 1,640
Unit-holder
additional
contributions... -- -- -- 14,000 -- -- -- -- -- 14,000
Net loss......... -- -- -- -- -- -- -- (2,036) -- (2,036)
-------- ------- -------- ------- ------- ---- ------ -------- ---- --------
Balance, December
31, 1996........ -- -- 10,000 15,640 -- -- -- (2,036) -- 13,604
Unitholder
additional
contributions... -- -- -- 12,000 -- -- -- -- -- 12,000
Issuance of units
- 1997
recapitalization. -- -- -- 1,580 (1,580) -- -- -- -- --
1997
recapitalization
(see Note 1).... 199,000 33,500 791,000 (27,640) -- -- -- -- -- 5,860
Comprehensive
income:
Net loss......... -- -- -- -- -- -- -- (16,091) -- (16,091)
-------- ------- -------- ------- ------- ---- ------ -------- ---- --------
Balance, December
31, 1997........ 199,000 33,500 801,000 1,580 (1,580) -- -- (18,127) -- 15,373
1998
recapitalization
(see Note 1).... (199,000) (33,500) (801,000) (1,580) -- 10 1,570 -- -- (33,500)
Unitholder
payment......... -- -- -- -- 80 -- -- -- -- 80
Warrants......... -- -- -- -- -- -- 5,300 -- -- 5,300
Comprehensive
income:
Net (loss)...... -- -- -- -- -- -- -- (24,826) -- (24,826)
Net unrealized
gain on
marketable
securities..... -- -- -- -- -- -- -- -- 701 701
-------- ------- -------- ------- ------- ---- ------ -------- ---- --------
Balance, December
31, 1998........ -- $ -- -- $ -- $(1,500) $ 10 $6,870 $(42,953) $701 $(36,872)
======== ======= ======== ======= ======= ==== ====== ======== ==== ========
</TABLE>
See accompanying notes.
F-13
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended
March 14, 1996 December 31,
(inception) to ------------------
December 31, 1996 1997 1998
----------------- -------- --------
<S> <C> <C> <C>
Operating activities
Net loss................................. $(2,036) $(16,091) $(24,826)
Adjustments to reconcile net loss to net
cash used in operating activities....... -- -- --
Depreciation and amortization............ 19 235 1,455
Amortization of premium (discount) of
securities acquired included in
interest income....................... -- -- 499
Amortization of debt discount and
issuance cost included in interest
expense................................. -- -- 552
Amortization of warrants included in
interest expense...................... -- -- 63
Amortization of developer payments
included in reselling costs........... -- -- 173
Losses in equity of interest of
unconsolidated investments.............. -- 3,072 3,698
Extraordinary gain on bond repurchases... -- -- (19,799)
Gain on investments in marketable
securities.............................. -- -- (790)
Change in allowance for doubtful
accounts................................ -- 7 777
Changes in operating assets and
liabilities:
Accounts receivable...................... -- (39) (3,022)
Developer payments PCTV acquisition.... -- -- (5,400)
Prepaid expenses....................... (11) (1,122) --
Other assets........................... (335) 79 (50)
Affiliates payable..................... -- -- 3,558
Affiliates receivable.................. (84) 51 (620)
Accounts payable and accrued expenses.. 427 2,370 4,370
Accrued interest....................... -- 11 1,690
------- -------- --------
Net cash used in operating activities.. (2,020) (11,427) (37,672)
Investing activities
Restricted cash, net..................... (13,000) 13,000 (5,199)
Acquisition of intangible assets......... -- -- (4,467)
Purchase of equity investments........... -- (13,133) --
Proceeds form sale of marketable
securities.............................. -- -- 85,179
Purchase of marketable securities........ -- -- (184,711)
Acquisition of property and equipment.... (517) (2,440) (9,374)
------- -------- --------
Net cash used in investing activities.... (13,517) (2,573) (118,572)
Financing activities
Proceeds from issuance of long-term debt. -- 1,500 188,050
Repayment of long-term debt.............. -- -- (22,151)
Debt discount and issuance costs......... -- -- (9,468)
Unitholder contributions................. 15,640 17,860 80
------- -------- --------
Net cash provided by financing
activities.............................. 15,640 19,360 156,511
------- -------- --------
Net increase (decrease) in cash.......... 103 5,360 267
Cash at the beginning of period.......... -- 103 5,463
------- -------- --------
Cash at the end of period................ $ 103 $ 5,463 $ 5,730
======= ======== ========
</TABLE>
See accompanying notes.
F-14
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
1. Organization and Recapitalization
Organization
OnePoint Communications Corp., (the "Company") was incorporated to provide
bundled communications services including local and long distance telephony,
video programming and Internet access to residents of multiple dwelling units
("MDU"). The Company has operations in a number of major markets. The Company
is the successor to OnePoint Communications, L.L.C. (the "Predecessor"). The
Predecessor entered into several significant contracts and began to generate
revenue during the second half of 1997, and was no longer considered to be in
the development stage at that time.
The Company consists of OnePoint Communications Corp., the parent and its
wholly-owned subsidiaries which consist of OnePoint Communications--Colorado,
L.L.C., OnePoint Communications--Illinois, L.L.C., OnePoint Communications--
Georgia, L.L.C., and OnePoint Communications Holdings, L.L.C. ("OPC
Holdings"). In addition, through OPC Holdings, the Company maintains (i) a
97.5% interest in VIC-RMTS-DC, L.L.C., which has been consolidated in the
Company's financial statements and (ii) 41.4% interest in Mid-Atlantic Telcom
Plus, L.L.C. ("Mid-Atlantic"), and a 50% interest in Mid-Atlantic Telcom Plus
Interactive, LLC ("MAC Interactive") and Mid-Atlantic RMTS Holdings, L.L.C.
which are accounted for under the equity method (see Note 7).
The Predecessor was initially formed in 1996 by Ventures in Communications,
L.L.C. ("VIC"), which initially owned 99% of the equity interests in the
Predecessor, and AMI-VCOM2, Inc. ("AMI2"), which owned the remaining 1% equity
interest in the Predecessor. VIC is an affiliate of SBC Communications, Inc.
("SBC"), and 99% of the equity of VIC is owned indirectly by SBC. The
remaining 1% of the equity of VIC is owned by The VenCom Group, Inc. , which
is, in turn, owned by James A. Otterbeck, the Company's Chairman and Chief
Executive Officer.
In October 1997, AMI2 transferred to VIC its membership units of the
Predecessor, Mr. Otterbeck became a member of the Predecessor and the
Predecessor was recapitalized (the "Recapitalization"). Pursuant to the
Recapitalization, VIC agreed to guarantee up to $9,000 of collateralized
indebtedness of the Predecessor, contributed additional capital to the
Predecessor (resulting in aggregate equity contributions to the Predecessor of
$33,500) and exchanged its membership interests for (i) 19.9% of the
Predecessor's membership units, and a priority on the first $33,500 of
distributions, (ii) a promissory note in the principal amount of $1,500 due
October 15, 2007 which bore interest at 10% per annum (the "Predecessor
Note"), and (iii) a warrant to purchase 5% of the common units outstanding
following exercise of the warrant. In connection with the Recapitalization,
Mr. Otterbeck purchased 80.1% of the Predecessor's membership units (which did
not have a preferential return or priority on distributions) for an aggregate
of $80 and agreed to contribute up to an additional $1,500 to the Predecessor.
Mr. Otterbeck's 80.1% of the Predecessor's membership units are held by
VenCom, L.L.C., a company in which Mr. Otterbeck is the sole member and
manager. The parties also entered into (i) a Members Agreement that restricted
the transfer of membership units and provided preemptive rights on the sale of
new securities and (ii) a Registration Agreement that provided certain rights
to register the Predecessor's securities under the Securities Act of 1933, as
amended.
In April 1998, in order to convert the Predecessor into a corporation,
VenCom, L.L.C. and VIC contributed their membership interests in the
Predecessor and a $1,500 promissory note payable by the Predecessor to VIC to
Ventures in Communications II, LLC ("VIC2") in exchange for membership
interests of VIC2. Subsequently, the Predecessor merged with and into the
Company, with the Predecessor's outstanding membership interests and its
$1,500 promissory note payable to VIC exchanged for shares of the Company's
common stock and
F-15
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
preferred stock. As a result of the April 1998 merger transactions, the
Company became a Delaware corporation which is a wholly owned by VIC2.
The membership interests of VIC2 are owned by VIC (19.9%) and VenCom, L.L.C.
(80.1%). VIC also owns a warrant to purchase 9.9% of the membership units of
VIC2. The operating agreement of VIC2 entered into in April 1998 in connection
with the Recapitalization (i) imposes certain restrictions on the transfer of
VIC2's membership units; (ii) grants certain participation rights in
connection with a sale of membership units by a member; (iii) grants VIC
certain preemptive rights with respect to VIC2 membership units in connection
with issuances by
VIC2 of membership units or issuances by the Company of common stock; (iv)
grants VIC the right to require VenCom, L.L.C. to purchase all or any portion
of the VIC2 membership units held by VIC; (v) grants a first refusal right to
the members in connection with a transfer of VIC2 membership units and shares
of the Company's common stock; (vii) requires the members to take certain
actions in the event of an initial public offering by VIC2; and (viii) grants
VIC the right to require VIC2 to exercise its demand and piggyback
registration rights and to require VIC2 to distribute the proceeds of the
resulting offering.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Marketable Securities
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization is included in
investment income. Interest on securities classified as held-to-maturity is
included in investment income.
Marketable equity securities and debt securities not classified as held-to-
maturity are classified as available-for-sale. Available-for-sale securities
are carried at fair value, with the unrealized gains and losses, net of tax,
reported in a component of comprehensive income. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in
investment income. Realized gains and losses and declines in value judged to
be other-than-temporary on
F-16
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
available-for-sale securities are included in investment income. The cost of
securities sold is based on the specific identification method. Interest and
dividends on securities classified as available-for-sale are included in
investment income.
Property and Equipment
Property and equipment are stated at cost and depreciated on the straight-
line method over their estimated useful lives, ranging from 3 to 5 years.
Leasehold improvements are depreciated over the shorter of their useful lives
or the lease term, not to exceed 15 years. The Company classifies installed
wiring and hardware costs in construction in process until the installation is
completed at which time the balances are classified as leasehold improvements.
Intangible Assets
Intangible assets consist of goodwill representing the excess of cost over
net assets acquired and rights of entry ("ROE") contracts resulting from the
purchase of certain assets and liabilities from Preferred Entertainment, Inc.,
a subsidiary of People's Choice-TV Corp.("PCTV"), deferred financing charges
consisting of original issue debt discount and issuance costs related to the
Company's offering of 175,000 units each consisting of $1,000 principal amount
of 14 1/2% Senior Notes due 2008 (the "Senior Notes") and warrants to purchase
111,125 shares of common stock (the "Warrants") for gross proceeds of $175,000
(collectively, the "Unit Offering"). Goodwill and rights of entry contracts
are amortized using the straight line method over a 15 year periods. Deferred
financing charges are amortized under the effective interest method as a
component of interest expense over the life of the related debt.
Research and Development
All research and development costs are charged to operations as incurred.
Revenue Recognition
The Company recognizes revenue as services are provided.
Fair Value of Financial Instruments
The Company considers the recorded value of its financial assets and
liabilities, to approximate the fair value of the respective assets and
liabilities at December 31, 1997 and 1998, respectively.
Stock Based Compensation
The Company has adopted the Financial Accounting Standards Board's Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" (Statement No. 123). Statement No. 123 allows companies to
either account for stock-based compensation under the new provisions of
Statement No. 123 or under the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (Opinion No. 25),
but requires pro forma disclosures in the footnotes to the consolidated
financial statements as if the measurement provisions of Statement No. 123 had
been adopted. The Company intends to continue to account for its stock-based
compensation in accordance with Opinion No. 25.
Marketing Costs
Marketing costs are expensed as incurred. For the period from March 14, 1996
(Inception) to December 31, 1996 and for the years ended December 31, 1997 and
1998, marketing costs were approximately $40, $484 and $1,921, respectively.
F-17
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long Lived Assets
The Company assesses the impairment of long-lived assets including
intangible assets in accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long Lived Assets and for
Long Lived Assets to be Disposed of ("SFAS No. 121"). SFAS No. 121 requires
impairment losses to be recognized for long-lived assets when indicators of
impairment are present and the undiscounted cash flows are not sufficient to
recover the assets' carrying amounts. Intangibles are also evaluated for
recoverability by estimating the projected undiscounted cash flows, excluding
interest, of the related business activities. The impairment loss of these
assets, including goodwill, is measured by comparing the carrying amount of
the asset to its fair value with any excess of carrying value over fair value
written off. Fair value is based on market prices where available, an estimate
of market value, or determined by various valuation techniques including
discounted cash flow.
Income Taxes
The Company accounts for income taxes and the related accounts under the
liability method. Deferred tax liabilities and assets are determined based on
the difference between the financial statement and tax basis of assets and
liabilities using enacted rates expected to be in effect during the year in
which the differences reverse. The Company has incurred losses for both
financial and income tax reporting since inception. Accordingly, no provision
or benefit for income tax has been recorded in the accompanying consolidated
financial statements.
Loss Per Share
The Company's basic loss per share calculations are based upon the weighted
average of shares of common stock outstanding. The dilutive effect of stock
appreciation rights are included for purposes of calculating diluted earnings
per share, except for periods when the Company reported a net loss, in which
case the inclusion of stock options would be anti-dilutive. Diluted loss per
share is not presented for the periods ended December 31, 1996, 1997, and 1998
as the effects of potentially dilutive instruments are anti-dilutive.
Segment Reporting
In June 1997, FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
(Statement No. 131) which is effective for fiscal years beginning after
December 15, 1997. The Statement changes the way public companies report
segment information in annual financial statements and also requires those
companies to report selected segment information in interim financial
statements to stockholders. The Statement also establishes standards for
related disclosures regarding products and services, geographic areas and
major customers. The Company adopted Statement No. 131 for the year ended
December 31, 1998, resulting in additional segment disclosures as required by
the Statement.
Comprehensive Income
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. The Statement establishes standards for
reporting of comprehensive income and its components in financial statements.
The Company adopted Statement No. 130 effective the fourth quarter of the year
ended December 31, 1998, and has applied its provisions retroactively as
required by the Statement. The adoption of this Statement did not have a
material impact on its financial position or results from operations.
Recently Issued Accounting Standards
In June 1998, The FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
requires that all derivatives be recognized as either assets
F-18
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
or liabilities in the statement of financial position and that those
instruments shall be measured at fair value. Statement No. 133 also prescribes
the accounting treatment for changes in the fair value of derivatives which
depends on the intended use of the derivative and the resulting designation.
Designations include hedges of the exposure to changes in the fair value of a
recognized asset or liability, hedges of the exposure to variable cash flows
of a forecasted transaction, hedges of the exposure to foreign currency
translations, and derivatives not designated as hedging instruments. Statement
No. 133 is effective for fiscal years beginning after June 15, 1999. The
Company expects to adopt Statement No. 133 in the first quarter of the fiscal
year ending December 31, 2000; however, no disclosures are expected to be
required. The Company does not believe the adoption of this Statement will
have a material impact on its financial position or results from operations.
3. Acquisitions
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. The
purchase price was approximately $400 in cash and was accounted for pursuant
to the purchase method of accounting.
On June 9, 1998, the Company entered into a definitive agreement to acquire
certain video programming ROE contracts and microwave cable television
equipment of Preferred Entertainment, Inc., a subsidiary of People's Choice TV
Corp. ("PCTV") , which provided contractual rights to serve 28,270 MDU in 160
properties in the Chicago market. 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 $12,479 in cash. The PCTV acquisition was recorded
pursuant to the purchase method of accounting.
The results of operations of these acquisitions have been included in the
Company's consolidated financial statements from the date of acquisition
through the end of the period presented. The Company amortizes the goodwill
and other intangible assets acquired over a period of 10 to 15 years, on a
straight-line basis, based on the estimated future economic benefit to the
Company related to the assets acquired in connection with these transactions.
The Company is not obligated to make any further payments or provide any form
of additional or contingent consideration related to these acquisitions.
F-19
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following pro forma unaudited financial data is based upon the
historical financial statements of the Company for the year ended December 31,
1998 adjusted to give effect to (i) the series of acquisitions of certain
assets, liabilities, and operations of PCTV from July 1, 1998 through October
1, 1998; and (ii) certain purchase accounting adjustments related to the
amortization of goodwill and other intangible assets acquired in connection
with the PCTV series of transactions as if such transactions had occurred on
January 1, 1997. The pro forma adjustments are based upon available
information and certain assumptions that management believes are reasonable.
The pro forma financial data does not purport to represent what the Company's
operations would have actually been had such transaction in fact occurred on
January 1, 1997 or to predict the Company's results of operations.
<TABLE>
<CAPTION>
Adjustments Pro Forma
OnePoint to Reflect OnePoint
Communications PCTV Communications
Corp. Acquisition Corp.
-------------- ----------- --------------
For the Year Ended December 31, 1997
<S> <C> <C> <C>
Revenue............................. $ 43 $ 5,208 $ 5,251
Loss before extraordinary items..... (16,091) (1,991) (18,082)
Net loss............................ $ (16,091) $(1,991) $ (18,082)
--------- ------- ---------
Basic loss per share................ $ (16.09) $ (18.08)
--------- ---------
<CAPTION>
For the Year Ended December 31, 1998
<S> <C> <C> <C>
Revenue............................. $ 6,953 $ 2,632 $ 9,585
Loss before extraordinary items..... (44,625) (1,519) (46,144)
Net loss............................ $ (24,826) $(1,519) $ (26,345)
--------- ------- ---------
Basic loss per share................ $ (24.82) $ (26.34)
--------- ---------
Shares used in computing loss before
extraordinary item per share (1997
and 1998)
Weighted average common shares--
Basic............................ 1,000,000 1,000,000
--------- ---------
</TABLE>
4. Restricted Cash
At December 31, 1998 the Company had restricted cash of $5,000 plus accrued
interest. These funds were held in this account in anticipation of meeting an
equity capital call for Mid-Atlantic, pending the successful outcome of
arbitration proceedings. On January 15, 1999 the Company entered into a
Settlement Agreement (the "Settlement Agreement") which resolved the disputes
covered by the arbitration demand (see Note 19 ). The Company also had $125 of
restricted cash at December 31, 1998 which represented security deposits on
certain leased office space.
5. Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December
31,
------------
1997 1998
---- ------
<S> <C> <C>
Customers................................................... $39 $2,487
Other....................................................... -- 6
--- ------
Total accounts receivable................................... 39 2,493
Allowance for doubtful accounts............................. (7) (216)
--- ------
Accounts receivable, net.................................... $32 $2,277
=== ======
</TABLE>
F-20
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company provides an allowance for doubtful accounts for accounts
receivable amounts deemed uncollectible as determined by management. The
Company computes its allowance for doubtful accounts based on industry trends
modified to reflect the Company's limited historical experiences. Activity in
the allowance for doubtful accounts was as follows:
<TABLE>
<CAPTION>
For the Period from Year Ended
March 14, 1996 December 31,
(inception) to ------------
December 31, 1996 1997 1998
------------------- ------------
<S> <C> <C> <C>
Opening balance......................... $-- $ -- $ 7
Bad debt charge-offs.................... -- -- (568)
Adjustments to reserves................. -- 7 777
---- ----- ------
Ending balance.......................... $-- $ 7 $ 216
==== ===== ======
</TABLE>
6. Investments in Marketable Securities
The table below is a summary of marketable securities, all of which were
classified as available-for-sale, as of December 31, 1998:
<TABLE>
<CAPTION>
Estimated
Unrealized Unrealized Accrued Fair
Cost Losses Gains Interest Value
-------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C>
Non-restricted:
Corporate bonds............ $ 13,048 $-- $ 91 $188 $13,327
Commercial paper........... 12,637 -- -- 121 12,758
Mutual Funds............... 339 -- -- 21 360
Restricted:
U.S.Treasury Notes and
Securities................ 69,988 -- 610 -- 70,598
Money Market............... 2,780 -- -- -- 2,780
-------- ---- ---- ---- -------
$ 98,792 $-- $701 $330 $99,823
======== ==== ==== ==== =======
</TABLE>
The gross realized gains on sales of available-for-sale securities totaled
$916, and the gross realized losses totaled $544. The net adjustment to
unrealized holding gains (losses) on available-for-sale securities included as
comprehensive income in shareholders' equity totaled $701 in 1998. The Company
did not hold investments in marketable securities in 1996 or 1997.
The amortized cost and estimated fair value of debt and marketable equity
securities at December 31, 1998, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties. The Company's restricted securities are comprised of the
Pledged Securities as discussed in Note 10. The Company has classified
restricted securities with an estimated fair value of approximately $27,270
which mature within twelve months as non-current investments in the
accompanying consolidated balance sheet.
<TABLE>
<CAPTION>
Estimated Fair
Cost Value
-------- --------------
<S> <C> <C>
Due in one year or less........................... $ 36,969 $37,248
Due after one year through three years............ 58,704 59,435
Due after three years............................. -- --
-------- -------
95,673 96,683
Mutual funds and money market..................... 3,119 3,140
-------- -------
$ 98,792 $99,823
======== =======
</TABLE>
F-21
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Investment in Unconsolidated Subsidiaries
The Company has investments ranging from 41-50% in three companies and
accounts for those investments using the equity method.
The daily operations of Mid-Atlantic are managed by an entity which owns the
other 58.6% interest Mid-Atlantic. The Company maintains certain veto rights
on significant transactions and as defined in the operating agreement between
the unitholders.
Mid-Atlantic RMTS Holdings, LLC had no material operations, assets or
liabilities as of and for the period from March 14, 1996 (inception) to
December 31, 1996, and for the years ended December 31, 1997 and 1998.
During 1997, the Predecessor entered into a joint venture with South Central
Development Corporation ("SCDC") to form MAC Interactive. SCDC and its
affiliates hold the equity interests in Mid-Atlantic Telcom Plus, LLC that is
not owned by the Company. The initial capitalization of the joint venture was
used to purchase certain assets and marketing rights. Each member owns a 50%
equity interest. On January 15, 1999, the Company took over control of MAC
Interactive and committed to a formal plan to terminate the joint venture as
soon as practicable. The Company has estimated the loss on disposal of the
assets and liabilities of the joint venture to be approximately $1,096 and
that the Company's proportionate share of these losses will be approximately
$548. This loss has been reflected in the accompanying financial statements as
a component of losses from unconsolidated subsidiaries.
The results of operations and financial position of the Company's equity-
basis affiliates are summarized below for the years ended December 31, 1997
and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Condensed Operating Information:
Net sales............................................. $14,040 $16,494
Loss from operations.................................. (3,367) (3,919)
Net loss.............................................. (6,142) (7,717)
Condensed Balance Sheet Information:
Current assets........................................ $ 1,402 $ 2,192
Non-current assets.................................... 47,380 55,183
Current liabilities................................... 29,461 7,233
Non-current liabilities............................... 713 34,257
Net worth............................................. 18,608 15,885
</TABLE>
Investments in net assets of companies accounted for under the equity method
was as follows:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Opening Balance......................................... $ -- $10,061
Purchase of equity interests............................ 12,750 --
Equity losses of unconsolidated subsidiaries............ (3,072) (3,698)
Other investment costs.................................. 463 --
Amortization of other investment costs.................. (80) (80)
------- -------
Balance at December 31.................................. $10,061 $ 6,283
======= =======
</TABLE>
F-22
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Furniture and equipment................................. $ 462 $ 3,157
Computer equipment...................................... 738 1,942
Facility equipment...................................... -- 3,176
Vehicles................................................ 139 791
Leasehold improvements.................................. 816 1,828
------- -------
2,155 10,894
Less accumulated depreciation........................... (254) (1,409)
------- -------
1,901 9,485
Construction in progress................................ 803 1,438
------- -------
$ 2,704 $10,923
======= =======
</TABLE>
The Company recognized depreciation expense of $19, $235 and $1,155 in 1996,
1997 and 1998, respectively.
9. Intangible Assets
Intangible assets consist of the following as of December 31:
<TABLE>
<CAPTION>
1997 1998
----- -------
<S> <C> <C>
Issuance costs and original issuance discount on Notes.... $ -- $ 7,250
Goodwill.................................................. -- 4,937
Other..................................................... -- 30
----- -------
12,217
Accumulated amortization.................................. -- (668)
----- -------
$ -- $11,549
===== =======
</TABLE>
During 1998 the Company repurchased $41,000 of its 14 1/2% Senior Notes and
wrote off $2,111 of issuance costs and original issuance discount on the
Senior Notes, net of accumulated amortization of $107.
Amortization expense for the period from March 14, 1996 (Inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998 totaled
$0, $0 and $775, respectively.
Amortization related to the issuance costs and original issuance discount on
the Senior Notes of $552 in 1998 was recognized as a component of interest
expense.
10. Long Term Debt
Unit Offering
During May 1998, the Company offered units each consisting of $1,000
principal amount of 14 1/2% Senior Notes due 2008 (the "Senior Notes") and
Warrants to purchase 111,125 shares of common stock (the "Warrants") for gross
proceeds of $175,000 (collectively, the "Unit Offering"). Each of the 175,000
Warrants entitles the holders to purchase 0.635 shares of common stock of the
Company at an exercise price of $0.01 per
F-23
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
share. Unless exercised, the Warrants expire on June 1, 2008. The Warrants
were valued at $5,300 based on independent appraisal thereof as of the
issuance date and are reflected as an additional debt discount in the
accompanying financial statements.
In connection with the Unit Offering, the Company purchased $80,500 of
government securities (the "Pledged Securities") to fund the first seven
scheduled interest payments on the Senior Notes. These Pledged Securities are
pledged to a trustee for the benefit of the holders of the Senior Notes, and
secure a portion of the Company's obligations under the indenture with respect
to the Unit Offering (the "Indenture"). Pursuant to the restricted securities
agreement entered into in connection with the Unit Offering, the trustee is
allowed to release Pledged Securities in excess of the amount required to fund
the first seven scheduled interest payments on the Senior Notes, upon request
by the Company.
As of November 6, 1998, the date on which the Senior Notes and the Warrants
became separable, the Company recognized a discount of $5,300 on the book
value of the Senior Notes relating to the Warrants and will amortize this
amount over the life of the Senior Notes. Accordingly, $63 of amortization of
the discount of the Senior Notes resulting from the issuance of the Warrants
has been recorded in the accompanying financial statement for the year ended
December 31, 1998.
The Company completed open market purchases of Senior Notes having an
aggregate principal amount of $73,250 between November 9, 1998 and March 5,
1999 at various prices for an aggregate total cost of approximately $38,355,
including accrued interest and transaction fees. The Company recognized an
extraordinary gain on the early extinguishment of this debt of $19,799 in the
fourth quarter of 1998 and will recognize an extraordinary gain of
approximately $12,417 in the first quarter of 1999. Pursuant to the restricted
securities agreement entered into in connection with the Unit Offering, the
trustee of the Pledged Securities released approximately $26,650 on February
24, 1999 upon request by the Company.
The Senior 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. During 1998, the Company paid $10,656 of
interest related to the Senior Notes and accrued approximately $32 of
liquidated damages as described below. The Company is not required to make
mandatory redemption or sinking fund payments under the Senior Notes. The
Senior Notes generally are not redeemable at the option of the Company at
anytime prior June to 1, 2003. Thereafter, the Senior 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 Senior 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 Senior Notes issued remain outstanding
immediately after such redemption.
In the event of a change in control, as defined in the Indenture, the
Company will be required to make an offer to each holder of Senior Notes to
repurchase all or any part of the Senior Notes at 101% of the aggregate
principal amount, plus unpaid interest and liquidated damages, if any.
F-24
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Amounts outstanding under the Senior Notes were $130,003, net of a discount
of $3,997 relating to the value assigned to the Warrants, at December 31,
1998. Interest accrued under the Senior Notes at December 31, 1998 was $1,678.
In connection with the Unit Offering, the Company is required to comply with
specified covenants described in the Indenture. These covenants include
limitations on sales of subsidiaries and certain assets, mergers, and other
activities.
In connection with the May 1998 Unit Offering, 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
Senior Notes for substantially identical notes which are not subject to
restrictions on transfer that are applicable to the Senior 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 on or before November 17, 1998, then
liquidated damages will accrue with respect to the Senior Notes. Such
liquidated damages accrue at a rate of $0.05 per week per $1,000 principal
amount of Senior Notes for the first 90 days beyond November 17, 1998, and
thereafter increase by $0.05 per week per $1,000 outstanding principal amount
of the Senior Notes each 90 day period, up to a maximum of $0.50 per week per
$1,000 principal amount of Senior Notes. Liquidated damages cease to accrue
when the registration statement is declared effective. As the registration
statement was not declared effective by November 17, the Company accrued
approximately $32 at December 31, 1998.
Term Note
On March 25, 1998, the Company entered into a term note with a bank (the
"Credit Facility"). Under the terms of the Credit Facility, the Company may
borrow up to $9,000. Through December 1998, the Company borrowed $8,750 with
the additional $250 of availability securing a letter of credit. Principal
payments begin on January 1,1999 with all balances payable on or before
January 1, 2003. The Credit Facility has mandatory repayment provisions upon
certain events. The Credit Facility is collateralized by certain of the
Company's assets and is guaranteed by SBC. As of December 31, 1998 the
outstanding principal balance was $8,750 and the amount available to the
Company under the Credit Facility was $0. At December 31, 1998, the Company
had accrued interest of $23 on the Credit Facility.
The following future minimum debt payments are required for the Company's
borrowings as of December 31, 1998:
<TABLE>
<S> <C>
1999........ $ 250
2000........ 500
2001........ 2,250
2002........ 3,500
2003........ 2,250
Thereafter.. 134,000
---------
142,750
Less
remaining
debt
discounts
attributable
to warrants
issued..... (3,997)
---------
$ 138,753
=========
</TABLE>
11. Stockholder's Equity
Pursuant to the Company's Recapitalization as described in Note 1, the
Company has authorized capital stock consisting of 2,000,000 shares of $0.01
par value common stock ("Common Stock") and 35,000 shares of $1.00 par value
preferred stock ("Preferred Stock").
F-25
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The Preferred Stock is not entitled to receive dividends; however, the
Company can not redeem, purchase, or otherwise acquire directly or indirectly
any junior securities or pay or declare dividends or make any distribution
upon any junior securities so long as the Preferred Stock is outstanding. The
Preferred Stock is not entitled to vote on matters upon which holders of the
Common Stock are entitled to vote unless the Company is non-compliant with
certain provisions of the Company's amended and restated articles of
incorporation (an "Event of Noncompliance"), at which time the holders of
Preferred Stock are entitled to elect an additional member of the Board of
Directors who shall have voting rights equal to the total number of board
members plus one. The Preferred Stock is redeemable by the Company at any time
in whole or in part, and the holders thereof have the right to demand
redemption if an Event of Noncompliance occurs, at a redemption price of
$1,000 per share. 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 liquidation value of all
Preferred Stock held by such holder. "Liquidation Value" for any share of
Preferred Stock is equal to $1,000. The Preferred Stock does not accrue
dividends, and is not convertible into any other class of capital stock. The
Preferred Stock is entitled to certain anti-dilution rights in the event of a
stock split, dividend, combination, or other recapitalization.
12. Stock Appreciation Rights Plan
During 1998, the Company authorized the issuance of up to 166,669 stock
appreciation rights ("SARs") pursuant to the OnePoint Stock Appreciation
Rights Plan (the "Plan") and granted a total of 71,719 SARs with an exercise
price of $67.50 per SAR to certain officers and employees of the Company
pursuant to agreements with each grantee. All SARs issued have an expiration
date of 10 years and are subject to certain vesting schedules, typically 5
years. The Company estimates the market value of SARs issued based on a
capitalization of discounted cash flow valuation model, as adjusted for the
current general market conditions and specific company information. No
compensation expense related to these stock appreciation rights was recognized
in the accompanying financial statements during 1998 as the estimated market
value was substantially lower than the exercise price at date of grant. No
form of stock based compensation was issued prior to 1998.
<TABLE>
<CAPTION>
Year Ended
Period from March 14, December
1996 (Inception) to 31,
December 31, -----------
1996 1997 1998
--------------------- ---- ------
<S> <C> <C> <C>
Stock appreciation rights outstanding,
beginning............................... -- -- --
Granted.................................. -- -- 71,719
Exercised................................ -- -- --
Forfeited................................ -- -- 1,975
--- --- ------
Stock appreciation rights outstanding,
ending.................................. -- -- 69,774
=== === ======
</TABLE>
The Company had no SARs that were exercisable as of December 31, 1998. The
weighted average grant-date estimated market value of common stock underlying
the SARs granted during the year ended December 31, 1998 was approximately $8
per share. Had the Company adopted the employee stock compensation measurement
provisions of Statement No. 123, net loss and basis net loss per share, on a
pro forma basis assuming no other adjustments, would have been the same as
reported amounts.
F-26
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's estimation of the fair value of stock appreciation rights
granted during 1998 was estimated on the grant date using the Black-Scholes
option pricing model. The following assumptions were used for grants made in
1998: no dividend yield; zero volatility; risk-free interest rate of 6
percent; and an expected life of ten years.
13. Related Party Transactions
Affiliate Receivable
As of December 31, 1997 and 1998, the Company had receivable balances from
Mid-Atlantic primarily resulting from a shared cash receipts lockbox totaling
approximately $33 and $653, respectively.
Other
Certain officers of the Company are officers of VIC and VIC2.
The Company shares certain operations and billing systems with Mid-Atlantic,
a company in which the Company holds a 41.4% interest. Allocations of costs
related to the shared systems are generally based upon volume measures such as
number of subscribers, passings, and level of service provided to customers.
Certain fixed costs and personnel costs are allocated based on negotiated
agreements between the companies and actual level of effort provided by
certain personnel to the separate companies. The Company paid approximately
$0, $250 and $836 for services provided by this company in 1996, 1997 and
1998, respectively.
At December 31, 1997 and 1998, the Company had accrued $203 and $208 in
accounts payable related to reimbursement for seconded employees provided by
SBC. The Company's reimbursement rate is based on actual direct and indirect
costs incurred by SBC including base compensation, fringe benefits,
allowances, and other costs associated with seconded employees provided to the
Company. SBC has guaranteed certain leases and other obligations of the
Company.
The Company entered into a professional services agreement with The VenCom
Group, Inc. in April 1998, pursuant to which The VenCom Group, Inc. provides
financial and management consulting services and manages the Company's
relationships with VIC2 and SBC. Under this agreement, The VenCom Group, Inc.
receives an annual management fee of $750 and a fee of 2% of the amount of any
capital raising activity or acquisition activity of the Company, including
debt and equity placements. Fees payable under the agreement are subject to an
annual cap of $900, provided that if the amount paid in any calendar year is
less than $900, the annual cap in the next calendar year shall be equal to the
difference between $1,800 and the amount paid in the previous calendar year
and further provided that amounts owed in excess of the cap in any year may be
paid in one or more subsequent years if and to the extent they are within the
cap in such years. The Company accrued consulting fees payable of $3,500 from
the Unit Offering, of which, approximately $3,350 remained unpaid as
of December 31, 1998. Amortization of this debt issuance cost has been
recognized as a component of interest expense. Under this agreement, the
Company paid The VenCom Group, Inc. $900 during 1998.
14. Income Taxes
The Company was treated as a partnership for income tax purposes until
incorporation in April 1998. Accordingly, no provision or benefit for income
taxes has been included in the financial statement for any period prior to
April 1998 as taxable income or loss passes through to and is reported by
unitholders individually. As of December 31, 1998, the Company had net tax
operating loss carryforwards of approximately $20.3 million, which were
generated from April 1998 through December 31, 1998 will expire through 2018.
Net operating loss carryforwards may be used to offset future taxable income
generated by the Company. All loss carryforwards may be limited in the future
in the event of significant changes in the ownership of the Company.
F-27
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company had net deferred tax assets of approximately $8.3 million at
December 31, 1998. The components of net deferred tax assets consist primarily
of net operating loss carryforwards and current nondeductible reserves. The
benefit of deferred tax assets are recorded to the extent that management
believes the realization of such deferred tax assets to be "more likely than
not." As of December 31, 1998, the Company has incurred losses since inception
and management does not believe taxable income will be achieved in the near
future. Accordingly, management has fully reserved the net deferred tax assets
due to uncertainty of the ultimate realization of any benefit from such
assets.
The effective income tax rate differs from the statutory federal income tax
rate due principally to the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Federal tax rate (benefit)................................... 34.0%
State tax, net of federal tax................................ (7.0)
Valuation allowance.......................................... 33.8
Nondeductible expenses....................................... 6.9
Change in entity tax status.................................. (0.1)
Other........................................................ 0.4
----
Effective rate............................................... 0.0%
====
</TABLE>
The net deferred tax liabilities in the accompanying balance sheets include
the following components:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Deferred tax asset and other temporary differences
deductible in the future.................................... $ 88
Deferred tax asset for net operating loss.................... 8,258
Valuation allowance.......................................... (8,346)
-------
Net deferred tax liability................................... $ --
=======
</TABLE>
15. Fringe Benefit Plans
The Company has a 401(k) Savings Plan and Trust for the benefit of all
employees who meet certain eligibility requirements. The plan documents
provide for the Company to make defined contributions as well as matching and
other discretionary contributions, as determined by the Board of Directors.
The Company contributed $0, $0, and $47 to the 401(k) Savings Plan and Trust
during the period from March 14, 1996 (Inception) to December 31, 1996 and for
the years ended December 31, 1997 and 1998, respectively.
16. Leases
The Company currently leases office space and equipment under non-cancelable
operating leases. The future minimum lease payments under non-cancelable
operating leases at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1999.............................................................. $ 1,638
2000.............................................................. 1,682
2001.............................................................. 1,736
2002.............................................................. 1,712
2003.............................................................. 1,061
Thereafter........................................................ 2,190
-------
Total............................................................. $10,019
=======
</TABLE>
F-28
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Most leases provide for the pass through of increases in operating expenses
and real estate taxes. Rent expense for 1996, 1997 and 1998 was approximately
$79, $629 and $1,107, respectively.
17. Other Information
During 1998, the Company made cash payments of $10,656 and $0 for interest
and income taxes, respectively, and recapitalized long-term debt totaling
$1,500 through the issuance of preferred stock. During 1996 and 1997, the
Company made no cash payments for interest or income taxes.
The Company is from time to time party to litigation arising in the ordinary
course of its business. The Company believes that such litigation will not
have a material impact on the Company's financial position or results from
operations.
Approximately 0%, 50% and 70% of the Company's cost of revenues for the
period from March 14, 1996 (Inception) to December 31, 1996 and for the years
ended December 31, 1997 and 1998, respectively, were purchased from 5
suppliers, each of whom supplied more than 10% of the total cost of revenues
during such periods.
18. Arbitration Proceedings
On August 6, 1998 the OPC Holdings made a demand for arbitration of certain
disputes under the Mid-Atlantic operating agreement. The arbitration demand
sought the resolution of several disputes between the parties, including among
other things, whether the Company was entitled to disclose Mid-Atlantic's
financial results in connection with the Company's exchange offer registration
statement. On January 15, 1999 OPC Holdings, Mid-Atlantic and other related
parties entered into a Settlement Agreement which resolved the disputes
covered by the arbitration demand. The Settlement Agreement provides, among
other things, that Mid-Atlantic would provide the necessary financial
information regarding Mid-Atlantic for the exchange offer and OPC Holdings'
periodic filings under the Security Exchange Act of 1934, as amended. Also as
part of the Settlement Agreement, the parties agreed to the formation of a new
holding company, Mid-Atlantic Telcom Plus Holding, LLC to own the membership
interests of Mid-Atlantic.
19. Segment Information
The Company's reportable segments are segregated into business units that
offer services to four distinct geographic regions; (i) Atlanta, Georgia and
Charlotte/Raleigh/Durham, North Carolina (the "Southeast Region"), (ii)
Chicago, Illinois (the "Central Region"), (iii) Denver, Colorado and Phoenix,
Arizona (the "Western Region"), and (iv) Washington, DC/Baltimore,
MD/Philadelphia, PA (the "Mid-Atlantic Region"). The Company's services to
each segment include a combination of telephony, video and/or high-speed
Internet access services.
The Company evaluates performance and allocates resources based on operating
profit or loss. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies. The
Company and its subsidiaries carry their investments in affiliates on the
equity method of accounting. Accordingly, certain segments have recognized
equity in the earnings of other segments and their proportionate share of the
assets and liabilities of investments in affiliates. All such amounts have
been excluded from the reported financial information for the business
segments. The Company's segments do not provide services to each other;
therefore, there were no inter-segment sales or related cost of sales during
the periods presented.
The Company's Mid-Atlantic Region holds all investments in affiliates
accounted for under the equity method. Equity in the net losses of investees
accounted for by the equity method totaled $0, $3,072, and $3,698 for the
periods ended December 31, 1996, 1997, and 1998, respectively. The Mid-
Atlantic Region's investment in affiliates accounted for under the equity
method totaled $10,061 and $6,283 as of December 31, 1997 and 1998,
respectively.
F-29
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table provides certain financial information for each business
segment:
<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Central Region................................. $ -- $ -- $ 2,690
Mid-Atlantic Region............................ -- 43 1,660
Southeast Region............................... -- -- 1,670
Western Region................................. -- -- 911
Other.......................................... -- -- 22
-------- -------- --------
$ -- $ 43 $ 6,953
======== ======== ========
Loss from operations:
Central Region................................. $ (663) $ (3,138) $ (5,817)
Mid-Atlantic Region............................ (556) (4,686) (11,772)
Southeast Region............................... -- (2,853) (6,938)
Western Region................................. -- (2,411) (5,585)
Other.......................................... (821) 25 (1,028)
-------- -------- --------
$(2,040) $(13,063) $(31,140)
======== ======== ========
Identifiable assets:
Central Region................................. $ 57 $ 1,039 $ 15,515
Mid-Atlantic Region............................ 287 1,860 4,378
Southeast Region............................... -- 595 2,206
Western Region................................. -- 465 908
Other.......................................... 13,687 15,722 126,300
-------- -------- --------
$ 14,031 $ 19,681 $149,307
======== ======== ========
Capital expenditures:
Central Region................................. $ 8 $ 816 $ 4,677
Mid-Atlantic Region............................ 172 1,004 1,200
Southeast Region............................... -- 364 837
Western Region................................. -- 199 390
Other.......................................... 337 57 2,270
-------- -------- --------
$ 517 $ 2,440 $ 9,374
======== ======== ========
Depreciation and amortization:
Central Region................................. $ -- $ 94 $ 684
Mid-Atlantic Region............................ 2 57 287
Southeast Region............................... -- 30 111
Western Region................................. -- 20 74
Other.......................................... 17 34 299
-------- -------- --------
$ 19 $ 235 $ 1,455
======== ======== ========
</TABLE>
The following table provides gross revenues on a service line basis:
<TABLE>
<CAPTION>
December 31,
----------------
1996 1997 1998
---- ---- ------
<S> <C> <C> <C>
Revenues:
Telephony.............................................. $-- $43 $4,463
Video.................................................. -- -- 2,462
High-speed Internet.................................... -- -- 28
---- --- ------
$-- $43 $6,953
==== === ======
</TABLE>
F-30
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
20. Consolidating Condensed Financial Statements
The Company's consolidating condensed financial statements for (i) the
Company, (ii) its wholly-owned subsidiaries (OnePoint Communications-Illinois
LLC, OnePoint Communications-Colorado LLC, OnePoint Communications-Georgia LLC
and OnePoint Communications Holdings, LLC), on a combined basis, which are
guarantors under the Senior Notes, and (iii) its majority owned subsidiary
(VIC-RMTS-DC, LCC) which is a guarantor under the Senior Notes as required by
the Securities and Exchange Commission's Staff Accounting Bulletin No. 53
follows. The Company has not provided individual financial statements for its
subsidiary guarantors (other than VIC-RMTS-DC, LLC), as the Company's
financial statements include all guarantors. The guarantors are wholly-owned
(other than VIC-RMTS-DC, LLC, which is majority-owned) and all non-guarantor
subsidiaries (other than Mid-Atlantic Telcom Plus, LLC, for which financial
statements are included) are inconsequential, individually and in the
aggregate, to the Company's consolidated financial statements. The guarantees
are full, unconditional and joint and several. The Company has determined that
separate financial statements of the wholly-owned guarantors would not be
material to investors.
Consolidating Condensed Balance Sheets as of
December 31, 1997 and 1998
<TABLE>
<CAPTION>
Majority
Wholly Owned Owned
Guarantor Guarantor Consolidated
Parent Subsidiaries Subsidiary Eliminations Total
------- ------------ ---------- ------------ ------------
December 31, 1997
<S> <C> <C> <C> <C> <C>
Current assets.......... $ 5,496 $ 548 $ 615 $ -- $ 6,659
Investments in
consolidated
subsidiaries........... 11,463 765 -- (12,228) --
Noncurrent assets....... -- 11,778 1,245 -- 13,022
Current liabilities..... 86 1,627 1,111 (16) 2,808
Noncurrent liabilities.. 1,500 -- -- -- 1,500
Redeemable preferred
stock.................. -- -- -- -- --
Minority interests...... -- -- -- -- --
Total unitholders'
equity................. 15,373 11,463 749 (12,212) 15,373
<CAPTION>
December 31, 1998
<S> <C> <C> <C> <C> <C>
Current assets.......... $24,769 $2,141 $ 965 $ -- $ 27,875
Investments in
consolidated
subsidiaries........... 23,871 3,315 -- (27,186) --
Noncurrent assets....... 95,544 22,475 3,413 -- 121,432
Current liabilities..... 7,553 4,060 1,063 -- 12,676
Noncurrent liabilities.. 138,503 -- -- -- 138,503
Redeemable preferred
stock.................. 35,000 -- -- -- 35,000
Minority interests...... -- -- -- -- --
Total stockholders'
equity/(deficit)........ (36,872) 23,871 3,315 (27,186) (36,872)
</TABLE>
F-31
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consolidating Condensed Statements of Operations
for the Period from March 14, 1996 (Inception) to December 31, 1996
and for the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Majority
Wholly Owned Owned
Guarantor Guarantor Consolidated
Parent Subsidiaries Subsidiary Eliminations Total
------------- --------------- ------------- ------------------------------
For the Period from March 14, 1996 (Inception) to December 31, 1996
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ -- $ -- $ --
Cost of revenues........ -- -- -- -- --
Loss from continuing
operations before
extraordinary items.... (2,036) (1,827) (670) 2,497 (2,036)
Net loss................ $ (2,036) $ (1,827) $ (670) $ 2,497 $ (2,036)
<CAPTION>
For the Year Ended December 31, 1997
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ 43 $ -- $ 43
Cost of revenues........ -- -- 83 -- 83
Loss from continuing
operations before
extraordinary items.... (16,091) (16,135) (4,686) 20,821 (16,091)
Net loss................ $ (16,091) $ (16,135) $ (4,686) $ 20,821 $ (16,091)
<CAPTION>
For the Year Ended December 31, 1998
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 5,293 $ 1,660 $ -- $ 6,953
Cost of revenues........ -- 5,925 2,840 -- 8,765
Loss from continuing
operations before
extraordinary items.... (44,625) (33,567) (11,772) 45,339 (44,625)
Net loss................ $ (24,826) $ (33,567) $ (11,772) $ 45,339 $ (24,826)
</TABLE>
21. Subsequent Events
On March 30, 1999, OPC Holdings filed a demand for arbitration seeking a
declaratory ruling on the equity ownership of VIC-RMTS-DC, LLC. OPC Holdings
believes that the value of the assets contributed by Mid-Atlantic RMTS
Holdings, LLC was sufficient to give Mid-Atlantic RMTS Holdings, LLC only an
approximate 5% interest based on capital contributions through December 31,
1998. The manager of Mid-Atlantic RMTS Holdings, LLC has suggested that they
are entitled to an unspecified, but higher, equity interest in VIC-RMTS-DC,
LLC. OPC Holdings will be entitled only to that portion of any distributions
made by VIC-RMTS-DC, LLC corresponding to its percentage equity ownership
therein.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Members of
the Mid-Atlantic Telcom Plus, LLC
Washington, D.C.
We have audited the accompanying balance sheets of Mid-Atlantic Telcom Plus,
LLC as of December 31, 1998 and 1997, and the related statements of
operations, changes in members' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mid-Atlantic Telcom Plus,
LLC as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
Beers & Cutler PLLC
Washington, D.C. February 19, 1999
F-33
<PAGE>
MID-ATLANTIC TELCOM PLUS, LLC
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Assets
Current Assets
Cash............................................... $ 359,065 $ 154,102
Accounts Receivable--trade, net of allowance for
doubtful accounts of $191,207 and $248,287........ 1,119,000 1,112,763
Accounts receivable--other......................... 445,848 43,293
Prepaid expenses and other assets.................. 268,488 144,740
----------- -----------
Total current assets............................. 2,192,401 1,454,898
----------- -----------
Fixed Assets
Cable TV systems, net of accumulated depreciation
of
$4,859,157 and $2,423,216......................... 18,838,667 13,223,221
Other property and equipment, net of accumulated
depreciation of
$923,238 and $419,133............................. 2,249,085 1,784,735
----------- -----------
Total fixed assets............................... 21,087,752 15,007,956
----------- -----------
Intangible assets
Goodwill........................................... 39,059,812 33,827,273
Loan origination costs............................. 758,635 1,143,650
Other intangible assets............................ 1,764,898 491,119
Accumulated amortization........................... (7,622,960) (3,840,159)
----------- -----------
Total intangible assets.......................... 33,960,385 31,621,883
----------- -----------
Total assets..................................... $57,240,538 $48,084,737
=========== ===========
Liabilities and Members' Equity
Current liabilities
Accounts payable--trade............................ $ 3,287,507 $ 2,168,064
Accrued expenses................................... 1,309,578 1,259,253
Accrued interest--CIBC............................. 168,558 312,222
Accrued interest--Allied........................... 331,048 --
Due to affiliates, net............................. 947,169 234,821
Deferred revenue................................... 764,490 784,764
Current maturities of notes payable--other......... 213,324 265,811
Current maturities of leases payable............... 197,155 115,061
Deferred rent--current............................. 10,706 8,088
----------- -----------
Total current liabilities........................ 7,229,535 5,148,084
----------- -----------
Long-term liabilities
Note payable--CIBC................................. 22,757,296 24,197,296
Subordinated debt--Allied.......................... 10,751,826 --
Notes payable--other............................... 250,000 457,017
Other long-term liabilities........................ 215,573 169,382
Leases payable..................................... 282,746 255,770
----------- -----------
Total long-term liabilities...................... 34,257,441 25,079,465
----------- -----------
Total liabilities................................ 41,486,976 30,227,549
Members' Equity...................................... 15,753,562 17,857,188
----------- -----------
Total Liabilities and Members' Equity............ $57,240,538 $48,084,737
=========== ===========
</TABLE>
F-34
<PAGE>
MID-ATLANTIC TELCOM PLUS, LLC
STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Revenue
Cable TV revenue................................... $16,493,994 $14,039,818
----------- -----------
Operating Expenses
Operating.......................................... 18,588,140 15,520,687
Selling, general and administrative................ 1,827,321 1,886,599
----------- -----------
Total operating expenses......................... 20,415,461 17,407,286
Loss from operations............................... (3,921,467) (3,367,468)
Other income (expense)
Interest income.................................... 26,217 186,129
Interest expense................................... (3,191,034) (3,001,174)
(Loss) gain on disposal of assets.................. (17,342) 39,701
----------- -----------
Total other income (expense)..................... (3,182,159) (2,775,344)
----------- -----------
Net loss............................................. $(7,103,626) $(6,142,812)
=========== ===========
</TABLE>
F-35
<PAGE>
MID-ATLANTIC TELCOM PLUS, LLC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
Years Ended December 31, 1998 And 1997
<TABLE>
<CAPTION>
OnePoint
Mid-Atlantic Communications
Holdings, LLC Holdings, LLC Total
============= -------------- -----------
<S> <C> <C> <C>
Balance, January 1, 1997.............. $ -- $ -- $ --
Contributions....................... 12,000,000 12,000,000 24,000,000
Net loss............................ (3,071,406) (3,071,406) (6,142,812)
----------- ----------- -----------
Balance, January 1, 1998.............. 8,928,594 8,928,594 17,857,188
Contributions....................... 5,000,000 -- 5,000,000
Net loss............................ (4,035,663) (3,067,963) (7,103,626)
----------- ----------- -----------
Balance, December 31, 1998............ $ 9,892,931 $ 5,860,631 $15,753,562
=========== =========== ===========
</TABLE>
F-36
<PAGE>
MID-ATLANTIC TELCOM PLUS, LLC
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 And 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from Operating Activities
Net loss......................................... $ (7,103,626) $ (6,142,812)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization.................. 7,956,365 6,682,508
Loss (gain) on disposal of assets.............. 17,342 (39,701)
Changes in current assets and liabilities, net
of contributed amounts in 1997
Accounts receivable--trade and other......... (408,792) (69,468)
Prepaid and other assets..................... (123,748) 126,329
Accounts payable, accrued interest payable,
accrued expenses and deferred rent.......... 1,657,791 (941,529)
Due to affiliates, net....................... 347,344 (3,416,693)
Deferred revenue............................. (20,274) (45,688)
------------ ------------
Net cash provided by (used in) Operating
Activities................................ 2,322,402 (3,847,054)
------------ ------------
Cash flows from Investing Activities
Capital expenditures............................. (9,154,465) (5,210,216)
Proceeds from sale of fixed assets............... 15,310 193,139
Acquisition of intangible assets................. (7,015,846) (2,601,597)
------------ ------------
Net cash used in Investing Activities...... (16,155,001) (7,618,674)
------------ ------------
Cash flows from Financing Activities
Capital Contribution--holdings, net of non-cash
contribution of assets and liabilities in 1997.. 5,000,000 184,702
Capital contribution--OPC........................ -- 12,000,000
Proceeds from issuance of subordinated debt...... 10,500,000 --
Repayments of debt, net.......................... (1,699,504) (1,249,164)
Advances from affiliate.......................... 365,000 --
Repayments of leases payable..................... (127,934) (125,277)
Proceeds from issuance of long-term debt......... -- 809,569
------------ ------------
Net cash provided by Financing Activities.. 14,037,562 11,619,830
------------ ------------
Net increase in cash and cash equivalents.......... 204,963 154,102
Cash and cash equivalents, beginning of year....... 154,102 --
------------ ------------
Cash and cash equivalents, end of year............. $ 359,065 $ 154,102
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest............................ $ 2,655,883 $ 2,553,752
============ ============
</TABLE>
F-37
<PAGE>
MID-ATLANTIC TELCOM PLUS, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. Organization
Mid-Atlantic Telcom Plus, LLC (the "Company" on pp. F-33 to F-43.) was
formed as of January 1, 1997 under the laws of Delaware as a limited liability
company. The Company was formed when Mid-Atlantic Cable Development Company
Limited Partnership, a Maryland Limited Partnership (DevCo), Mid-Atlantic CATV
Limited Partnership, a Maryland Limited Partnership (NewCo) and Mid-Atlantic
Cable Service Company, Inc., a Virginia Corporation (MCSC), collectively
referred to as the Mid-Atlantic Cable Companies, contributed all of their
assets and liabilities to Mid-Atlantic Cable Holdings, LLC ("Holdings").
Holdings simultaneously contributed these assets and liabilities to the
Company for an original 50% ownership interest. The remaining original 50%
ownership interest was owned by OnePoint Communications Holdings LLC ("OPC"),
formerly known as VIC RMTS Holdco, LLC.
Except for certain matters specified in the Operating Agreement between
Holdings and OPC, which require a supermajority vote of 80%, voting control is
held by Holdings.
In 1997, Holdings contributed tangible and intangible assets with a fair
value of $48,020,000 (including cash of $184,702 and goodwill of $21,966,000
created at the time of contribution), liabilities with a fair value of
$36,020,000, and received ownership in the Company with a fair value of
$12,000,000. During 1997, OPC contributed $12,000,000 in cash for its original
ownership interest. Holdings contributed an additional $5,000,000 in cash to
the Company in 1998.
On August 6, 1998 OPC made a demand for arbitration of certain disputes
under the Operating Agreement. On January 15, 1999, the Company, OPC and other
related parties entered into a settlement agreement related to matters covered
by the August 1998 demand for arbitration. The issues were settled. As part of
the settlement, the parties agreed to the formation of a new holding company,
Mid-Atlantic Telcom Plus Holding, LLC ("Telcom Plus Holding") to own the
membership interest in the Company. Telcom Plus Holding is controlled and
owned 58.6% by Holdings. The remaining 41.4% is held by OPC. The creation of
this new entity eliminates the need for OPC's and Holdings' direct pledge of
their membership interests in the Company to CIBC as collateral for the CIBC
Reducing, Revolving Credit Facility.
The Company and an OPC affiliate do business under the name OnePoint
Communications providing bundled cable and telephone services in Washington,
D.C., Maryland, Virginia, Pennsylvania, New Jersey and Delaware. The Company
will cease use of the OnePoint name on April 1, 1999 and begin doing business
under the name Mid-Atlantic Communications.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents--The term cash, as used in the accompanying
financial statements, includes cash on deposit with financial institutions,
cash on hand and short-term liquid investments purchased with a maturity of
three months or less.
The Company maintains its cash in bank deposit accounts that, at times,
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant
credit risk on cash.
Fixed Assets--Cable TV systems and other property and equipment are recorded
at cost and depreciated using the straight-line method over their estimated
useful lives of 10 and 5 years, respectively. Depreciation expense was
$3,279,021 and $2,842,349 in 1998 and 1997, respectively. In accordance with
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), the Company
periodically reviews the carrying value of the investment in cable TV systems
and equipment based on the related contracts to provide cable services.
F-38
<PAGE>
MID-ATLANTIC TELCOM PLUS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
The evaluation involves comparing whether the expected cash flows for the
contract will be sufficient to recover the carrying value of the equipment
investment, deferred costs and goodwill related to the contract, with any
excess of carrying value over expected cash flows written off.
Intangible Assets--Intangible assets are amortized using the straight-line
method over their estimated useful lives ranging from 3 to 15 years.
Amortization expense was $4,677,344 and $3,840,159 in 1998 and 1997,
respectively.
The Company has classified as goodwill the cost in excess of fair value of
net assets of companies acquired that were accounted for as purchase
transactions. The Company periodically reviews the carrying value of the
investment in cable TV systems and equipment based on the related contracts to
provide cable services. The evaluation involves consideration of whether the
expected cash flows for the contract will be sufficient to recover the
equipment investment, deferred costs and goodwill related to the contract.
Deferred Revenue--Deferred revenue is reported on the balance sheet for
amounts which have been billed
to customers in advance and therefore not yet earned. These advance charges
are also included in accounts receivable.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities.
Actual results may differ from estimates.
Income Taxes--No provision for federal and state income taxes has been made
in the accompanying financial statements of the limited liability company as
profits and losses of the Company are reported by the members on their
respective income tax returns.
Prior Year Reclassification--In the accompanying financial statements,
certain prior year balances have been reclassified to conform to current year
classifications.
3. Cable TV Systems Acquisitions
In February 1997 and throughout 1998 the Company acquired several cable TV
systems located throughout Maryland, Pennsylvania, New Jersey and Delaware.
The 1998 acquisitions, totaling approximately $9.3 million, were completed
between February and October 1998. The accompanying statements of operations
include the results of operations for the acquired systems from the dates of
acquisition. These acquisitions have been accounted for using the purchase
method. The purchase price has been allocated to the tangible cable TV assets
acquired based on their estimated fair values. The excess of the purchase
price over tangible assets received allocable to goodwill is $5,497,836 and
$2,000,000 for 1998 and 1997, respectively.
One of the above acquisitions, serving approximately 60 multiple dwelling
units in and around Philadelphia, uses a wireless technology to deliver
programming. Within the terms of the purchase contract, the seller (CAI)
agreed to operate the newly acquired systems until each system could be
technically converted from the wireless system to the Company's private cable
system signal distribution system. During this period, which is expected to be
completed by September 1999, the Company pays a management fee to CAI equal to
70% of gross revenue of those systems remaining on the wireless system. In
addition, the purchase contract provided for a 90 day right to return to CAI
any system serving any of these multiple dwelling units which the Company
determines are undesirable. The 90 day period expired on January 1, 1999.
Effective January 1, 1999 seven systems valued at approximately $400,000 were
returned to the seller and related escrow proceeds were released to the
Company; accordingly, the purchase price has been reduced by $400,000 and a
corresponding amount is included in
F-39
<PAGE>
MID-ATLANTIC TELCOM PLUS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounts receivable--other. The purchase contract also allows for offsets due
to losses incurred by the Company for any unpaid seller liability, taxes,
copyright payments, programming charges or subscriber deduction not credited
at closing. The offset period ends six months after the technical conversion
of the wireless system to a private cable system. Approximately $741,000 of
the purchase price paid by the Company is escrowed by CAI at December 31,
1998.
4. Long-Term Debt
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Notes Payable to Financial Institutions
CIBC (As Agent) Term Loan (including Expansion) in
the original amount of $23,125,000 bearing interest
based on either CIBC's base rate plus 4% or LIBOR
plus 5% (10.94% at December 31, 1997). Interest
payments were paid monthly. The loan was
renegotiated and amended as described below........ $ -- $ 21,636,296
CIBC Revolving Line of Credit in the amount of
$5,500,000 bearing interest based on either CIBC's
base rate plus 4% or LIBOR plus 5% (10.94% at
December 31, 1997). Interest payments were paid
monthly. The loan was renegotiated and amended as
described below.................................... -- 2,561,000
The above CIBC loans were renegotiated in June 1998
to the following:
CIBC Reducing, Revolving Credit Facility, dated June
1998 in the amount of $30,000,000. The applicable
interest margin is determined based on the
Company's leverage ratio. The margin applicable to
the Company's current leverage ratio is based on
either CIBC's base rate plus 2.25% or LIBOR plus
3.25% (8.375% at December 31, 1998.) Interest
payments are paid monthly or quarterly............. 22,757,296
Subordinate Debt--Allied Capital
Subordinate debenture dated June 18, 1998, maturing
June 2006, in the original amount of $5,000,000.
Amended September 1998 for additional borrowings of
$5,500,000. Note bears interest at 18% of which 12%
is payable for twenty calendar quarters and 6% is
deferred. The remaining deferred interest also
accrues compound interest at 18%. Deferred interest
converted to long-term notes payable totaled
$251,826 in 1998. Commencing June 2003 until
maturity, quarterly payments of deferred interest
and principal will be required. Compound interest
on deferred interest is due at maturity............ 10,751,826
Notes Payable--Other
Promissory note payable to Cecilton CATV, Inc. dated
February 1, 1997 in the original amount of
$800,000. The note bears interest at 8.5% per
annum. The note requires quarterly principal
payments of $50,000 plus accrued interest. The note
matures in February 2001........................... 456,392 659,318
Promissory note payable to former owners of an
acquired business, dated November 15, 1996, in the
original amount of $100,000. The note bore interest
at 8% per annum. Eight quarterly principal payments
of $12,500 plus interest were due. The note was
paid in full as of November 30, 1998............... -- 50,340
Note payable bearing interest at 10.50%. Monthly
principal and interest payments of $611 are
required. The note matures in December 1999. 6,932 13,170
----------- ------------
Total Notes Payable............................... $33,972,446 $ 24,920,124
----------- ------------
</TABLE>
F-40
<PAGE>
MID-ATLANTIC TELCOM PLUS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Borrowings under the CIBC Reducing, Revolving Credit Facility (The CIBC
Facility) for 1998 were limited to $27,136,296. As discussed in Note 1, the
formation of Telcom Plus Holding eliminates the OPC pledge. Therefore,
borrowing capacity from CIBC was increased to $30,000,000 in 1999. The CIBC
Facility shall be automatically and permanently reduced on each quarterly date
commencing March 31, 2000 until maturity on December 31, 2004. As of December
31, 1997, obligations to CIBC under the Term Loan were classified as long-term
as a result of the Company entering into the CIBC Loan.
The CIBC Facility is subject to certain restrictive covenants with respect
to maintaining certain ratios of operating cash flows to total debt, principal
and interest payments. Allied Capital Subordinated Debt is subject to the same
covenants as required by CIBC. During 1997, the Company was not in compliance
with certain of the financial covenants. Waivers of default were received from
the lenders related to these covenants.
The Company has entered into interest rate swap agreements with CIBC, to
reduce the impact of changes in interest rates on its debt. The swap agreement
effectively converts a portion of the variable rate debt to fixed rate debt to
reduce the risk of incurring higher interest costs. The interest rate swaps
are settled and paid quarterly by an adjustment to interest expense. No
amounts were receivable or payable under the swap agreements at December 31,
1998 and 1997. The notional amounts of interest rate agreements are used to
measure interest to be paid or to be received and do not represent the amount
of exposure to credit loss. At December 31, 1998 and 1997, the notional amount
was $13,000,000 and $9,000,000, respectively, with a fixed payment rate of
5.2% and 6.07%.
The CIBC Facility is collateralized by all of the assets, the assignment of
all franchise agreements, SMATV agreements and other material agreement owned
by the Company and the assignment of all general and limited partnership
interests in NewCo and Devco, the outstanding stock in MCSC, the
members'equity interests in the Company and Holdings, a $1.4 million guaranty
by the President of the Company and an assignment of the proceeds of a $1
million life insurance policy of the President of the Company.
The maturities of the above loans are as follows:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1999......................................................... $ 213,324
2000......................................................... 200,000
2001......................................................... 307,296
2002......................................................... 6,000,000
2003......................................................... 7,075,183
Thereafter................................................... 20,176,643
------------
$ 33,972,446
============
</TABLE>
5. Lease Commitments
The Company is obligated under operating leases for premises occupied with
minimum lease terms expiring at various times through 2008. Certain of these
leases contain escalation clauses for increases based upon increases in
operating expenses and real estate taxes. The Company has entered into a
sublease for a portion of its primary office location. The Company also has
several operating leases for other operating equipment. Total rent expense was
$439,632 and $391,233 for 1998 and 1997, respectively. The following future
minimum rental payments, net of sublease receipts, are required under
noncancellable operating leases with terms in excess of one year:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1999.......................................................... $ 750,184
2000.......................................................... 762,849
2001.......................................................... 774,066
2002.......................................................... 793,277
2003.......................................................... 853,918
Thereafter.................................................... 3,703,606
-----------
$ 7,637,900
===========
</TABLE>
F-41
<PAGE>
MID-ATLANTIC TELCOM PLUS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Lease commitments do not reflect payments to be made by an OPC affiliate who
is jointly obligated with the Company on certain lease agreements. Expected
lease payments by the OPC affiliate are as follows:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1999.......................................................... $ 372,023
2000.......................................................... 380,793
2001.......................................................... 389,811
2002.......................................................... 386,401
2003.......................................................... 381,885
Thereafter.................................................... 1,749,633
-----------
$ 3,660,546
===========
</TABLE>
During 1998 and 1997, the Company purchased $237,303 and $232,181,
respectively, in property and equipment through issuance of capital lease
obligations. The amounts of leased equipment included in other property and
equipment, net of accumulated depreciation of $309,275, totals $533,006. The
following future lease payments are required as of December 31, 1998:
<TABLE>
<CAPTION>
December 31,
------------
<S> <C>
1999.......................................................... $ 261,454
2000.......................................................... 186,503
2001.......................................................... 145,068
---------
593,025
Less: amounts representing interest........................... (113,124)
---------
$ 479,901
=========
</TABLE>
6. Related Party Transactions
The Company and an OPC affiliate jointly operate a customer support and
operations center (the "Operations Center"). Personnel assigned to the
Operations Center are directly employed and paid by either the Company or the
OPC affiliate. Rent, utilities and other office support costs of the
Operations Center are allocated to the Company or the OPC affiliate. The
allocation is based on the proportional number of employees assigned to the
Operations Center by the Company or the OPC affiliate. The Company believes
its costs related to the Operations Center if operated on a stand alone basis
would have been comparable to amounts allocated to it under the joint
operation with the OPC affiliate. In addition, the companies share a lockbox
in which customers' payments are deposited, which is controlled by the
Company. At December 31, 1998 and 1997, the Company owed the OPC affiliate
approximately $680,000 and $56,000, respectively, related to these
relationships. During 1997, the OPC affiliate reimbursed the Company $221,186
in accordance with the cost sharing agreement.
In accordance with the Contribution Agreement between and among DevCo,
NewCo, MCSC, Holdings and OPC, the Company made a payment of $2,250,000 to
DevCo in February 1997. The liability for payment was included in liabilities
contributed by Holdings.
In February 1997, the Company paid $1,093,000 to an entity affiliated with
Holdings to satisfy a note obligation that was included in liabilities
contributed by Holdings.
During 1997, the Company paid $434,310 to its chief executive officer to
satisfy a liability contributed by Holdings.
F-42
<PAGE>
MID-ATLANTIC TELCOM PLUS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Included in Due to Affiliates at December 31, 1998 is $365,000 due to DevCo.
The amount represents a $350,000 note bearing interest at 8%. Repayment of the
note is subject to CIBC approval.
The Company provides certain administrative, management, and customer
support services to Prince William Operating Partnership (PW) and Mid-Atlantic
Connecticut LP I (CT), affiliates of Holdings. The costs of providing these
services is allocated to PW and CT based on relative proportion of total
subscribers. Total costs allocated to these affiliates are $179,671 and
$182,118 for 1998 and 1997, respectively. Amounts due from these affiliates as
of December 31, 1998 and 1997 are $162,617 and $11,782, respectively.
7. Pension Plan
The Company sponsors a 401(k) and Profit Sharing Plan covering all
employees. Contributions to the plan are at the discretion of management.
Contributions to the plan for 1998 were $45,223 and no contributions were made
in 1997.
8. Fair Value of Financial Instruments
The Company has the following financial instruments: cash, trade receivables
and payables and notes payable (including the swap agreement). Based on the
floating rate nature of the debt and the short-term nature of cash, trade
receivables and payables, carrying values of the financial instruments
approximate fair value.
F-43
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners and Shareholders of the Mid-Atlantic Cable Companies
Washington, D.C.
We have audited the consolidated and combined balance sheet of Mid-Atlantic
Cable Service Company, Inc., its Subsidiaries and Mid-Atlantic CATV Limited
Partnership, collectively referred to as the Mid-Atlantic Cable Companies as
of December 31, 1996 and the related consolidated and combined statements of
operations, changes in owners' equity (deficit) and cash flows for the year
then ended. These consolidated and combined financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these consolidated and combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated and combined financial position of
Mid-Atlantic Cable Service Company, Inc., its Subsidiaries and Mid-Atlantic
CATV Limited Partnership as of December 31, 1996 and the consolidated and
combined results of their operations and their consolidated and combined cash
flows for the year then ended, in conformity with generally accepted
accounting principles.
Beers & Cutler PLLC
Washington, D.C.
April 4, 1997
F-44
<PAGE>
MID-ATLANTIC CABLE COMPANIES
(Predecessor to Mid-Atlantic Telcom Plus, LLC)
CONSOLIDATED AND COMBINED BALANCE SHEET
December 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Current Assets
Cash........................................................ $ 184,702
Accounts receivable, net of allowance for doubtful accounts
of $216,271................................................ 1,086,589
Prepaid expenses and other assets........................... 291,545
Investment in and advances to affiliates.................... 986,139
-----------
Total current assets...................................... 2,548,975
-----------
Fixed Assets
Cable TV systems, net of accumulated depreciation of
$10,995,040................................................ 11,716,022
Other property and equipment, net of accumulated
depreciation of $1,823,085................................. 790,855
-----------
Total fixed assets........................................ 12,506,877
-----------
Intangible Assets
Goodwill.................................................... 10,755,829
Other intangible assets..................................... 2,505,573
Accumulated amortization.................................... (2,152,137)
-----------
Total intangible assets................................... 11,109,265
-----------
Deferred Income Taxes......................................... 563,147
-----------
Total Assets............................................ $26,728,264
===========
<CAPTION>
LIABILITIES AND OWNERS' EQUITY (DEFICIT)
<S> <C> <C>
Current Liabilities
Accounts payable--trade..................................... $ 2,929,191
Accrued interest and success fee--financial institution..... 852,392
Accrued expenses............................................ 643,222
Deferred compensation....................................... 434,310
Deferred revenue............................................ 830,452
Current maturities of notes payable--financial institution.. 5,556,000
Current maturities of notes payable and interest payable--
partners................................................... 1,093,820
Current maturities of notes payable--other.................. 224,163
Current maturities of leases payable........................ 98,608
-----------
Total current liabilities................................. 12,662,158
-----------
Long-Term Debt
Notes payable--financial institution........................ 19,536,296
Notes payable and accrued interest--partner................. 1,203,348
Notes payable and accrued interest--other................... 203,170
Leases payable.............................................. 165,320
-----------
Total long-term debt...................................... 21,108,134
-----------
Total liabilities....................................... 33,770,292
Owners' Equity (Deficit)
Common stock................................................ 245
Additional paid-in capital.................................. 1,355
Retained deficit............................................ (962,093)
Partners' deficit........................................... (6,081,535)
-----------
Total owners' equity (deficit)............................ (7,042,028)
-----------
Total Liabilities and Owners' Equity (Deficit).......... $26,728,264
===========
</TABLE>
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-45
<PAGE>
MID-ATLANTIC CABLE COMPANIES
(Predecessor to Mid-Atlantic Telcom Plus, LLC)
CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS
Year ended December 31, 1996
<TABLE>
<S> <C>
Revenue
Cable TV revenue................................................ $12,605,721
-----------
Operating Expenses
Operating....................................................... 11,210,652
Selling, general and administrative............................. 1,490,184
-----------
Total operating expenses...................................... 12,700,836
-----------
Loss from operations............................................ (95,115)
-----------
Other Income (Expense)
Interest expense................................................ (2,772,087)
CIBC success fee................................................ (835,439)
Equity in loss of affiliate..................................... (279,297)
-----------
Total other income (expense).................................. (3,886,823)
-----------
Loss before income tax and extraordinary item................... (3,981,938)
Income tax benefit--deferred.................................... 320,748
-----------
Net loss before extraordinary item.............................. (3,661,190)
Extraordinary item--debt restructuring gain..................... 414,474
-----------
Net loss.................................................... $(3,246,716)
===========
</TABLE>
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-46
<PAGE>
MID-ATLANTIC CABLE COMPANIES
(Predecessor to Mid-Atlantic Telcom Plus, LLC)
CONSOLIDATED AND COMBINED STATEMENT OF CHANGES
IN OWNERS' EQUITY (DEFICIT)
Year ended December 31, 1996
<TABLE>
<CAPTION>
Common Stock--1,000
Shares Authorized,
$1 Par Value
--------------------
Shares Issued Additional Total
Partners' and Paid-in Retained Owners'
Capital Outstanding Amount Capital Deficit Deficit
----------- ------------- ------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996................... $(3,651,330) 245 $ 245 $1,355 $(483,302) $(4,133,032)
Distributions......... -- -- -- -- -- --
Purchase of Partners'
Interest............. 337,720 -- -- -- -- 337,720
Net Loss.............. (2,767,925) -- -- -- (478,791) (3,246,716)
----------- ------ ------ ------ --------- -----------
Balance, December 31,
1996................... $(6,081,535) 245 $ 245 $1,355 $(962,093) $(7,042,028)
=========== ====== ====== ====== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-47
<PAGE>
MID-ATLANTIC CABLE COMPANIES
(Predecessor to Mid-Atlantic Telcom Plus, LLC)
CONSOLIDATED AND COMBINED STATEMENT OF CASH FLOWS
Year ended December 31, 1996
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net loss........................................................ $(3,246,716)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization................................. 3,826,136
Noncash interest expense...................................... 101,485
Extraordinary time--debt restructuring gain................... (414,474)
Income tax benefit--deferred.................................. (320,748)
Changes in:
Accounts receivable......................................... (89,503)
Prepaid and other assets.................................... 127,967
Investments in and advances to affiliates................... (135,298)
Accounts payable and accrued expenses....................... 1,506,785
Deferred revenue............................................ 130,096
-----------
Net cash provided by operating activities................. 1,485,730
-----------
Cash Flows from Investing Activities
Capital expenditures............................................ (3,235,848)
Acquisition of intangible assets................................ (2,054,256)
-----------
Net cash used in investing activities..................... (5,290,104)
-----------
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt........................ 8,925,630
Repayments of debt.............................................. (5,388,088)
-----------
Net cash provided by financing activities................. 3,537,542
Net Decrease in Cash and Cash Equivalents......................... (266,832)
Cash and Cash Equivalents, Beginning of Year...................... 451,534
-----------
Cash and Cash Equivalents, End of Year............................ $ 184,702
===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest.......................................... $ 2,846,704
===========
Supplemental Disclosure of Noncash Investing and Financing
Activities
Additions to property and equipment from issuance of capital
lease obligations.............................................. $ 263,928
===========
Additions to goodwill through issuance of a note payable........ $ 1,093,820
===========
Goodwill arising from repurchase of a partners' interests....... $ 337,720
===========
</TABLE>
The accompanying notes are an integral part of these consolidated and combined
financial statements.
F-48
<PAGE>
MID-ATLANTIC CABLE COMPANIES
(Predecessor to Mid-Atlantic Telcom Plus, LLC)
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
December 31, 1996
1. Consolidation, Combination and Organization
The consolidated and combined financial statements include the accounts of
Mid-Atlantic Cable Service Company, Inc., a Virginia corporation, ("MCSC") and
its subsidiaries, Mid-Atlantic Cable Development Company Limited Partnership,
a Maryland limited partnership ("DevCo"), Chesapeake Private Cablevision
Limited Partnership, a Maryland limited partnership (Chessie) combined with
its affiliate, Mid-Atlantic CATV Limited Partnership, a Maryland limited
partnership, ("NewCo"). These entities are under common control. All material
intercompany transactions have been eliminated.
The primary purpose of these entities, collectively referred to as the Mid-
Atlantic Cable Companies (the Company), is to acquire, construct, operate and
otherwise deal in and with franchise and private cable TV systems and other
forms of communication in the Mid-Atlantic region.
MCSC
MCSC is a wholly-owned subsidiary of South Central Development Company
Limited Partnership, a Maryland limited partnership ("South Central"). John C.
Norcutt, an individual ("Norcutt"), is the sole general partner of South
Central with a 1% general partnership interest as well as a 12.74% limited
partnership interest in South Central. MCSC exists solely to manage the
interests and investments of South Central and to provide management services
to the cable operating limited partnerships it owns and controls.
DevCo
MCSC is the 1% general partner in DevCo. The remaining 99% limited
partnership interest is held by South Central.
NewCo
Norcutt holds the sole general partnership interest in NewCo. As of December
31, 1996, the limited partners are South Central, Chessie and Mid-Atlantic
Cable Limited Partnership of Caroline County, a Virginia limited partnership
("Caroline").
Norcutt, South Central and MCSC collectively own 98.4% of Chessie. An
individual owns a 1.6% limited partnership interest in Chessie. This
individual also holds a 6.13% limited partnership interest in South Central.
Norcutt and South Central own 100% of Caroline; Norcutt has a 1% general
partnership interest and South Central has a 99% limited partnership interest.
Subsequent Events
Effective as of January 1, 1997, MCSC, NewCo, and DevCo (referred to in this
paragraph as the "Transferors") contributed all of their assets and
substantially all of their liabilities to a newly formed entity, Mid-Atlantic
Holdings, LLC ("Holdings") and Holdings simultaneously contributed the assets
and liabilities of the transferors to a newly formed entity, Mid-Atlantic
Telcom Plus, LLC ("CableCo"). In connection with the contribution of the
assets through Holdings to CableCo, VIC RMTS HoldCo, LLC ("VIC") purchased a
50% interest in CableCo for $12,000,000, also effective as of January 1, 1997.
The transfer of a portion of the assets from the Transferors and a portion of
the cash from VIC to CableCo remain subject to certain closing conditions
which reasonably should occur on or before June 30, 1997. In connection with
the organization of CableCo,
F-49
<PAGE>
MID-ATLANTIC CABLE COMPANIES
(Predecessor to Mid-Atlantic Telcom Plus, LLC)
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
South Central Development Company Limited Partnership (the owner directly or
indirectly of substantially all of the equity of the Transferors and Holdings)
and VIC organized Mid-Atlantic RMTS, LLC ("Telco") each owning a 50%
membership interest therein. Thus, South Central initially is indirectly a 25%
equity owner of Telco. CableCo and Telco have joined together and are doing
business under the name OnePoint Communications with CableCo owning the cable
television assets and Telco owning the telephone assets and together will sell
bundled cable and telephony services in Washington, D.C., Maryland, Virginia,
Pennsylvania, New Jersey and Delaware.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents--The term cash, as used in the accompanying
financial statements, includes cash on deposit with financial institutions and
cash on hand.
The Company maintains its cash in bank deposit accounts which, at times,
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant
credit risk on cash equivalents.
Investments--MCSC is 1% general partner in Mid-Atlantic Cable Operating
Limited Partnership No. 1 of Prince William County. The investment is
accounted for using the equity method and has a credit balance of $279,297 at
December 31, 1996.
Fixed Assets--Cable TV systems and other property and equipment are recorded
at cost and depreciated using the straight-line method over their estimated
useful lives of 10 and 5 years, respectively. Total 1996 depreciation expense
was $2,413,641.
Intangible Assets--Intangible assets are amortized using the straight-line
method over their estimated useful lives ranging from 5 to 15 years. The
Company has classified as goodwill the cost in excess of fair value of net
assets of companies acquired accounted for as purchase transactions. At each
balance sheet date, the Company evaluates the realizeability of goodwill based
on the related cable system contracts.
As a result of the PPCLP transaction (Note 6) and the purchase of Howard's
preferred partnership interest in NewCo (Note 9), $2.3 million was added to
goodwill during 1996 which represents the excess of the purchase prices over
the carrying value of the partners' interests.
Deferred Revenue--Deferred revenue is reported on the balance sheet for
amounts which have been billed to customers in advance and therefore not yet
earned. These advance charges are also included in accounts receivable.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of consolidated and combined
assets, liabilities, revenues and expenses and the disclosure of contingent
assets and liabilities. Actual results may differ from estimates.
Income Taxes--No provision for federal and state income taxes has been made
in the accompanying financial statements of the limited partnerships as the
profits and losses of the partnerships are reported by the individual partners
on their respective income tax returns. In addition, no current provision for
federal and state income taxes has been made for MCSC as MCSC had cumulative
net operating losses of $2.3 million available as of December 31, 1996 for
carryforward to reduce taxable income of future periods. The availability of
the losses expires at various times through 2011.
F-50
<PAGE>
MID-ATLANTIC CABLE COMPANIES
(Predecessor to Mid-Atlantic Telcom Plus, LLC)
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
3. Cable TV Systems Acquisitions
In August and November 1996, DevCo acquired the assets of Delaware Valley
Cablevision and Satleasco, LLC for $350,000 and $476,000, respectively. In
addition, DevCo entered into an agreement with Cecilton CATV, Inc. on November
26, 1996 to purchase for $2.8 million four cable TV franchises located in
Cecil and Kent County, Maryland. A $50,000 deposit was placed in escrow until
closing by CableCo which occurred on February 8, 1997. These financial
statements do not reflect this acquisition.
The accompanying statement of operations includes the results of operations
for Delaware Valley and the Satleasco Properties from the date of their
acquisition as stated above. The aforementioned acquisitions were accounted
for using the purchase method.
4. Debt Restructuring
On January 31, 1996, Canadian Imperial Bank of Commerce (CIBC) provided Mid-
Atlantic with the CIBC Expansion Term Loan in the amount of $5,125,000. The
proceeds of the loan were used to refinance and repay certain notes, pay
success fees to CIBC related to the transaction and provide Mid-Atlantic with
working capital. This transaction generated a restructuring gain in the amount
of $414,474.
5. Long-Term Debt
Notes Payable to Financial Institutions
<TABLE>
<S> <C>
NewCo and DevCo
CIBC (As Agent) Term Loan (including Expansion) in the original
amount of $23,125,000 bearing interest based on either CIBC's
base rate plus 4% or LIBOR plus 5%. Interest payments are paid
quarterly. A balloon payment of $14,375,000 is due at loan
maturity, September 30, 1998..................................... $21,636,296
CIBC Revolving Line of Credit in the amount of $5,500,000 bearing
interest based on either CIBC's base rate plus 4% or LIBOR plus
5% (10.5% at December 31, 1996). Interest payments are made
quarterly. The line of credit expires June 30, 1997. Negotiations
for restructuring the Term Loan and the Revolving Line of Credit
into one long-term self liquidating loan are currently underway.. 3,456,000
DevCo
Promissory note payable to Delaware Valley Cablevision, dated
August 1, 1996, in the original amount of $190,000. Interest
accrues at 8% and is payable quarterly. Beginning April 1997,
quarterly principal installments of $15,000 are also due. In
October 1997, quarterly principal installments increase to
$20,000 and are payable with interest until the note is paid in
full on July 31, 1999............................................ 192,541
Promissory note payable to Satleasco, dated November 15, 1996, in
the original amount of $115,000. The note was non-interest
bearing and was paid in full February 28, 1997................... 115,000
Promissory note payable to Satleasco, dated November 15, 1996, in
the original amount of $100,000. The note bears interest at 8%
per annum. Eight quarterly principal payments of $12,500 plus
interest are due. The note matures on November 30, 1997.......... 101,008
MCSC
Note payable to Ditch Witch bearing interest at 10.50%. Monthly
principal and interest payments of $611 are required. The note
matures in December 1999......................................... 18,784
-----------
Total notes payable............................................ $25,519,629
===========
</TABLE>
F-51
<PAGE>
MID-ATLANTIC CABLE COMPANIES
(Predecessor to Mid-Atlantic Telcom Plus, LLC)
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The maturities of the above loans are as follows:
<TABLE>
<S> <C>
December 31, 1997............ $ 5,780,163
1998......................... 19,672,534
1999......................... 66,932
-----------
$25,519,629
===========
</TABLE>
Mid-Atlantic has entered into an interest rate swap agreement with CIBC,
Toronto to reduce the impact of changes in interest rates on its debt. The
swap agreement effectively converts a portion of the variable rate debt to
fixed rate debt to reduce the risk of incurring higher interest costs. The
interest rate swaps are settled and paid quarterly by an adjustment to
interest expense. No amounts were receivable or payable under the swap
agreements at December 31, 1996. The notional amounts of interest rate
agreements are used to measure interest to be paid or to be received and do
not represent the amount of exposure to credit loss. At December 31, 1996, the
notional amount was $9,000,000 with an average receive rate of 5.75%.
The CIBC loan is collateralized by all of the assets of NewCo and DevCo and
PW East #1, the assignment of all franchise agreements, SMATV agreements and
other material agreements owned by MCSC, NewCo, DevCo and PW East #1, the
assignment of all general and limited partnership interests in NewCo, DevCo,
and PW East #1, outstanding stock in MCSC, a $1 million guaranty by Norcutt
and an assignment of the proceeds of a $1 million life insurance policy on
Norcutt. Subsequent to year end, the assets of PW East #1 were released from
the loan.
The CIBC loans are subject to certain restrictive covenants with respect to
maintaining certain ratios of operating cash flows to total debt, principal
and interest payments and limits on capital expenditures. During 1996, the
Company was not in compliance with certain of the financial covenants related
to the CIBC debt. Waivers of default have been received from the lender
related to these covenants. Also, during 1996, the Company agreed to pay CIBC
$835,000 as additional consideration associated with the Term Loan. The fee
was paid in February 1997 and is classified as a success fee in the
accompanying consolidated and combined statement of operations.
6. Notes Payable to Partners
NewCo is indebted to South Central for two loans made to NewCo by South
Central. The first South Central Note bears simple interest at prime plus 1%
on the outstanding principal balance of $130,000. Interest is deferred until
the maturity of the loan on December 31, 1998.
The second South Central Note in the original amount of $700,000, bears
simple interest at the rate of 2% over that rate charged by NewCo's primary
lender (12.78% at December 31, 1996). Interest is deferred until the maturity
of the loan on December 31, 1998.
Payment of principal or interest on the South Central Notes is prohibited
according to the provisions of the CIBC Initial Term Loan. However, Norcutt,
general partner of South Central, represents that upon repayment of these
notes, the proceeds will be used to repay monies owed to MCSC (see Note 1).
On December 26, 1996 Newco entered into an agreement to purchase all of
Potomac Private Cablevision Limited Partnership's (PPCLP) interest in Newco
for $1,592,000. A $500,000 principal payment was made at closing. The
remaining balance was converted to a promissory note with interest of 10% per
annum. The note was paid in full on February 28, 1997 by CableCo.
F-52
<PAGE>
MID-ATLANTIC CABLE COMPANIES
(Predecessor to Mid-Atlantic Telcom Plus, LLC)
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
7. Deferred Income Taxes
The net deferred income tax asset in the accompanying balance sheet as of
December 31, 1996 consists of the following components:
<TABLE>
<S> <C>
Deferred tax assets--federal.................................... $342,000
Deferred tax assets--state...................................... 239,400
Deferred tax liabilities--federal............................... (10,010)
Deferred tax liabilities--state................................. (8,243)
--------
Net deferred tax benefit........................................ $563,147
========
</TABLE>
The income tax benefit in the accompanying income statement consist of the
following components:
<TABLE>
<S> <C>
Current benefit:
Federal....................................................... $ --
State......................................................... --
Deferred benefit:
Federal....................................................... 184,621
State......................................................... 136,127
--------
Total deferred tax benefit.................................. $320,748
========
</TABLE>
A reconciliation of income tax benefit as statutory rates to recorded
benefit is as follows:
<TABLE>
<S> <C>
Federal income tax benefit at statutory rate (34%)........... $1,353,859
Net loss attributable to entities whose tax attributes pass
through to partners......................................... (941,094)
Difference in graduated tax rates............................ (218,319)
Other........................................................ 126,302
----------
Deferred tax benefit....................................... $ 320,748
==========
</TABLE>
Deferred income taxes reflected in the accompanying financial statement are
primarily attributable to temporary differences between financial statement
reporting and income tax reporting for depreciation methods of the equity
investees of MCSC and MCSC net operating loss carryforwards totaling $2.3
million.
8. Lease Commitments
The Company is obligated under operating leases for premises occupied with
minimum lease terms expiring at various times through 2004. Certain of these
leases contain escalation clauses for increases based upon increases in
operating expenses and real estate taxes. The Company has also entered into
several operating leases for vehicles and other operating equipment. Total
rent expense for the year was $288,330. The following future minimum rental
payments are required under noncancellable operating leases with terms in
excess of one year as of December 31, 1996:
<TABLE>
<S> <C>
December 31, 1997............. $ 309,786
1998.......................... 296,837
1999.......................... 294,929
2000.......................... 279,274
2001.......................... 55,064
Thereafter.................... 65,087
----------
$1,300,977
==========
</TABLE>
F-53
<PAGE>
MID-ATLANTIC CABLE COMPANIES
(Predecessor to Mid-Atlantic Telcom Plus, LLC)
NOTES TO THE CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The Company also has entered into several capital leases for vehicles and
other operating equipment. The amounts of leased equipment, net of accumulated
depreciation reflected in other property and equipment is $293,003. The
following future lease payments are required as of December 31, 1996.
<TABLE>
<S> <C>
December 31, 1997............... $100,346
1998............................ 100,346
1999............................ 100,346
--------
Total......................... 301,038
--------
Less: Amounts representing
interest....................... (37,110)
--------
$263,928
========
</TABLE>
9. Related Party Transactions
Included in deferred compensation on the balance sheet of MCSC is $434,310
owed to Norcutt, consisting of unpaid compensation and unreimbursed advances
to Mid-Atlantic. Payment of these amounts was subordinated to restrictions
established in the CIBC Initial Term Loan. The Term Loan was amended on
December 26, 1996 to allow for repayment of the amount due Norcutt.
Subsequently, the balance due Norcutt at February 28, 1997 was paid in full by
CableCo.
As of December 31, 1996, MCSC is owed $690,263 by South Central, its owner,
for cumulative development and operating costs. As of December 31, 1996 MCSC
is owed $575,212 from affiliates for management fees and reimbursement of
operating expenses.
On November 30, 1996, NewCo entered into an agreement with Howard County
CATV (Howard) and Gerald Vento (Vento) to purchase Howard's preferred
partnership interest in NewCo for $595,000. In addition, it was agreed that
upon receipt of the closing payment that Vento would release Norcutt, South
Central and Mid-Atlantic from the payment of any and all fees outstanding. On
December 27, 1996 the closing payment was made.
10. Pension Plan
In November, 1996 Mid-Atlantic adopted a 401(k) and Profit Sharing Plan
covering all employees. Contributions to the plan are at the discretion of
management. For the year ended December 31, 1996, a matching contribution of
50% of all employee contributions, up to $3,000, totaling $27,869 was made.
11. Fair Value of Financial Instruments
The Company has the following financial instruments: cash, trade receivables
and payables and long-term debt (including the interest rate swap). Based on
the nature and terms of the long-term debt and the interest rate swap and the
short-term nature of cash, trade receivables and payables, carrying values of
the financial instruments approximate fair value.
F-54
<PAGE>
VIC-RMTS-DC, LLC
UNAUDITED STATEMENTS OF OPERATIONS
(Dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Three Months Ended March
31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue............................................ $ 902 $ 107
Cost of revenue.................................... 1,127 316
------------ ------------
(225) (209)
Expenses:
Selling, general and administrative.............. 2,784 1,529
Depreciation and amortization.................... 93 54
------------ ------------
Net loss........................................... $ (3,102) $ (1,792)
============ ============
Basic loss per unit................................ $(139,727.73) $(298,666.67)
============ ============
Units used in the computation of basic loss per
unit.............................................. 22.2 6
============ ============
</TABLE>
See accompanying notes.
F-55
<PAGE>
VIC-RMTS-DC, LLC
UNAUDITED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998*
--------- ------------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net.............................. $ 529 $ 490
Affiliate receivable.................................. 425 139
Prepaid expenses...................................... 526 336
-------- --------
Total current assets.................................... 1,480 965
Property and equipment, net............................. 2,418 2,248
Intangible assets, net.................................. 775 800
Other assets............................................ 250 265
-------- --------
Total assets............................................ $ 4,923 $ 4,278
======== ========
Liabilities and Unitholders' Equity
Current liabilities:
Accounts payable and accrued expenses................. $ 1,310 $ 1,005
Other current liabilities............................. 63 52
-------- --------
Total current liabilities............................... 1,373 1,057
Unitholders Equity:
Contributed capital................................... 23,865 20,434
Accumulated deficit................................... (20,315) (17,213)
-------- --------
Total unitholders' equity............................... 3,550 3,221
-------- --------
Total liabilities and unitholders' equity............... $ 4,923 $ 4,278
======== ========
</TABLE>
- --------
* The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
F-56
<PAGE>
VIC-RMTS-DC, LLC
UNAUDITED STATEMENTS OF CASH FLOW
(Dollars in thousands, except per unit data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Operating activities
Net loss.................................................... $(3,102) $(1,792)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization............................. 93 54
Amortization of developer payments included in reselling
cost..................................................... 122 159
Change in allowance for doubtful accounts................... 14 4
Changes in operating assets and liabilities:
Accounts receivable....................................... (53) (50)
Affiliates receivable..................................... (286) --
Prepaid expenses.......................................... (297) (13)
Other assets.............................................. -- (50)
Affiliates payable........................................ -- 84
Accounts payable and accrued expenses..................... 316 (382)
------- -------
Net cash used in operating activities..................... (3,193) (1,986)
Investing activities
Acquisition of property and equipment....................... (238) (277)
------- -------
Net cash used in investing activities....................... (238) (277)
Financing activities
Unitholder contributions.................................... 3,431 2,263
------- -------
Net cash provided by financing activities................... 3,431 2,263
------- -------
Net increase (decrease) in cash............................. -- --
Cash at the beginning of period............................. -- --
------- -------
Cash at the end of period................................... $ -- $ --
======= =======
</TABLE>
See accompanying notes.
F-57
<PAGE>
VIC-RMTS-DC, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)
Note 1--Basis of Presentation
The financial statements for the three months ended March 31, 1999 and 1998
and the related footnote information are unaudited and have been prepared on a
basis consistent with the audited financial statements of VIC-RMTS-DC, LLC as
of and for the year ended December 31, 1998 included in Registration Statement
on Form S-4, filed with the Securities and Exchange Commission on April 30,
1999 (the "Registration Statement") of OnePoint Communications Corp.
("OnePoint"). These financial statements should be read in conjunction with
the audited financial statements and the related notes to Financial Statements
of VIC-RMTS-DC, L.L.C. as of and for the years ended December 31, 1998 and
1997, and for the period from November 1996 through December 31, 1996 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 financial position of the Company at March 31, 1999 and the results of its
operations and its cash flows for the quarters ended March 31, 1999 and 1998.
Note 2--Intangible Assets
Intangible assets consisted of goodwill with an acquisition value of
approximately $1,000 as of March 1999 and December 31, 1998, less accumulated
amortization of $200 and $225 respectively. Goodwill is amortized under the
straight-line method over a ten-year period.
Note 3--Guarantor of the Debt of Others
The Company is an unconditional guarantor of the 14 1/2% Senior Notes due
2008 issued by OnePoint in May 1998. As of March 31, 1999, there was $101,750
in principal amount of Senior Notes outstanding. The Company is required under
Indenture governing OnePoint's Senior Notes to comply with specified debt
covenants, including limitations on sales of certain assets, mergers,
distributions, and other activities.
In May 1998, OnePoint offered 175,000 units each consisting of a $1
principal amount of 14 1/2% Senior Notes due 2008 (the "Senior Notes") and a
warrant to purchase 0.635 shares of the common stock of OnePoint for gross
proceeds of $175,000. OnePoint used approximately $80,500 of the net proceeds
from the Unit Offering to purchase securities pledged (the "Pledged
Securities") with a trustee to fund future interest payments on the Senior
Notes. OnePoint also used a portion of the proceeds to pay down the borrowings
under the Credit Facility. During three months ended March 31, 1999, OnePoint
used approximately $18,107 to repurchase $32,250 of Senior Notes in the open
market. The balance of the net proceeds have been, or will be, used to acquire
private cable operators or their assets, to invest in video infrastructure, to
invest selectively in a facilities-based platform for telephony services, to
fund additional open market purchases of Senior Notes, to fund future capital
calls by Mid-Atlantic (OnePoint investee) and to fund working capital and for
general corporate purposes, including operating losses. OnePoint may require
additional capital if it achieves market penetration for its services
significantly different than, or at a different stage than, management
estimates, achieves lower than expected pricing for its services, enters
additional markets, locates additional or larger acquisition opportunities or
encounters higher than expected costs to purchase or upgrade telephony, video
or DBS services, equipment or facilities. OnePoint also expects that it will
require additional financing (or require financing sooner than anticipated) if
OnePoint's development plans or projections change or prove to be inaccurate
or if OnePoint is unable to continue to take advantage of the pricing provided
for in SBC-negotiated contracts for any reason. There can be no assurance that
OnePoint will be successful in raising sufficient additional debt or equity
capital, or of the terms of any such capital-raising activities. Failure to
raise and generate sufficient funds may require OnePoint to delay or abandon
some of its planned future expansion or expenditures, which could have a
material adverse effect on OnePoint's growth and its ability to compete.
F-58
<PAGE>
VIC-RMTS-DC, LLC
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per unit data)
Note 3--Guarantor of the Debt of Others (Continued)
OnePoint completed open market purchases of Senior Notes having an aggregate
principal amount of $32,250 between January 8, 1999 and March 5, 1999 at
various prices for an aggregate total cost of approximately $18,107, including
accrued interest and transaction fees. OnePoint recognized an extraordinary
gain on the early extinguishment of this debt of $12,427 in the three months
ended March 31, 1999. Pursuant to the restricted securities agreement entered
into in connection with the issuance of the Senior Notes, the trustee of the
Pledged Securities released approximately $26,651 of such securities on
February 24, 1999 upon request by OnePoint.
Note 4--Unitholders' Equity
During February 1999, the Company issued capital calls to its members for an
aggregate of $6.7 million to fund working capital requirements. As of March
31, 1999, the Company had received approximately $23.8 million, all of which
was paid by OnePoint Communications Holdings, LLC ("OPC Holdings"), the
Company's managing member.
Note 5--Arbitration
On March 30, 1999, OnePoint filed a demand for arbitration seeking a
declaratory ruling on the equity ownership of VIC-RMTS-DC, LLC. OnePoint
stated that it believes that the value of the assets contributed by Mid-
Atlantic RMTS Holdings, LLC was sufficient to give Mid-Atlantic RMTS Holdings,
LLC a 5% interest based on capital contributions though December 31, 1998. The
manager of Mid-Atlantic RMTS Holdings, LLC has suggested that they are
entitled to an unspecified, but higher, equity interest in VIC-RMTS-DC, LLC.
On April 5, 1999, Mid-Atlantic Holdings filed its own demand for arbitration
to resolve issues of equity ownership of VIC-RMTS-DC, LLC.
F-59
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Unitholders
VIC-RMTS-DC, LLC
We have audited the accompanying balance sheets of VIC-RMTS-DC, LLC, a
majority-owned subsidiary of OnePoint Communications Corp., as of December 31,
1997 and 1998, and the related statements of operations, unitholders' equity
and cash flows for the period from November 6, 1996 (inception) to December
31, 1996 and each of the years ended December 31, 1997 and 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VIC-RMTS-DC, LLC at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from November 6, 1996 (inception) to December 31, 1996,
and for the years ended December 31, 1997 and 1998, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young, LLP
February 12, 1999, except for the
fifth paragraph of Note 9 as to
which the date is March 5, 1999
and Note 10 as to which the date
is March 30, 1999.
Vienna, Virginia
F-60
<PAGE>
VIC-RMTS-DC, LLC
STATEMENTS OF OPERATIONS
(Dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Period from
November 6,
1996 (Inception) Year Ended December 31,
to December 31, ----------------------------
1996 1997 1998
---------------- ------------ --------------
<S> <C> <C> <C>
Revenue......................... $ -- $ 43 $ 1,660
Cost of revenue................. -- 82 2,840
------------ ------------ --------------
-- (39) (1,180)
Expenses:
Selling, general and
administrative............... 668 4,575 10,305
Depreciation and amortization. 2 157 287
------------ ------------ --------------
Net loss........................ $ (670) $ (4,771) $ (11,772)
============ ============ ==============
Basic loss per unit............. $(670,000.00) $(795,166.67) $(1,962,000.00)
============ ============ ==============
Units used in the computation of
basic loss per unit............ 1 6 6
============ ============ ==============
</TABLE>
See accompanying notes.
F-61
<PAGE>
VIC-RMTS-DC, LLC
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net.................................... $ 26 $ 490
Affiliate receivable........................................ -- 139
Prepaid expenses............................................ 590 336
------- -------
Total current assets...................................... 616 965
Property and equipment, net................................... 1,229 2,248
Intangible assets, net........................................ 900 800
Other assets.................................................. 11 265
------- -------
Total assets.............................................. $ 2,756 $ 4,278
======= =======
Liabilities and Unitholders' Equity
Current liabilities:
Accounts payable and accrued expenses....................... $ 1,091 $ 1,005
------- -------
Other current liabilities................................... 4 52
Total current liabilities................................. 1,095 1,057
Unitholders Equity:
Contributed capital......................................... 7,102 20,434
Accumulated deficit......................................... (5,441) (17,213)
------- -------
Total unitholders' equity................................. 1,661 3,221
------- -------
Total liabilities and unitholders' equity................. $ 2,756 $ 4,278
======= =======
</TABLE>
See accompanying notes.
F-62
<PAGE>
VIC-RMTS-DC, LLC
STATEMENTS OF CHANGES IN UNITHOLDERS' EQUITY
(Dollars in thousands, except per unit data)
<TABLE>
<CAPTION>
Total
Contributed Accumulated Unitholders'
Units Capital Deficit Equity
----- ----------- ----------- ------------
<S> <C> <C> <C> <C>
November 6, 1996.................... -- $ -- $ -- $ --
Initial unitholder contribution... 1 751 -- 751
Net loss.......................... -- -- (670) (670)
--- ------- -------- -------
Balance, December 31, 1996.......... 1 751 (670) 81
Additional unitholders'
contributions.................... 5 6,351 -- 6,351
Net loss.......................... -- -- (4,771) (4,771)
--- ------- -------- -------
Balance, December 31, 1997.......... 6 7,102 (5,441) 1,661
Additional unitholders'
contributions.................... -- 13,332 -- 13,332
Net loss.......................... -- -- (11,772) (11,772)
--- ------- -------- -------
Balance, December 31, 1998.......... 6 $20,434 $(17,213) $ 3,221
=== ======= ======== =======
</TABLE>
See accompanying notes.
F-63
<PAGE>
VIC-RMTS-DC, LLC
STATEMENTS OF CASH FLOW
(Dollars in thousands, except per unit data)
<TABLE>
<CAPTION>
Period from
November 6, 1996
(Inception) to Year Ended December 31,
December 31, -----------------------
1996 1997 1998
---------------- ----------- ------------
<S> <C> <C> <C>
Operating activities
Net loss.......................... $(670) $ (4,771) $ (11,772)
Adjustments to reconcile net loss
to net cash
used in operating activities
Depreciation and amortization... 2 157 287
Change in allowance for doubtful
accounts......................... -- 7 300
Changes in operating assets and
liabilities:
Accounts receivable............. -- (34) (764)
Affiliates receivable........... -- -- (139)
Prepaid expenses................ (3) (587) 254
Other assets.................... (2) (9) (254)
Accounts payable and accrued
expenses....................... 154 941 (38)
----- ----------- ------------
Net cash used in operating
activities..................... (519) (4,296) (12,126)
Investing activities
Acquisition of property and
equipment........................ (232) (1,055) (1,206)
----- ----------- ------------
Net cash used in investing
activities....................... (232) (1,055) (1,206)
Financing activities
Unitholder contributions.......... 751 5,351 13,332
----- ----------- ------------
Net cash provided by financing
activities....................... 751 5,351 13,332
----- ----------- ------------
Net increase (decrease) in cash... -- -- --
Cash at the beginning of period... -- -- --
----- ----------- ------------
Cash at the end of period......... $ -- $ -- $ --
===== =========== ============
</TABLE>
See accompanying notes.
F-64
<PAGE>
VIC-RMTS-DC, LLC
NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands, except per unit data)
1. Organization
VIC-RMTS-DC, LLC, (the "Company") was formed to provide telephone services
to multiple dwelling units in the Mid-Atlantic region. The Company was formed
as VIC-RMTS-DC Metro, LLC and changed its name to VIC-RMTS-DC, LLC on November
7, 1996. The Company was formed in Delaware and will terminate on January 31,
2017.
The Company is jointly owned by OnePoint Communications Holdings, LLC ("OPC
Holdings"), formerly known as VIC-RMTS Holdco, LLC, a wholly-owned subsidiary
of OnePoint Communications, LLC, and Mid-Atlantic RMTS Holdings, LLC ("Mid-
Atlantic RMTS"). Mid-Atlantic RMTS is 50% held by OPC Holdings and South
Central Development L.P. In April 1998, OnePoint Communications, LLC merged
with and into OnePoint Communications Corp. ("OnePoint"). As a result of these
holdings, the Company is a majority owned subsidiary of OnePoint as of
December 31, 1998.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Property and Equipment
Property and equipment are stated at cost and depreciated on the straight-
line method over their estimated useful lives, ranging from 3 to 5 years.
Leasehold improvements are depreciated over the shorter of their useful lives
or the lease term, not to exceed 15 years. The Company classifies installed
wiring and hardware costs in construction in process until the installation is
completed at which time the balances are classified as leasehold improvements.
Revenue Recognition
The Company recognizes revenue as services are provided.
Fair Value of Financial Instruments
The Company considers the recorded value of its financial assets and
liabilities, to approximate the fair value of the respective assets and
liabilities at December 31, 1997 and 1998, respectively.
Marketing Costs
Marketing costs are expensed as incurred. During the periods from November
6, 1996 (Inception) to December 31, 1996 and the years ended December 31, 1997
and 1998, marketing costs were approximately $11, $136 and $140 respectively.
Income Taxes
The Company is treated as a partnership for income tax purposes.
Accordingly, no provision for income taxes has been included in these
financial statements, as taxable income or loss passes through to, and is
reported by, the unitholders individually.
F-65
<PAGE>
VIC-RMTS-DC, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Loss Per Unit
The Company's loss per unit calculations are based upon the weighted average
of membership units outstanding. The Company did not have any dilutive
securities as of December 31, 1996, 1997, and 1998; accordingly, diluted loss
per unit is not presented.
Comprehensive Income
In June 1997, FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. The Statement establishes standards for
reporting of comprehensive income and its components in financial statements.
The Company adopted Statement No. 130 effective the fourth quarter of the year
ended December 31, 1998; however, the Company did not have any items of
comprehensive income during 1996, 1997 or 1998. Accordingly, the adoption of
this Statement did not have an impact on the Company's financial position or
results from operations.
Recently Issued Accounting Standards
In June 1998, The FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
requires that all derivatives be recognized as either assets or liabilities in
the statement of financial position and that those instruments shall be
measured at fair value. Statement No. 133 also prescribes the accounting
treatment for changes in the fair value of derivatives which depends on the
intended use of the derivative and the resulting designation. Designations
include hedges of the exposure to changes in the fair value of a recognized
asset or liability, hedges of the exposure to variable cash flows of a
forecasted transaction, hedges of the exposure to foreign currency
translations, and derivatives not designated as hedging instruments. Statement
No. 133 is effective for fiscal years beginning after June 15, 1999. The
Company expects to adopt Statement No. 133 in the first quarter of the fiscal
year ending December 31, 2000; however, no disclosures are expected to be
required. The Company does not believe the adoption of this Statement will
have a material impact on its financial position or results from operations.
3. Accounts Receivable
Accounts receivable consists of amounts due from customers. The Company
provides an allowance for doubtful accounts for accounts receivable amounts
deemed uncollectible as determined by management. Activity in the allowance
for doubtful accounts was as follows:
<TABLE>
<CAPTION>
Year Ended
For the period from December
November 6, 1996 31,
(inception) to -----------
December 31, 1996 1997 1998
------------------- ----- -----
<S> <C> <C> <C>
Opening Balance............................. $ -- $ -- $ 7
Bad debt charge-offs........................ -- -- (261)
Adjustments to reserves..................... -- 7 300
----- ----- -----
Ending balance.............................. $ -- $ 7 $ 46
===== ===== =====
</TABLE>
F-66
<PAGE>
VIC-RMTS-DC, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Furniture and equipment................................... $ 149 $ 343
Computer equipment........................................ 208 254
Facility Equipment........................................ -- 483
Vehicles.................................................. 172 232
Leasehold improvements.................................... 20 280
------ ------
549 1,592
Less accumulated depreciation............................. (59) (246)
------ ------
490 1,346
Construction in progress.................................. 739 902
------ ------
$1,229 $2,248
====== ======
</TABLE>
The Company recognized depreciation expense of $2, $57 and $187 in 1996,
1997 and 1998, respectively.
5. Intangible Assets
Intangible assets consisted of goodwill with an acquisition value of
approximately $1,000 as of December 31, 1997 and 1998, less accumulated
amortization of $100 and $200, respectively. Goodwill is amortized under the
straight line method over a ten year period.
6. Unitholders' Equity
Pursuant to the Company's operating agreement, OPC Holdings contributed $751
at inception and has subsequently contributed approximately $18,683 and Mid-
Atlantic RMTS contributed $1,000 during 1997 in the form of intangible assets.
Mid-Atlantic RMTS has not met capital calls made during 1998. Accordingly, the
ownership interests have been modified from the equal ownership interests
pursuant to the operating agreement to reflect the dilution of Mid-Atlantic
RMTS's interests in favor of OPC Holdings. The operating agreement obligates
Mid-Atlantic RMTS to contribute additional assets acceptable to the Company
and, upon such contribution, Mid-Atlantic RMTS will receive 1 additional
membership unit for each $1 million contribution, with fair market value
determined by the Company's manager.
The units make up the only class of ownership interests, of which there is
an unlimited authorized number. However, all units issued must be in
accordance with the operating agreement. Certain restrictions on the sale and
transfer of units exist as provided by the operating agreements. Net profits
and net losses are allocated to the members according to their membership
percentages. The member unitholders' liabilities are limited to their
respective capital contributions.
The managing member (OPC Holdings) is the only member that takes part in the
operations or management of the Company. Matters requiring membership voting
or significant input from the non-managing member are limited to certain
transactions as defined in the operating agreement including filing for
bankruptcy, liquidating the Company or other significant transactions.
Transactions requiring membership voting approval must be approved by 80% of
the votes of the member designees.
7. Related Party Transactions
As of December 31, 1997 and 1998, the Company had affiliate receivable
balances of $0 and $139, respectively, due from Mid-Atlantic TelcomPlus, LLC.
F-67
<PAGE>
VIC-RMTS-DC, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company shares certain billing and collections systems with an affiliate
of the Company. The Company paid approximately $0, $250 and $836 for services
provided by this affiliate in 1996, 1997 and 1998, respectively.
SBC and VIC provided other employment and operating services on behalf of
the Company for which the Company has not recorded expenses. The Company
believes that the value of unreimbursed services provided by SBC and VIC are
not material to its financial position or results of operations.
8. Fringe Benefit Plans
The Company's employees are eligible to participate in OnePoint's 401(k)
Savings Plan & Trust (the "Plan") pursuant to the terms thereof. Substantially
all employees of OnePoint and participating affiliates who meet certain
eligibility requirements are eligible to participate in the Plan. The Plan
provides for OnePoint and participating affiliates to make defined
contributions as well as matching and other discretionary contributions, as
determined by OnePoint's Board of Directors. The Company contributed $0, $0,
and $7 to the Plan during the period from November 6, 1996 (Inception) to
December 31, 1996 and for the years ended December 31, 1997 and 1998,
respectively.
9. Guarantor of the Debt of Others
The Company is an unconditional guarantor of $175 million of Senior Notes
issued by OnePoint as discussed below. The Company is required under
OnePoint's Senior Notes to comply with specified debt covenants, including
limitations on sales of certain assets, mergers, distributions, and other
activities.
During May 1998, OnePoint offered units each consisting of $1,000 principal
amount of 14 1/2% Senior Notes due 2008 (the "Senior Notes") and Warrants to
purchase 111,125 shares of OnePoint's common stock (the "Warrants") for gross
proceeds of $175,000 (collectively, the "Unit Offering"). Each of the 175,000
Warrants entitles the holders to purchase 0.635 shares of common stock of
OnePoint at an exercise price of $0.01 per share. Unless exercised, the
Warrants expire on June 1, 2008. The Warrants were valued at $5,300 based on
independent appraisal thereof as of the issuance date and are reflected as an
additional debt discount in the accompanying financial statements.
In connection with the Unit Offering, OnePoint purchased $80,500 of
government securities (the "Pledged Securities") to fund the first seven
scheduled interest payments on the Senior Notes. These Pledged Securities are
pledged to a trustee for the benefit of the holders of the Senior Notes, and
secure a portion of OnePoint's obligations under the indenture with respect to
the Unit Offering (the "Indenture"). Pursuant to the restricted securities
agreement entered into in connection with the Unit Offering, the trustee is
allowed to release Pledged Securities in excess of the amount required to fund
the first seven scheduled interest payments on the Senior Notes, upon request
by OnePoint.
As of November 6, 1998, the date on which the Senior Notes and the Warrants
became separable, OnePoint recognized a discount of $5,300 on the book value
of the Senior Notes relating to the Warrants and will amortize this amount
over the life of the Senior Notes.
OnePoint completed open market purchases of Senior Notes having an aggregate
principal amount of $73,250 between November 9, 1998 and March 5, 1999 at
various prices for an aggregate total cost of approximately $38,355, including
accrued interest and transaction fees. Pursuant to the restricted securities
agreement entered into in connection with the Unit Offering, the trustee of
the Pledged Securities released approximately $26,650 on February 24, 1999
upon request by OnePoint.
The Senior 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. During 1998, OnePoint paid $10,656 of interest
related to the Senior Notes and accrued approximately $32 of liquidated
damages as described below.
F-68
<PAGE>
VIC-RMTS-DC, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
OnePoint is not required to make mandatory redemption or sinking fund payments
under the Senior Notes. The Senior Notes generally are not redeemable at the
option of OnePoint at anytime prior June to 1, 2003. Thereafter, the Senior
Notes will be subject to redemption at any time at the option of OnePoint, 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, OnePoint may redeem up to 35% of the aggregate principal amount
of issued Senior 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 OnePoint of at least $20,000 provided at least 65% of the
aggregate principal amount of Senior Notes issued remain outstanding
immediately after such redemption.
In the event of a change in control, as defined in the Indenture, OnePoint
will be required to make an offer to each holder of Senior Notes to repurchase
all or any part of the Senior Notes at 101% of the aggregate principal amount,
plus unpaid interest and liquidated damages, if any.
Amounts outstanding under the Senior Notes were $134,000, less a discount of
$3,997 relating to the value assigned to the Warrants, at December 31, 1998.
Interest accrued under the Senior Notes at December 31, 1998 was $1,678.
In connection with the Unit Offering, OnePoint and the Company are required
to comply with specified covenants described in the Indenture. These covenants
include limitations on sales of subsidiaries and certain assets, mergers, and
other activities.
In connection with the May 1998 Unit Offering, OnePoint 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
Senior Notes for substantially identical notes which are not subject to
restrictions on transfer that are applicable to the Senior Notes. OnePoint
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 on or before November 17, 1998, then
liquidated damages will accrue with respect to the Senior Notes. Such
liquidated damages accrue at a rate of $0.05 per week per $1,000 principal
amount of Senior Notes for the first 90 days beyond November 17, 1998, and
thereafter increase by $0.05 per week per $1,000 outstanding principal amount
of the Senior Notes each 90 day period, up to a maximum of $0.50 per week per
$1,000 principal amount of Senior Notes. Liquidated damages cease to accrue
when the registration statement is declared effective. As the registration
statement was not declared effective by November 17, OnePoint accrued
approximately $32 at December 31, 1998.
10. Subsequent Events
On March 30, 1999, OPC Holdings filed a demand for arbitration seeking a
declaratory ruling on the equity ownership of the Company. OPC Holdings
believes that the value of the assets contributed by Mid-Atlantic Holdings was
sufficient to give Mid-Atlantics Holdings only an approximate 5% interest
based on capital contributions through December 31, 1998. The manager of Mid-
Atlantic RMTS Holdings, LLC has suggested that they are entitled to an
unspecified, but higher, equity interest in the Company. OPC Holdings will be
entitled only to that portion of any distributions made by the Company
corresponding to its percentage equity ownership therein.
F-69
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To People's Choice TV Corp.:
We have audited the accompanying statements of certain assets and
liabilities of Preferred Entertainment, Inc. as of December 31, 1997 and 1996
and the statements of related revenues and expenses for the years ended
December 31, 1997 and 1996. These financial statements are the responsibility
of People's Choice TV Corp.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The statements have been prepared pursuant to the Asset Purchase and Sale
Agreement described in Note 2 between People's Choice TV Corp. and OnePoint
Communications LLC dated June 8, 1998 and is not intended to be a complete
presentation of People's Choice TV Corp.'s or Preferred Entertainment, Inc.'s
assets, liabilities, revenues and expenses.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities of Preferred
Entertainment, Inc. as of December 31, 1997 and 1996 pursuant to the Asset
Purchase and Sale Agreement referred to in Note 2 and the related revenues and
expenses for the years ending December 31, 1997 and 1996 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Stamford, Connecticut
June 15, 1998
F-70
<PAGE>
PEOPLE'S CHOICE TV CORP.
STATEMENTS OF CERTAIN ASSETS AND LIABILITIES
OF PREFERRED ENTERTAINMENT, INC. TO BE SOLD
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
ASSETS 1996 1997 1998
------ ---------- ---------- -------------
(unaudited)
<S> <C> <C> <C>
Accounts receivable, net................... $ 439,743 $ 442,849 $ 7,050
Prepaid expenses........................... 100,111 77,272 1,200
Other assets............................... 141,283 130,900 2,100
Investment in wireless system and
equipment, net............................ 5,061,576 4,141,398 65,900
---------- ---------- -------
$5,742,713 $4,792,419 $76,250
========== ========== =======
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C> <C>
Liabilities:
Accounts payable......................... $ 110,104 $ 97,829 $ 1,600
Accrued expenses......................... 232,631 163,289 2,600
Subscriber advance payments and deposits. 507,629 573,536 9,150
---------- ---------- -------
Total.................................. 850,364 834,654 13,350
---------- ---------- -------
Commitments and contingencies
PCTV equity in operations to be sold....... 4,892,349 3,957,765 62,900
---------- ---------- -------
$5,742,713 $4,792,419 $76,250
========== ========== =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-71
<PAGE>
PEOPLE'S CHOICE TV CORP.
STATEMENTS OF REVENUES AND EXPENSES RELATED TO CERTAIN
ASSETS AND LIABILITIES OF PREFERRED ENTERTAINMENT, INC.
TO BE SOLD
<TABLE>
<CAPTION>
For the Years Ended For the Nine
December 31, Months Ended
------------------------ September 30,
1996 1997 1998
----------- ----------- -------------
(unaudited)
<S> <C> <C> <C>
Revenues................................ $ 4,685,385 $ 5,208,471 $ 2,632,000
Costs and expenses:
Service costs......................... 2,881,774 2,994,226 1,785,500
Selling, general and administrative... 2,323,034 1,838,249 979,000
Depreciation and amortization......... 1,138,177 1,722,216 1,124,500
----------- ----------- -----------
Total............................... 6,342,985 6,554,691 3,889,000
----------- ----------- -----------
Net loss................................ $(1,657,600) $(1,346,220) $(1,257,000)
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-72
<PAGE>
PEOPLE'S CHOICE TV CORP.
NOTES TO STATEMENTS OF CERTAIN ASSETS AND LIABILITIES AND
RELATED REVENUES AND EXPENSES OF PREFERRED ENTERTAINMENT, INC.
(1) Company Operations:
People's Choice TV Corp. (the "Company" or "PCTV") was incorporated in
Delaware on April 22, 1993. The Company and its predecessors have been engaged
in wireless communications since 1988.
The Company's strategy is to own, develop and operate wireless
communications systems, and provide wireless cable and high-speed data
communication services in large markets. PCTV's operating and targeted markets
are concentrated in the midwestern and southwestern regions of the United
States. Currently, the Company operates six wireless cable systems located in
Houston, Tucson, Chicago, Phoenix, St. Louis and Detroit. The Company operates
a high-speed data communication service in the Detroit and Phoenix markets. In
addition, the Company controls wireless frequency rights in Indianapolis, Salt
Lake City, and Milwaukee.
On September 8, 1995, PCTV and Preferred Entertainment, Inc. ("PEI") closed
on a merger transaction pursuant to which PCTV acquired each share of PEI
common stock that it did not already own for consideration of approximately
$65 million through a merger in which PEI became an indirect wholly owned
subsidiary of PCTV. The acquisition was accounted for as a purchase
transaction and accordingly, the purchase price was allocated to the fair
value of assets acquired and liabilities assumed. Substantially all of the
excess of purchase price over the net assets acquired has been allocated to
frequency rights acquired from PEI.
The Company offers 44 channels (including 12 off-air VHF/UHF channels) in
the Chicago market and controls the rights to 32 wireless channels and
transmits at 50 watts from the Sears Tower, the tallest building in Chicago.
PCTV leases approximately 14,000 square feet of office and warehouse space in
Chicago. At December 31, 1997 and 1996 PCTV's Chicago market had approximately
18,100 and 19,000 customers, respectively.
(2) Asset Purchase and Sale Agreement:
On June 8, 1998, PCTV and PEI ("the Sellers") and OnePoint Communications-
Illinois LLC ("OnePoint" or "the Buyer") entered into an Asset Purchase and
Sale Agreement ("the Agreement") to sell certain Assets and Assumed
Liabilities as stipulated in the Agreement. Under the Agreement, PCTV agrees
to sell to OnePoint the Assets and Assumed Liabilities, as defined related to
video programming services to its subscribers at multiple dwelling units
(MDUs) in Chicago, Illinois. The assets sold to OnePoint do not include the
MMDS, MDS or ITFS licenses currently controlled by the Company and certain AML
licenses not related to the MDU segment of the business. OnePoint shall not
assume any Excluded Liabilities, as defined.
The consideration for the Assets and Assumed Liabilities is $444 times the
units of the properties covered by the right of entry agreements included in
the transaction. The Agreement contemplates that there are a maximum of twenty
nine thousand two hundred fifty (29,250) of such units. Payment of the
consideration will be a $500,000 cash deposit paid to PCTV prior to the
execution of the Agreement and a $12,500,000 cash payment upon execution of
the Agreement.
Approximately $2.85 million of the consideration will be held in escrow
until transfer of certain AML licenses are approved and the final units of
property sold are confirmed. The Agreement also provides for purchase price
reductions of up to $260,000 for failure to meet service and system standards
specified in the Agreement.
Assets, as defined in the Agreement, constitutes all rights of PCTV and PEI
under certain contracts, AML licenses, AML applications, equipment, Accounts
Receivable, subscribers and customer lists related to the assets, permits, all
data, books and records related to the Assets, inventory and vehicles but
excludes the Excluded Assets, as defined. Excluded Assets include such items
as cash and cash equivalents, video programming
F-73
<PAGE>
PEOPLE'S CHOICE TV CORP.
NOTES TO STATEMENTS OF CERTAIN ASSETS AND LIABILITIES AND
RELATED REVENUES AND EXPENSES OF PREFERRED ENTERTAINMENT, INC.--(Continued)
contracts, insurance policies, licenses and contract rights (unless
specifically cited in the Agreement), any tax refunds or claims and Federal
Communications Commissions (FCC) frequencies (unless specifically indicated in
the Agreement).
Assumed Liabilities as defined in the agreement include (i) all obligations
of PCTV assigned to OnePoint for any contract or permit assigned to the Buyer
under the Agreement (ii) all obligations of the Buyer arising out of the
Buyers' ownership of assets sold to the Buyer under the Agreement and (iii)
customer deposits and advances. The accompanying financial statements include
an allocation of accrued programming costs and access fees paid to landlords
of MDUs. Deposits received from MDU customers and the advance payments by
subscribers for video services are also included in liabilities.
Accounts Receivable represents all accounts receivable of PCTV related to
the subscribers being sold as of the closing date. The accompanying financial
statements include a reserve of 3% of such receivables to reflect possible
losses from nonpayment. Customer deposits and advances represents all deposits
and advanced billings related to the subscribers being sold as of the closing
date.
(3) Summary of Significant Accounting Policies:
The accompanying financial statements include the historical cost of the
assets and liabilities of PCTV that have been sold to OnePoint pursuant to the
Agreement and the allocated historical revenues and expenses of such
operations using generally accepted accounting principles.
Subscribers are determined through the use of an equivalent basic unit (EBU)
calculation for customers receiving basic video programming service on a bulk
basis. The number of subscribers on a bulk basis is determined by dividing the
monthly revenue for such bulk subscribers by the weighted average rate that
single family home (SFH) subscribers pay per month for basic service. This
number is then added to those customers receiving basic video programming
service on an individual basis to arrive at the total subscriber count.
The assets and liabilities included in the financial statements are those to
be assumed by OnePoint pursuant to the Agreement and allocations of certain
assets or liabilities used by PCTV to provide services to the subscribers
covered by the Agreement. The assets assumed by OnePoint pursuant to the
agreement are Accounts Receivable and the investment in the wireless system
and equipment. The liabilities assumed by OnePoint are subscriber advance
payments and deposits. The assets allocated to the operations included in the
accompanying financial statements (prepaid expenses and other assets) are
generally based on the relative subscribers sold to the total subscribers of
PEI at the end of each period presented. The liabilities allocated (accounts
payable and accrued expenses) include programming and franchise taxes and
excludes accrued payroll and related amounts.
Revenue represents the amounts billed to the specific MDU subscribers
covered by the Agreement. Allocations have been made of certain minor
revenues, such as late fees.
Service costs and selling, general, and administrative expenses for the
years ended December 31, 1996 and 1997 are generally based upon allocation of
such costs of PEI based upon the relative number of subscribers sold to the
total number of subscribers of PEI. Certain expenses have been specifically
identified as related directly to MDU operations and have been assigned to
those operations included in these financial statements. Also included in
selling, general, and administrative expenses are management fees of $140,562
and $156,254 for the years ended December 31, 1996 and 1997, respectively.
These management fees represent a portion of the historical allocation of
costs by PCTV to its various subsidiaries. The portion allocated in these
financial statements are based on the relative subscribers sold to the total
subscribers of PEI for each period.
F-74
<PAGE>
PEOPLE'S CHOICE TV CORP.
NOTES TO STATEMENTS OF CERTAIN ASSETS AND LIABILITIES AND
RELATED REVENUES AND EXPENSES OF PREFERRED ENTERTAINMENT, INC.--(Continued)
Depreciation and amortization are based upon the specific assets included in
the statements of assets and liabilities to be sold.
Under the terms of the Agreement, the debt of PEI (which consists of various
capital lease obligations on equipment not being sold to OnePoint and a bank
line of credit) is not being assumed by OnePoint. Accordingly, the
accompanying financial statements do not include any allocation of interest
expense incurred by PEI in 1996 and 1997.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PCTV management believes the allocation of revenues and expenses included in
the accompanying financial statements is reasonable.
Long-lived assets
The Company periodically reviews the carrying value of the investment in
wireless systems and equipment, for each wireless communication system in
order to determine whether an impairment may exist. The Company considers
relevant cash flow, estimated future operating results, trends and other
available information including the fair value of frequency rights owned, in
assessing whether the carrying value of the assets can be recovered. An
impairment would be measured as any deficiency in estimated discounted cash
flows of the wireless communication system to recover the carrying value
related to the assets.
Revenue recognition
Subscription revenues are recognized in the period of service.
System launch expenses
Administrative and marketing expenses incurred by systems during their
launch period are expensed as incurred.
(4) Investment in Wireless System and Equipment:
The investment in wireless systems and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Right of entry fees............................... $ 36,562 $ 44,287
Headend equipment................................. 754,821 747,503
Systems........................................... 965,600 965,600
Installations..................................... 4,929,477 5,731,108
Less--accumulated depreciation and amortization... (1,624,884) (3,347,100)
---------- ----------
$5,061,576 $4,141,398
========== ==========
</TABLE>
F-75
<PAGE>
PEOPLE'S CHOICE TV CORP.
NOTES TO STATEMENTS OF CERTAIN ASSETS AND LIABILITIES AND
RELATED REVENUES AND EXPENSES OF PREFERRED ENTERTAINMENT, INC.--(Continued)
Depreciation and amortization is calculated on a straight-line basis over 3-
10 years.
Wireless systems and equipment include the cost of initial customer
installations. These costs include reception equipment on customer premises,
related labor and the excess of direct commission costs over installation
revenues to be realized. The excess of direct commission costs over
installation revenues are deferred and amortized over a three year period, the
estimated useful life of customers. Amortization is accelerated upon the
disconnection of specific customers. Sat-Tel, a subsidiary of PCTV and
affiliate of PEI, provided customer installation and other services to PEI.
(5) Employee Benefits:
The Company maintains a 401(k) employee benefit plan pursuant to which
participants can defer a certain percent of their annual compensation in order
to receive certain benefits upon retirement, death, disability or termination
of employment. For the years ended December 31, 1996 and 1997 PEI incurred
expense of $4,230 and $6,050, respectively, of which $2,661 and $4,223,
respectively, have been allocated to the operations being sold.
(6) Income Taxes:
PCTV and PEI account for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109--Accounting for Income Taxes.
SFAS No. 109 requires, among other things, recognition of future tax benefits,
measured by enacted tax rates, attributable to deductible temporary
differences between financial and income tax basis of assets and liabilities
and to net operating loss carryforwards, to the extent that realization of
such benefits is more likely than not.
PCTV and PEI have net operating loss carryforwards ("NOL's") for financial
and tax reporting purposes. SFAS 109 requires that the tax benefit of
financial reporting NOL's be recorded as an asset to the extent that
management assesses the utilization of such NOL's to be "more likely than
not". PCTV and PEI recorded a valuation allowance against the entire deferred
asset attributable to the NOL's since PCTV and PEI have incurred operating
losses since inception.
(7) Commitments and Contingencies:
There are certain claims against the PCTV and PEI which are incidental to
the ordinary course of business. In the opinion of management, the ultimate
resolution of these claims will not have a material effect on the financial
statements of PCTV or PEI.
F-76
<PAGE>
PEOPLE'S CHOICE TV CORP.
NOTES TO STATEMENTS OF CERTAIN ASSETS AND LIABILITIES AND
RELATED REVENUES AND EXPENSES OF PREFERRED ENTERTAINMENT, INC.--(Concluded)
(8) Service Costs and Selling, General and Administrative Expenses:
Service costs and selling, general and administrative expenses included in
the accompanying financial statements for the years ended December 31, 1996
and 1997 are comprised of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
---------- ----------
<S> <C> <C>
Service Costs:
Programming...................................... $1,648,359 $1,777,260
Channel lease and access fees.................... 501,558 591,009
Transmitter site rental.......................... 211,169 319,230
Service calls.................................... 420,287 176,750
Other............................................ 100,401 129,977
---------- ----------
$2,881,774 $2,994,226
========== ==========
Selling, General and Administrative:
Salaries and wages, net.......................... $1,000,644 $ 736,638
Payroll taxes.................................... 90,908 83,192
Employee health and life, net.................... 99,701 117,728
Rent and occupancy............................... 167,026 173,050
Telephone........................................ 143,281 135,848
Billing.......................................... 93,869 59,780
Management fee................................... 140,562 156,254
Other............................................ 587,043 375,759
---------- ----------
$2,323,034 $1,838,249
========== ==========
</TABLE>
(9) Subsequent Event (unaudited)
The interim financial statements as of September 30, 1998 and for the nine
months ended September 30, 1998 and the related footnote information are
unaudited and have been prepared on a basis consistent with the People's
Choice TV Corp.'s audited Statements of Certain Assets and Liabilities and
Related Revenues and Expenses of Preferred Entertainment, Inc. as of and for
the year ended December 31, 1997 included in this prospectus. These financial
statements should be read in conjunction with the audited Statements of
Certain Assets and Liabilities and Related Revenues and Expenses of Preferred
Entertainment, Inc. and the related notes to such statements as of and for the
year ended December 31, 1997. In the opinion of OnePoint Communications-
Illinois, LLC's management, the accompanying unaudited Statements of Certain
Assets and Liabilities and Related Revenues and Expenses of Preferred
Entertainment, Inc. contain all adjustments (consisting of normal recurring
adjustments) which management considers necessary to present fairly the
financial position of certain assets and liabilities and related revenues and
expenses of Preferred Entertainment, Inc. purchased by OnePoint
Communications-Illinois LLC at September 30, 1998 and for the nine months then
ended.
On October 1, 1998, OnePoint Communications--Illinois, LLC completed its
acquisition of certain assets and liabilities of Preferred Entertainment, Inc.
Accordingly, the net assets reflected in the accompanying statement of certain
asset and liabilities of Preferred Entertainment, Inc. to be sold as of
September 30, 1998 were transferred to OnePoint Communications--Illinois, LLC
on October 1, 1998.
On July 7, 1999, the PCTV common and preferred stockholders approved the
Agreement and Plan of Merger, dated April 12, 1999 between PCTV and Sprint
Corporation. Each stockholder of PCTV will receive $10.00 per share in cash
upon consummation of the Merger. The Merger is expected to be completed by the
end of 1999.
F-77
<PAGE>
ANNEX A
ONEPOINT COMMUNICATIONS CORP.
GLOSSARY
CAP (Competitive Access Provider)--A name for a category of local service
provider that competes with incumbent local telephony companies in providing
originating and/or terminating access to IXCs.
CLEC (Competitive Local Exchange Carrier)--A category of local telephony
service provider (carrier) that offers services similar to the former monopoly
local telephony company, as recently allowed by changes in telecommunications
law and regulation. A CLEC may also provide other types of communications
services (long distance, Internet access, entertainment etc.).
CLEC certification--Granted by a state public service commission or public
utility commission, this certification provides a telecommunications services
provider with the legal standing to offer local exchange telephony services in
direct competition with ILECs and other CLECs. Such certifications are granted
on a state by state basis.
Communications Act of 1934--Federal legislation that established rules for
broadcast and non-broadcast communications, including both wireless and wired
telephony service and created the FCC.
DBS--Direct broadcast satellite television.
FCC (Federal Communications Commission)--The US Government agency charged
with regulating interstate and international communications by radio,
television, wire, satellite and cable.
facilities-based carrier/provider--A telecommunications provider that
delivers a significant amount of its services to the end-user via owned and/or
leased network equipment.
ILEC (Incumbent Local Exchange Carrier)--The local exchange carrier that was
the monopoly carrier prior to the opening of local exchange services to
competition.
interconnection agreement--A contract between and ILEC and a CLEC for the
interconnection of the two networks, for the purpose of mutual passing of
traffic between the networks, allowing customers of one of the networks to
call users served by the other network. These agreements set out the financial
and operational aspects of such interconnection.
interexchange services--Telecommunications services that are provided
between two exchange areas, i.e., long distance.
IXC (Interexchange Carrier)--A provider of telecommunications services that
extend between LATAs or cities.
LATA (Local Access and Transport Area)--A geographic area inside of which a
RBOC can offer long distance service (known as local toll). There are 196
LATAs in the U.S.
local exchange--An area inside of which telephone calls are generally
completed without any toll, or long distance charges. Local exchange areas are
defined by the state regulator of telephony services.
local exchange services--Telephony services that are provided within a local
exchange. These usually refer to local calling services (dial tone services).
Business local exchange services include Centrex, access lines and trunks and
customer owned, coin operated telephone lines.
A-1
<PAGE>
Right of Entry--Contractual rights providing preferential rights for on-site
marketing of telephony, video and other services.
RBOC (Regional Bell Operating Company)--One of the remaining ILECs created
by the divestiture by AT&T of its local exchange business. These include
BellSouth, Bell Atlantic (which acquired NYNEX in 1997), Ameritech, US West
Inc. and SBC (which acquired Pacific Telesis in 1997).
UNEs--Unbundled network elements including switches, local loops, and
transmission facilities.
A-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No person has been authorized to give any information or to make any repre-
sentation other than those contained in this Prospectus and, if given or made,
such information or representation must not be relied upon as having been au-
thorized. This Prospectus does not constitute an offer to sell, or solicita-
tion of an offer to buy any securities other than the securities to which it
relates, nor does it constitute and offer to sell or the solicitation of an
offer to buy such securities in any circumstances in which such offer or so-
licitation is unlawful. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company since the date hereof
or that the information contained herein is correct as of any time subsequent
to its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 12
The Recapitalization...................................................... 35
Use of Proceeds........................................................... 36
Dividend Policy........................................................... 36
Capitalization............................................................ 37
Selected Historical Financial Data........................................ 38
Pro Forma Unaudited Condensed Financial Data.............................. 40
Pro Forma Unaudited Condensed Statements of Operations.................... 40
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 44
Business.................................................................. 58
Management................................................................ 88
Certain Relationships and Related Transactions............................ 92
Security Ownership of Certain Beneficial Owners and Management............ 95
Description of Certain Indebtedness....................................... 96
The Exchange Offer........................................................ 97
Description of Notes...................................................... 105
Description of Warrants................................................... 131
Description of Capital Stock.............................................. 135
Certain United States Federal Income Tax Considerations................... 136
Plan of Distribution...................................................... 140
Experts................................................................... 140
Legal Matters............................................................. 141
Index to Financial Statements............................................. F-1
Glossary.................................................................. A-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$82,750,000
OnePoint Communications Corp.
Offer to Exchange its
14 1/2% Senior Notes Due 2008,
Series B, for any and all
outstanding 14 1/2% Senior Notes due 2008
---------------
PRELIMINARY PROSPECTUS
---------------
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II: INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 15: Indemnification of Directors and Officers.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware ("Section 145")
provides that a Delaware corporation may indemnify any persons who are, or are
threatened to be made, parties to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person is or was an officer, director, employee or agent of
such corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the corporation's best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was
illegal. A Delaware corporation may indemnify any persons who are, or are
threatened to be made, a party to any threatened, pending or completed action
or suit by or in the right of the corporation by reason of the fact that such
person was a director, officer, employee or agent of such corporation, or is
or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit, provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
which such officer or director has actually and reasonably incurred.
The Company's Certificate of Incorporation and By-laws provide for the
indemnification of officers and directors to the fullest extent permitted by
the Delaware General Corporation Law.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him and incurred by him
in any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
All of the directors and officers of the Company are covered by insurance
policies maintained and held in effect by such corporation against certain
liabilities for actions taken in such capacities, including liabilities under
the Securities Act of 1933.
Each Subsidiary Guarantor is a limited liability company organized under the
laws of the State of Delaware. Section 18-108 of the Delaware Limited
Liability Company Act provides that, subject to such standards and
restrictions, if any, as are set forth in its limited liability company
agreement, a limited liability company may, and shall have the power to,
indemnify and hold harmless any member or manager or other person from and
against any and all claims and demands whatsoever.
The limited liability company agreements of each of the Subsidiary
Guarantors provide for broad indemnification of their respective members,
managers and persons controlling their managers for losses, claims, damages
and liabilities incurred by such persons in connection with the conduct of the
business of the Company, except for such persons' fraud, gross negligence or
willful misconduct.
Each of the Subsidiary Guarantors may carry insurance protecting it and
potential indemnitees from liabilities to third parties, to the extent
practicable.
II-1
<PAGE>
Item 16. Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
2.1* Agreement and Plan of Merger dated April 29, 1998 of OnePoint
Communications, LLC with and into the Company
3.1* Amended and Restated Certificate of Incorporation of the Registrant, as of
April 29, 1998
3.2* Bylaws of the Registrant, as amended
3.3* Operating Agreement of OnePoint Communications--Georgia, LLC dated as of
April 7, 1997, as amended
3.4* Operating Agreement of OnePoint Communications--Colorado, LLC dated as of
April 23, 1997, as amended
3.5* Operating Agreement of OnePoint Communications--Illinois, LLC, dated as of
April 23, 1997, as amended
3.6* Operating Agreement of OnePoint Communications Holdings, LLC, dated as of
January 30, 1997, as amended
3.7* Operating Agreement of VIC-RMTS-DC, LLC between Mid-Atlantic RMTS
Holdings, LLC and OnePoint Communications Holdings, LLC dated as of
February 6, 1997
4.1* Purchase Agreement, dated as of May 15, 1998 by and between the Company,
the Subsidiary Guarantors, Bear, Stearns and Co., Inc. and NationsBank
Montgomery Securities LLC
4.2* Indenture dated as of May 21, 1998, by and between the Company, the
Subsidiary Guarantors and Harris Trust and Savings Bank
4.3* Form of 14 1/2% Senior Notes due 2008
4.4* Registration Rights Agreement dated as of May 21, 1998 by and between the
Company, Bear, Stearns & Co. Inc. and NationsBank Montgomery Securities,
as Initial Purchasers relating to the Notes
4.5* Warrant Agreement dated as of May 21, 1998 by and between the Company and
Harris Trust and Savings Bank, as Warrant Agent relating to the warrants
to purchase Common Stock of the Company (the "Warrants")
4.6* Specimen Certificate for the Warrants of the Company
4.7* Warrant Registration Rights Agreement dated as of May 21, 1998 by and
between the Company and Harris Trust and Savings Bank
4.8* Pledge & Security Agreement, dated May 21, 1998, between the Company and
Harris Trust and Savings Bank as Collateral Agent and Trustee, relating to
the interest reserve account for the Notes
4.9* Guarantee of the Subsidiary Guarantors dated May 21, 1998
4.10* Registration Agreement dated April 29, 1998 between the Company and
Ventures in Communications II, LLC
5.1* Opinion and Consent of Kirkland & Ellis
10.1* Professional Services Agreement dated May 15, 1998 by and between the
Company and The VenCom Group, Inc.
10.2* Letter Agreement by and between the Company and Sprint Communications
dated April 23, 1998 electing renewal of the Affiliate Services Agreement
10.3+* Affiliate Services Agreement by and between the Company and Sprint
Communications dated April 4, 1997
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
10.4 (intentionally omitted)
10.5+* Asset Purchase and Sale Agreement dated June 8, 1988 by and between the
Company and People's Choice TV Corp. and Preferred Entertainment, Inc.
10.6* Amended and Restated Security Agreement dated April 29, 1998 by and
between the Company and The Northern Trust Company
10.7* Amended and Restated Call on Term-Term Note dated April 29, 1998
evidencing the Company's indebtedness to The Northern Trust Company
10.8* Deed of Lease Agreement dated July 3, 1996 between Mid-Atlantic Cable
Service Company and LEP/Largo Limited Partnership relating to the property
at 1200 Mercantile Lane, Largo, Maryland, as amended
10.9* Stock Appreciation Rights program of the Company, effective as of January
1, 1998
10.10+* CSG Master Subscriber Management Agreement dated September 27, 1998 by and
between the Company and CSG Systems, Inc.
10.11+* End User License Agreement dated March 7, 1997 by and between the Company
and BDSI, Inc. D/B/A Beechwood Data Systems
10.12* Resale Agreement dated as of May 28, 1997 by and between VIC-RMTS-DC, LLC
and Bell Atlantic--Virginia, Inc., as amended
10.13* Resale Agreement dated as of August 1, 1997 by and between VIC-RMTS-DC,
LLC and Bell Atlantic--Washington, D.C., Inc., as amended
10.14* Resale Agreement dated as of August 1, 1997 by and between VIC-RMTS-DC,
LLC and Bell Atlantic--Pennsylvania, Inc., as amended
10.15* Resale Agreement dated as of May 7, 1997 by and between VIC-RMTS-DC, LLC
and Bell Atlantic--Maryland, Inc., as amended
10.16* Resale Agreement dated as of March 25, 1998 by and between VIC-RMTS-DC,
LLC and Bell Atlantic--Delaware, Inc., as amended
10.17* Agreement for Sale of Telecommunications Services dated July 21, 1997 by
and between OnePoint Communications--Georgia, LLC and BellSouth
Telecommunications, Inc.
10.18* Agreement for Sale of Telecommunications Services dated February 6, 1998
by and between OnePoint Communications--Colorado, LLC and US WEST
Communications, Inc.
21.1* Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, independent auditors
23.2 Consent of Beers & Cutler PLLC, independent auditors
23.3 Consent of Arthur Andersen LLP, independent auditors
23.4* Consent of Kirkland & Ellis (included in Exhibit 5.1)
23.5* Consent of Sturgill & Associates LLP, independent appraisers
24.1* Powers of Attorney of Directors and Officers of the Company and each
Subsidiary Guarantor (contained in signature pages)
25.1* Statement of Eligibility of Note Trustee
27.1* Financial Data Schedule
99.1* Form of Letter of Transmittal
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
99.2* Form of Notice of Guaranteed Delivery
99.3* Form of Tender Instructions
</TABLE>
- --------
*Previously filed
+Confidential treatment requested
Item 22. Undertakings.
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions, or otherwise, the registrants have
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a directors, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
(d) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company duly
caused this Amendment No. 4 to the Registration Statement on Form S-4 to be
signed on its behalf by the undersigned, thereunto duly authorized, in City of
Bannockburn, State of Illinois, on the 4th day of August, 1999.
Onepoint Communications Corp.
/s/ James A. Otterbeck
By: _________________________________
James A. Otterbeck
Chairman and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the 4th day of August, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ James A. Otterbeck Chairman, Chief Executive Officer and
___________________________________________ Director (Principal Executive Officer)
James A. Otterbeck
* President, Chief Operating Officer and
___________________________________________ Director (Principal Operating Officer)
William F. Wallace
/s/ John D. Stavig Chief Financial Officer and Director
___________________________________________ (Principal Financial Officer)
John D. Stavig
* Treasurer (Principal Accounting Officer)
___________________________________________
William McMoil
* Director
</TABLE> ___________________________________________
Linda L. Pace
/s/ John D. Stavig
*By _________________________________
John D. Stavig
Attorney-in-fact
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, OnePoint
Communications Holdings, LLC duly caused this Amendment No. 4 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in City of Bannockburn, State of
Illinois, on the 4th day of August, 1999.
OnePoint Communications Holdings,
LLC
/s/ James A. Otterbeck
By: _________________________________
James A. Otterbeck
Chairman and Chief Executive
Officer of OnePoint Communications
Corp., its manager
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the 4th day of August, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* President (Principal Executive Officer)
___________________________________________
William F. Wallace
/s/ John D. Stavig Chief Financial Officer (Principal
___________________________________________ Financial Officer)
John D. Stavig
* Treasurer (Principal Accounting Officer)
</TABLE>___________________________________________
William McMoil
/s/ John D. Stavig
*By _________________________________
John D. Stavig
Attorney-in-fact
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, OnePoint
Communications--Georgia, LLC duly caused this Amendment No. 4 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in City of Bannockburn, State of
Illinois, on the 4th day of August, 1999.
OnePoint Communications--Georgia,
LLC
/s/ James A. Otterbeck
By: _________________________________
James A. Otterbeck
Chairman and Chief Executive
Officer of OnePoint Communications
Corp., its manager
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the 4th day of August, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* President (Principal Executive Officer)
___________________________________________
William F. Wallace
/s/ John D. Stavig Chief Financial Officer (Principal
___________________________________________ Financial Officer)
John D. Stavig
* Treasurer (Principal Accounting Officer)
</TABLE>___________________________________________
William McMoil
/s/ John D. Stavig
*By _________________________________
John D. Stavig
Attorney-in-fact
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, OnePoint
Communications--Illinois, LLC duly caused this Amendment No. 4 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in City of Bannockburn, State of
Illinois, on the 4th day of August, 1999.
OnePoint Communications--Illinois,
LLC
/s/ James A. Otterbeck
By: _________________________________
James A. Otterbeck
Chairman and Chief Executive
Officer of OnePoint Communications
Corp., its manager
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the 4th day of August, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* President (Principal Executive Officer)
___________________________________________
William F. Wallace
/s/ John D. Stavig Chief Financial Officer (Principal
___________________________________________ Financial Officer)
John D. Stavig
* Treasurer (Principal Accounting Officer)
</TABLE>___________________________________________
William McMoil
/s/ John D. Stavig
*By _________________________________
John D. Stavig
Attorney-in-fact
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, OnePoint
Communications--Colorado, LLC duly caused this Amendment No. 4 to the
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in City of Bannockburn, State of
Illinois, on the 4th day of August, 1999.
OnePoint Communications--Colorado,
LLC
/s/ James A. Otterbeck
By: _________________________________
James A. Otterbeck
Chairman and Chief Executive
Officer of OnePoint Communications
Corp., its manager
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the 4th day of August, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* President (Principal Executive Officer)
___________________________________________
William F. Wallace
/s/ John D. Stavig Chief Financial Officer (Principal
___________________________________________ Financial Officer)
John D. Stavig
* Treasurer (Principal Accounting Officer)
</TABLE>___________________________________________
William McMoil
/s/ John D. Stavig
*By _________________________________
John D. Stavig
Attorney-in-fact
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, VIC-RMTS-DC, LLC
duly caused this Amendment No. 4 to the Registration Statement on Form S-4 to
be signed on its behalf by the undersigned, thereunto duly authorized, in City
of Bannockburn, State of Illinois, on the 4th day of August, 1999.
VIC-RMTS-DC, LLC
/s/ James A. Otterbeck
By: _________________________________
James A. Otterbeck
Chairman and Chief Executive
Officer of OnePoint Communications
Corp., the manager of its manager
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 4 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the 4th day of August, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* President (Principal Executive Officer)
___________________________________________
William F. Wallace
/s/ John D. Stavig Chief Financial Officer (Principal
___________________________________________ Financial Officer)
John D. Stavig
* Treasurer (Principal Accounting Officer)
</TABLE>___________________________________________
William McMoil
/s/ John D. Stavig
*By _________________________________
John D. Stavig
Attorney-in-fact
II-11
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports with respect to the financial statements of: OnePoint
Communications Corp. dated February 12, 1999 (except for the fourth paragraph of
Note 10 as to which the date is March 5, 1999 and Note 21 as to which the date
is March 30, 1999); and VIC-RMTS-DC, LLC dated February 12, 1999 (except for the
fifth paragraph of Note 9 as to which the date is March 5, 1999 and Note 10 as
to which the date is March 30, 1999), in Amendment No. 4 to the Registration
Statement (Form S-4 No. 333-63787) and related Prospectus of OnePoint
Communications Corp. for the registration of $82,750,000 14 1/2% Senior notes
due 2008, Series B.
/s/ Ernst & Young, LLP
August 4, 1999
Vienna, Virginia
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the use of our report dated
February 19, 1999, on our audit of the financial statements of Mid-Atlantic
Telcom Plus, LLC as of December 31, 1997 and 1998, and for the years then ended,
and to our report dated April 4, 1997, on our audit of the consolidated and
combined financial statements of Mid-Atlantic Cable Companies as of December 31,
1996, and for the year ended (and to all references to our Firm) included in or
made a part of this registration statement on Form S-4 of OnePoint
Communications Corp.
/s/ Beers & Cutler PLLC
BEERS & CUTLER PLLC
Washington, DC
August 4, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated June 15, 1998 on our audits of certain assets and liabilities of
Preferred Entertainment, Inc. as of December 31, 1997 and 1996 and the
statements of related revenues and expenses for the years ended December 31,
1997 and 1996 (and to all references to our Firm) included in this registration
statement on Form S-4 of OnePoint Communications Corp. It should be noted that
we have not audited any financial statements of Preferred Entertainment, Inc.
subsequent to December 31, 1997 or performed any audit procedures subsequent to
the date of our reports.
/s/ Arthur Andersen LLP
Stamford, Connecticut
August 4, 1999
