<PAGE>
Securities and Exchange Commission
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarterly Period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-63787
---------
ONEPOINT COMMUNICATIONS CORP.
(exact name of registrant as specified in its charter)
State of Delaware 36-4225811
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
Two Conway Park 60045
150 Field Drive, Suite 300 (Zip Code)
Lake Forest, IL
(Address of principal executive offices)
Telephone number, including area code: 847-582-8800
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
---------
As of November 14, 2000, the Company had 1,029,645 shares of Common Stock
outstanding.
<PAGE>
ONEPOINT COMMUNICATIONS CORP.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
--------------------------------
<S> <C>
Item 1. Financial Statements
ONEPOINT COMMUNICATIONS CORP.
. Consolidated Statements of Operations (Unaudited) for the three and nine
months ended September 30, 2000 and 1999 4
. Consolidated Balance Sheet as of September 30, 2000 (Unaudited) and
December 31, 1999 5
. Consolidated Statements of Cash Flows (Unaudited) for the nine months
ended September 30, 2000 and 1999 6
. Notes to Consolidated Financial Statements (Unaudited) 7
VIC-RMTS-DC, LLC
. Statements of Operations (Unaudited) for the three and nine months ended
September 30, 2000 and 1999 13
. Balance Sheet as of September 30, 2000 (Unaudited) and
December 31, 1999 14
. Statements of Cash Flows (Unaudited) for the nine months ended
September 30, 2000 and 1999 15
. Notes to Financial Statements (Unaudited) 16
ONEPOINT SERVICES, LLC
. Consolidated Statements of Operations (Unaudited) for the three and nine
months ended September 30, 2000 18
. Consolidated Balance Sheet as of September 30, 2000 (Unaudited) and
December 31, 1999 19
. Consolidated Statements of Cash Flows (Unaudited) for the nine
months ended September 30, 2000 20
. Notes to Consolidated Financial Statements (Unaudited) 21
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
ONEPOINT COMMUNICATIONS CORP. 23
VIC-RMTS-DC, LLC 29
ONEPOINT SERVICES, LLC 32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34
</TABLE>
2
<PAGE>
PART II. OTHER INFORMATION:
---------------------------
Item 1. Legal Proceedings 35
Item 2. Changes in Securities and Use of Proceeds 35
Item 3. Defaults upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
Signatures 37
3
<PAGE>
Item 1. Financial Statements
-----------------------------
OnePoint Communications Corp.
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
---------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 12,392 $ 5,957 $ 33,378 $ 15,080
Cost of revenue 12,266 5,869 32,115 15,096
---------------------------------------------------
126 88 1,263 (16)
Expenses:
Selling, general and administrative 18,379 12,766 52,784 33,432
Depreciation and amortization 1,077 727 3,232 1,947
---------------------------------------------------
Loss from operations (19,330) (13,405) (54,753) (35,395)
Other income (expense)
Interest income 291 506 1,143 2,308
Interest expense (4,127) (3,369) (12,131) (11,489)
Other (11,265) (141) (11,287) (102)
---------------------------------------------------
(15,101) (3,004) (22,275) (9,283)
---------------------------------------------------
Equity in income and (losses) of unconsolidated
subsidiaries 4,610 (1,097) 24,325 (2,641)
---------------------------------------------------
Loss before extraordinary item (29,821) (17,506) (52,703) (47,319)
Extraordinary gain on bond repurchases -- -- -- 20,506
--------------------------------------------------
Net Loss $ (29,821) $ (17,506) $ (52,703) $ (26,813)
===================================================
Loss per share - Basic:
Loss before extraordinary item $(28.96) $ (17.51) $(51.85) $ (47.32)
Extraordinary item -- -- -- 20.51
--------------------------------------------------
Net Loss $ (28.96) $ (17.51) $(51.85) $ (26.81)
==================================================
Shares used in computing loss per share:
Weighted average common shares - basic 1,029,645 1,000,000 1,016,445 1,000,000
==================================================
</TABLE>
See accompanying notes.
4
<PAGE>
OnePoint Communications Corp.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999 (*)
-------------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,677 $ 6,608
Restricted cash 134 134
Investment in marketable securities, current 1,762 4,230
Accounts receivable, net 5,162 2,722
Other receivable 2,000 --
Affiliate receivable 566 266
Prepaid expenses 1,448 3,358
-------------------------------------------
Total current assets 12,749 17,318
-------------------------------------------
Investment in marketable securities, non-current ($18,250 and $23,390,
restricted 18,652 24,570
at September 30, 2000 and December 31, 1999, respectively)
Investments in unconsolidated subsidiaries -- 2,240
Property and equipment, net 22,645 20,378
Intangible assets, net 6,147 10,909
Other assets 2,203 5,993
-------------------------------------------
Total assets $ 62,396 $ 81,408
===========================================
Liabilities, Redeemable Preferred Stock and Stockholders' (Deficit)
Current liabilities:
Accounts payable and accrued expense $ 27,563 $ 17,232
Affiliate payable 4,611 3,778
Accrued interest payable 5,024 1,152
Current portion of long term debt 3,605 980
Total current liabilities 40,803 23,142
Deferred obligations 354 864
Deferred gain on sale of equity interest in consolidated subsidiary 3,744 9,188
Minority interest in consolidated subsidiaries 1,256 1,041
Long term debt 116,460 102,437
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, 1,029,645 and 10 10
1,000,000 shares issued and outstanding at September 30, 2000 and December
31, 1999 , respectively
Additional capital 14,444 6,870
Note receivable - stockholder (1,500) (1,500)
Accumulated deficit (148,382) (95,679)
Other comprehensive income 207 35
-------------------------------------------
Total stockholders' (deficit) (135,221) (90,264)
-------------------------------------------
Total liabilities, redeemable preferred stock and stockholders' (deficit) $ 62,396 $ 81,408
===========================================
</TABLE>
(*) The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date, but does not include all of
the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements.
See accompanying notes.
5
<PAGE>
OnePoint Communications Corp.
Consolidated Statements of Cash Flow (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
-------------------------------------
<S> <C> <C>
Operating activities
Net loss $ (52,703) $ (26,813)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 3,232 1,947
Amortization of premium (discount) of securities acquired included in interest income (1,096) (973)
Amortization of debt discount issuance cost and warrants included in interest expense 677 683
Amortization of developer payments included in reselling costs 2,583 1,475
Losses in equity of interest of unconsolidated investments 792 2,641
Loss on sale of private cable assets 11,265
Extraordinary gain on bond repurchases -- (20,506)
Deferred gain on sale of investments (5,444) --
Unrealized gain /(loss) on investments in marketable securities 172 (593)
Loss on disposal of property and equipment -- 114
Change in allowance for doubtful accounts 648 172
Change in minority interest 444 --
Changes in operating assets and liabilities:
Accounts receivable (3,694) (1,141)
Prepaid expenses 2,986 (1,951)
Other assets 4,883 100
Affiliates payable 833 (358)
Affiliates receivable (300) 366
Accounts payable and accrued expenses 10,331 788
Accrued interest 3,872 2,320
------------------------------------
Net cash (used in) operating activities (20,519) (41,729)
Investing activities
Restricted cash, net -- 5,066
Proceeds from sale of unconsolidated subsidiary 26,500 --
Purchase of equity instruments 1,449 --
Proceeds from sale of marketable securities 51,986 74,987
Purchase of marketable securities (69,439) (8,313)
Purchase of Note Receivable (900) --
Repayment of Note Receivable 633 --
Acquisition of property and equipment (12,225) (8,714)
------------------------------------
Net cash provided by investing activities (1,996) 63,026
Financing activities
Proceeds from issuance of long-term debt 20,000 --
Proceeds from issuance (repayment) of short-term debt -- (27,027)
Proceeds from issuance of common stock 7,632 --
Repayment of long-term debt (5,851) --
Repayment of capital lease obligations (4,197) --
------------------------------------
Net cash provided by (used in) financing activities 17,584 (27,027)
------------------------------------
Net (decrease) in cash (4,931) (5,730)
Cash at the beginning of period 6,608 5,730
------------------------------------
Cash at the end of period $ 1,677 $ --
====================================
</TABLE>
See accompanying notes.
6
<PAGE>
OnePoint Communications Corp.
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Organization and Basis of Presentation
OnePoint Communications Corp. (the "Company") was incorporated to provide
voice, data and video services to residents of multiple dwelling units ("MDUs").
The Company consists of OnePoint Communications Corp., the parent company, and
its wholly-owned subsidiaries, OnePoint Communications-Colorado, LLC, OnePoint
Communications-Illinois, LLC, OnePoint Communications Holdings, LLC ("OPC
Holdings") and its majority-owned subsidiary OnePoint Services, LLC ("OPS") in
which the Company maintains a 71% interest and is consolidated in the
accompanying financials statements. In addition, through OPC Holdings, the
Company maintains a 87.97% interest in VIC-RMTS-DC, LLC, which has been
consolidated in the accompanying financial statements.
In August 2000, the Company signed a definitive merger agreement with Bell
Atlantic Corporation d/b/a Verizon Communications ("Verizon") under which the
Company would merge into a wholly-owned subsidiary of Verizon. As a result of
this transaction, Verizon will acquire all of the Company's stock and the
Company will be the surviving entity. The merger is anticipated to close during
December 2000 and is subject to certain conditions, adjustments and regulatory
and other approvals. Since signing the merger agreement, Verizon has provided
the Company with certain equity and debt financing to fund its operations. See
Management's Discussion and Analysis--Liquidity and Capital Resources for
additional information related to the funding committments and impact to the
Company if such financings are not consummated.
The accompanying unaudited consolidated financial statements include the
accounts of OnePoint Communications Corp., its wholly-owned subsidiaries, and
its majority-owned subsidiaries (OnePoint Services, LLC, and VIC-RMTS-DC, LLC).
All inter-company transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, the accompanying
consolidated financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normally recurring accruals) considered necessary for
a fair presentation have been included in the accompanying consolidated
financial statements. The consolidated results of operations for the nine-month
period ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the full fiscal year. These consolidated financial
statements should be read in conjunction with the consolidated audited financial
statements as of December 31, 1999 and 1998 and for each of the three years in
the period ended December 31, 1999 included in the Annual Report on Form 10-K of
OnePoint Communications Corp. (File No. 333-63787), as filed with the Securities
and Exchange Commission.
Note 2 - Summarized Income Statement Information of Affiliates
Since 1997, the Company had a 41% minority equity investment in Mid-
Atlantic Telcom Plus, LLC and accounted for this investment using the equity
method. In March 2000, this company sold substantially all of its assets to
Comcast Corporation, ceased operations and provided for an initial distribution
of the sale proceeds. In July 2000, Mid-Atlantic Telcom Plus, LLC redeemed the
Company's 41% interest for $4.5 million and entered into a series of agreements
which terminated all relationships between the parties and waived any future
claims.
During March 2000, the Company purchased a minority equity investment of 1%
in ComPlus LP, an affiliated company which provided engineering services to the
Company and which was accounted for using the equity method. During the second
quarter of 2000 this company became insolvent and the investment was written
off. The Company also made a secured loan to ComPlus, LP in March 2000 for $0.9
million. Although the Company reserved $0.3 million against this loan during the
second quarter, the Company has since received payments and offset its payable
to this vendor in an amount sufficient to completely retire this secured loan.
The combined results of operations and financial position of the Company's
equity-basis affiliates are summarized below (in thousands):
7
<PAGE>
Note 2 - Summarized Income Statement Information of Affiliates (continued)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Condensed Operating
Information
Net sales -- $ 4,937 17,197 $14,697
Income/(loss) from operations -- 1,221 4,614 4,064
Gain on sale of assets -- -- 83,310 --
Net income/(loss) -- (2,675) (75,593) (6,407)
</TABLE>
Note 3 - Long Term Debt
In May 1998, the Company offered 175,000 units each consisting of a $1,000
principal amount of 14.5 % Senior Notes due 2008 (the "Senior Notes") and a
warrant to purchase 0.635 shares of the common stock of the Company (a
"Warrant") for gross proceeds of $175.0 million (collectively, the "Unit
Offering"). The Company used approximately $80.5 million of the net proceeds
from the Unit Offering to purchase securities pledged with a trustee to fund
future interest payments on the Senior Notes (the "Pledged Securities"). The
Company also used a portion of the proceeds to pay down the borrowings under a
term note from Northern Trust Bank (the "Credit Facility") which the Company has
borrowed again since that time. The Company completed open market purchases of
Senior Notes having an aggregate principal amount of $92.3 million between
November 9, 1998 and June 30, 1999 at various prices for an aggregate total cost
of approximately $47.9 million, including accrued interest and transaction fees.
The Company recognized an extraordinary gain on the early extinguishment of this
debt of $19.8 million in the fourth quarter of 1998 and recognized an
extraordinary gain of approximately $12.4 million and $8.0 million in the first
and second quarters of 1999, respectively. 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 $26.7 million of such
securities on February 24, 1999 and $11.5 million on July 8, 1999 upon request
by the Company. The balance of the net proceeds have been invested in network
infrastructure, to support voice and data services, investment in the Company's
subsidiaries and to fund working capital for general corporate purposes,
including operating losses. As of September 30, 2000 the carrying value of the
Senior Notes was $77.4 million net of the unamortized debt discount, warrants
and issue costs of $1.9, $2.0 and $1.5 million respectively
In March 1998, the Company obtained the $9.0 million Credit Facility.
Borrowings under the Credit Facility outstanding as of December 15, 1998,
(approximately $8.75 million) are repaid 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 September
30, 2000, the Company had outstanding $8.3 million and obtained a $0.25 million
letter of credit under the facility. On August 30, 1999 the Company established
a $16.0 million credit facility (the "Second Credit Facility") with the same
bank that matures on January 1, 2004. The terms of the Second Credit Facility
are similar to those contained in the previous agreement. On August 30, 1999 the
Credit Facility was amended in order to make the default provisions consistent
under both facilities. As of September 30, 2000 the Company had $13.8 million
outstanding on the Second Credit Facility and obtained $1.6 million in letters
of credit.
In July 2000, the Company entered into a $20.0 million unsecured loan
agreement with Lucent Technologies Inc. which was guaranteed by all of the
Company's controlled subsidiaries. Advances under this loan agreement were
subsequently capped at $5.0 million at the Company's direction and incur
interest at prime plus 7% per annum, with a scheduled maturity during 2008.
This loan agreement was assigned by Lucent Technologies Inc. to Verizon
Investments, Inc., an affiliate of Verizon, during October 2000 with an
outstanding principal balance of $5.0 million.
In August 2000, the Company entered into a $15.0 million unsecured loan
agreement with Verizon Investments, Inc., an affiliate of Verizon, which was
guaranteed by all of the Company's controlled subsidiaries. Advances under this
loan agreement incur interest at prime plus 7% per annum, with a scheduled
maturity during 2008. As of September 30, 2000 $10.0 million was drawn against
this loan agreement.
8
<PAGE>
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 nine months ended September 30, 2000 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
----------------------------------------
<S> <C> <C>
Net (loss) $ (52,703) $ (26,813)
Unrealized gain/(loss) on securities 207 108
----------------------------------------
Changes in non-owner equity $ (52,496) $ (26,705)
========================================
</TABLE>
Note 5 - Accounting for Derivatives
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which was required to be adopted in years
beginning after June 15, 1999. The FASB recently issued Statement No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of
Effective Date of FASB Statement No. 133". The Statement defers for one year the
effective date of FASB Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities". The rule now will apply to all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Certain of the Company's holdings of equity
instruments have been deemed derivatives pursuant to the criteria established in
SFAS 133. The Company expects the adoption of SFAS 133 in fiscal 2001, as well
as the effect on subsequent periods, to be immaterial. The Company is evaluating
the impact of the adoption of SFAS 133, which will be adopted effective January
1, 2001, on the Company's financial position and results of operations.
Note 6 - Shareholder's Deficit
The Company's basic loss per share calculations are based upon the weighted
average shares of common stock outstanding. The dilutive effect of the vested
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.
The Company sold 29,645 shares of common stock in the second quarter of
2000 for net proceeds of $7.6 million and 17,850 warrants to purchase common
stock in the third quarter for net proceeds of $2.5 million.
Note 7 - Disposition of Assets
In September 2000, the Company completed the sale of its private cable
assets in Chicago to 21st Century Cable TV of Chicago, Inc. The Company sold
approximately $19.0 million in net assets, received $5.7 million in cash and
recognized an accounts receivable balance of $2.0 million relating to an escrow
amount.
<TABLE>
<S> <C>
PP&E, net of accumulated depreciation of $2.8 million $10.4million
Intangible assets, net of accumulated amortization of $0.8 million $3.9 million
Other Assets $4.7 million
------------
$19.0 million
Cash proceeds received ($5.7million)
Other receivable ($2.0 million)
-------------
Loss on disposition $11.3 million
=============
</TABLE>
9
<PAGE>
Note 7 - Disposition of Assets (continued)
In addition to the proceeds received at closing and escrowed amounts, the
Company can receive up to $2.0 million, or a pro rata share thereof, contingent
upon the Company securing short-term extensions of contracts with property
owners expiring prior to March 11, 2001. These contingent sales proceeds have
not been recognized in the accompanying financial statements due to the
uncertainty of the ultimate resolution of the contingencies.
Note 8 - Other Information
The Company made cash payments of $7.7 million and $8.5 million for
interest during the nine months ended September 30, 2000 and 1999, respectively.
There were no cash payments for income taxes during those periods.
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 of
operations.
Note 9 - 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 income 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.
All investments in affiliates accounted for under the equity method are in
the Mid-Atlantic Region segment, except for the Company's investment in ComPlus,
LP which is included in the Other segment. Equity in the net income/(losses) of
investees accounted for by the equity method totaled $24.4 million and ($2.6)
million for the Mid-Atlantic segment and ($0.1) million and $0.0 million for the
Other segment for the nine months ended September 30, 2000 and 1999,
respectively. The Company sold its remaining interest in the investment held in
the Mid-Atlantic region during July 2000. The Mid-Atlantic region's investment
in affiliates accounted for under the equity method totaled $0.0 million and
$2.2 million as of September 30, 2000 and December 31, 1999, respectively. The
Company wrote off its $0.1 million equity investment in ComPlus, LP during the
second quarter due to the insolvency of ComPlus, LP. As the Other region's
investment in affiliates accounted for under the equity method was established
during the first quarter of 2000 and written off during the second quarter of
2000 the investment totaled $0.0 million and $0.0 million as of September 30,
2000 and December 31, 1999, respectively.
The following table provides certain financial information for each business
segment (in thousands):
September 30,
2000 1999
--------------------------------
Revenues:
Central Region $ 6,023 $ 4,512
Mid-Atlantic Region 5,550 3,187
Southeast Region 7,964 4,232
Western Region 13,841 3,112
10
<PAGE>
Note 9 - Segment Information (continued)
<TABLE>
<S> <C> <C>
Other -- 37
------------------------------
$ 33,378 $ 15,080
==============================
Earning/(Loss) from operations:
Central Region $(10,401) $(11,541)
Mid-Atlantic Region (11,018) (8,345)
Southeast Region (12,287) (7,690)
Western Region (18,494) (7,235)
Other (2,553) (584)
------------------------------
$(54,753) $(35,395)
==============================
Identifiable assets:
Central Region $ 3,166 $ 20,784
Mid-Atlantic Region 3,689 4,919
Southeast Region 3,672 3,061
Western Region 14,025 1,794
Other 37,844 44,341
------------------------------
$ 62,396 $ 74,899
==============================
</TABLE>
The following table provides gross revenues on a service line basis (in
thousands):
Nine Months September 30,
2000 1999
--------------------------------
Revenues:
Voice $29,626 $11,628
Video 3,664 3,415
Data 88 37
--------------------------------
$33,378 $15,080
================================
Note 10 - Related Party Transactions
The Company entered into a professional services agreement with The VenCom
Group Inc., ("VenCom") in April 1998, pursuant to which VenCom provides
financial and management consulting services and manages the Company's
relationships with Ventures in Communications II, LLC ("VIC2") and SBC
Communications Inc. ("SBC"). The Company accrued fees of $0.8 million during
the nine month period ended September 30, 2000. Approximately $4.6 million and
$3.8 million remained unpaid as of September 30, 2000 and December 31, 1999
respectively.
Note 11 - Deferred Gain on Sale of Equity Interest in Consolidated Subsidiary
In December 1999 and February 2000, SBC Comventures, Inc., a wholly-owned
subsidiary of SBC, invested $10.0 million and $5.0 million, respectively, to
obtain a 24.0% and 12.0% direct ownership interest, respectively, in a majority-
owned subsidiary of the Company, VIC-RMTS-DC, LLC. These transactions resulted
in
11
<PAGE>
Note 11 - Deferred Gain on Sale of Equity Interest in Consolidated Subsidiary
(continued)
an aggregate deferred gain of approximately $12.9 million. This agreement
provided the Company the right to repurchase the interest in VIC-RMTS-DC, LLC
for the original sales price plus 15% per annum. In addition, SBC Comventures,
Inc. has the right to put the VIC-RMTS-DC, LLC interests to the Company's
Chairman, personally, under the same terms as the Company's call repurchase
rights.
In April 2000, the Company exercised its right to repurchase a portion of
the common ownership interest in VIC-RMTS-DC, LLC previously sold to SBC
Comventures, Inc. in exchange for $10.4 million. After giving effect to this
repurchase, SBC Comventures, Inc. holds a 12.0% interest in VIC-RMTS-DC, LLC.
The Company retains its call on such units at the original purchase price plus
15.0% per annum and SBC Comventures, Inc. retains its rights to put such
interest to the Company's Chairman, personally, under the same provisions as the
Company's call right. As of September 30, 2000 the Company has accrued $0.6
million relating to the outstanding ownership interest of $5.0 million. The
Company has deferred the recognition of gains generated by the sale of VIC-RMTS-
DC, LLC units to SBC Comventures, Inc. due to the uncertainty of the ultimate
outcome of these transactions.
Note 12 - Leases
In January 2000, the Company entered into a long-term lease for office
space in Lake Forest, IL to serve as the Company's corporate headquarters. The
lease terms require monthly payments of approximately $0.06 million in 2000 and
escalate at 3.0% per annum to $0.08 million per month in 2010 at the lease
expiration date. The lease provides for the pass-through of increases in
operating expenses and real estate taxes in years subsequent to 2000 on a pro
rata basis. The aggregate future minimum lease payments under this noncancelable
operating lease are approximately $8.4 million over the 10 year term.
Note 13 - Subsequent Events
In October 2000, the Company sold to Verizon Investments, Inc. of a Common
Stock Purchase Warrant to purchase 17,850 shares of Common Stock, par value
$0.01 per share, of the Company in exchange for $2.5 million.
In October 2000, the Company borrowed an additional $5.0 million against
the unsecured loan agreement with Verizon Investments, Inc., an affiliate of
Verizon, which was guaranteed by all of the Company's controlled subsidiaries.
Advances under this loan agreement incur interest at prime plus 7% per annum,
with a scheduled maturity during 2008. As of October 31, 2000 $15.0 million was
outstanding against this loan agreement.
Pursuant to Section 5.18 of the Verizon merger agreement, the shareholders
of the Company received notice from Verizon on November 2, 2000 that requires
them to invest $12.9 million of additional equity in the Company by November 17,
2000.
12
<PAGE>
Item 1. Financial Statements
-----------------------------
VIC-RMTS-DC, LLC
Statements of Operations (Unaudited)
(Dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
2000 1999 2000 1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 1,946 $ 1,291 $ 5,550 $ 3,187
Cost of revenue 1,857 1,547 6,108 3,887
------------------------------------------------------------------------------
89 (256) (558) (700)
Expenses:
Selling, general and administrative 3,438 2,535 10,135 7,365
Depreciation and amortization 110 94 326 280
------------------------------------------------------------------------------
Net loss $ (3,459) $ (2,885) $ (11,019) $ (8,345)
==============================================================================
Basic loss per unit $ (120,522.65) $ (106,534.49) $ (383,937.28) $ (322,128.00)
==============================================================================
Units used in the computation of basic loss
per unit 28.7 27.1 28.7 25.9
==============================================================================
</TABLE>
See accompanying notes.
13
<PAGE>
VIC-RMTS-DC, LLC
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999(*)
---------------------------------------
(Unaudited)
Assets
<S> <C> <C>
Current assets:
Accounts receivable, net $ 1,013 $ 554
Affiliate receivable -- 263
Prepaid expenses 334 730
---------------------------------------
Total current assets 1,347 1,547
Property and equipment, net 2,150 2,439
Other assets 192 204
---------------------------------------
Total assets $ 3,689 $ 4,190
=======================================
Liabilities and Unitholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,135 1,744
Total current liabilities 2,135 1,744
Other deferred obligations -- 171
Unitholders Equity:
Contributed capital 43,214 2,916
Accumulated deficit (41,660) 0,641)
---------------------------------------
Total unitholders' equity 1,554 2,275
---------------------------------------
Total liabilities and unitholders' equity $ 3,689 $ 4,190
=======================================
</TABLE>
(*) The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
See accompanying notes.
14
<PAGE>
VIC-RMTS-DC, LLC
Statements of Cash Flow (Unaudited)
(Dollars in thousands, except per unit data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
------------------------------------------
<S> <C> <C>
Operating activities
Net loss $(11,019) $ (8,345)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 326 280
Amortization of developer payments included in reselling 434 527
cost
Change in allowance for doubtful accounts 129 70
Changes in operating assets and liabilities:
Accounts receivable (588) (350)
Affiliates receivable 263 (142)
Other assets (31) 102
Prepaid expenses 5 (506)
Accounts payable, accrued expenses and deferred obligations 220 610
Net cash used in operating activities (10,261) (7,754)
Investing activities
Acquisition of property and equipment (37) (522)
-------------------------------------------
Net cash used in investing activities (37) (522)
Financing activities
Unitholder contributions 10,298 8,276
Net cash provided by financing activities 10,298 8,276
-------------------------------------------
Net increase (decrease) in cash - -
Cash at the beginning of period - -
Cash at the end of period $ - $ -
===========================================
</TABLE>
See accompanying notes.
15
<PAGE>
VIC-RMTS-DC, LLC
Notes to Financial Statements (Unaudited)
Note 1 - Basis of Presentation
VIC-RMTS-DC, LLC (the "Company") was incorporated to provide voice, data
and video services to residents of multiple dwelling units ("MDUs") in the Mid-
Atlantic region of the United States. The Company is a majority-owned subsidiary
of OnePoint Communications Corp. (the "Parent Company" or "OnePoint"), through
its wholly-owned subsidiary, OnePoint Communications Holdings, LLC ("OPC
Holdings").
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, the accompanying financial statements do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, all adjustments (consisting of normally recurring
accruals) considered necessary for a fair presentation have been included in the
accompanying financial statements. The results of operations for the nine-month
period ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the full fiscal year. These financial statements should
be read in conjunction with the Company's audited financial statements as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999 included in the Annual Report on Form 10-K of OnePoint
Communications Corp. (File No. 333-63787), as filed with the Securities and
Exchange Commission.
Note 2 - Long Term Debt
The Company is an unconditional guarantor of the 14 1/2% Senior Notes due
2008 issued by OnePoint in May 1998. As of September 30, 2000, there was $82.8
million in principal amount of Senior Notes outstanding. The Company is
required under the Indenture governing the 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 $1,000
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 (a "Warrant")
for gross proceeds of $175.0 million (collectively, the "Unit Offering").
OnePoint used approximately $80.5 million of the net proceeds from the Unit
Offering to purchase securities pledged with a trustee to fund future interest
payments on the Senior Notes (the "Pledged Securities"). OnePoint also used a
portion of the proceeds to pay down the borrowings under a term note from
Northern Trust Bank (the "Credit Facility") which OnePoint has borrowed again
since that time. OnePoint completed open market purchases of Senior Notes having
an aggregate principal amount of $92.3 million between November 9, 1998 and June
30, 1999 at various prices for an aggregate total cost of approximately $47.9
million, including accrued interest and transaction fees. OnePoint recognized an
extraordinary gain on the early extinguishment of this debt of $19.8 million in
the fourth quarter of 1998 and recognized an extraordinary gain of approximately
$20.4 million in the first and second quarters of 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
$26.7 million of such securities on February 24, 1999 and $11.5 million on July
8, 1999 upon request by OnePoint. The balance of the net proceeds have been
invested in network infrastructure, to support voice and data services, to
invest in OnePoint's subsidiaries and to fund working capital and for general
corporate purposes, including operating losses.
In March 1998, OnePoint obtained a $9.0 million credit facility from
Northern Trust (the "Credit Facility"). Borrowings under the Credit Facility
outstanding as of December 15, 1998, (approximately $8.75 million) are amortized
over a five-year period. The interest rate on borrowings under the Credit
Facility is, at OnePoint'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 September 30, 2000, OnePoint had
outstanding $8.3 million and obtained a $0.25 million letter of credit under the
facility. On August 30, 1999 OnePoint established a $16.0 million credit
facility (the "Second Credit Facility") with the same bank that matures on
January 1, 2004. The terms of the Second Credit Facility are similar to those
contained in the previous agreement. On August 30, 1999 the Credit Facility was
amended in order to make the default provisions consistent under both
facilities. As of September 30, 2000 OnePoint had $13.8 million outstanding on
the Second Credit Facility and obtained $1.6 million in letters of credit.
In August 2000, OnePoint entered into a $15.0 million unsecured loan
agreement with Verizon Investments,
16
<PAGE>
Inc., an affiliate of Verizon, which was guaranteed by all of OnePoint's
controlled subsidiaries, including the Company. Advances under this loan
agreement incur interest at prime plus 7% per annum, with a scheduled maturity
during 2008. As of September 30, 2000 $10.0 million was outstanding under this
loan agreement.
Note 3 - Unitholders' Equity
As of September 30, 2000, the Company had received approximately $43.2
million in contributed capital, all of which was paid by OnePoint Communications
Holdings, LLC ("OPC Holdings"), the Company's managing member.
In December 1999 and February 2000, SBC Comventures, Inc., a wholly-owned
subsidiary of SBC Communications Inc. ("SBC"), paid $10.0 million and $5.0
million, respectively to OPC Holdings in exchange for a 24.0% and 12.0% direct
ownership interest, respectively, in the Company. These transactions have not
been recognized in the accompanying financial statements, except for the
transfer of relative net equity positions of the parties thereto, as such
transactions were among the equity owners of the Company. These transactions
resulted in an aggregate deferred gain of approximately $12.9 million on OPC
Holdings financial statements. The agreements provided OPC Holdings the right to
repurchase the interest in the Company from SBC Comventures, Inc. for the
original sales price plus 15.0% per annum. In April 2000 OnePoint Communications
Holdings, LLC repurchased a 24.0% ownership interest in the Company from SBC
Comventures, Inc. for $10.4 million. As a result of this transaction SBC,
Comventures Inc. currently holds a 12.0% interest in the Company and the call
and put rights thereto remain in effect.
Note 4 - Subsequent Events
In October 2000, OnePoint borrowed an additional $5.0 million against the
unsecured loan agreement with Verizon Investments, Inc., an affiliate of
Verizon, which was guaranteed by all of OnePoint's controlled subsidiaries,
including the Company. Advances under this loan agreement incur interest at
prime plus 7% per annum, with a scheduled maturity during 2008. As of October
2000 $15.0 million was outstanding against this loan agreement.
17
<PAGE>
Item 1. Financial Statements
-----------------------------
OnePoint Services, LLC
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except for per unit data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
-------------------------------------------------
<S> <C> <C>
Revenue $ 3,438 $ 7,835
Cost of revenue 4,136 7,825
-------------------------------------------------
(698) 10
Expenses:
Selling, general and administrative 957 2,566
Interest Income 7 39
Depreciation and amortization 109 321
-------------------------------------------------
Net loss $ (1,757) $ (2,838)
=================================================
Basic loss per unit $ (24.82) $ (40.09)
=================================================
Units used in the computation of basic loss per unit 7,079,000 7,079,000
=================================================
</TABLE>
See accompanying notes.
18
<PAGE>
OnePoint Services, LLC
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999(*)
------------------------------------------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 694 $ 1,549
Accounts receivable, net 266 73
Inventory 108 70
Prepaid expenses 11 1
------------------------------------------
Total current assets 1,079 1,693
Property and equipment, net 426 415
Intangible assets, net 2,490 2,774
Other assets 124 82
------------------------------------------
Total assets $ 4,119 $ 4,964
==========================================
Liabilities and Unitholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 2,125 $ 478
Other current liabilities 1,759 1,471
Total current liabilities 3,884 1,949
Unitholders Equity:
Preferred Units par value, 1,629,300 authorized, issued and outstanding 923 923
Common Units par value, 6,790,700 units authorized and 5,449,700 units 2,753 2,706
issued and outstanding
Subscriptions receivable (384) (395)
Accumulated deficit (3,057) (219)
------------------------------------------
Total unitholders' equity 235 3,015
Total liabilities and unitholders' equity $ 4,119 $ 4,964
==========================================
</TABLE>
(*) The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.
See accompanying notes.
19
<PAGE>
OnePoint Services, LLC
Consolidated Statements of Cash Flow (Unaudited)
(Dollars in thousands, except per unit data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 2000
-----------------------
Operating activities
<S> <C>
Net loss $ (2,838)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 321
Change in allowance for doubtful accounts --
Changes in operating assets and liabilities:
Accounts receivable (193)
Inventory (38)
Prepaid expenses (10)
Other assets (42)
Accounts payable and accrued expenses 1,935
Other current liabilities --
Net cash used in operating activities (865)
Investing activities
Acquisition of intangible property 82
Acquisition of property and equipment (130)
-----------------------
Net cash used in investing activities (48)
Financing activities
Issuance of Preferred and Common membership units 58
Net cash provided by financing activities 58
-----------------------
Net increase (decrease) in cash (855)
Cash at the beginning of period 1,549
Cash at the end of period $ 694
=======================
</TABLE>
See accompanying notes.
20
<PAGE>
OnePoint Services, LLC
Notes to Consolidated Financial Statements
Note 1 - Basis of Presentation
OnePoint Services, LLC (the "Company") was incorporated in November of 1999
to provide services in the prepaid retail telecommunications market, which
includes prepaid telephone cards, prepaid residential and prepaid cellular
services in the Southwestern United States. The calling cards include local and
long distance telephony services. The Company is a majority-owned subsidiary of
OnePoint Communications Corp. (the "Parent Company" or "OnePoint").
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form 10-
Q and Article 10 of Regulation S-X. Accordingly, the accompanying financial
statements do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments (consisting
of normally recurring accruals) considered necessary for a fair presentation
have been included in the accompanying financial statements. The results of
operations for the nine-month period ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the full fiscal
year. These financial statements should be read in conjunction with the
Company's audited financial statements as of December 31, 1999 and the inception
period ended December 31, 1999 included in the Annual Report on Form 10-K of
OnePoint Communications Corp. (File No. 333-63787), as filed with the Securities
and Exchange Commission.
Note 2 - Long Term Debt
The Company is an unconditional guarantor of the 14 1/2% Senior Notes due
2008 issued by OnePoint in May 1998. As of September 30, 2000, there was $82.8
million in principal amount of Senior Notes outstanding. The Company is required
under the Indenture governing the 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 $1,000
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 (a "Warrant")
for gross proceeds of $175.0 million (collectively, the "Unit Offering").
OnePoint used approximately $80.5 million of the net proceeds from the Unit
Offering to purchase securities pledged with a trustee to fund future interest
payments on the Senior Notes (the "Pledged Securities"). OnePoint also used a
portion of the proceeds to pay down the borrowings under a term note from
Northern Trust Bank (the "Credit Facility") which OnePoint has borrowed again
since that time. OnePoint completed open market purchases of Senior Notes having
an aggregate principal amount of $92.3 million between November 9, 1998 and June
30, 1999 at various prices for an aggregate total cost of approximately $47.9
million, including accrued interest and transaction fees. OnePoint recognized an
extraordinary gain on the early extinguishment of this debt of $19.8 million in
the fourth quarter of 1998 and recognized an extraordinary gain of approximately
$20.4 million in the first and second quarters of 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
$26.7 million of such securities on February 24, 1999 and $11.5 million on July
8, 1999 upon request by OnePoint. The balance of the net proceeds have been
invested in network infrastructure, to support voice and data services, to
invest in OnePoint's subsidiaries and to fund working capital and for general
corporate purposes, including operating losses.
In March 1998, OnePoint obtained a $9.0 million credit facility from
Northern Trust (the "Credit Facility"). Borrowings under the Credit Facility
outstanding as of December 15, 1998, (approximately $8.75 million) are amortized
over a five-year period. The interest rate on borrowings under the Credit
Facility is, at OnePoint'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 September 30, 2000, OnePoint had
outstanding $8.3 million and obtained a $0.25 million letter of credit under the
facility. On August 30, 1999 OnePoint established a $16.0 million credit
facility (the "Second Credit Facility") with the same bank that matures on
January 1, 2004. The terms of the Second Credit Facility are similar to those
contained in the previous agreement. On August 30, 1999, the Credit Facility
was amended in order to make the default provisions consistent under both
facilities. As of September 30, 2000 OnePoint had $13.8 million outstanding on
the Second Credit Facility and obtained $1.6 million in letters of credit.
21
<PAGE>
In August 2000, OnePoint entered into a $15.0 million unsecured loan
agreement with Verizon Investments, Inc., an affiliate of Verizon, which was
guaranteed by all of OnePoint's controlled subsidiaries, including the Company.
Advances under this loan agreement incur interest at prime plus 7% per annum,
with a scheduled maturity during 2008. As of September 30, 2000 $10.0 million
was outstanding under this loan agreement.
Note 3 - Subsequent Events
In October 2000, OnePoint borrowed an additional $5.0 million against the
unsecured loan agreement with Verizon Investments, Inc., an affiliate of
Verizon, which was guaranteed by all of the OnePoint's controlled subsidiaries,
including the Company. Advances under this loan agreement incur interest at
prime plus 7% per annum, with a scheduled maturity during 2008. As of October
2000 $15.0 million was outstanding against this loan agreement.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Results of Operations - OnePoint Communications Corp.
Three Months Ended September 30, 2000 Compared with Three Months Ended
September 30, 1999.
Revenue
Revenues for the three months ended September 30, 2000 were $12.4
million compared to $6.0 million for the same period ended September 30, 1999 an
increase of $6.4 million or 106.7%. Telephony, cable television and data
revenues for the three months ended September 30, 2000 were $11.2, $1.2 and
$0.03 million respectively. The increase in revenues during the third quarter of
2000 compared to 1999 is due to an increase in multiple dwelling units and
subscribers served by the Company and higher average revenue per subscriber as
the Company continued to expand its customer base and the customers usage of
multiple services. In addition, revenues earned by OnePoint Services, LLC, which
was acquired by the Company in November 1999, contributed approximately $3.4
million to the increase in consolidated revenues.
Cost of Revenue
Cost of revenue (consisting primarily of telecommunications service
costs, programming and payments to owners and employees of multiple dwelling
units) was $12.3 million for the three month period ended September 30, 2000
compared to $5.9 million for the three month period ended September 30, 1999 an
increase of $6.4 million or 108.5%. This increase is directly related to the
increase in the number of subscribers to the Company's services and cost of
additional services provided by OnePoint Services, LLC. The Company makes
payments to developers of multiple dwelling units in advance of revenues to
secure long-term contracts. Additionally, OnePoint Services, LLC, which was
acquired by the Company in November 1999, contributed cost of goods sold of
approximately $4.1 million. Revenue for the three months ended September 30,
2000 exceeded cost of revenue by $0.1 million.
Selling, General and Administrative Expenses
Selling general and administrative expenses were $18.4 million for the
three month period ended September 30, 2000 compared to the $12.8 million for
the three months ended September 30, 1999 an increase of $5.6 million or 43.8%.
This increase was primarily the result of increases in personnel and related
costs and the increased number of subscribers for the Company's communications
services and the provisioning of those services. The Company continues to
experience high customer activation costs as it currently provides services
through resale agreements with the incumbent local exchange carriers ("ILECs")
and is dependent on the ILECs for the efficiency of order processing and
installation while it operates on a resale platform. The reserve for bad debts
was increased from 10.7% to 17.8% of outstanding accounts receivable from the
September 30, 1999 to September 30, 2000. The Company is implementing credit
scoring and deposit programs to address its high rate of bad debt.
Depreciation and Amortization
Depreciation and amortization was $1.0 million for the three months
ended September 30, 2000 compared to $0.7 million for the three months ended
September 30, 1999 an increase of $0.3 million or 42.9%. This increase in
depreciation is primarily due to an increase in telephony and data equipment of
approximately $2.0 million.
Interest Income and Expenses
Interest expense was $4.1 million for the three months ended September
30, 2000 compared to $3.4 million for the three months ended September 30, 1999.
This increase is primarily due to an increase in debt financing as the Company
incurred an additional $15.0 million of indebtedness during the three month
period ended September 30, 2000. Interest income was $0.3 million compared to
$0.5 million for the three month periods ended September 30, 2000 and 1999
respectively. Interest income decreased $0.2 million reflecting a decrease in
the balance of short-term investments as the proceeds have been used to fund
capital improvements and operations.
Other Income and Expense
Other income and expense for the three month period ended September
30, 2000 was $11.3 million
23
<PAGE>
compared to $0.1 million for the three months ended September 30, 1999. The
increase was the result of the Company's completed sale of its private cable
assets in Chicago to 21st Century Cable TV of Chicago, Inc. in which the Company
sold approximately $19.0 million in net assets, received $5.7 million in cash
and recognized an accounts receivable of $2.0 million relating to an escrow
amount resulting in a loss of $11.3 million.
Equity in Losses in Unconsolidated Subsidiaries
The Company recognized equity in the income and losses of its
unconsolidated subsidiaries of $4.6 million and ($1.1) million for the three
month periods ended September 30, 2000 and 1999, respectively. This increase in
income of $5.7 million is a result of the Company's recognized gain in the third
quarter of 2000 of approximately $4.3 million relating to the sale of
substantially all of the assets, net of certain liabilities, of Mid-Atlantic
Telcom Plus, LLC which amounts were offset by operating losses from that
investee.
Nine Months Ended September 30, 2000 Compared with Nine Months Ended
September 30, 1999.
Revenue
Revenues for the nine month period ended September 30, 2000 were $33.4
million compared to $15.1 million for the same period ended September 30, 1999
and increase of $18.3 or $121.2%. Telephony, cable television and data revenues
were $29.6, $3.7 and $0.1 million respectively. The increase in revenues during
the third quarter of 2000 compared to 1999 is due to an increase in multiple
dwelling units and subscribers served by the Company and increases in the
average revenue per subscriber as the Company continues to expand its customer
base and the customers usage of multiple services. The revenue also increased
due to approximately $7.8 million attributable to OnePoint Services, LLC, which
was acquired in November 1999.
Cost of Revenue
Cost of revenue (consisting primarily of telecommunication service
costs, programming and payments to owners and employees of multiple dwelling
units) was $32.1 million for the nine month period ended September 30, 2000
compared to $15.1 million for the nine month period ended September 30, 1999, an
increase of $17.0 million or 112.6%. This increase is a direct result of the
increase in the number of subscribers to the Company's services and additional
prepaid calling card services provided by OnePoint Services, LLC. The Company
makes payments to developers of multiple dwelling units in advance of revenues
to secure long-term contracts. Additionally, OnePoint Services, LLC, which was
acquired by the Company in November 1999, contributed approximately $7.8 million
in cost of goods sold. Revenue for the nine months ended September 30, 2000
exceeded cost of revenue by $1.3 million.
Selling, General and Administrative Expenses
Selling general and administrative expenses were $52.8 million for the
nine month period ended September 30, 2000 compared to $33.4 million for the
nine month period ended September 30, 1999 an increase of $19.4 million or
58.1%. This increase was primarily the result of increases in personnel and
related costs and the increased number of subscribers for the Company's
communications services and provisioning of those services. The Company
continues to experience high customer activation costs as it currently provides
services through resale agreements with the incumbent local exchange carriers
("ILECs") and is dependent on the ILECs for the efficiency of order processing
and installation while it operates on a resale platform. The reserve for bad
debts was increased from 10.7% to 17.8% of outstanding accounts receivable from
September 30, 1999 to September 30, 2000. The Company is implementing credit
scoring and deposit programs to address its high rate of bad debt.
Depreciation and Amortization
Depreciation and amortization was $3.2 million for the nine months
ended September 30, 2000 compared to $1.9 million for the nine months ended
September 30, 1999 and increase of $1.3 million or 68.4%. This increase in
depreciation is primarily due to an increase in telephony and data equipment of
approximately $14.0 million.
Interest Income and Expenses
Interest expense was $12.1 million for the nine months ended September
30, 2000 compared to
24
<PAGE>
$11.5 million for the period ended September 30, 1999 an increase of $0.6
million or 5.2%. This increase is primarily due to the increase in debt
financing as the Company incurred an additional $15.0 million of indebtedness
during the three month period ended September 30, 2000. Interest income was $1.1
million for the nine months ended September 30, 2000 compared to $2.3 million
for the nine months ended September 30, 1999 a decrease of $1.2 million or
52.2%. The decrease reflects a decline in the interest income from short-term
investments due to lower balances of short term investments due to the use of
the proceeds to fund capital improvements and operations.
Other Income and Expense
Other income and expense for the nine month period ended September 30,
2000 was $11.3 million compared to $0.1 million for the nine months ended
September 30, 1999. The increase was the result of the Company's completed sale
of its private cable assets in Chicago to 21st Century Cable TV of Chicago, Inc.
The Company sold approximately $19.0 million in net assets, received $5.7
million in cash and recognized an accounts receivable of $2.0 million relating
to an escrow amount resulting in a loss of $11.3 million.
Equity in Losses in Unconsolidated Subsidiaries
The Company recognized equity in the income and losses of its
unconsolidated subsidiaries of $24.3 million and ($2.6) million for the periods
ended September 30, 2000 and 1999, respectively. This increase in income of
$26.9 million is a result of the Company's recognized gain in the first and
third quarters of 2000 of approximately $20.0 and $4.3 million respectively,
relating to the sale of substantially all of the assets, net of certain
liabilities, of Mid-Atlantic Telcom Plus, LLC which amounts were offset by
operating losses from that investee.
Liquidity and Capital Resources - OnePoint Communications Corp.
The Company has financed its development through September 30, 2000
with proceeds from the issuance of $175.0 million in Senior Notes, $35.0 million
of funding provided by Ventures in Communications, LLC ("VIC"), $0.1 million of
equity invested by VenCom, L.L.C., borrowings under a $9.0 million credit
facility from Northern Trust (the "Credit Facility"), a second $16.0 million
credit facility from Northern Trust (the "Second Credit Facility"), a net $5.0
million sale of OnePoint's equity investment in VIC-RMTS-DC, LLC to SBC
Comventures, Inc., a $5.0 million equity investment by Bell Atlantic
Investments, a $2.6 million equity investment by Ventures in Communications II,
LLC ("VIC2"), net proceeds of $26.5 million from the sale of Mid-Atlantic Telcom
Plus, LLC, $5.7 million from the sale of its private cable assets, and $15.0
million in debt financing provided by Verizon. As of September 30, 2000: (i)
VIC2 owned 98.1% of the Company's outstanding capital stock; (ii) the Company's
Chairman Mr. Otterbeck indirectly owned 88.9% of VIC2's common membership units,
and had first priority on the first $35.0 million of distributions by VIC2 (less
all principal and interest payments on the VIC2 Note); (iii) SBC indirectly
owned 10.1% of VIC2's common membership units and VIC had warrants exercisable
for 11.9% of VIC2's equity (iv) CAIS Internet, Inc. owned 1% of VIC2's common
membership units and (v) Bell Atlantic Investments Inc. owned 1.9% of the
Company's outstanding capital stock.
From February to June 1997, the Company made investments totaling
approximately $12.0 million in Mid-Atlantic, a joint venture the Company entered
into to provide video service in the mid-atlantic region. In March of 2000, Mid-
Atlantic sold substantially all of its assets, net of certain liabilities to
Comcast Corporation. The Company's proportionate share of the net proceeds
related thereto was approximately $26.5 million, of which approximately $4.5
million was received in the third quarter of 2000. The Company recognized a gain
of approximately $20.0 million in the first quarter of 2000 related to this
transaction as a component of its equity in earnings/(losses) of unconsolidated
subsidiaries. Remaining interests in Mid-Atlantic were sold in July 2000 for net
proceeds of $4.5 million resulting in an additional gain of $4.3 million.
In March 1998, the Company obtained a $9.0 million credit facility
from Northern Trust (the "Credit Facility"). Borrowings under the Credit
Facility outstanding as of December 15, 1998, (approximately $8.75 million) are
repaid 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 September 30, 2000, the Company had
outstanding $8.3 million and obtained a $0.25 million letter of credit under the
facility. On August 30, 1999 the Company established a $16.0 million credit
facility (the "Second Credit Facility") with the same bank that matures on
January 1, 2004. The terms of the Second Credit Facility are similar to those
contained in the previous agreement. On the same date the Credit Facility was
amended in order to make the default provisions consistent under both
facilities. As of September 30, 2000 the Company had $13.8 million outstanding
on the Second Credit Facility and obtained $1.6 million in letters of credit.
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In May 1998, the Company offered 175,000 units each consisting of a $1,000
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 the Company (a
"Warrant") for gross proceeds of $175.0 million (collectively, the "Unit
Offering"). The Company used approximately $80.5 million of the net proceeds
from the Unit Offering to purchase securities pledged with a trustee to fund
future interest payments on the Senior Notes (the "Pledged Securities"). The
Company also used a portion of the proceeds to pay down the borrowings under the
Credit Facility which the Company has borrowed again since that time. The
Company completed open market purchases of Senior Notes having an aggregate
principal amount of $92.3 million between November 9, 1998 and September 30,
1999 at various prices for an aggregate total cost of approximately $47.9
million, including accrued interest and transaction fees. The Company recognized
an extraordinary gain on the early extinguishment of this debt of $19.8 million
in the fourth quarter of 1998 and recognized an extraordinary gain of
approximately $20.4 million in the first and second quarters of 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 $26.7 million of such securities on February 24, 1999 and $11.5
million on July 8, 1999 upon request by the Company. The balance of the net
proceeds have been used to invest in network infrastructure, to support voice
and data services to fund future investments in the Company's subsidiaries and
to fund working capital and for general corporate purposes, including operating
losses. As of September 30, 2000, $82.8 million in principal amount of Senior
Notes were outstanding.
Cash flows used in operating activities were $21.0 million and $41.7
million for the nine months ended September 30, 2000 and 1999, respectively, a
decrease of $20.7 million or 49.6%. A loss on the sale of the private cable
assets in Chicago of $11.3 million and an increase in accrued expenses of $10.3
million helped to offset the operating loss of $52.8 million for the period
ended September 30, 2000. Additionally, the Company recognized a $20.5 million
gain on bond repurchases which increased the cash used in operating activities
for the period ended September 30, 1999. 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 nine months ended September 30, 2000 totaled $14.0 million, compared to
$8.7 million in 1999, an increase of $5.3 million or 60.9%. This increase was
primarily due to the investment in equipment and systems for the Company's
Internet Protocol-Based Network, ("IP-Based Network"). As of September 30, 2000
the Company had an accumulated deficit of $148.4 million, and had cash and cash
equivalents of $1.7 million and available investments of $2.2 million, net of
the Pledged Securities totaling $18.3 million.
Cash flows used in investing activities for the nine months ended September
30, 2000 were $2.0 million. Cash flows provided by investing activities for the
nine months ended September 30, 1999 were $63.0 million. The significant
variance is primarily due to the purchase of marketable securities in 2000 using
the proceeds of the sale of the investment in Mid-Atlantic Telcom Plus, LLC, the
sale of the private cable assets by OnePoint Communications-Illinois, LLC and
the debt and equity financing provided by Verizon. Cash flows provided by
financing activities were $17.6 million for the nine months ended September 30,
2000. Cash flows used in financing activities for the nine months ended
September 30, 1999 were $27.0 million. The significant variance from 2000 to
1999 was primarily attributable to the repayment of long-term debt that occurred
in the first quarter of 1999. As of September 30, 2000 the Company had $1.7
million of cash and cash equivalents, excluding the Pledged Securities.
In November of 1999 OnePoint Services LLC, a 71% majority owned subsidiary,
was formed by the Company. On November 30, 1999 OnePoint Services, LLC purchased
100% of RCP Communications, Inc. ("RCP"), a prepaid telephony service company,
for a total consideration of $1.0 million and 1.425 million restricted common
units. Of these amounts $0.9 million and 1.050 million restricted common units
are held in escrow subject to the achievement of certain revenue and cash flow
targets. The consolidated results of operations, for the nine months ended
September 30, 2000, of OnePoint Services, LLC and RCP are included in the
Company's September 30, 2000 consolidated results of operations.
In December 1999, the Company sold 6.889 units of VIC-RMTS-DC, LLC units
for the sum of $10.0 million to SBC Comventures, Inc., a wholly owned subsidiary
of SBC Communications, Inc. ("SBC"), an indirect holder of 9.9% of the Company's
common stock. The Company exercised its option to sell an additional 3.445
units to SBC Comventures, Inc. in February 2000 for the sum of $5.0 million. The
Company has the right to call the units at any time for the purchase price plus
15% per annum. In addition, SBC has the right to put the VIC-RMTS-DC, LLC units
acquired from the Company directly to James Otterbeck, the Company's Chairman
and the sole member of
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VenCom, L.L.C. (an 87.2% owner of the Company), personally, under the same terms
and conditions as the Company's call rights. In April 2000, OnePoint
Communications Holdings, LLC repurchased a 24.0% ownership interest in its
majority-owned subsidiary, VIC-RMTS-DC, LLC, from SBC Comventures, Inc. for
$10.4 million. As a result of this repurchase, SBC Comventures, Inc. currently
holds a 12.0% interest in VIC-RMTS-DC, LLC and the call and put rights related
thereto remain in affect. As of September 30, 2000 the Company has accrued $0.6
million related to the possible repurchase of this outstanding equity interest.
On March 20, 2000 the Company invested $0.1 million in ComPlus LP, an
affiliated engineering services company, and acquired 10 redeemable units,
representing a 1% equity interest. ComPlus LP provided services to the Company
and is 98% owned by VIC, LLC and 1% owned by AMI-VCOM2 ("AMI2"), Inc. In
addition, the Company made a secured loan to ComPlus LP for $0.9 million which
accrued interest at 15% per annum, payable on demand. The investment was
accounted for pursuant to the equity method and is not expected to be material
to the Company's consolidated results of operations or financial position. In
June 2000, the Company charged off its equity investment in ComPlus LP as
ComPlus LP had become insolvent. In October 2000, the Company and ComPlus LP
reached a setoff agreement whereby the Company reduced its demand note of $0.9
million by approximately $0.3 million in accounts payable due to ComPlus LP.
Also in October 2000, the Company received $0.1 million against the remaining
balance of the demand note. In November 2000, the Company received payment
sufficient to completely retire the secured loan.
In May 2000, the Company sold 19,570 common shares to Bell Atlantic
Investments, Inc. for $5.0 million. In May 2000, the Company sold 10,075 shares
of its common stock to VIC2 in exchange for $2.6 million.
As the Company begins deployment of its IP-based network capable of
providing a full range of voice, data and video services, the Company has
divested its remaining private cable assets in Illinois and is in the process of
divesting it private cable assets in Georgia. In September 2000, the Company
completed the sale of the private cable and related assets of its wholly-owned
subsidiary, OnePoint Communications-Illinois, LLC to 21st Century Cable TV of
Chicago, Inc. for a purchase price of $10.0 million of which $2.0 million is
subject to an escrow and an additional $2.0 million is being withheld by 21st
Century subject to renewal and/or assignment of certain agreements.
In July 2000, the Company entered into a $20.0 million unsecured loan
agreement with Lucent Technologies Inc. Advances incur interest at prime plus 7%
per annum. This agreement is guaranteed by all of the Company's controlled
subsidiaries. During the third quarter of 2000, Verizon assumed the $5.0 million
of debt outstanding to Lucent Technologies Inc. and signed an agreement with the
Company to provide an additional $15.0 million in debt financing. As of October
19, 2000 the Company had a total of $20.0 million of debt outstanding to Verzion
Investments, Inc.
In October 2000, the Company sold to Verizon Investments, Inc. a Common
Stock Purchase Warrant to purchase 17,850 shares of common stock, par value
$0.01 per share, of the Company in exchange for $2.5 million.
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Pursuant to Section 5.18 of the Verizon merger agreement, the shareholders
of the Company received notice from Verizon on November 2, 2000 that requires
them to invest $12.9 million of additional equity in the Company by November 17,
2000. VIC2 is negotiating a bridge loan agreement with a bank to fund this
amount, with all advances under this bridge loan subject to, among other items,
the Company executing a loan agreement with Verizon for $25.0 million and
Verizon waiving certain restrictions in the merger agreement related to pledging
of the Company's equity and extending the time to close the Verizon merger
agreement to January 4, 2001. In the event the bridge loan is executed and
funded, VIC2 will invest $12.9 million of the proceeds into the Company. Without
such funding, the Company will not have sufficient funds to continue operations
through the end of the month, and it will be in breach of the merger agreement.
The Company is not able to obtain additional debt financing pursuant to the
terms of its indenture for the Senior Notes, and there can be no assurances the
Company would be able to obtain equity financing. In that event, the value of
the Senior Notes would be significantly impaired.
The Company believes that if consummated, the $12.9 million equity
contribution from VIC2 and the $25.0 million Verizon loan agreement will provide
adequate capital for the Company to fund operations through the end of 2000 and
beyond the anticipated closing of the merger. Each of these proposed agreements,
however, would in certain respects be dependent upon the continuation and/or
eventual closing of the Verizon merger. Should the Verizon merger agreement be
terminated subject to certain provisions thereof, Verizon would not be required
to make further advances under its loan. If the merger agreement is terminated
for any reason, the lender on the loan to VIC2 may foreclose on its loan and
take VIC2's equity interest in the Company, thus resulting in a change of
control under the indenture and the Company's other debt instruments. Upon a
change of control, the Company would be required to make an offer to purchase
the Senior Notes at 101% of principal value, and would be required to repay its
other debt. In that event, the Company does not believe that it would have the
resources to meet its obligations with respect to its debts, including the
Senior Notes.
In the event the Verizon merger has not closed by the first quarter of
2001, the Company will be required to raise significant additional capital in
order to fund its operations during 2001 and beyond. There can be no assurances
that the Company would be able to raise such capital, or of the terms of any
such financing. If the merger did not close by the first quarter of 2001 and
Company was not able to raise the necessary capital, the Company's ability to
meet its current and long-term obligations and to continue its operations would
be in doubt, and the value of the Senior Notes would be significantly impaired.
If the Verizon merger is consummated, the Company will become a subsidiary
of Verizon. At this time, the Company cannot predict what its liquidity needs
and resources would be following the consummation of the Merger.
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Results of Operations - VIC-RMTS-DC, LLC
In December 1999 and February 2000, a subsidiary of SBC purchased a 36.0%
direct ownership interest in VIC-RMTS-DC, LLC, a majority-owned subsidiary of
OnePoint Communications Corp. in exchange for $15.0 million. The agreement
provided OnePoint Communications Corp. the right to repurchase a portion or all
of the VIC-RMTS-DC, LLC interest in exchange for the original sales price plus
15.0% per annum and provided the SBC subsidiary the right to put the VIC-RMTS-
DC, LLC interest to OnePoint Communications Corp.'s chairman personally under
the same terms. In April 2000, OnePoint Communications Corp. exercised its
rights to repurchase 24.0% of VIC-RMTS-DC LLC in exchange for $10.4 million. As
of September 30, 2000 $0.6 was accrued relating to the outstanding ownership
interest of $5.0 million.
Three Months Ended September 30, 2000 Compared with Three Months Ended
September 30, 1999
Revenue
VIC-RMTS-DC, LLC's total revenues for the three months ended September 30,
2000 were $1.9 million compared to $1.3 million in the three months ended
September 30, 1999, an increase of $0.6 million or 46.2% as VIC-RMTS-DC, LLC
significantly increased its volume of operations and subscriber base.
Cost of Revenue
Cost of revenue (consisting primarily of telecommunication service costs
and payments to owners and employees of multiple dwelling units) was $1.8
million in the three months ended September 30, 2000 as compared to $1.5 million
in the three months ended September 30, 1999, an increase of $0.3 million or
20.0%. The Company makes payments to developers of multiple dwelling units in
advance of revenues to secure long term contracts. Revenue for the three months
ended September 30, 2000 exceeded cost of revenue by $0.1 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3.4 million in the three
months ended September 30, 2000 compared to $2.5 million in the three months
ended September 30, 1999, an increase of $0.9 million, or 36.0%. This was
primarily the result of increases in personnel and related costs associated with
the provisioning of an increased volume of subscribers for VIC-RMTS-DC, LLC's
communications services. VIC-RMTS-DC, LLC continues to experience high 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 from 13.1%
to 17.9% of outstanding accounts receivable from September 30, 1999 to September
30, 2000. The Company is implementing credit scoring and deposit programs to
address its high rate of bad debt.
Depreciation and Amortization
Depreciation and amortization was $0.1 million in the three months ended
September 30, 2000 compared to $0.1 million in the three months ended
September 30, 1999, resulting in no increase or decrease.
Nine Months Ended September 30, 2000 Compared with Nine Months Ended
September 30, 1999
Revenue
VIC-RMTS-DC, LLC's total revenues for the nine months ended September 30,
2000 were $5.6 million compared to $3.2 million in the nine months ended
September 30, 1999, an increase of $2.4 million or 75.0% as VIC-RMTS-DC, LLC
significantly increased its volume of operations and subscriber base.
Cost of Revenue
Cost of revenue (telecommunication service costs and payments to owners and
employees of multiple dwelling units) was $6.1 million in the nine months ended
September 30, 2000 as compared to $3.9 million in the nine months ended
September 30, 1999, an increase of $2.2 million or 56.4%. The Company makes
payments to developers of multiple dwelling units in advance of revenues to
secure long term contracts. Cost of revenue for the nine months ended September
30, 2000 exceeded revenue by $0.5 million.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses were $10.1 million in the nine
months ended September 30, 2000 compared to $7.4 million in the nine months
ended September 30, 1999, an increase of $2.7 million, or 36.5%. This was
primarily the result of increases in personnel and related costs associated with
the provisioning of an increased volume of subscribers for VIC-RMTS-DC, LLC's
communications services. VIC-RMTS-DC, LLC continues to experience high 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 from 13.1%
to 17.9% of outstanding accounts receivable from September 30, 1999 to September
30, 2000. The Company is implementing credit scoring and deposit programs to
address its high rate of bad debt.
Depreciation and Amortization
Depreciation and amortization was $0.3 million in the nine months ended
September 30, 2000 compared to $0.3 million in the nine months ended September
30, 1999, resulting in no increase or decrease.
Liquidity and Capital Resources - VIC-RMTS-DC, LLC
(Dollars in thousands, except per unit data)
VIC-RMTS-DC, LLC has financed its development with $43.2 million in cash of
contributed equity by its unit holders.
Cash flows used in operating activities were $10.3 million and $7.7 million
in the nine months ended September 30, 2000 and the nine months ended September
30, 1999, respectively, an increase of $2.6 million or 33.8%. The increased
number of subscribers and the associated costs to support those subscribers
during the nine months ended September 30, 2000 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 investing activities, primarily for
the acquisitions of property and equipment during the nine months ended
September 30, 2000 totaled $0.04 million, compared to $0.5 million in the nine
months ended September 30, 1999. This decrease is as a result of the delay in
the procurement of telephony equipment by VIC-RMTS-DC, LLC. As of September 30,
2000 VIC-RMTS-DC, LLC had an accumulated deficit of $41.7 million, and had no
cash or cash equivalents.
Cash flows provided by financing activities were $10.3 million and $8.3
million in the nine months ended September 30, 2000 and the nine months ended
September 30, 1999, respectively. As of September 30, 2000 VIC-RMTS-DC, LLC had
no cash or cash equivalents.
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Pursuant to Section 5.18 of the Verizon merger agreement, the shareholders
of OnePoint received notice from Verizon on November 2, 2000 that requires
them to invest $12.9 million of additional equity in OnePoint by November 17,
2000. VIC2 is negotiating a bridge loan agreement with a bank to fund this
amount, with all advances under this bridge loan subject to, among other items,
OnePoint executing a loan agreement with Verizon for $25.0 million and
Verizon waiving certain restrictions in the merger agreement related to pledging
of OnePoint's equity and extending the time to close the Verizon merger
agreement to January 4, 2001. In the event the bridge loan is executed and
funded, VIC2 will invest $12.9 million of the proceeds into OnePoint. Without
such funding, OnePoint will not have sufficient funds to continue operations
through the end of the month, and it will be in breach of the merger agreement.
OnePoint is not able to obtain additional debt financing pursuant to the
terms of its indenture for the Senior Notes, and there can be no assurances
OnePoint would be able to obtain equity financing. In that event, the value of
the Senior Notes would be significantly impaired. Additionally, OnePoint would
not be able to fund its subsidiaries including VIC-RMTS-DC LLC.
OnePoint believes that if consummated, the $12.9 million equity
contribution from VIC2 and the $25.0 million Verizon loan agreement will provide
adequate capital for OnePoint to fund operations through the end of 2000 and
beyond the anticipated closing of the merger. Each of these proposed agreements,
however, would in certain respects be dependent upon the continuation and/or
eventual closing of the Verizon merger. Should the Verizon merger agreement be
terminated subject to certain provisions thereof, Verizon would not be required
to make further advances under its loan. If the merger agreement is terminated
for any reason, the lender on the loan to VIC2 may foreclose on its loan and
take VIC2's equity interest in OnePoint, thus resulting in a change of control
under the indenture and OnePoint's other debt instruments. Upon a change of
control, OnePoint would be required to make an offer to purchase the Senior
Notes at 101% of principal value, and would be required to repay its other debt.
In that event, OnePoint does not believe that OnePoint or its subsidiaries
including VIC-RMTS-DC LLC would have the resources to meet their obligations
with respect to their debts, including the Senior Notes.
In the event the Verizon merger has not closed by the first quarter of
2001, OnePoint will be required to raise significant additional capital in order
to fund its operations during 2001 and beyond. There can be no assurances that
OnePoint would be able to raise such capital, or of the terms of any such
financing. If the merger did not close by the first quarter of 2001 and OnePoint
was not able to raise the necessary capital, the ability of OnePoint or its
subsidiaries including VIC-RMTS-DC LLC to meet their current and long-term
obligations and to continue their operations would be in doubt, and the value of
the Senior Notes would be significantly impaired.
If the Verizon merger is consummated, OnePoint and its subsidiaries
including VIC-RMTS-DC, LLC will become a subsidiary of Verizon. At this time,
OnePoint cannot predict what its liquidity needs and resources would be
following the consummation of the Merger.
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Results of Operations - OnePoint Services, LLC
OnePoint Services, LLC commenced operations on November 30, 1999
OnePoint Services, LLC's total revenues for the nine months ended September
30, 2000 were $7.8 million. Cost of Revenue (consisting primarily of
telecommunication costs to provide prepaid phone service) was $7.8 million for
the nine months ended September 30, 2000. Selling general and administrative
expenses were $2.6 million for the same period. Depreciation and amortization
was $0.3 million for the nine months ended September 30, 2000. Interest income
was $0.04 million for the nine months ended September 30, 2000 comprised of
interest on funds available for anticipated needs for the remainder of 2000.
Liquidity and Capital Resources - OnePoint Services, LLC
OnePoint Services, LLC began operations in December 1999 and has financed
its development with $3.2 million of contributed equity by unit holders.
Cash flows used in operating activities were $0.9 million for the nine
months ended September 30, 2000. Cash flows used in operating activities can
vary 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 OnePoint Services, LLC for the acquisitions of property
and equipment during the nine months ended September 30, 2000 was $0.1 million.
As of September 30, 2000 OnePoint Services, LLC has an accumulated deficit of
$3.1 million and had $0.7 million of cash and cash equivalents.
Pursuant to Section 5.18 of the Verizon merger agreement, the shareholders
of OnePoint received notice from Verizon on November 2, 2000 that requires
them to invest $12.9 million of additional equity in OnePoint by November 17,
2000. VIC2 is negotiating a bridge loan agreement with a bank to fund this
amount, with all advances under this bridge loan subject to, among other items,
OnePoint executing a loan agreement with Verizon for $25.0 million and
Verizon waiving certain restrictions in the merger agreement related to pledging
of OnePoint's equity and extending the time to close the Verizon merger
agreement to January 4, 2001. In the event the bridge loan is executed and
funded, VIC2 will invest $12.9 million of the proceeds into OnePoint. Without
such funding, OnePoint will not have sufficient funds to continue operations
through the end of the month, and it will be in breach of the merger agreement.
OnePoint is not able to obtain additional debt financing pursuant to the
terms of its indenture for the Senior Notes, and there can be no assurances
OnePoint would be able to obtain equity financing. In that event, the value of
the Senior Notes would be significantly impaired. Additionally, OnePoint would
not be able to fund its subsidiaries including OnePoint Services, LLC..
OnePoint believes that if consummated, the $12.9 million equity
contribution from VIC2 and the $25.0 million Verizon loan agreement will provide
adequate capital for OnePoint to fund operations through the end of 2000 and
beyond the anticipated closing of the merger. Each of these proposed agreements,
however, would in certain respects be dependent upon the continuation and/or
eventual closing of the Verizon merger. Should the Verizon merger agreement be
terminated subject to certain provisions thereof, Verizon would not be required
to make further advances under its loan. If the merger agreement is terminated
for any reason, the lender on the loan to VIC2 may foreclose on its loan and
take VIC2's equity interest in OnePoint, thus resulting in a change of control
under the indenture and OnePoint's other debt instruments. Upon a change of
control, OnePoint would be required to make an offer to purchase the Senior
Notes at 101% of principal value, and would be required to repay its other debt.
In that event, OnePoint does not believe that OnePoint or its subsidiaries
including OnePoint Services, LLC would have the resources to meet their
obligation with respect to their debts, including the Senior Notes.
In the event the Verizon merger has not closed by the first quarter of
2001, OnePoint will be required to raise significant additional capital in order
to fund its operations during 2001 and beyond. There can be no assurances that
OnePoint would be able to raise such capital, or of the terms of any such
financing. If the merger did not close by the first quarter of 2001 and OnePoint
was not able to raise the necessary capital, the ability of OnePoint or its
subsidiaries including OnePoint Services, LLC to meet their current and long-
term obligations and to continue their operations would be in doubt, and the
value of the Senior Notes would be significantly impaired.
If the Verizon merger is consummated, OnePoint and its subsidiaries
including OnePoint Services, LLC will become a subsidiary of Verizon. At this
time, OnePoint cannot predict what its liquidity needs and resources would be
following the consummation of the Merger.
Inflation
The Company's obligations under the Credit Facility, the Second Credit
Facility and the Verizon debt agreements 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. VIC-RMTS-DC, LLC and
OnePoint Services, LLC are not exposed to inflation other than those exposures
attributable to the Parent Company.
Impact of New Accounting Pronouncements
There are no new accounting pronouncements which would have a significant
impact on the financial position, results of operations, or liquidity of the
Company, VIC-RMTS-DC, LLC, or OnePoint Services, LLC.
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This Form 10-Q contains certain forward-looking statements, including,
without limitation, statements concerning the Company's future financial
position, business strategy, budgets, projected costs and plans and objectives
of management for future operations. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 (which do not apply to initial public offerings). Forward-
looking statements generally can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "intend," "estimate," "anticipate,"
"believe," "should," "plans," or "continue" or the negative thereof or
variations thereon or similar terminology. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
These forward-looking statements are subject to a number of risks and
uncertainties, including, without limitation, those related to the Company's
need for additional capital to fund its operations, the Company's substantial
leverage and debt service requirements, the Company's dependence on significant
customers and on certain suppliers, the effects of competition on the Company,
and the other factors discussed in the Company's filings with the Securities and
Exchange Commission. Actual results could differ materially from these forward-
looking statements.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
OnePoint Communications Corp.
The Company has certain exposure to financial market risks, including
changes in the interest rates and other relevant market prices. Specifically, an
increase or decrease in interest rates would affect interest costs relating to
our Credit Facility and our Second Credit Facility. Additionally, an interest
rate fluctuation could affect the debt financing that has been provided by
Verizon Communications which accrues at the prime rate of interest plus 7%. At
September 30, 2000, the Company has an outstanding loan balance of $8.3 million
and $13.8 million on the Credit Facility and the Second Credit Facility
respectively and $15.0 million of debt outstanding with Verizon Communications.
The outstanding loan balances represent approximately 31.8 % of our outstanding
long-term debt.
The Company also maintains securities which are classified as "available
for sale" valued at $18.3 million as of September 30, 2000. An immediate
increase or decrease in interest rates could have a material impact on the fair
value of these financial instruments or on our short-term investment portfolio.
Changes in interest rates do not have a direct impact on interest expense
relating to our remaining fixed rate long-term debt, although the fair market
value of our fixed rate debt is sensitive to changes in interest rates. If
market rates declined, our interest payments could exceed those based on our
current market rate. We currently do not use interest rate derivative
instruments to manage our exposure to interest rate changes, but may do so in
the future.
VIC-RMTS-DC, LLC and OnePoint Services, LLC are not exposed to any
significant market risks other than those exposures attributable to the Parent
Company.
34
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PART II. OTHER INFORMATION:
Item 1. Legal Proceedings
--------------------------
OnePoint Communications Corp., VIC-RMTS-DC, LLC and OnePoint Services, LLC
From time to time, the Company, VIC-RMTS-DC, LLC and OnePoint Services, LLC
have 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, VIC-RMTS-DC, LLC and
OnePoint Services, LLC with respect to such proceedings cannot be estimated with
certainty, but the Company, VIC-RMTS-DC, LLC and OnePoint Services, LLC believe,
based on their examination of such matters, that none of such proceedings, if
determined adversely to the Company, VIC-RMTS-DC, LLC or OnePoint Services, LLC
would have a material adverse effect on their results of operations and
financial condition and their ability to meet their obligations under the Senior
Notes.
Item 2. Changes in Securities
------------------------------
None
Item 3. Defaults upon Senior Securities
----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
None
Item 5. Other Information
--------------------------
None
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits. The following exhibits are included herein:
2.1 Asset Purchase Agreement, dated as of June 16, 2000, among 21st
Century Cable TV of Chicago, Inc., OnePoint Communications Corp., OnePoint
Communications - Illinois L.L.C., and James A. Otterbeck. (Incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q filed on August 14,
2000.)
2.2 Definitive Merger Agreement, dated as of August 4, 2000, among Bell
Atlantic Corporation d/b/a/ Verizon Communications, Sphere Merger Corp.,
OnePoint Communications Corp., Ventures in Communications II, L.L.C. and VenCom,
L.L.C. (Incorporated by reference to the Registrant's Current Report on Form 8-K
filed on August 7, 2000 and amended on August 15, 2000)
4.1 Loan Agreement dated July 26, 2000 between OnePoint Communications
Corp. and Lucent Technologies, Inc.
4.2 Loan Agreement dated August 24, 2000 between OnePoint
Communications Corp. and Verizon Investments, Inc.
4.3 Supplemental Indenture dated August 2, 2000 between OnePoint
Communications Corp., Harris Trust and Savings Bank, as Trustee, Mid-Atlantic
RMTS Holdings LLC and the other Subsidiary Guarantors listed therein.
27.1 Financial Data Schedule
(b) Reports on Form 8-K. The following Current Reports on Form 8-K were
filed during the quarter for which this report is filed:
35
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Current Report on Form 8-K dated August 4, 2000 (filed August 7, 2000)
reporting under Item 5 the execution of the Definitive Merger Agreement among
Bell Atlantic Corporation d/b/a/ Verizon Communications, Sphere Merger Corp.,
OnePoint Communications Corp., Ventures in Communications II, L.L.C. and VenCom,
L.L.C., as amended by the Form 8-K/A dated August 4, 2000 (filed August 15,
2000).
Current Report on Form 8-K dated September 11, 2000 (filed September 22,
2000) reporting under Item 5 the consummation of the transactions contemplated
by the Asset Purchase Agreement, dated as of June 16, 2000, among 21st Century
Cable TV of Chicago, Inc., OnePoint Communications Corp., OnePoint
Communications - Illinois L.L.C., and James A. Otterbeck.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 14, 2000.
ONEPOINT COMMUNICATIONS CORP.
By: /s/ JOHN D. STAVIG
-------------------------
John D. Stavig
Chief Financial Officer
37
