UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
May 14, 2000
Date of Report (Date of earliest event reported)
CHOICE ONE COMMUNICATIONS INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-29279 16-1550742
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(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization) File No.) Identification No.)
100 Chestnut Street, Suite 700, Rochester, New York 14604
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(Address of principal executive offices and zip code)
(716) 246-4231
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(Registrant's telephone number, including area code)
<PAGE>
-2-
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Agreement to acquire US Xchange, Inc.
On May 14, 2000, Choice One Communications Inc. (the "Company") entered
into an Agreement and Plan of Merger (the "Merger Agreement") with US Xchange,
Inc., a Delaware corporation ("US Xchange"), and the stockholder of US Xchange,
pursuant to which US Xchange will be merged with and into a newly formed wholly
owned subsidiary of the Company (the "Merger"). As a result of the Merger, the
separate corporate existence of US Xchange shall cease and the Company's
subsidiary shall continue as the surviving corporation and each share of US
Xchange's common stock will be converted into the right to receive cash and
shares of the Company's common stock. The amount of cash and the number of
shares of the Company's common stock into which each share of US Xchange's
common stock will be converted will be determined immediately prior to
consummation of the Merger in accordance with formulas specified in the Merger
Agreement. The Company estimates that it will be required to issue approximately
7.0 million shares of its common stock and to pay approximately $311 million in
net cash pursuant to the Merger, subject to adjustment. The above-referenced
cash payment includes approximately $279.2 million in US Xchange debt, together
with associated premiums, which will be paid off upon the consummation of the
Merger. The Company has agreed to provide certain registration rights to the
holders of the shares of its common stock to be issued in the Merger for the
registration of such shares under the Securities Act of 1933.
Consummation of the Merger is subject to the satisfaction of certain
conditions, including (i) the Company obtaining financing on terms not
materially less favorable to the Company than those set forth in the executed
commitment letters received by the Company prior to the execution of the Merger
Agreement, (ii) the redemption of at least 80% of the outstanding principal
amount of the 15% Senior Notes due July 1, 2008 of US Xchange, L.L.C., having
properly authorized and approved an amendment to the Indenture, to take effect
on the redemption date, providing for the deletion of certain covenants and
other provisions thereof specified by the Company, (iii) the modification of
certain agreements relating to the operations of US Xchange, (iv) compliance
with all applicable provisions of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 and the expiration of all applicable waiting periods thereunder, (v)
receipt of specified regulatory approvals and (vi) certain other customary
conditions. Both the Company and US Xchange may terminate the Merger Agreement
if the Merger has not been consummated by November 14, 2000.
In connection with the execution of the Merger Agreement, the Company
entered into a credit facility with US Xchange Finance Company, L.L.C. ("US
Xchange Finance Company"), a subsidiary of US Xchange, pursuant to which the
Company agreed to lend to US Xchange Finance Company up to $25 million on a
secured basis. The amount of such loans which are used to fund operating losses
of US Xchange and its subsidiaries will cause a reduction in the number of
shares of the Company's common stock to be issued at the closing of the Merger.
The foregoing descriptions of the Merger Agreement and the transactions
contemplated thereby are intended to be a general summary and do not purport to
be complete.
Attached as Exhibit 99.1 is a press release issued by the Company and
US Xchange, dated May 15, 2000, which is incorporated by reference herein.
<PAGE>
-3-
Certain statements contained in this Current Report on Form 8-K are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and the company intends that such forward-looking
statements be subject to the safe harbors created thereby. The words "believes",
"expects", "estimates", "anticipates", "will be" and "plans" and similar words
or expressions identify forward-looking statements made by or on behalf of the
company. These forward-looking statements are subject to many uncertainties and
factors that may cause the actual results of the company to be materially
different from any future results expressed or implied by such forward-looking
statements. Examples of such uncertainties and factors include, but are not
limited to, availability of financing and regulatory approvals, the number of
potential customers in a target market, the existence of strategic alliances or
relationships, technological, regulatory or other developments in the Company's
business, changes in the competitive climate in which the Company operates and
the emergence of future opportunities, all of which could cause actual results
and experiences of the Company to differ materially from anticipated results and
expectations expressed in the forward-looking statements contained herein. These
and other applicable risks are summarized under the caption "Risk Factors" and
elsewhere in the Company's Registration Statement on Form S-1, Registration No.
333-91321, filed with the Securities and Exchange Commission and declared
effective on February 16, 2000.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits.
99.1 Press Release, dated May 15, 2000, announcing the
Company's execution of a definitive agreement to acquire US
Xchange.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
CHOICE ONE COMMUNICATIONS INC.
Dated: May 15, 2000 By: /s/Steve Dubnik
-------------------------
Name: Steve Dubnik
Title: Chairman and Chief Executive
Officer
Exhibit 99.1
FOR IMMEDIATE RELEASE
CHOICE ONE MEDIA CONTACT: US XCHANGE CONTACT:
Ythan Lax Richard Postma
Director, Corporate Communications Chairman and CEO
(716) 530-2944 (616) 988-7013
[email protected] [email protected]
CHOICE ONE INVESTOR CONTACT:
Lisa Schnorr
Director, Investor Relations
(716) 530-2965
[email protected]
CHOICE ONE SIGNS MERGER AGREEMENT WITH US XCHANGE; CHOICE ONE ALSO ANNOUNCES
$550 MILLION IN NEW FINANCING COMMITMENTS
o MERGER CONSIDERATION INCLUDES APPROXIMATELY $311 MILLION IN NET CASH, PLUS
7 MILLION SHARES OF CHOICE ONE STOCK, SUBJECT TO CLOSING ADJUSTMENTS
o SIGNIFICANTLY ENLARGES CHOICE ONE'S TERRITORY; ACCELERATES EXPANSION OF
ADDRESSABLE MARKET
o ADDITIONAL FINANCING COMMITMENTS, INCLUDING $200 MILLION IN PREFERRED
EQUITY, $200 MILLION IN ADDITIONAL SENIOR SECURED CREDIT AND $150 MILLION
BRIDGE FACILITY FULLY FUND MERGER AND EXPANDED BUSINESS PLAN
Rochester, New York & Grand Rapids, Michigan - May 15, 2000 -- Choice One
Communications (NASDAQ: CWON), an Integrated Communications Provider offering
telecommunications services to small and medium-sized businesses in the
Northeast, announced today it has signed a definitive merger agreement with US
Xchange, a privately-held facility-based CLEC headquartered in Grand Rapids,
Michigan.
Founded in 1997, US Xchange offers a full suite of local and long distance voice
services to business and residential customers in second and third tier markets
located in Illinois, Indiana, Michigan and Wisconsin. With a principal focus
toward small and medium sized businesses, US Xchange currently serves
approximately 17,000 business and residential clients and has an installed base
of nearly 60,000 access lines. Based on unaudited first quarter 2000 results, US
Xchange has an annualized revenue run-rate of approximately $38 million. At
March 31, 2000, US Xchange had approximately $136 million in net property, plant
and equipment (without adjusting for fiber assets to be retained by an affiliate
of US Xchange) and a total of 476 colleagues.
--MORE--
<PAGE>
"This merger effectively doubles the size of our company and is an excellent
strategic fit that significantly accelerates our expansion into contiguous
markets," said Steve Dubnik, chairman and CEO of Choice One. "Choice One and US
Xchange share similar market philosophies, with a focus on small and medium
sized businesses in second and third tier markets, and our network and operating
systems are highly compatible. Importantly, this transaction adds many
experienced and knowledgeable telecommunications professionals to support the
combined companies' growth. Our recently announced first quarter results clearly
indicate we are executing on all facets of our business plan. We are excited
about this opportunity to rapidly extend the reach of our successes into new
markets through this merger." On May 8, Choice One reported first quarter
results exceeding analyst expectations for line growth, revenue and collocations
in service.
US Xchange's network is comprised of nine Lucent 5ESS switches, four Lucent
remote switching devices, 48 collocations and a 13 node data network. US Xchange
also has a network operations center (NOC) that provides after-hours alarm
surveillance and dispatching. The network infrastructure and many of US
Xchange's OSS elements, including their MetaSolv facility/order management
system, are both scalable and consistent with the technologies deployed by
Choice One. US Xchange's switching platforms are connected to the company's
soon-to-be-completed intra- and inter-city fiber network, which will be retained
by an affiliate of US Xchange. Prior to closing, Choice One and US Xchange will
finalize an agreement granting Choice One fiber access under a 20-year
indefeasible right to use (IRU) for no additional payments.
"With its extensive data network and growing base of business clients, US
Xchange is well positioned to market Choice One's suite of integrated data and
voice services. We believe this will result in substantial incremental revenue
growth for the combined companies in 2001 and beyond," stated Dubnik. "With a
contiguous service area that now extends from Wisconsin to Massachusetts, we are
well positioned to be the leading provider of voice and data communications in
second and third tier markets in the Northeast quadrant of the United States."
On a pro forma basis, the combined companies had $65 million in annualized first
quarter 2000 revenue. At March 31, 2000, the combined companies had
approximately $195 million in net property, plant and equipment, 226
collocations, more than 93,000 lines in service and nearly 1,000 total
colleagues. The combined companies expect to have nearly 4.5 million addressable
business lines via over 400 collocations in 26 markets by the end of this year.
"We are excited to join forces with Choice One--this transaction is a win for
all US Xchange colleagues and clients," commented Richard Postma, chairman and
CEO of US Xchange. "This combination will allow us to introduce new services to
our clients, including DSL and web services that complement our existing voice
services offerings. Choice One's access to capital will enable us to expand our
addressable market by making aggressive investments in our network collocations.
And most importantly, US Xchange colleagues will have exciting growth
opportunities as this new organization comes together." Mr. Postma is expected
to join Choice One's Board of Directors upon completion of the merger.
The companies expect to begin work immediately on transition plans to bring the
two organizations together. After closing, US Xchange plans to market products
and services under the name "US Xchange, A Choice One Communications Company".
--MORE--
<PAGE>
SUMMARY OF TERMS OF THE MERGER AGREEMENT
The transaction has been approved by the Boards of Directors of US Xchange and
Choice One, by the sole shareholder of US Xchange and conditionally approved by
a majority of Choice One shareholders. Choice One was advised in the transaction
by UBS Warburg and First Union; US Xchange was advised by Morgan Stanley. Terms
of the agreement include:
o Choice One will purchase the stock of US Xchange for approximately $311
million in net cash and 7 million shares of newly issued Choice One common
stock, subject to certain closing adjustments
o Choice One does not expect to assume any US Xchange debt
o Based on last Friday's closing price of $29.50 per share, the transaction
is valued at approximately $518 million
o Choice One will receive access to US Xchange's fiber via a 20-year IRU
The transaction is subject to certain conditions, including Hart-Scott-Rodino
clearance and other regulatory approvals. Additionally, US Xchange must
successfully cause bondholders to tender at least 80% of its high yield public
debt. As of Friday's close of business, holders of 100% of US Xchange's bonds
have agreed to tender their bonds. The transaction is expected to close before
the end of this year.
ADDITIONAL FINANCING COMMITMENTS
In connection with this agreement, Choice One announced that $550 million in
additional financing commitments have been secured to fund the transaction and
continued expansion of Choice One's business plan. These commitments are
expected to close coincident with the closing of the merger. The three
components of the financing package are:
o $200 million in Series A Senior Cumulative Preferred stock. This
non-convertible preferred stock has a 12-year maturity and provides for
dividends of 14% payable in kind (PIK). The preferred shares will be placed
with Morgan Stanley Dean Witter Capital Partners. In connection with the
purchase of the preferred stock, the company will grant the purchaser
warrants for 4.25% of the company's pro forma fully diluted common stock.
The purchaser of the preferred stock and its affiliates currently own
nearly 35% of Choice One's common stock.
o $200 million in additional senior secured credit; Choice One's existing
$150 million credit facility is to be replaced by a $350 million facility
with similar terms and conditions. Importantly, the key lenders in the
expanded facility, led by First Union Bank, were initial financial partners
in Choice One's business plan.
o $150 million senior unsecured bridge facility. Choice One plans to seek
alternative permanent financing before the bridge facility is funded. If
funded, the bridge notes will be placed with Morgan Stanley Senior Funding,
Inc. and will have a term of up to one year. Upon maturity, the bridge
facility may be replaced by a callable 9-year rollover facility.
--MORE--
<PAGE>
Commenting on these financing commitments, Dubnik said, "Capital is a strategic
asset and our ability to secure this kind of financing from high-quality
partners is a testament to all that we have accomplished. It also speaks volumes
to the potential of our business plan going forward and we are proud that our
existing financial sponsors have "re-committed" with a financing structure that
is unique to a company like ours." Dubnik noted that the additional financing is
expected to provide Choice One with the capital necessary to complete the merger
with US Xchange, to expand US Xchange's collocation footprint, to deploy DSL
capability throughout the US Xchange markets and to fully fund Choice One's
existing 20-city business plan. "When this is completed, Choice One will have
over $700 million in total funding available and a very strong balance sheet."
"This transaction represents a significant step for Choice One's strategy of
providing data and voice services to second and third tier markets," said John
B. Ehrenkranz, Managing Director of Morgan Stanley Dean Witter Private Equity.
"We are very excited about our partnership with Choice One's impressive
management team and the company's strong industry position. As one of the
largest and most successful private equity investors in the telecommunications
industry, with over $5 billion of investment gains in companies including
Equant, Allegiance Telecom and First Telecom, we believe that Choice One is
representative of our philosophy of partnering with proven management teams to
build leading companies in this sector."
Completion of the financing is subject to certain conditions, including closing
of the proposed merger and other customary conditions.
ABOUT CHOICE ONE COMMUNICATIONS
Headquartered in Rochester, New York, Choice One (NASDAQ: CWON) offers local
exchange and long distance telecommunications services, high-speed data,
Internet and DSL solutions, and web design and hosting primarily to small and
medium-sized businesses in second and third tier markets in the Northeast, U.S.
Choice One currently serves customers in twelve markets and plans to operate in
five additional markets by the end of the year. In February, Choice One
completed an Initial Public Offering for a total of $164 million of common
stock. The proceeds are being used to fund the continued expansion of Choice One
markets and infrastructure. At March 31, 2000, Choice One had 520 colleagues.
ABOUT US XCHANGE
Headquartered in Grand Rapids, Michigan, US Xchange is a privately-held
facilities-based CLEC offering a full suite of voice services to business and
residential customers in nine second and third tier markets in the Midwest, U.S.
At March 31, 2000 the company had 476 colleagues.
ABOUT MORGAN STANLEY DEAN WITTER PRIVATE EQUITY
Morgan Stanley Dean Witter Private Equity is the private equity business of
Morgan Stanley Dean Witter & Co. (NYSE: MWD), a preeminent global financial
services firm, and includes Capital Partners and Venture Partners. Since its
founding 15 years ago, funds managed by Private Equity have invested more than
$5.4 billion of capital. For more information, please visit
www.msdw.com/privateequity.
Please see attached Fact Sheets for additional information on Choice One and US
Xchange.
--MORE--
<PAGE>
ANALYST CONFERENCE CALL
Choice One Communications will host an investor conference call today to discuss
the merger agreement with US Xchange.
Date: Monday, May 15, 2000
Time: 10:00 a.m. (Eastern Time)
Participants: Steve Dubnik, Chairman and CEO of Choice One
Ajay Sabherwal, Senior VP and CFO of Choice One
Phil Yawman, Senior VP, Corporate Development of Choice One
Rich Postma, Chairman and CEO of US Xchange
Dial-in information:
Toll-free (US): 800-289-0730
International: 913-981-5509
Confirmation #: 436731
Replay information:
A replay of the call will be available until Friday, May 19 at midnight.
Toll-free (US): 888-203-1112
International: 719-457-0820
Confirmation #: 436731
FORWARD-LOOKING STATEMENTS
Certain statements contained in this press release constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and the company intends that such forward-looking statements be subject
to the safe harbors created thereby. The words "believes", "expects",
"estimates", "anticipates", "will be" and "plans" and similar words or
expressions identify forward-looking statements made by or on behalf of the
company. These forward-looking statements are subject to many uncertainties and
factors that may cause the actual results of the company to be materially
different from any future results expressed or implied by such forward-looking
statements. Examples of such uncertainties and factors include, but are not
limited to, availability of financing and regulatory approvals, the number of
potential customers in a target market, the existence of strategic alliances or
relationships, technological, regulatory or other developments in the company's
business, changes in the competitive climate in which the company operates and
the emergence of future opportunities, all of which could cause actual results
and experiences of Choice One to differ materially from anticipated results and
expectations expressed in the forward-looking statements contained herein. These
and other applicable risks are summarized under the caption "Risk Factors" and
elsewhere in the company's Registration Statement on Form S-1, Registration No.
333-91321, filed with the Securities and Exchange Commission and declared
effective on February 16, 2000.
For further information about Choice One, visit our web site at
www.choiceonecom.com or contact us at 1-888-832-5800.
# # # #
<PAGE>
CHOICE ONE COMMUNICATIONS
FACT SHEET
MAY, 2000
(PLEASE FORWARD ANY QUESTIONS TO YTHAN LAX, DIRECTOR OF CORPORATE
COMMUNICATIONS, AT [email protected])
SERVICES OVERVIEW:
Headquartered in Rochester, New York, Choice One (NASDAQ: CWON) offers local
exchange, long distance, high-speed data, Internet and DSL solutions, primarily
to small and medium sized businesses in second and third tier markets in the
Northeast. The company is making significant long-term commitments in its target
markets by deploying integrated switching and data platforms, including DSL
technology, to offer its clients fully integrated, high quality solutions for
telecommunications services.
CITIES SERVED (SEE ATTACHED MAP):
Choice One Communications serves customers in twelve markets in the Northeast
U.S. and has announced plans to enter five additional markets before the end of
this year. Most of these markets are in the Bell Atlantic service area. The
three planned Ohio markets will be Choice One Communications' first markets in
the Ameritech service area. Current markets include:
Buffalo, New York (Voice and Data Switch)
Rochester, New York (Voice and Data Switch)
Syracuse, New York (Voice and Data Switch)
Albany, New York (Voice and Data Switch)
Springfield, Massachusetts (Voice and Data Switch)
Worcester, Massachusetts (Served by Springfield switch)
Providence, Rhode Island (Voice and Data Switch)
Manchester, New Hampshire (Voice and Data Switch)
Allentown, Pennsylvania (Data Switch Only)
Harrisburg, Pennsylvania (Data Switch Only)
Pittsburgh, Pennsylvania (Voice and Data Switch)
Wilkes-Barre/Scranton, Pennsylvania (Data Switch Only)
Hartford, Connecticut (Summer, 2000) (Digital Remote Module)
New Haven, Connecticut (Summer, 2000) (Digital Remote Module)
Akron, Ohio (Fall, 2000) (Digital Remote Module)
Dayton, Ohio (Fall, 2000) (Digital Remote Module)
Columbus, Ohio (Fall, 2000) (Digital Remote Module)
NETWORK AND OPERATIONS AS OF 3/31/00:
Number of Lucent 5ESS Switches in service - 8 (plus 5 Digital Remote Modules to
be deployed)
Data Switches in Service - 17
Total Collocations - 178 total (162 equipped with voice)
OSS - MetaSolv
Total Colleagues - 520
Total Clients - 4,409
Total Lines Installed - 33,110
Addressable Business Lines - approximately 1.9 million
PRODUCTS OFFERED:
- - Local Phone Service (Dial Tone, Hunting, Three-way calling, call
forwarding, caller ID)
- - Long Distance
- - Voice Mail
- - T1
- - DSL
- - Dial-up Internet Access
- - Virtual Private Network
- - Web Hosting and Design
<PAGE>
US XCHANGE
FACT SHEET
MAY, 2000
(PLEASE FORWARD ANY QUESTIONS TO YTHAN LAX, DIRECTOR OF CORPORATE
COMMUNICATIONS, AT [email protected]) SERVICES OVERVIEW:
US Xchange is a facilities-based CLEC based in Grand Rapids, Michigan. Similar
to Choice One, US Xchange targets second and third tier cities for their
services. US Xchange offers a full suite of voice services and dial-up data
services; US Xchange does not currently offer DSL. US Xchange's network is
comprised of 9 voice switches, 4 remote switching devices and a 13 node data
network.
CITIES SERVED (SEE ATTACHED MAP):
US Xchange serves customers in thirteen cities in the Midwest in the Ameritech
and GTE service areas. Current markets include:
Rockford, Illinois (Voice and Data Switch)
Evansville, Indiana (Voice and Data Switch)
Fort Wayne, Indiana (Voice and Data Switch)
Bloomington, Indiana (Voice and Data Switch)
South Bend, Indiana (Voice and Data Switch)
Elkhart, Indiana (Remote Switching Module)
Kalamazoo, Michigan (Voice and Data Switch)
Grand Rapids, Michigan (Remote Switching Module)
Appleton, Wisconsin (Voice and Data Switch)
Green Bay, Wisconsin (Remote Switching Module)
Oshkosh, Wisconsin (Remote Switching Module)
Madison, Wisconsin (Voice and Data Switch)
Milwaukee, Wisconsin (Voice and Data Switch)
NETWORK AND OPERATIONS AS OF 3/31/00:
Number of Lucent 5ESS Switches - 9 (plus 4 Remote Switching Modules)
Total Collocations - 48
OSS - MetaSolv
Total Colleagues - 476
Total Clients - 17,000
Total Lines Installed - 60,000
Addressable Business Lines - approximately 748,000
Fiber network - 2,176 route miles (total planned); 1,967 complete as of 3/31/00
72 Fibers, 485 route miles intra-city; complete
48 Fibers, 1,691 route miles inter-city (planned); 1,482
complete as of 3/31/00
PRODUCTS OFFERED:
- - Local Phone Service (Dial tone, auto-callback, call blocking, caller ID,
call forwarding, call screening, call waiting, multi-ring service, repeat
dialing, speed calling, three-way calling)
- - Long Distance
- - Toll-Free
- - Calling Card
- - Centrex
- - Fax and Modem Lines
- - Voice Mail
<PAGE>
GRAPHIC HERE
[MAP OF CENTRAL AND EASTERN UNITED STATES SHOWING OPERATIONAL MARKETS OF CHOICE
ONE; MARKETS OF CHOICE ONE WHICH ARE UNDER DEVELOPMENT; AND MARKETS OF US]
XCHANGE
