Exhibit 99.3
ATX TELECOMMUNICATIONS SERVICES, INC.
BALANCE SHEET
(UNAUDITED)
JUNE 30,
2000
-----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 3,530,871
Accounts receivable, net of allowances for doubtful
accounts and credits of $2,108,000 and $1,811,000,
respectively........................................... 25,669,479
Other current assets...................................... 744,860
-----------
TOTAL CURRENT ASSETS........................................ 29,945,210
PROPERTY AND EQUIPMENT, net................................. 13,310,781
INTANGIBLE ASSETS, net...................................... 638,210
OTHER ASSETS................................................ 261,864
-----------
TOTAL ASSETS...................................... $44,156,065
===========
LIABILITIES AND EQUITY/PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable.......................................... $28,465,971
Accrued expenses.......................................... 1,069,050
Accrued payroll and related expenses...................... 4,886,165
Sales and excise taxes payable............................ 2,023,133
Payables, related parties................................. 1,445,168
-----------
TOTAL CURRENT LIABILITIES................................... 37,889,487
-----------
TOTAL LIABILITIES........................................... 37,889,487
-----------
CONTINGENCIES
PHANTOM UNIT COMPENSATION................................... 1,200,000
EQUITY/PARTNERS' CAPITAL.................................... 5,066,578
-----------
TOTAL LIABILITIES AND EQUITY/PARTNERS' CAPITAL.... $44,156,065
===========
See accompanying notes to unaudited financial statements.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES.......................... $40,303,265 $33,465,119 $76,566,416 $64,398,923
----------- ----------- ----------- -----------
EXPENSES
Cost of revenues................ 29,586,139 20,914,123 51,337,853 39,949,002
Selling, general and
administrative............... 15,927,345 12,912,934 32,175,309 24,459,164
----------- ----------- ----------- -----------
TOTAL EXPENSES.................... 45,513,484 33,827,057 83,513,162 64,408,166
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS.............. (5,210,219) (361,938) (6,946,746) (9,243)
----------- ----------- ----------- -----------
INTEREST INCOME, NET.............. 16,136 19,899 50,327 24,317
----------- ----------- ----------- -----------
NET (LOSS) INCOME................. $(5,194,083) $ (342,039) $(6,896,419) $ 15,074
=========== =========== =========== ===========
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
ATX TELECOMMUNICATIONS SERVICES, INC.
STATEMENTS OF CHANGES IN EQUITY/PARTNERS' CAPITAL
(UNAUDITED)
BALANCE, December 31, 1999.................................. $12,164,122
Net loss for the Six Months ended June 30, 2000............. (6,896,419)
Capital contributions....................................... 4,064,560
Partners' distributions..................................... (4,265,685)
-----------
BALANCE, June 30, 2000...................................... $ 5,066,578
===========
See accompanying notes to unaudited financial statements.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income......................................... $(6,896,419) 15,074
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities
Depreciation and amortization.......................... 1,445,010 962,703
Provision for allowances............................... 199,500 98,000
Phantom unit compensation.............................. (200,000) (200,000)
Changes in assets and liabilities
(Increase) decrease in assets
Accounts receivable............................... (5,229,893) (1,733,868)
Other current assets.............................. (643,684) 250,576
Increase (decrease) in liabilities
Accounts payable.................................. 16,125,512 512,443
Accrued payroll and related expenses.............. 185,283 (321,030)
Accrued expenses.................................. 2,870 110,956
Sales and excise taxes payable.................... (233,383) (528,691)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... 4,754,796 (833,837)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (6,306,632) (1,361,048)
Increase (decrease) in receivables and payable, related
parties................................................ (305,668) 197,733
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (6,612,300) (1,163,315)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long term debt................................. -- (275,000)
Capital Distributions..................................... (691,190)
Capital contributions..................................... 2,200,000 --
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 2,200,000 (966,190)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 342,496 (2,963,342)
BEGINNING CASH AND CASH EQUIVALENTS......................... 3,188,375 5,067,315
----------- -----------
ENDING CASH AND CASH EQUIVALENTS............................ $ 3,530,871 2,103,973
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
ATX Telecommunication Services, Inc. ("ATX, Inc." or "the Company") was
organized in the state of Delaware on February 9, 2000 upon the consent of the
former partners of ATX Telecommunications LP ("ATX") and Global Telecom LP
("Global"). The financial position of the Company as of June 30, 2000 included
the net assets contributed by the former partnerships of ATX and Global to ATX,
Inc. on February 9, 2000 at their historical costs basis. For financial
reporting purposes, the results of operations for the Six Months ended June 30,
2000 include the results of operations of the former partnerships of ATX and
Global. These partnerships were terminated on February 9, 2000 upon their merger
into ATX, Inc. ATX, Inc. was capitalized with 10,000 shares of common stock at
$.01 par value. Upon the merger, 1,000 shares of common stock was issued to the
former partners of ATX and Global.
Upon the merger into ATX, Inc., distributions were made to certain former
partners of ATX to satisfy their loans and advances.
The Company is a single-source provider of voice and data services offering
a full range of telecommunications services, including long distance, local,
data, private line, cellular, PC-based billing, prepaid calling, paging,
Internet access and World Wide Web consulting, development and hosting.
The ATX Shareholders Agreement and former Partnership Agreements provided
for bonuses to certain executives totaling $8,000,000 per year. The Company has
recorded $4,000,000 of compensation expense for these bonuses included in
selling, general and administrative expenses for the Six Months ended June 30,
2000 and June 30, 1999. These bonuses will be eliminated upon the merger
agreement as discussed on Note 2.
2. PLAN OF RECAPITALIZATION AND MERGER
On April 9, 2000, ATX, Inc. and its stockholders ("ATX Stockholders")
entered into a plan of recapitalization and merger ("Merger Agreement") with
CoreComm Limited ("CoreComm"). Under the terms of the merger agreement, as
amended, the ATX stockholders will exchange their issued and outstanding common
stock for the following aggregate consideration: (i) approximately 12.4 million
shares of CoreComm common stock; (ii) $250 million of CoreComm's Series B
preferred stock and (iii) $150 million in cash from CoreComm. Such amounts may
be subject to adjustments as defined in the merger agreement. In the event
CoreComm has not completed a debt or equity financing prior to the closing date,
CoreComm may elect to issue short term notes of $119.0 million and reduce the
cash consideration by such amount. The Merger Agreement is subject to regulatory
and CoreComm shareholder approval, amongst other conditions.
3. BASIS OF PRESENTATION
In the opinion of management, all adjustments which have been made are
necessary to present fairly the financial position of the Company as of June 30,
2000 and 1999 and the results of operations for the six month periods ended June
30, 2000 and 1999. The results of operations for the six month period ending
June 30, 2000 are not necessarily indicative of the results to be experienced
for the fiscal year ending December 31, 2000.
The Statements and related notes herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations. The accompanying notes
should therefore be read in conjunction with the Company's December 31, 1999
financial statements included elsewhere herein.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
Upon the incorporation of ATX, Inc as of February 9, 2000, ATX is subject
to federal and state income taxation. ATX did not provide for an income tax
benefit for the Six Months ended June 30, 2000 based on the uncertainty of
future earnings and profits.
Prior to the incorporation of ATX, Inc., the partners were required to
report their respective share of the Company's profits and losses in their
individual income tax returns. Accordingly, no provision for federal, state and
local income taxes is reflected in these statements for periods prior to
February 9, 2000.
4. PHANTOM UNIT PLAN
The Phantom Unit Plan ("the Plan") provides for the issuance of a total of
5,000,000 phantom units. The phantom units shall become payable on the earlier
of termination or a change of control. Upon the termination of employment, such
phantom unit holders shall be entitled to compensation. Such compensation shall
be payable over a 36-month period beginning in the thirteenth month after
termination. Compensation is determined by the Phantom Unit Plan's formula and
is based on average net income as defined in the Plan for the three years prior
to termination.
Upon a change in control as defined in the Plan, the Company will record a
compensation charge equal to the fair market value of the phantom units. Such
event would be the consummation of the Merger Agreement above resulting in a
charge of approximately 5% of the fair market value of the aggregate
consideration as described in Note 2.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Prior to the merger into ATX, Inc. distributions were made to the former
partners of ATX of approximately $4.3 million to satisfy their loan balances.
Additionally, loans to an officer of the Company were forgiven of approximately
$1.9 million and shown as a contribution to equity.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ATX Telecommunications Services Group
Bala Cynwyd, Pennsylvania
We have audited the accompanying combined balance sheets of ATX
Telecommunications Services Group as of December 31, 1999, 1998 and 1997, and
the related combined statements of operations, changes in partners' capital, and
cash flows for the years then ended. These financial statements are the
responsibility of the management of ATX Telecommunications Services Group. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of ATX
Telecommunications Services Group as of December 31, 1999, 1998 and 1997, and
the results of their operations and their cash flows for the three years then
ended in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Philadelphia, Pennsylvania
March 10, 2000
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................... $ 3,188,375 $ 5,067,315 $ 3,231,366
Accounts receivable, net of allowances for
doubtful accounts and credits of $1,909,000,
$1,713,000 and $1,412,000, respectively........ 20,639,086 16,857,357 12,987,283
Other current assets.............................. 101,176 1,267,796 924,227
Receivables, related parties...................... -- -- 2,924,430
----------- ----------- -----------
TOTAL CURRENT ASSETS................................ 23,928,637 23,192,468 20,067,306
PROPERTY AND EQUIPMENT, net......................... 8,359,873 6,304,365 3,275,769
INTANGIBLE ASSETS, net.............................. 727,496 906,067 1,084,638
OTHER ASSETS........................................ 261,864 -- --
RECEIVABLES, partners............................... 4,265,685 2,037,620 570,442
----------- ----------- -----------
TOTAL ASSETS........................................ $37,543,555 $32,440,520 $24,998,155
=========== =========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable.................................. $12,340,460 $ 9,709,815 $ 6,536,352
Accrued expenses.................................. 1,066,180 1,072,655 931,500
Accrued payroll and related expenses.............. 4,700,882 4,518,969 475,547
Accrued partners' distributions................... -- 1,350,000 --
Sales and excise taxes payable.................... 2,256,516 1,908,584 2,528,878
Current portion of long-term debt................. -- 562,500 275,000
Payables, related parties......................... 1,750,835 678,793 --
----------- ----------- -----------
TOTAL CURRENT LIABILITIES........................... 22,114,873 19,801,316 10,747,277
LONG-TERM DEBT...................................... -- -- 562,500
PAYABLES, related parties........................... 1,864,560 1,864,560 170,885
----------- ----------- -----------
TOTAL LIABILITIES................................... 23,979,433 21,665,876 11,480,662
COMMITMENTS AND CONTINGENCIES
PHANTOM UNIT COMPENSATION........................... 1,400,000 1,800,000 --
PARTNERS' CAPITAL................................... 12,164,122 8,974,644 13,517,493
----------- ----------- -----------
TOTAL LIABILITIES AND PARTNERS' CAPITAL............. $37,543,555 $32,440,520 $24,998,155
=========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
REVENUES.......................................... $135,020,849 $113,654,155 $92,594,419
------------ ------------ -----------
EXPENSES
Cost of revenues................................ 85,477,119 68,435,883 52,769,825
Selling, general and administrative............. 51,213,416 43,280,185 26,406,902
------------ ------------ -----------
TOTAL EXPENSES.................................... 136,690,535 111,716,068 79,176,727
------------ ------------ -----------
(LOSS) INCOME FROM OPERATIONS..................... (1,669,686) 1,938,087 13,417,692
INTEREST INCOME, NET.............................. 71,844 115,042 179,215
------------ ------------ -----------
NET (LOSS) INCOME................................. $ (1,597,842) $ 2,053,129 $13,596,907
============ ============ ===========
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
BALANCE, December 31, 1996.................................. $ 11,313,825
Net income for the year ended December 31, 1997............. 13,596,907
Partners' contributions..................................... 412,500
Partners' distributions..................................... (11,805,739)
------------
BALANCE, December 31, 1997.................................. 13,517,493
Net income for the year ended December 31, 1998............. 2,053,129
Partners' contributions..................................... 2,000,000
Partners' distributions..................................... (8,595,978)
------------
BALANCE, December 31, 1998.................................. 8,974,644
Net loss for the year ended December 31, 1999............... (1,597,842)
Partners' contributions..................................... 4,847,739
Partners' distributions..................................... (60,419)
------------
BALANCE, December 31, 1999.................................. $ 12,164,122
============
See accompanying notes to combined financial statements.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income..................................... $(1,597,842) $ 2,053,129 $ 13,596,907
Adjustments to reconcile net (loss) income to net cash
provided by operating activities
Depreciation and amortization.................... 1,820,453 1,947,830 1,830,449
Provision for allowances......................... 196,000 301,000 112,000
Loss on sale of equipment........................ -- 5,380 --
Phantom unit compensation........................ (400,000) 1,800,000 --
Changes in assets and liabilities
(Increase) decrease in assets
Accounts receivable........................... (3,977,729) (4,171,074) (1,892,732)
Other current assets.......................... 1,166,620 (343,569) 41,083
Other assets.................................. (261,864) -- --
Increase (decrease) in liabilities
Accounts payable.............................. 2,630,645 3,173,463 1,179,702
Accrued expenses.............................. (6,475) 141,155 280,701
Accrued payroll and related expenses.......... 181,913 4,043,422 98,822
Sales and excise taxes payable................ 347,932 (620,294) 38,146
----------- ----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES............... 99,653 8,330,442 15,285,078
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of property and equipment...... -- 11,000 --
Purchase of property and equipment.................... (3,697,390) (4,814,235) (1,214,911)
Purchase of intangible assets......................... -- -- (412,500)
Decrease (increase) in receivables and payable,
related parties.................................... 1,072,042 5,296,898 (1,924,745)
Increase in loans to partners......................... (2,228,065) (117,178) (324,765)
----------- ----------- ------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES..... (4,853,413) 376,485 (3,876,921)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt............................. (562,500) (275,000) --
Partners' contributions............................... 4,847,739 2,000,000 412,500
Partners' distributions............................... (1,410,419) (8,595,978) (11,805,739)
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES..... 2,874,820 (6,870,978) (11,393,239)
----------- ----------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.... (1,878,940) 1,835,949 14,918
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......... 5,067,315 3,231,366 3,216,448
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR................ $ 3,188,375 $ 5,067,315 $ 3,231,366
=========== =========== ============
</TABLE>
See accompanying notes to combined financial statements.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
The combined financial statements of ATX Telecommunications Services Group
("the Company") include the accounts of ATX Telecommunications Services Ltd.
("ATX") and Global Telecom Services, Ltd. ("Global") which were under common
control and ownership by the same partners/family members. ATX and Global were
limited partnerships organized under the laws of the Commonwealth of
Pennsylvania. ATX and Global are single-source providers of voice and data
services offering a full range of telecommunications services, including long
distance, local, data, private line, cellular, PC-based billing, prepaid
calling, paging, Internet access and World Wide Web consulting, development and
hosting.
These partnerships were terminated on February 9, 2000 upon their merger
into ATX Telecommunication Services, Inc. ("ATX, Inc."). ATX, Inc. was
incorporated on the above date in the state of Delaware upon the consent of the
Company's partners. ATX, Inc. was capitalized with 10,000 shares of common stock
at $.01 par value. Upon the merger, 1,000 shares of common stock was issued to
the former partners of ATX and Global. On such date, the Company contributed its
assets and its liabilities were assumed by ATX, Inc. at their historical cost
basis.
The partnership agreement provides for the allocation of profits and losses
on an annual basis. Profits and losses are allocated among partners based on the
partnership agreement.
Distributions, other than liquidating distributions, shall be made to all
partners in proportion to their percentage interests except as otherwise
stipulated in the partnership agreement.
The partnership agreement required that during 1999 certain partners
receive distributions totaling $1,350,000 for prior years. This agreement also
provides for bonuses to these partners totaling $8,000,000 per year for the
years 1998 through 2002. The Company has recorded compensation expenses for
these bonuses included in selling, general and administrative expenses for the
years ended December 31, 1999 and 1998, respectively.
If a sale or public offering of the Company does not occur before January
31, 2003, certain minority partners have an option to put their respective
interests to the Company at fair value, as defined within the partnership
agreement. The total amount to be paid to these partners for their respective
interests will be paid over a seven and one-half year period.
2. PLAN OF RECAPITALIZATION AND MERGER
On March 9, 2000, ATX, Inc. and its stockholders ("ATX Stockholders")
entered into a plan of recapitalization and merger ("Merger Agreement") with
CoreComm Limited ("CoreComm"). Under the terms of the merger agreement, ATX will
be recapitalized such that the ATX Stockholders will receive the following
aggregate consideration: (i) approximately 12.4 million shares of CoreComm
common stock; (ii) $250 million of CoreComm's 3% senior preferred stock and
(iii) $150 million in cash from CoreComm. Such amounts may be subject to
adjustments as defined in the merger agreement. In the event CoreComm has not
completed a debt or equity financing prior to the closing date, CoreComm may
elect to issue short term notes of $70 million and reduce the cash consideration
by such amount. The Merger Agreement is subject to regulatory and CoreComm
shareholder approval, among other conditions.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue based on the customers' usage of services.
Revenues are presented net of estimated discounts. Additionally, the Company
accrues for unbilled telecommunication revenue as a result of its billing cycle
and such amounts are included in accounts receivable.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Cost of Revenues
Cost of revenues includes network costs which consist of access, transport,
and termination costs. Such costs are recognized when incurred in connection
with the provision of telecommunication services.
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided by the straight-line method over the estimated useful lives of the
respective assets. Property and equipment are depreciated over useful lives
ranging from five to seven years and leasehold improvements are amortized over
the terms of the lease.
Intangible Assets
Intangible assets represent acquired customer lists which are being
amortized using the straight line method over a 7-year period. Intangible assets
are presented net of accumulated amortization of $522,504, $343,933 and $165,362
as of December 31, 1999, 1998 and 1997, respectively.
Impairment of Assets
The Company's long-lived assets and identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate that the net
carrying amount may not be recoverable. When such events occur, the Company
measures impairment by comparing the carrying value of the long-lived asset to
the estimated undiscounted future cash flows expected to result from the use of
the assets and their eventual disposition. The Company determined that, as of
December 31, 1999, there had been no impairment in the carrying value of the
long-lived and intangible assets.
Advertising and Marketing Costs
All costs related to advertising and marketing the Company's products and
services are expensed in the period incurred.
Income Taxes
The partners are required to report their respective share of the Company's
profits and losses in their individual income tax returns. Accordingly, no
provision for federal, state and local income taxes is reflected in the
financial statements.
Concentrations of Credit Risk
The Company maintains its cash deposits and temporary cash investments with
high-quality institutions at levels which may exceed federally insured limits.
The Company has not experienced any losses on cash deposits or temporary cash
investments maintained in this manner.
The Company sells its telecommunications services and products to customers
operating primarily in the Northeastern region of the United States. The Company
performs ongoing credit evaluation of its customers, and it generally does not
require collateral from those customers.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying value of all financial instruments approximates their fair
value due to the short maturity of the respective instruments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C> <C>
Computer and switching equipment............ $19,964,627 $16,801,263 $12,314,302
Furniture and fixtures...................... 1,150,108 711,471 592,556
Automobiles................................. 352,113 279,533 107,147
Leasehold improvements...................... 79,492 56,683 56,683
----------- ----------- -----------
21,546,340 17,848,950 13,070,688
Less accumulated depreciation and
amortization.............................. 13,186,467 11,544,585 9,794,919
----------- ----------- -----------
$ 8,359,873 $ 6,304,365 $ 3,275,769
=========== =========== ===========
</TABLE>
5. LONG-TERM DEBT
In connection with an acquisition of customer lists during 1997 for
$1,250,000, Global issued a note for $837,500. The note provided for payments of
$275,000 and $562,500 with interest at 5.5% in 1998 and 1999, respectively.
During 1999, the note was repaid in full. Global recorded interest expense of
$47,238 and $39,724 for the years ended 1999 and 1998.
6. LEASE COMMITMENTS
The Company leases various facilities classified as operating leases. Under
terms of these leases, the Company is required to pay its proportionate share of
real estate taxes, operating expenses and other related costs. Rent expense for
the years ended December 31, 1999, 1998 and 1997 was $1,619,083, $1,444,456 and
$1,295,971, respectively.
Additionally, the Company leases its principal office and equipment space
from various partnerships in which the general partner was also a partner of the
Company. The Company recorded rent included in the above amounts aggregating
$1,227,010, $1,182,515 and $1,179,358 to these partnerships for the years ended
December 31, 1999, 1998 and 1997, respectively.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rental payments, including those due to related parties, are
summarized as follows:
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
2000..................................................... $1,902,000
2001..................................................... 1,927,000
2002..................................................... 1,954,000
2003..................................................... 1,565,000
2004..................................................... 537,000
Thereafter............................................... 105,000
----------
$7,990,000
==========
7. RELATED PARTY TRANSACTIONS
There are various transactions with a partner of the Company relating to
certain professional services approximating $1,000,000 for each of the years
1999, 1998 and 1997. These transactions resulted in intercompany balances shown
as payables to related parties, with the related costs reflected in general and
administrative expenses. Additionally, companies affiliated with this partner
advanced funds to the Company for their operations and purchases of certain
telecommunication equipment. These amounts have no formal repayment terms or
interest rates and are shown as payables, related party.
Additionally, the Company advanced funds to certain partners. These amounts
are included in receivables, partners and had no formal repayment terms or
interest rates. Subsequent to December 31, 1999, prior to the partnerships'
merger into ATX, Inc., a distribution of approximately $4.3 million was declared
and satisfied by the above mentioned receivables, partners.
8. CONTINGENCIES
The Company is a defendant in various lawsuits relative to its business
operations. Management believes that the outcome of these pending lawsuits will
not materially effect the financial position, results of operations or cash
flows of the Company.
9. EMPLOYEE BENEFITS
The Company and affiliated business entities controlled by a partner of the
Company maintain a self-insured health plan for their employees and partners.
The Company is responsible for participant claims, stop loss premiums and
administrative fees. Such plan does not provide for post retirement benefits.
10. RETIREMENT PLAN
The Company's employees participate in a defined contribution profit
sharing plan established under Section 401(k) of the Internal Revenue Code. The
plan allows employees to defer up to 15% of their income through contributions
to the plan on a pretax basis, subject to a statutory dollar limitation. In
accordance with the provisions of the plan, the employer may match employees'
contributions. In addition, the employer may make optional contributions to the
plan. The Company and other business entities controlled by a partner of the
Company participate in this plan. The Company made matching contributions to the
plan for the years ended December 31, 1999, 1998 and 1997 of $176,166, $127,670
and $58,047, respectively.
<PAGE>
ATX TELECOMMUNICATIONS SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
11. PHANTOM UNIT PLAN
During 1998, ATX adopted the 1998 Phantom Unit Plan (the "Plan"). The Plan
provides for the issuance of a total of 5,000,000 phantom units representing a
phantom 5% equity interest in ATX. Eligible employees may receive phantom units
or equivalent consideration as determined by a committee appointed by ATX to
administer the Plan. The committee has the authority at its sole discretion to
designate the employees eligible to participate in the Plan. In addition, the
committee may terminate or amend the Plan at its discretion. Termination or
amendment of the Plan shall not affect phantom awards previously granted.
Typically, the awards vest over a seven-year period from the date of grant;
however, an employee may receive credit for employment time prior to the date of
the award at the discretion of the committee. The Plan is unfunded.
The phantom units become payable to a participant on the earlier of his
termination of employment or a change of control. Upon termination of
employment, a participant is entitled to compensation under the Plan. Such
compensation is payable over a 36-month period beginning in the thirteenth month
after termination. The participant's compensation is determined by his
proportionate ownership of units and the Plan's formula for determining value,
which is 10 times average net cash income as defined in the Plan for the prior
three fiscal years.
The Company has recorded a noncash (benefit) charge of ($400,000) and
$1,800,000 for the years ended December 31, 1999 and 1998, respectively, related
to the issuance of the phantom units.
Upon a change in control as defined in the Plan, the participants will
become entitled to receive compensation based upon the exchange or transaction
value of ATX's equity. ATX, Inc. will record a compensation charge equal to the
fair market value of the consideration payable to the Plan participants less
amounts previously recorded. The consummation of the Merger Agreement, described
in Note 2 above, would result in a non-cash charge of approximately $44 million.
The following table contains information on phantom units for units granted
under the Plan from the date of adoption of the Plan through December 31, 1999:
NUMBER OF
PHANTOM UNITS
-------------
Outstanding at January 1, 1998........................ --
Granted............................................... 3,350,000
Cancelled............................................. (75,000)
---------
Outstanding at December 31, 1998...................... 3,275,000
Granted............................................... 1,725,000
Cancelled............................................. --
---------
Outstanding at December 31, 1999...................... 5,000,000
=========
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Global financed $837,500 in 1997 related to the purchase of customer lists
and paid interest of $47,238 and $39,724 in 1999 and 1998, respectively, in
connection with this note.
