Quarterly Report on Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to __________
COMMISSION FILE NUMBER: 0-29279
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CHOICE ONE COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)
STATE OF DELAWARE 16-1550742
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
100 CHESTNUT STREET, ROCHESTER, NEW YORK 14604-2417
(Address of principal executive offices) (Zip Code)
(716) 246-4231
(Registrant's telephone number, including area code)
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for the past 90 days. Yes X No__
As of August 10, 2000 there were outstanding 37,777,106 shares of the
registrant's common stock, par value $.01 per share.
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CHOICE ONE COMMUNICATIONS AND SUBSIDIARIES FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................................1
Condensed Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999................................................1
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2000 and June 30, 1999.....................3
Condensed Consolidated Statements of Operations for the six months
ended June 30, 2000 and June 30, 1999............................4
Condensed Consolidated Statements of Cash Flow for the six months
ended June 30, 2000 and June 30, 1999............................5
Notes to Condensed Consolidated Financial Statements.............7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk........
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................23
Item 2. Changes in Securities and Use of Proceeds.......................24
Item 3. Defaults Upon Senior Securities.................................24
Item 4. Submission of Matters to a Vote of Security Holders.............24
Item 5. Other Information...............................................24
Item 6. Exhibits and Reports on Form 8-K................................24
Signatures ................................................................25
(i)
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PART I FINANCIAL INFORMATION
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(amounts in thousands, except share and per share data)
JUNE 30, DECEMBER 31,
2000 1999
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents...................... $8,095 $3,615
Accounts receivable, net....................... 8,024 2,929
Note receivable................................ 5,357 --
Prepaid expenses and other current assets...... 1,616 709
-------- --------
Total current assets.................................. 23,092 7,253
Property and Equipment:
Property and equipment.........................131,036 77,318
Less-accumulated depreciation..................(10,999) (4,891)
-------- -------
Total property and equipment...................120,037 72,427
Other assets 21,243 14,832
-------- -------
Total assets...................................$164,372 $94,512
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt............ $2,430 $ --
Accounts payable............................. 939 5,060
Accrued expenses............................. 15,704 11,228
------- -------
Total current liabilities.................... 19,073 16,288
Long-Term Debt and Other Liabilities:
Long-term debt, less current portion......... - 51,500
Other long-term liabilities.................. 1,655 -
------- -------
Total long-term debt and other liabilities... 1,655 51,500
Commitments and Contingencies
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Stockholders' Equity:
Preferred stock, $0.01 par value, 5,000,000 -- --
and 5,000,000 shares authorized, respectively;
and no shares issued and outstanding
Common stock, $0.01 par value, 150,000,000 310 220
and 47,730,196 shares authorized, 31,028,484
and 22,022,056 shares issued and outstanding
as of June 30, 2000 and December 31, 1999
respectively.................................
Additional paid-in capital...................343,517 72,454
Deferred compensation........................(55,961) (8,401)
Accumulated deficit.........................(144,222) (37,549)
-------- --------
Total stockholders' equity.................. 143,644 26,724
-------- --------
Total liabilities and stockholders' equity..$164,372 $94,512
======== --------
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
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CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
THREE MONTHS ENDED
JUNE 30,
2000 1999
(unaudited (unaudited)
Revenues......................................... $10,411 $152
Operating expenses:
Network costs.............................. 9,711 617
Selling, general and administrative, including
noncash deferred compensation of $728 and
$359 in 2000 and 1999, respectively and
non-cash management ownership allocation
charge of $6,342 and $0 in 2000 and 1999,
respectively............................. 21,662 4,562
Depreciation and amortization............... 3,986 1,169
-------- --------
Total operating expenses.............. 35,359 6,348
-------- --------
Loss from operations............................. (24,948) (6,196)
Interest income/(expense):
Interest income............................. 680 --
Interest expense............................ (750) (327)
-------- --------
Total income/(expense), net...................... (70) (327)
-------- --------
Net loss......................................... $(25,018) $(6,523)
========= ========
Net loss per share, basic and diluted............ $(0.81) $(0.31)
========= ========
Weighted average number of shares outstanding,
basic and diluted........................... 31,022,503 21,275,829
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
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CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except share and per share data)
SIX MONTHS ENDED
JUNE 30,
2000 1999
(unaudited) (unaudited)
Revenue.......................................... $17,201 $154
Operating expenses:
Network costs............................. 16,701 797
Selling, general and administrative, including
noncash deferred compensation of $2,477
and $680 in 2000 and 1999, respectively and
non-cash management ownership allocation
charge of $70,871 and $0 in 2000 and 1999,
respectively.............................. 99,087 7,831
Depreciation and amortization............. 6,979 1,909
-------- --------
Total operating expenses............... 122,767 10,537
-------- --------
Loss from operations............................. (105,566) (10,383)
Interest income/(expense):
Interest income............................. 1,105 --
Interest expense............................ (2,213) (587)
-------- --------
Total income/(expense), net...................... (1,108) (587)
-------- --------
Net loss......................................... $(106,674) $(10,970)
========== =========
Net loss per share, basic and diluted............ $(3.72) $(0.52)
======= =======
Weighted average number of shares outstanding,
basic and diluted............................. 28,689,868 21,275,829
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
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CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
SIX MONTHS ENDED
JUNE 30,
2000 1999
(unaudited) unaudited)
Cash flows from operating activities:
Net loss.................................... $(106,674) $(10,970)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization............. 6,979 2,016
Amortization of deferred financing costs.. 318 --
Deferred compensation and management
ownership allocation charge............... 73,348 680
Changes in assets and liabilities:
Accounts receivable, net................ (4,915) (134)
Note receivable......................... (5,357) --
Prepaid expenses and other assets....... (948) (690)
Accounts payable........................ (4,160) 1,037
Accrued expenses........................ 4,409 (5,986)
------- --------
Net cash used in operating activities....... (37,000) (14,047)
Cash flows from investing activities:
Capital expenditures........................ (53,632) (14,374)
Cash payments for acquisition of business,
net of cash acquired.................... (1,862) --
------- -------
Net cash used in investing activities....... (55,494) (14,374)
Cash flows from financing activities:
Additions to long-term debt................. 12,900 14,500
Principal payments of long-term debt........ (64,400) --
Proceeds from capital contributions and
issuance of common stock................... 150,276 12,431
Payments of financing costs................. (1,802) --
------- -------
Net cash provided by financing activities... 96,974 26,931
------- -------
Net increase/(decrease) in cash and cash equivalents.. 4,480 (1,490)
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Cash and cash equivalents, beginning of period... 3,615 1,491
------- ------
Cash and cash equivalents, end of period......... $ 8,095 $ 1
======= ======
Supplemental disclosures of cash flow information:
Interest paid........................... $ 590 $280
======= ======
Income taxes paid....................... $(187) $ --
======= ======
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CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 2000
(Unaudited)
NOTE 1. GENERAL
The Company is an integrated communications provider offering
broadband data and voice telecommunications services primarily to small and
medium- sized businesses in second and third tier markets in the northeastern
United States. The Company's services include high-speed data and Internet
service, principally utilizing digital subscriber line (DSL) technology, local
exchange service, long distance service, Web page design and Web hosting
services. The Company seeks to become the leading integrated communications
provider in each target market by offering a single source for competitively
priced, high quality, customized telecommunications services.
Until February 1999, the Company was in the development stage, as
defined by Statement of Financial Accounting Standards ("SFAS") No. 7,
"Accounting and Reporting by Development Stage Enterprises." The Company's
principal activities included developing its business plans; procuring
governmental authorizations; raising capital; hiring management and other key
personnel; developing, acquiring and integrating operations support systems and
other back office systems; acquiring equipment and facilities; and negotiating
interconnection agreements. Accordingly, the Company has incurred operating
losses and operating cash flow deficits. Expenses are expected to exceed
revenues in each location in which the Company offers service until a sufficient
customer base is established. It is anticipated that obtaining a sufficient
customer base will take a number of years, and positive cash flows from
operations are not expected in the near future.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission (the "SEC"). The interim consolidated
financial statements include the consolidated accounts of Choice One
Communications Inc. and its wholly-owned subsidiaries (collectively, "the
Company") with all significant intercompany transactions eliminated. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the financial position, results
of operations and cash flows for the interim periods presented have been made.
Certain footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles (GAAP) have been
condensed or omitted pursuant to such SEC rules and regulations. These financial
statements should be read in conjunction with the Company's audited financial
statements as of and for the year ended December 31, 1999. The results of
operations for the six months ended June 30, 2000 are not necessarily indicative
of the results to be expected for the full year.
Certain amounts in the prior period's consolidated financial statements
have been reclassified to conform to the current period presentation.
<PAGE>
Unless otherwise stated, all amounts are in thousands except share and
per share data.
NOTE 3. ACQUISITION
On February 24, 2000, the Company acquired EdgeNet, Inc. a corporation
based in Buffalo, New York, which is engaged in the business of providing
Internet home page design and development. The purchase price was approximately
$4.3 million, approximately $1.9 million in cash and approximately $2.4 million
in a promissory note that is convertible into 132,148 shares of our common stock
not sooner than 180 days after the closing of the initial public offering which
occurred in February 2000. The acquisition was accounted for using the purchase
method of accounting and, accordingly, the net assets and results of operations
of EdgeNet, Inc. have been included in the Company's consolidated statement
since the acquisition date.
The purchase price was allocated based upon the fair value of the
assets acquired and liabilities assumed with any excess reflected as goodwill
($3.5 million), which is being amortized on a straight-line basis over ten
years. In connection with the acquisition, liabilities assumed and cash paid
were as follows:
Fair value of assets acquired, including cash acquired....................$4,397
Less-liabilities assumed.....................................................134
-------
Total consideration paid...................................................4,263
Less-cash acquired.............................................................1
Less-amounts borrowed......................................................2,400
-----
Net cash paid for acquisition.............................................$1,862
======
NOTE 4. PRO FORMA RESULTS OF OPERATIONS
The following unaudited pro forma condensed results of operations
combine the operations of the Company with those of Atlantic Connections as
adjusted for the acquisition on November 3, 1999 by the Company. The pro forma
results of operations are presented as if the acquisition of Atlantic
Connections was consummated on January 1, 1999. The pro forma information is
presented after giving effect to certain adjustments for depreciation,
amortization of intangible assets and interest expense on the acquisition
financing. The acquisition was accounted for using the purchase method of
accounting.
The unaudited pro forma results of operations are based upon currently
available information and upon certain assumptions that the Company believes are
reasonable. The unaudited pro forma statements do not purport to represent what
the Company's financial position or results of operations would actually have
been if the transaction in fact occurred on such date or at the beginning of the
period indicated or to project the Company's financial position or the results
of operations at any future date or for any future period.
Pro Forma Three Months Ended Pro Forma Six Months Ended
June 30, 1999
Revenues $2,374 $4,157
Loss from operations $(6,376) $(10,955)
Net loss $(6,624) $(11,430)
Net loss per share, basic and diluted $(0.31) $(0.54)
Weighted average number of shares
outstanding, basic and diluted 21,275,829 21,275,829
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment, at cost consisted of the following at June 30,
2000 and December 31, 1999:
June 30, 2000 December 31, 1999
Switch equipment $91,225 $56,263
Computer equipment and software 15,793 11,416
Office furniture and equipment 5,265 2,687
Leasehold improvement 4,602 1,675
Construction in progress 14,151 5,277
------ -----
$131,036 $77,318
======== =======
NOTE 6. OTHER ASSETS
Other assets consisted of the following at June 30, 2000 and December
31, 1999:
June 30, 2000 December 31, 1999
Goodwill $9,278 $5,464
Deferred financing costs 6,739 5,305
Customer base 3,800 3,300
Indefeasible right to use fiber 1,703 --
Other assets 1,556 1,406
----- -----
23,076 15,475
Less-Accumulated amortization 1,833 643
----- ---
$21,243 14,832
======= ======
NOTE 7. LONG-TERM DEBT
In November 1999, the Company, as a guarantor, and the Company's
subsidiaries, as borrowers, amended and restated the Credit Agreement (the
"Amended Agreement"). The
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Amended Agreement, which terminates on November 3,2007, provides the Company
with a maximum revolving credit facility of $100.0 million and a delayed draw
term loan of $50.0 million. Any unused portion of the term loan commitment will
expire on November 3, 2000. The Amended Agreement was used to finance the
purchase of Atlantic Connections, and will be used to finance capital
expenditures and to provide working capital. Borrowings under the Amended
Agreement are secured by substantially all of the assets of the Company and bear
interest, at the Company's option, at either the LIBOR rate or the base rate
(the higher of the prime interest rate or the federal funds rate plus 0.5
percent), with additional percentage points added based on the Company's
leverage ratio, as defined in the agreement. In addition, the Company is also
required to pay a commitment fee of 0.75 percent to 1.50 percent per annum based
on the Company's utilization of the Amended Agreement.
The Amended Agreement revised certain covenants including maximum debt
to capital ratio, minimum revenue amounts, maximum earnings before interest,
taxes, depreciation and amortization (EBITDA) losses, maximum capital
expenditure levels, minimum ratio of fixed assets to total debt, maximum
leverage ratio, maximum fixed charge coverage ratio, and minimum interest
coverage ratio, all as defined in the Amended Agreement. At June 30, 2000, the
Company was in compliance with these covenants.
In February 2000, in connection with the acquisition of EdgeNet, the
Company entered into $2.4 million of promissory notes with the shareholders of
EdgeNet. The promissory notes are convertible into 132,148 shares of our common
stock not sooner than 180 days after the closing of the initial public offering
completed in February 2000.
NOTE 8. CAPITALIZATION
On January 17, 2000, the Company's Board of Directors voted to amend
the Certificate of Incorporation of the Company to increase the number of
authorized common shares and preferred shares to 150 million and 5 million
respectively, as calculated after the stock split.
On January 25, 2000, the Company's Board of Directors approved a
354.60-for-one stock split, the effect of which is retroactively reflected
within these financial statements for all periods presented.
On February 16, 2000, the Company raised $164.3 million of gross
proceeds in an initial public offering of Common Stock (the "Equity Offering").
The Company's institutional investors and management owned 95.0 percent
and 5.0 percent, respectively, of the ownership interests of Choice One
Communications, L.L.C., an entity that owned substantially all of the Company's
outstanding capital stock. As a result of the successful initial public
offering, Choice One Communications, L.L.C was dissolved and its assets, which
consisted almost entirely of such capital stock, was distributed to the
Company's institutional investors and management in accordance with the LLC
Agreement. The LLC Agreement provided that the Equity Allocation between the
Company's institutional investors and management be 68.5 percent to the Investor
Members and 31.5 percent to management based upon the valuation implied by the
initial public offering.
Under generally accepted accounting principles, upon the consummation
of the initial public offering, the Company was required to record the increase
(based upon the valuation of
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the Common Stock implied by the Equity Offering) in the assets of Choice One LLC
allocated to management as a $119.9 million increase in additional paid-in
capital, with a corresponding increase in noncash deferred compensation, of
which we were required to record $64.5 million as a noncash, nonrecurring charge
to operating expense and $55.4 million was recorded as a deferred management
ownership allocation charge. The deferred charge will be amortized at $19.0
million, $23.9 million, $11.6 million and $0.9 million during 2000, 2001, 2002
and 2003, respectively, which is the period over which the Company has the right
to repurchase the securities (at the lower of fair market value or the price
paid by the employee) in the event the management employee's employment with the
Company is terminated.
NOTE 9. RELATED PARTIES
The Company entered into a master facilities agreement with Fiber
Technologies, a company that designs, constructs and leases high performance
fiber networks in second and third tier markets in the Northeast and
Mid-Atlantic regions of the United States. The agreement provides the Company
with a 20-year indefeasible right to use (IRU) fiber without electronics in a
minimum of 13 of Choice One's original 20 cities. Fiber deployment will allow
the Company to optimize network costs and enhance the quality and reliability of
its network. The Company has committed to four fibers in each cable at a cost of
$65.00 per fiber per route mile per month in the 13 original cities. The minimum
cost for all 13 cities, when operational, over the 20- year IRU term is
estimated at $100.0 million.
In addition to the master facilities agreement, the Company made a
minority equity investment in Fiber Technologies, in return for which the
Company has the right to appoint one representative to the board of directors,
and has a vote in determining the new markets in which Fiber Technologies will
develop and build local loops. The Company may be obligated to provide
additional capital in future periods to fund the operations of Fiber
Technologies.
In addition, Fleet Equity Partners LP, a related party to the Company,
has a significant equity investment in Fiber Technologies and a member of the
Company's board of directors is a member of Fiber Technologies' board of
directors.
NOTE 10. SUBSEQUENT EVENT
On August 1, 2000, the Company announced the consummation of its merger
with US Xchange for aggregate net cash consideration of $303.0 million in cash
and 6.7 million shares of common stock to the sole shareholder and employees of
US Xchange. The merger has been accounted for using the purchase method of
accounting.
In connection with the merger with US Xchange, fiber network net assets
were transferred to a separate entity, RVP Fiber Company, L.L.C., prior to
closing and will be owned and maintained by this affiliate of US Xchange's,
which is not an affiliate of Choice One. US Xchange's switching platforms are
connected to its intra-city and inter-city fiber network. The Company was
granted rights under an indefeasible right to use fiber (IRU) for the fiber
network at no additional consideration. The IRU has an initial term of 20 years,
and a ten year renewal option (renewable at the Company's option).
On August 1, 2000, the Company also announced $550.0 million in new
financing to fund the merger with US Xchange and continued expansion of the
consolidated companies'
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business plan. The new financing consists of $200.0 million in Series A Senior
Non-Convertible Cumulative Preferred Stock, a $200.0 million increase to the
existing $150.0 million senior secured credit facility (totaling $350.0 million
in aggregate credit facility), and $180.0 million unsecured bridge facility.
The 200,000 shares of Series A Preferred Stock mature on August 1, 2012
and provide for cumulative quarterly dividends of 14%. Warrants, to purchase
1,747,454 shares of common stock at an exercise price of $0.01 per share, were
granted in connection with the preferred stock which equaled 4.25% of the
Company's common stock. The Series A Preferred Stock was issued to Morgan
Stanley Capital Partners, a related party to the Company.
The $350.0 million senior secured credit facility replaces the
Company's $150.0 million senior secured credit facility. It is comprised of a
revolving credit facility, a term A loan and a term B loan. The revolving credit
facility is a $100.0 million eight-year revolver, term A loan is a $125.0
million eight-year multiple draw term loan and term B loan is a $125.0 million
eight and one-half year term loan. Borrowings under the credit facility bear
interest at our option, at the higher of the lender's prime rate or the
effective federal funds rate, plus 1/2 of 1%, plus the applicable margin, or at
the LIBOR rate for deposits in US dollars for the relevant period, adjusted for
the statutory reserve rate, plus the applicable margin. As of August 1, 2000,
the term B loan was fully funded, $20.0 million of the revolving credit facility
was funded, $80.0 million remained available under the revolving credit facility
and $125.0 million remained available under the term A loan.
The $180.0 million unsecured bridge facility is a one-year overfund
facility and, upon draw down of the bridge loan, up to $30.0 million of the
bridge loan proceeds will be credited into escrow to make cash interest payments
on the bridge loan. Morgan Stanley Senior Funding, a related party of the
Company, was sole lead arranger for the bridge facility. The bridge facility
matures on the first anniversary of the bridge loan commitment date, August 1,
2001. On the maturity date, any outstanding balance will be redeemed with the
issuance of rollover notes. The rollover notes mature on the ninth anniversary
of the rollover issuance date. On the date of the issuance of the rollover
notes, the Company will issue warrants representing 1% of the fully diluted
common stock of the Company on such date, but not to exceed 5% of the
outstanding common stock of the Company on date of issuance. All warrants will
be exercisable at 10% above the then current trading price for the common stock
of the Company for a period of five years from the warrants issuance date.
During August 2000, the Company negotiated the final purchase price
adjustment in connection with the acquisition of Atlantic Connections. The final
amount to be paid in cash is $1.5 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW
We are an integrated communications provider offering broadband data
and voice telecommunications services primarily to small and medium-sized
businesses in second and third tier markets in the northeastern United States.
Our offerings include high-speed data and
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Internet service, principally utilizing DSL technology, local exchange
service, long distance service, Web page design and Web hosting services. We
seek to become the leading integrated service provider in each of our target
markets by offering a single source for competitively priced, high quality,
customized telecommunications services. A key element of our strategy is to be
one of the first integrated service providers to provide comprehensive coverage
in each of the markets we serve. We are achieving this market coverage by
installing both data and voice network equipment in the central offices of
established telephone companies, a process known as collocation. We also intend
to maximize utilization of our market network coverage by offering data and
voice services on a wholesale basis to Internet service and other
telecommunications providers. Through our strategy of connecting substantially
all of our clients directly to our own switches, we are able to more efficiently
route traffic, ensure quality service and control costs.
Since our inception on June 2, 1998 through January 1999, we were in
the development stage of operations and did not generate any revenue. Our
principal activities during that time consisted of the following:
o the hiring of management and other key personnel;
o the raising of capital;
o the procurement of governmental authorizations and space in central
offices;
o the acquisition of equipment and facilities;
o the development, acquisition and integration of operations support
systems and other back office systems; and
o the negotiation of interconnection agreements.
Therefore, our revenues during this period are not indicative of
revenues that may be attained in the future. As a result of our development
activities, we have experienced significant operating losses and negative
EBITDA, as adjusted to date. We do not expect to achieve positive EBITDA, as
adjusted in any market while we emphasize development, construction and
expansion of our telecommunications services business in such market and until
we establish a sufficient revenue-generating client base. We expect to continue
to experience increasing operating losses and negative EBITDA, as adjusted as we
expand our operations.
Included in our management's discussion and analysis of financial
condition and results of operations is EBITDA, as adjusted. EBITDA, as adjusted,
represents earnings before interest, income taxes, depreciation and
amortization, non-cash deferred compensation and non-cash management allocation
charges. EBITDA, as adjusted is used by management and certain investors as an
indicator of a company's historical ability to service debt. Management believes
that an increase in EBITDA, as adjusted is an indicator of improved ability to
service existing debt, to sustain potential future increases in debt and to
satisfy capital requirements. However, EBITDA, as adjusted is not intended to
represent cash flows for the period, nor has it been presented as an alternative
to either operating income, as determined by generally accepted accounting
principles, nor as an indicator of operating performance or cash flows from
operating, investing and financing activities, as determined by generally
accepted accounting principles,
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and is thus susceptible to varying calculations. EBITDA, as adjusted as
presented may not be comparable to other similarly titled measures of other
companies.
Inasmuch as the Company has significantly increased the scope and size
of its operations from its infancy during the three months and six months ended
June 30, 1999, a comparison of the three months and six months ended June 30,
2000 results with the three months and six months ended June 30, 1999 is not
meaningful.
The net loss (after noncash one-time management allocation charge and
amortization of deferred compensation and a portion of the deferred management
allocation charge) for the three months ended June 30, 2000 was $25.0 million.
The net loss for the three months ended June 30, 1999 was $6.5 million. Earnings
before interest, taxes, depreciation, amortization, non-cash deferred
compensation and management allocation charge ("EBITDA, as adjusted") was a
negative $13.9 million for the three months ended June 30, 2000 versus a
negative $4.7 million for the three months ended June 30, 1999.
During the three months ended June 30, 2000, we achieved positive gross
margin for the first time. Gross profit was $700,000 or 6.7% of revenue during
the three months ended June 30, 2000 versus a loss of $465,000 for the three
months ended June 30, 1999. Gross profit, as used by management, is revenues
less direct network costs.
We have rapidly deployed our networks since commencing service. We were
operational in 12 markets across the northeastern United States as of June 30,
2000. In addition, during July, 2000, we became operational in two additional
markets (New Haven and Hartford, Connecticut). The table below provides selected
key operational data as of and for the three months ended:
June 30, 2000 June 30, 1999
Markets Served 12 4
Number of switches-voice 8 4
Number of switches-data 25 6
Central Office Collocations-voice 178 27
Central Office Collocations-data 224 --
Addressable Market (Business Lines) 2.1 million 1.3 million
Lines Sold in quarter-total 19,699 4,883
Lines sold in quarter-voice 18,600 4,833
Lines sold in quarter-data 1,099 50
Lines Installed in quarter-total 18,635 2,033
Lines installed in quarter-voice 17,504 2,011
Lines installed in quarter-data 1,131 22
Lines in service-total 51,745 2,326
Lines in service-voice 49,915 2,301
Lines in service-data 1,830 25
<PAGE>
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Total Employees 671 174
Sales Employees 283 70
During the three months ended June 30, 2000, we made substantial
progress in the areas of electronic bonding and integration of OSS systems. On
July 26, 2000, we announced the integration of our order management and billing
systems. This enables us to transmit client information directly from the order
management and service fulfillment systems into the billing system, thereby
eliminating redundant keying and reducing the potential for errors. In addition,
in order to minimize the time between a client order and service installation we
have also established an on-line and real-time connection of our operations
support systems, called electronic bonding, with Bell Atlantic North. Electronic
bonding automates the service provisioning process, leading to enhanced quality
of service and a reduction in the overall processing intervals for our clients.
We have also rolled out an integrated ordering system to enhance
productivity in the sales organization. The system populates an electronic order
form with client data previously collected in the sales force automation system.
Once complete, the order is transmitted to a central repository, where it is
retrieved and keyed into our OSS system. This reduces the amount of time spent
on administrative duties and allows sales colleagues to spend more time on
productive sales activities.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000
Revenues
The Company generated $10.4 million in revenue during the three months
ended June 30, 2000. Revenue for the three months ended June 30, 2000 represents
a 53.3% increase compared to revenue for the three months ended March 31, 2000.
The Company installed 18,635 lines during the three months ended June 30, 2000;
an increase of 43.2% compared with 13,014 lines installed during the three
months ended March 31, 2000. At June 30, 2000, the Company has a total installed
base of 51,745 lines, which compares with 33,110 access lines in service as
March 31,2000. Sales are expected to increase from the level realized during the
three months ended June 30, 2000 as new markets are opened and as existing
markets achieve full sales staffing levels.
The Company has significantly increased sales of facilities-based
lines. Of the 18,635 access lines installed during the three months ended June
30, 2000, 100% are facility based and the Company is not currently marketing
telephone company provided service via resale. At June 30, 2000, facility-based
lines represent 93% of the total installed base as compared to 87% of the total
installed base at March 31, 2000.
Revenues were generated from the following categories:
o DSL and other data services;
o Local calling services;
o Long distance services;
o Access charges;
<PAGE>
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o Reciprocal compensation; and
o E-services, which includes Web design and Web hosting services.
The market for local and long distance services is well established and
we expect revenue growth principally from taking market share away from other
service providers. Similarly, we expect revenue from access charges that are
based on long distance calls made by and to our customers and reciprocal
compensation that entitles us to bill the established telephone companies for
calls in the same local calling area, placed by their clients to our clients, to
grow as we are able to increase our client base.
The market for high-speed data communications services and Internet
access is rapidly growing. We expect to generate revenues from the sale of these
services to end user clients in the small and medium-sized business market
segments, but may augment this core revenue source by selectively supplying
wholesale services, including equipment collocation and facilities management
services, to information providers, such as audio-text service providers, and
Internet service providers.
We price our services competitively in relation to those of the
established telephone companies and offer combined service discounts designed to
give clients incentives to buy a portfolio of services and enter into multi-year
service agreements. Although pricing will be an important part of our strategy,
we believe that direct relationships with our customers and consistent, high
quality service and customer support will be key to generating customer loyalty.
Our experience demonstrates that there is significant churn of
customers within the telecommunications industry, and we believe that churn is
especially high when customers are only buying long distance services from a
carrier or when customers are buying resold services. We expect to minimize
churn by providing superior customer care, by offering a competitively priced
portfolio of local, long distance, data and Internet services, and by focusing
on offering our own facilities based services.
Network Costs
Network costs for the three months ended June 30, 2000 were $9.7
million representing a 38.9% increase compared to network costs for the three
months ended March 31, 2000. This sharp increase is consistent with the
deployment of our networks and growth of our services. Gross profit was $700,000
or 6.7% of revenue during the three months ended June 30, 2000 versus a loss of
$200,000 for the three months ended March 31, 2000. Gross margin is expected to
remain positive in future periods.
Under our network buildout strategy, we are deploying voice and data
switches with local and long distance capability and leasing transmission lines
from the established telephone companies and other competitive local exchange
carriers to connect our switch with our transmission equipment collocated in the
established telephone company's central offices. We will lease transmission
lines from the established telephone companies to connect our clients and other
carriers' networks to our network. We plan to lease capacity or overbuild
specific network segments in certain markets as economically justified by
traffic volume growth. In addition, we expect to increase the capacity of our
switches, and may install additional switches, in a market
<PAGE>
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as demand warrants. We have acquired the rights to two transmission lines
between Springfield and Worcester, and have an option to purchase the rights to
additional transmission lines.
We entered into a master facilities agreement with Fiber Technologies,
a company that designs, constructs and leases high performance fiber networks in
second and third tier markets in the Northeast and Mid-Atlantic regions of the
United States. The agreement provides us with a 20-year lease for fiber without
electronics from Fiber Technologies in a minimum of 13 of our original 20
cities. Fiber deployment will allow us to optimize network costs and enhance the
quality and reliability of our network.
We expect switch site lease costs will be a significant part of our
ongoing cost of services. The costs to lease transmission lines from the
established telephone companies will vary by company and are regulated by state
authorities. Collocation costs are also expected to be a significant part of our
network development and ongoing cost of services. We will be required to invest
a significant amount of funds to develop the central office collocation sites
and to deploy the transmission and distribution electronics. We have entered
into an agreement with Lucent Technologies, Inc. to purchase Lucent equipment at
a discount to their standard pricing with a term expiring in December 2002.
In order to enter a market, we must enter into an interconnection
agreement with the established telephone company to make comprehensive calling
available to our clients. Typically these agreements set the cost per minute to
be charged by each party for the calls which have traversed between each
carrier's network. These costs grow in proportion to outbound call volume and
are expected to be a major portion of our cost of services. To the extent our
clients' outbound call volume is equivalent to their inbound call volume, we
expect that our interconnection costs paid to the established telephone
companies will be substantially offset by the interconnection revenues received
from the established telephone companies.
We have entered into a resale agreement with Frontier Communications of
the West Inc. to provide us with long distance transmission services. This
agreement provides for the resale of long distance services on a per-minute
basis and contains minimum volume commitments. In the event we fail to meet our
minimum volume commitments, we may be obligated to pay under-utilization charges
and in the event we underestimate our need for transmission capacity, we may be
required to obtain capacity through more expensive means. Transmission capacity
costs will increase as our clients' long distance calling volume increases, and
we expect that these costs will be a significant portion of our cost of long
distance services. As traffic on specific routes increases, however, we may
lease or otherwise acquire transmission capacity which, over time, would have
the effect of reducing our per unit network costs and increasing our
depreciation and amortization expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended
June 30, 2000 were $21.7 million. This compares to selling, general and
administrative expenses of $77.4 million during the three months ended March 31,
2000. These decreased expenses resulted primarily from the recording of a $64.5
million noncash management allocation charge during the three months ended June
30, 2000 as a result of the company's initial public offering in February 2000.
Excluding the non-cash management allocation charge and amortization of
<PAGE>
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deferred compensation, selling, general and administrative expenses increased
$3.4 million or 31.0% compared to the three months ended March 31, 2000.
The number of employees increased to 671 as of June 30, 2000, from 520
as of March 31, 2000 and 174 as of June 30, 1999. As of June 30, 2000, sales
employees (which include direct sales, sales support and sales management)
increased to 283. This compares to 214 as of March 31, 2000 and 70 as of June
30, 1999. We expect the number of sales employees and total employees to
increase significantly throughout the remainder of 2000.
Our selling, general and administrative expenses include selling and
marketing costs, client care, billing, corporate administration, personnel and
network maintenance.
We have developed a customized information system and procedures for
operations support systems and other back office systems that are required to
enter, schedule, provision and track a client order from point of sale to the
installation and testing of service and that will include or interface with
trouble management, inventory, billing, collection and client care service
systems. Along with the development cost of the systems, we will also incur
ongoing expenses for client care and billing. We currently outsource our billing
under an agreement with ADC Communications, Inc. (formerly Saville Systems
Inc.). This agreement provides for the processing of our billing records and
includes minimum monthly transaction fees based on the number of calls and
access lines billed to customers. Billing is expected to be a significant part
of our ongoing administrative expenses.
We will incur other costs and expenses, including the costs associated
with the maintenance of our network, administrative overhead, office leases and
bad debt. We expect that these costs will grow significantly as we expand our
operations and that administrative overhead will be a large portion of these
expenses during the start-up phase of our business. However, we expect these
expenses to become smaller as a percentage of our revenue as we build our client
base.
Management Ownership Allocation Charge and Deferred Compensation
The magnitude of the loss for the three months and six months ended
June 30, 2000 is principally due to the management ownership allocation charge
included in selling, general and administrative expenses. Institutional
investors of Choice One Communications L.L.C. and 27 members of our management
owned approximately 95.0% and 5.0%, respectively, of the ownership interests of
Choice One Communications L.L.C., the entity that owned all of our outstanding
capital stock. As a result of the successful completion of the initial public
offering, Choice One Communications L.L.C. was dissolved and its assets, which
consisted almost entirely of our capital stock, were distributed to our
institutional investors and management. Approximately 68.5% of the stock held by
the L.L.C. was distributed to our institutional investors and 31.5% was
distributed to management, which is the full amount allocable to management
under the L.L.C. agreement.
Under generally accepted accounting principles, upon consummation of
the initial public offering, we were required to record the $119.9 million
increase in the assets of Choice One Communications L.L.C. allocated to
management as an increase in additional paid-in capital, with a corresponding
increase in deferred compensation, of which we were required to record
<PAGE>
-19-
$64.5 million as a noncash, non-recurring charge to operating expense during the
period in which this offering is consummated and $55.4 million was recorded as
deferred management ownership allocation charge. The deferred charge will be
amortized at $19.0 million, $23.9 million, $11.6 million and $.9 million during
2000, 2001, 2002 and 2003, respectively, which is based upon the period over
which we have the right to repurchase the securities. During the three months
and six months ended June 30, 2000 the company recognized amortization of
deferred management ownership allocation charge of $6.3 million and $70.9
million, respectively.
In addition to the above expenses, we recognized $0.7 million and $2.5
million of amortization of deferred compensation expenses during the three
months and six months ended June 30, 2000, respectively. This also is a noncash
charge. Deferred compensation was recorded in connection with membership units
of Choice One Communications LLC sold to certain management employees and grants
to employees under our 1998 Stock Option Plan.
Depreciation and Amortization
Depreciation and amortization for the three months ended June 30, 2000
was $4.0 million representing a 33.2% increase compared to depreciation and
amortization expenses for the three months ended March 31, 2000. The increase is
consistent with the deployment of our networks and initiation of services in 12
markets by June 30, 2000. Our depreciation and amortization expense includes
depreciation of switch related equipment, non-recurring charges and equipment
collocated in established telephone company central offices, network
infrastructure equipment, information systems and furniture and fixtures.
It also includes amortization of goodwill and customer base. Goodwill
from the acquisitions of Atlantic Connections and EdgeNet Inc. was $5.5 million
and $3.5 million, respectively. Customer base acquired through the acquisitions
of Atlantic Connections and EdgeNet Inc. was $3.3 million and $0.5 million,
respectively. Goodwill and customer base is being amortized over a 10-year and
five-year period, respectively. We expect that our depreciation and amortization
expense will increase as we continue to make capital expenditures, acquire
long-term rights in telecommunications facilities and acquire other businesses.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
Revenues
The Company generated $17.2 million in revenue during the six months
ended June 30, 2000 compared to $154,000 during the six months ended June 30,
1999. The Company installed 31,649 lines during the six months ended June 30,
2000 compared with 2,326 lines installed during the six months ended June 30,
1999. At June 30, 2000, the Company has a total installed base of 51,745 lines,
which compares with 2,326 access lines in service as June 30, 1999. Sales are
expected to increase from the level realized during the six months ended June
30, 2000 as new markets are opened and as existing markets achieve full sales
staffing levels.
The Company has significantly increased sales of facilities-based
lines. Of the 31,649 access lines installed during the six months ended June 30,
2000, 100% are facility based and the Company is not currently marketing
telephone company provided service via resale. At June 30, 2000, facility-based
lines represent 93% of the total installed base as compared to 87% of the total
installed base at March 31, 2000.
<PAGE>
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Network Costs
Network costs for the six months ended June 30, 2000 were $16.7 million
compared to network costs of $797,000 for the six months ended June 30, 1999.
This sharp increase is consistent with the deployment of our networks and growth
of our services.
During the six months ended June 30, 2000, we achieved positive gross
margin for the first time. Gross profit was $500,000 or 2.9% of revenue during
the six months ended June 30, 2000 versus a loss of $643,000 for the six months
ended June 30, 1999. Gross margin is expected to remain positive in future
periods.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended
June 30, 2000 were $99.1 million compared to selling, general and administrative
expenses of $7.8 million during the six months ended June 30, 1999. These
decreased expenses resulted primarily from the recording of a $64.5 million
noncash management allocation charge during the three months ended June 30, 2000
as a result of the company's initial public offering in February 2000. Excluding
the non-cash management allocation charge and amortization of deferred
compensation, selling, general and administrative expenses were $25.7 million
for the six months ended June 30, 2000 as compared to $7.2 million for the six
months ended June 30, 1999. This is consistent with the growth in number of
employees for the same comparative periods.
The number of employees increased to 671 as of June 30, 2000, from 174
as of June 30, 1999. As of June 30, 2000, sales employees (which include direct
sales, sales support and sales management) increased to 283. This compares to 70
as of June 30, 1999. We expect the number of sales employees and total employees
to increase significantly throughout the remainder of 2000.
Management Ownership Allocation Charge and Deferred Compensation
The magnitude of the loss for the six months ended June 30, 2000 is
principally due to the management ownership allocation charge included in
selling, general and administrative expenses. Institutional investors of Choice
One Communications L.L.C. and 27 members of our management owned approximately
95.0% and 5.0%, respectively, of the ownership interests of Choice One
Communications L.L.C., the entity that owned all of our outstanding capital
stock. As a result of the successful completion of the initial public offering,
Choice One Communications L.L.C. was dissolved and its assets, which consisted
almost entirely of our capital stock, was distributed to our institutional
investors and management. Approximately 68.5% of the stock held by the L.L.C.
was distributed to our institutional investors and 31.5% was distributed to
management, which is the full amount allocable to management under the L.L.C.
agreement.
Under generally accepted accounting principles, upon consummation of
the initial public offering, we were required to record the $119.9 million
increase in the assets of Choice One Communications L.L.C. allocated to
management as an increase in additional paid-in capital, with a corresponding
increase in deferred compensation, of which we were required to record $64.5
million as a noncash, non-recurring charge to operating expense during the
period in which
<PAGE>
-21-
this offering is consummated and $55.4 million was recorded as deferred
management ownership allocation charge. The deferred charge will be amortized at
$19.0 million, $23.9 million, $11.6 million and $.9 million during 2000, 2001,
2002 and 2003, respectively, which is based upon the period over which we have
the right to repurchase the securities. During the six months ended June 30,
2000 the company recognized amortization of deferred management ownership
allocation charge of $70.9 million.
In addition to the above expenses, we recognized $2.5 million and $0.7
million of amortization of deferred compensation expenses during the six months
ended June 30, 2000 and 1999, respectively. This also is a noncash charge.
Deferred compensation was recorded in connection with membership units of Choice
One Communications LLC sold to certain management employees and grants to
employees under our 1998 Stock Option Plan.
Depreciation and Amortization
Depreciation and amortization for the six months ended June 30, 2000
was $7.0 million as compared to $2.0 million of depreciation and amortization
expenses for the six months ended June 30, 1999. The increase is consistent with
the deployment of our networks and initiation of services in 12 markets by June
30, 2000. Our depreciation and amortization expense includes depreciation of
switch related equipment, non-recurring charges and equipment collocated in
established telephone company central offices, network infrastructure equipment,
information systems and furniture and fixtures.
It also includes amortization of goodwill and customer base. Goodwill
from the acquisitions of Atlantic Connections and EdgeNet Inc. was $5.5 million
and $3.5 million, respectively. Customer base acquired through the acquisitions
of Atlantic Connections and EdgeNet Inc. was $3.3 million and $0.5 million,
respectively. Goodwill and customer base is being amortized over a 10-year and
five-year period, respectively. We expect that our depreciation and amortization
expense will increase as we continue to make capital expenditures, acquire
long-term rights in telecommunications facilities and acquire other businesses.
The net loss (after noncash one-time management allocation charge and
amortization of deferred compensation and a portion of the deferred management
allocation charge) for the six months ended June 30, 2000 was $106.7 million.
The net loss for the six months ended June 30, 1999 was $11.0 million. Earnings
before interest, taxes, depreciation, amortization, non-cash deferred
compensation and management allocation charge ("EBITDA, as adjusted") was a
negative $25.2 million for the six months ended June 30, 2000 versus a negative
$7.8 million for the six months ended June 30, 1999.
Interest Expense and Income.
Interest expense for the three months and six months ended June 30,
2000 was approximately $0.8 million and $2.2 million, respectively. Interest
expense includes interest payments on borrowings under our credit facility. It
also includes amortization of deferred financing costs related to our credit
facility. Interest expense for the three months and six months ended June 30,
1999 was $0.3 million and $0.6 million, respectively.
Interest income for the three months and six months ended June 30, 2000
was approximately $0.7 million and $1.1 million, respectively. Interest income
results from the
<PAGE>
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investment of cash and cash equivalents, mainly from the cash proceeds generated
from the initial public offering of our common stock in February 2000. There was
no interest income during the three months and six months ended June 30, 1999.
Income Taxes
We have not generated any taxable income to date and do not expect to
generate taxable income in the next few years. Use of our net operating loss
carryforwards, which begin to expire in 2018, may be subject to limitations
under Section 382 of the Internal Revenue Code of 1986, as amended. We have
recorded a full valuation allowance on the deferred tax asset, consisting
primarily of net operating loss carryforwards, due to the uncertainty of its
realizability.
LIQUIDITY AND CAPITAL RESOURCES
Credit Facility. Our credit facility permits us to borrow up to $150.0
million, subject to various conditions, covenants and restrictions for the next
eight years with maximum borrowing limits to be reduced starting in 2002 by 5.0%
with increasing reductions thereafter for each year. The $50.0 million term loan
portion of the credit facility will not be available for borrowing by us after
November 3, 2000 if these funds have not been borrowed before that date. As of
June 30, 2000, there were no borrowings outstanding under the revolving portion
of the credit facility. The credit facility, which is secured by liens on
substantially all of our and our subsidiaries' assets and a pledge of our
subsidiaries' common stock, contains covenants and events of default that are
customary for credit of this nature.
Cash Flows. We have incurred significant operating and net losses since
our inception. We expect to continue to experience increasing operating losses
and negative EBITDA as we expand our operations and build our client base. As of
June 30, 2000, we had an accumulated deficit of $144.2 million. Net cash used
for operating activities was approximately $37.0 million for the six months
ended June 30, 2000 and approximately $14.0 million for the six months ended
June 30, 1999. The net cash used for operating activities during the six months
ended June 30, 2000 was primarily due to net losses, an increase in note
receivable attributable to cash advance to US Xchange prior to the merger, and a
decrease in accounts payable.
Net cash provided by financing activities was $97.0 million for the six
months ended June 30, 2000 and $26.9 million for the six months ended June 30,
1999. Net cash provided by financing activities for the six months ended June
30, 2000 was primarily related to the initial public offering completed in
February 2000. Net cash provided by financing activities for the six months
ended June 30, 1999 was related to borrowings under the credit facility.
Capital Requirements. Capital expenditures were $53.6 million and $14.4
million for the six months ended June 30, 2000 and June 30, 1999, respectively.
Capital expenditures were $33.2 million for the three months ended June 30,
2000. We expect that our capital expenditures will continue at this rate in
future periods in connection with the purchase of infrastructure equipment
necessary for the development and expansion of our network, the development of
new markets and potential acquisitions, investments and strategic alliances.
In addition, under our agreement with Fiber Technologies we have
committed to four fibers in each cable at a cost of $65.00 per fiber per route
mile per month in the 13 original cities.
<PAGE>
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The minimum cost for all 13 cities, when operational, over the 20- year IRU term
is estimated at $100.0 million.
To expand and develop our business, we will need a significant amount
of cash. The actual amount and timing of our future capital requirements may
differ materially from our estimates as a result of the demand for our services
and regulatory, technological and competitive developments, including additional
market developments and new opportunities in the industry and other factors. We
also expect that we may require additional financing, or require financing
sooner than anticipated, if our development plans or projections change or prove
to be inaccurate or to complete our roll-out plan to 20 markets. We may also
require additional financing in order to take advantage of unanticipated
opportunities, to effect acquisitions of businesses, to develop new services or
to otherwise respond to changing business conditions or unanticipated
competitive pressures. Sources of additional financing may include commercial
bank borrowings, vendor financing or the private or public sale of equity or
debt securities. Our ability to obtain additional financing is uncertain.
At June 30, 2000, we had approximately $8.1 million in cash and cash
equivalents. In addition, the Company has a $150.0 million credit facility. At
June 30, 2000, there were no borrowings outstanding on that facility. The
Company believes that its cash resources and available credit facilities are
sufficient to meet its requirements for at least the next twelve months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2000, the carrying value of our debt obligations excluding
capital lease obligations was $2.4 million and the fair value of those
obligations was $2.4 million.
We have not, in the past, used in any material respect financial
instruments as hedges against financial and currency risks or for trading.
However, as we expand our operations, we may begin to use various financial
instruments, including derivative financial instruments, in the ordinary course
of business, for purposes other than trading. These instruments could include
letters of credit, guarantees of debt and interest rate swap agreements. We do
not intend to use derivative financial instruments for speculative purposes.
Interest rate swap agreements would be used to reduce our exposure to risks
associated with interest rate fluctuations and, subject to limitations and
conditions, are required by our credit facility. By their nature, these
instruments would involve risk, including the risk of nonperformance by
counterparties, and our maximum potential loss may exceed the amount recognized
in our balance sheet. We would attempt to control our exposure to counterparty
credit risk through monitoring procedures and by entering into multiple
contracts.
<PAGE>
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports for Form 8-K
A. Exhibits
See Exhibit Index
B. Reports on Form 8-K
A Form 8-K/A was filed on May 16, 2000 relating to the
agreement to acquire US Xchange, Inc. No financial statements
were included.
<PAGE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHOICE ONE COMMUNICATIONS INC.
Registrant
DATE: August 14, 2000 By: /S/ STEVE M. DUBNIK
------------------------
Steve M. Dubnik, Chairman and Chief
Executive Officer
By: /S/ AJAY SABHERWAL
-------------------------
Ajay Sabherwal, Chief Financial Officer and
Senior Vice President - Finance
(Principal Accounting and Financial Officer)
<PAGE>
-26-
EXHIBIT
NUMBER DESCRIPTION
10.1 Master Facilities Agreement between Choice One Communications Inc. and
Fiber Technologies L.L.C.*
11.1 Statement regarding computation of per share loss for the three month
period ending June 30, 2000
11.2 Statement regarding computation of per share loss for the six month
period ending June 30, 2000
11.3 Statement regarding computation of per share loss for the three month
period ending June 30, 1999
11.4 Statement regarding computation of per share loss for the six month
period ending June 30, 1999
27.1 Financial Data Schedule
* Portions of this Agreement have been omitted and filed separtely with
the Commision pursuant to an application for confidential treatment
under Rule 246b-2.
<PAGE>
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EXHIBIT 11.1
CHOICE ONE COMMUNICATIONS INC.
COMPUTATION OF PER SHARE LOSS
THREE MONTHS ENDED JUNE 30, 2000
Equivalent
Title Number of Shares Percent Shares
Choice One Communications, Inc. 22,022,256 100.0% 22,022,256
Choice One Communications, Inc. 770,791 100.0% 770,791
February 2000 Stock Offering 8,216,750 100.0% 8,216,750
1998 Employee Stock Option Plan 18,687 67.99% 12,706
Weighted Average Share Outstanding 31,022,503
Net Loss Applicable to Common Stock $(25,018,519)
Net Loss Per Share, Basic and Diluted $(0.81)
<PAGE>
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EXHIBIT 11.2
CHOICE ONE COMMUNICATIONS INC.
COMPUTATION OF PER SHARE LOSS
SIX MONTHS ENDED JUNE 30, 2000
Equivalent
Title Number of Shares Percent Shares
Choice One Communications, Inc. 22,022,256 100.0% 22,022,256
Choice One Communications, Inc. 770,791 74.2% 571,741
February 2000 Stock Offering 8,216,750 74.1% 6,088,953
1998 Employee Stock Option Plan 18,687 37.0% 6,918
Weighted Average Share Outstanding 28,689,868
Net Loss Applicable to Common Stock $(106,674,012)
Net Loss Per Share, Basic and Diluted $(3.72)
<PAGE>
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EXHIBIT 11.3
CHOICE ONE COMMUNICATIONS INC.
COMPUTATION OF PER SHARE LOSS
THREE MONTHS ENDED JUNE 30, 1999
Equivalent
Title Number of Shares Percent Shares
Choice One Communications, Inc. 21,275,829 100.0% 21,275,829
Weighted Average Share Outstanding 21,275,829
Net Loss Applicable to Common Stock $(6,523,239)
Net Loss Per Share, Basic and Diluted $(0.31)
<PAGE>
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EXHIBIT 11.4
CHOICE ONE COMMUNICATIONS INC.
COMPUTATION OF PER SHARE LOSS
SIX MONTHS ENDED JUNE 30, 1999
Equivalent
Title Number of Shares Percent Shares
Choice One Communications, Inc. 21,275,829 100.0% 21,275,829
Weighted Average Share Outstanding 21,275,829
Net Loss Applicable to Common Stock $(10,970,417)
Net Loss Per Share, Basic and Diluted $(0.52)
