UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-49899
------------------------------------------------------------
ATX COMMUNICATIONS, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-4078506
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
50 Monument Road, Bala Cynwyd, Pennsylvania 19004
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 668-3000
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(Registrant's telephone number, including area code)
CoreComm Holdco, Inc., 110 East 59th Street, New York, New York, 10022
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the issuer's common stock as of September
30, 2002 was 30,000,054.
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Index
PART I. FINANCIAL INFORMATION Page
------------------------------ ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2002 (Unaudited) and December 31, 2001 .................................... 2
Condensed Consolidated Statements of Operations -
Three and nine months ended September 30, 2002 and 2001 (Unaudited) ..................... 3
Condensed Consolidated Statement of Shareholders' Equity (Deficiency) -
Nine months ended September 30, 2002 (Unaudited) ........................................ 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2002 and 2001 (Unaudited) ............................... 5
Notes to Unaudited Condensed Consolidated Financial Statements ............................. 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ..................................................... 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................. 40
Item 4. Controls and Procedures..................................................................... 41
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings..............................................................................42
Item 4. Submission of Matters to A Vote of Security Holders............................................47
Item 5. Other Information..............................................................................47
Item 6. Exhibits and Reports on Form 8-K ..............................................................48
SIGNATURES .............................................................................................50
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CERTIFICATIONS..........................................................................................51
--------------
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
September 30, 2002 December 31, 2001
--------------------------------------------
(Unaudited) (See Note)
Assets
Current assets:
Cash and cash equivalents $ 16,982,000 $ 24,966,000
Accounts receivable-trade, less allowance for doubtful
accounts of $8,507,000 (2002) and $9,759,000 (2001) 38,465,000 32,261,000
Due from CCL Historical, Inc. -- 646,000
Other 5,283,000 3,683,000
-----------------------------------------
Total current assets 60,730,000 61,556,000
Fixed assets, net 69,168,000 86,722,000
Investment in CCL Historical, Inc. -- 3,863,000
Goodwill 157,207,000 147,380,000
Intangible assets, net 5,455,000 5,706,000
Other, net of accumulated amortization of $1,674,000 (2002) and
$1,045,000 (2001) 12,532,000 11,393,000
-----------------------------------------
$ 305,092,000 $ 316,620,000
=========================================
Liabilities and shareholders' equity (deficiency)
Current liabilities:
Accounts payable $ 55,087,000 $ 37,348,000
Accrued expenses 66,649,000 67,766,000
Due to NTL Incorporated 1,761,000 917,000
Current portion of long-term debt 922,000 33,000
Current portion of capital lease obligations 9,362,000 9,634,000
Deferred revenue 23,215,000 29,652,000
-----------------------------------------
Total current liabilities 156,996,000 145,350,000
Long-term debt 145,439,000 144,413,000
Notes payable to NTL Incorporated 17,154,000 15,807,000
Capital lease obligations 244,000 267,000
Commitments and contingent liabilities
Shareholders' equity (deficiency):
preferred stock-- $.01 par value, authorized
10,000,000 shares; issued and outstanding none -- --
Common stock-- $.01 par value, authorized 250,000,000
shares; issued and outstanding 30,000,000 shares 300,000 300,000
Additional paid-in capital 1,030,613,000 1,022,634,000
Deficit (1,044,919,000) (1,012,151,000)
-----------------------------------------
(14,006,000) 10,783,000
Treasury stock at cost, 333,000 (735,000) --
-----------------------------------------
(14,741,000) 10,783,000
-----------------------------------------
$ 305,092,000 $ 316,620,000
=========================================
Note: The balance sheet at December 31, 2001 has been derived from the audited balance sheet at that date.
See accompanying notes.
2
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
-------------------------------------------------------------------
Revenues $ 73,422,000 $ 74,172,000 $ 222,942,000 $ 220,109,000
Costs and expenses
Operating 47,927,000 54,760,000 144,723,000 175,942,000
Selling, general and administrative 18,512,000 20,907,000 61,049,000 75,021,000
Corporate 1,930,000 944,000 5,244,000 3,854,000
Non-cash compensation - 3,234,000 - 9,702,000
Recapitalization costs 373,000 - 5,825,000
Other charges - 3,910,000 - 37,395,000
Asset impairments - - - 167,599,000
Depreciation 8,895,000 10,972,000 26,916,000 34,551,000
Amortization 84,000 20,784,000 251,000 75,390,000
-------------------------------- -------------------------------
77,721,000 115,511,000 244,008,000 579,454,000
-------------------------------- -------------------------------
Operating loss (4,299,000) (41,339,000) (21,066,000) (359,345,000)
Other income (expense)
Interest income and other, net 115,000 555,000 349,000 1,875,000
Interest expense (4,503,000) (6,943,000) (12,143,000) (18,467,000)
-------------------------------- -------------------------------
Loss before income taxes
and extraordinary item (8,687,000) (47,727,000) (32,860,000) (375,937,000)
Income tax benefit 92,000 - 92,000 33,000
-------------------------------- -------------------------------
Loss before extraordinary item (8,595,000) (47,727,000) (32,768,000) (375,904,000)
Gain from early extinguishments of debt - 2,216,000 - 2,216,000
-------------------------------- -------------------------------
Net loss $ (8,595,000) $ (45,511,000) $ (32,768,000) $(373,688,000)
================================ ===============================
Basic and diluted net loss per share:
Loss before extraordinary item $ (0.29) $ (1.67) $ (1.10) $ (13.17)
Extraordinary Item - (0.08) - (0.08)
-------------------------------- -------------------------------
Net loss $ (0.29) $ (1.59) $ (1.10) $ (13.09)
================================ ===============================
Weighted average number of shares 29,667,000 28,542,000 29,889,000 28,542,000
================================ ===============================
See accompanying notes
3
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Condensed Consolidated Statement of Shareholders' Equity (Deficiency)
(Unaudited)
Common Stock Treasury Stock
--------------------------- Additional --------------------------
Shares Par Paid-In Capital Deficit Shares Amount
---------------------------------------------------------------------------------------------
Balance December 31, 2001 30,000,000 $ 300,000 $ 1,022,634,000 $(1,012,151,000) -- $ --
Shares issued in exchange offer -- -- 7,979,000 -- -- --
Common stock acquired upon merger
with CCL Historical, Inc. -- -- -- -- 333,000 (735,000)
Net loss for the nine months ended
September 30, 2002 -- -- -- (32,768,000) -- --
---------------------------------------------------------------------------------------------
Balance, September 30, 2002 30,000,000 $ 300,000 $ 1,030,613,000 $(1,044,919,000) $ 333,000 (735,000)
=============================================================================================
See accompanying notes.
4
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2002 2001
-------------------------------
Net cash provided by (used in) operating activities $ 735,000 $(33,448,000)
Investing activities
Purchase of fixed assets (8,861,000) (4,243,000)
Proceeds from sales of marketable securities -- 2,737,000
Cash acquired in merger with CCL Historical, Inc. 470,000 --
-------------------------------
Net cash used in investing activities (8,391,000) (1,506,000)
Financing activities
Capital distributions -- (23,064,000)
Proceeds from borrowing, net of financing costs -- 88,679,000
Principal payments -- (1,001,000)
Principal payments of capital lease obligations (328,000) (5,720,000)
-------------------------------
Net cash provided by (used in) financing activities (328,000) 58,894,000
-------------------------------
(Decrease) increase in cash and cash equivalents (7,984,000) 23,940,000
Cash and cash equivalents at beginning of period 24,966,000 22,773,000
-------------------------------
Cash and cash equivalents at end of period $ 16,982,000 $ 46,713,000
===============================
Supplemental disclosure of cash flow information
Cash paid for interest $ 8,127,000 $ 10,195,000
Supplemental schedule of non-cash investing activities
Capital contributions of non-cash net assets $ -- $ 5,450,000
Liabilities incurred to acquire fixed assets 422,000 6,450,000
Acquisition of CCL Historical, Inc. 11,842,000 --
See accompanying notes.
5
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information pursuant to the rules and regulations of the SEC.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine months ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2002. For further information, refer to the consolidated financial
statements and footnotes thereto included in Item 14(d) of CCL Historical,
Inc.'s (formerly CoreComm Limited), referred to as CCL, annual report on Form
10-K/A for the year ended December 31, 2001.
Certain amounts have been reclassified to conform to the 2002 presentation.
Note 2. ATX Communications Recapitalization
In April 2001, ATX Communications, Inc. (formerly CoreComm Holdco, Inc.),
referred to as the Company, and CCL completed a reevaluation of their business
plans in light of market conditions and made significant modifications to the
plans. The Company streamlined its strategy and operations to focus on its two
most successful and promising lines of business. The first is integrated
communications products and other high bandwidth/data/web-oriented services for
the business market. The second is bundled local telephony and Internet products
for the residential market, with a focus on using Internet interfaces, as well
as our call centers, to efficiently sell and install our products and services
for our customers.
Also in April 2001, the Company and CCL commenced a process to potentially sell
selected assets and businesses (now owned by the Company) that are not directly
related to their competitive local exchange carrier, referred to as CLEC,
business, and retained advisors for the purpose of conducting this sale. The
Company's CLEC assets and businesses include its local and toll-related
telephone services that compete with the incumbent local exchange carrier,
referred to as ILEC, and other carriers.
In October 2001, the Company and CCL commenced the ATX Communications
recapitalization. In the first phase of the ATX Communications recapitalization,
which was completed in December 2001, the Company and CCL entered into
agreements with holders of approximately $600 million of outstanding
indebtedness and preferred stock whereby the holders agreed, among other things,
to exchange their debt and preferred stock for approximately 87% of the
Company's common stock. In addition, the holders of CCL's 6% Convertible
Subordinate Notes due 2006 received the amount of an October 1, 2001 interest
payment of $4.8 million in the aggregate.
6
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 2. ATX Communications Recapitalization (continued)
The following summarizes the indebtedness and preferred stock that was exchanged
for shares of the Company's common stock in December 2001:
Principal Amount
or Stated Value
Description Date Issued Issuer when Issued
----------- ----------- ------ -----------
10.75% Unsecured Convertible PIK Notes due 2011 April 2001 CCL and the Company $10.0 million
10.75% Senior Unsecured Convertible PIK Notes Due
2010 December 2000 CCL and the Company $16.1 million
Senior Unsecured Notes Due September
29, 2003 September 2000 CCL $108.7 million
6% Convertible Subordinated Notes Due
2006 October 1999 CCL $175.0 million(1)
Series A and Series A-1 Preferred
Stock September 2000 CCL $51.1 million
Series B Preferred Stock September 2000 CCL $250.0 million
(1) $164.75 million was outstanding as of December 31, 2001, of which $160 million was exchanged.
The Company exchanged the approximately $10.8 million principal and accrued
interest of 10.75% Unsecured Convertible PIK Notes Due 2011 and the
approximately $18.0 million principal and accrued interest of 10.75% Senior
Unsecured Convertible PIK Notes Due 2010 for shares of its common stock. The
Company recorded an extraordinary gain of $25.7 million from the extinguishment
of these notes, and incurred costs of $2.7 million in 2001 in connection with
the ATX Communications recapitalization. This gain is based on the fair value of
$0.9797 per share on December 31, 2001 for the shares issued by the Company in
exchange for the notes. The Company incurred additional costs in connection with
the ATX Communications recapitalization, which consist primarily of employee
incentives, legal fees, accounting fees and printing fees of $373,000 and
$5,825,000 during the three and nine months ended September 30, 2002,
respectively.
The shareholders and noteholders who exchanged their shares and notes,
respectively, received shares of common stock of the Company and no longer hold
securities of CCL.
Following the completion of the first phase of the ATX Communications
recapitalization on December 28, 2001 (but prior to the completion of the second
phase on July 1, 2002), approximately 87% of the Company's outstanding shares,
or 26,056,806 shares, were owned by the former holders of indebtedness and
preferred stock of the Company and CCL, and approximately 13% of the Company's
outstanding shares, or 3,943,248 shares, were held by CCL.
7
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 2. ATX Communications Recapitalization (continued)
As a result of the completion of the first phase of the ATX Communications
recapitalization, the Company held $160 million principal amount of CCL's 6%
Convertible Subordinated Notes due 2006, approximately $105.7 million principal
amount of CCL's Senior Unsecured Notes due September 29, 2003, approximately
51,000 shares of CCL's Series A preferred stock and 250,000 shares of CCL's
Series B preferred stock. As of December 31, 2001, prior to the consummation of
the second phase of the ATX Communications recapitalization, the Company's
investment in CCL notes and preferred stock was $3,863,000.
In the second phase of the ATX Communications recapitalization, the Company
offered to all holders of CCL common stock and all remaining holders of 6%
Convertible Subordinated Notes due 2006 of CCL to exchange shares of the
Company's common stock for their CCL common stock and their notes, respectively.
The Company completed the exchange offer on July 1, 2002, and issued 3,610,624
shares of common stock to former holders of CCL common stock and holders of 6%
Convertible Subordinated Notes due 2006 of CCL. The common stock issued under
the exchange offer was valued at $7,979,000, which was based on the estimated
fair value of the Company's common stock. Following the exchange offer, the
Company transferred the shares of CCL common stock that it received in the
exchange offer to a wholly owned subsidiary. The Company then merged this
subsidiary into CCL, with CCL surviving the merger as a wholly owned subsidiary
of the Company.
CCL has surrendered to the Company all of the shares of the Company's common
stock that CCL held at the completion of the exchange offers, excluding 332,624
shares, of which 39,678 shares are being held for holders of the 6% Convertible
Subordinated Notes who did not participate in the exchange offer and 292,946
shares are reserved for holders of CCL's warrants. In exchange for CCL
surrendering such shares of the Company's common stock, CCL and the Company have
agreed to waivers and amendments to delay CCL from having to make any payments
with respect to the CCL securities held by the Company through April 2003. Also,
as part of the exchange agreement between the Company and CCL, the due date of
CCL's Senior Unsecured Notes was extended until September 29, 2023.
In connection with the second phase of the ATX Communications recapitalization,
on July 1, 2002 the Company converted all of the 6% Convertible Subordinated
Notes Due 2006 of CCL and all of the shares of Series A and B preferred stock of
CCL that it owned into shares of CCL common stock. All of these shares of CCL
were tendered in the exchange offer, and subsequently, all of the shares
received by the Company in the exchange offer were cancelled. The Company
continues to hold approximately $105.7 million principal amount of CCL's Senior
Unsecured Notes.
8
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 2. ATX Communications Recapitalization (continued)
The merger with CCL has been accounted for as a purchase, and, accordingly the
net assets and results of operations of CCL have been included in the
consolidated financial statements from July 1, 2002. The aggregate purchase
price of $11,842,000 exceeded the estimated fair value of net tangible assets
acquired by $9,827,000, which was allocated to goodwill.
The pro forma unaudited consolidated results of operations for the nine months
ended September 30, 2002 assuming consummation of the acquisition as of January
1, 2002 is as follows:
Total revenue $223,193,000
Net loss (34,027,000)
Basic and diluted net loss per share (1.15)
In connection with the ATX Communications recapitalization, on July 2, 2002,
Nasdaq transferred CCL's listing on the Nasdaq National Market to the Company.
On May 16, 2002, Nasdaq provided CCL with notice of a Nasdaq Staff Determination
indicating that CCL common stock was subject to delisting from the Nasdaq
National Market because CCL did not comply with the minimum bid price and the
minimum market value of publicly held shares requirements for continued listing.
On August 15, 2002, the Nasdaq Listing Qualifications Panel issued its decision
to delist the Company's common stock. On August 16, 2002, the Company's common
stock began trading on the OTC bulletin board. The Company had requested a
review of the Panel's decision by the Nasdaq listing and Hearing Review Council
and on October 28, 2002, the Listing Council affirmed the Panel's decision to
delist the Company's common stock. The delisting of the Company's common stock
from the Nasdaq National Market, could, among other things, have a negative
impact on the trading activity and price of the common stock and could make it
more difficult for the Company to raise equity capital in the future.
Note 3. Recent Accounting Pronouncements
In April 2002, the Financial Accounting Standards Board, referred to as FASB,
issued Statement of Financial Accounting Standards, referred to as SFAS, No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections," effective for the Company on
January 1, 2003. This Statement rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The adoption of this
standard will require the Company to reclassify its gain from extinguishment of
debt from extraordinary to continuing operations. The Company's loss before
income taxes for the three and nine months ended September 30, 2001 would have
been $45,511,000 and $373,721,000, respectively, upon adoption of SFAS No. 145.
The adoption of SFAS No. 145 will not change the Company's net loss for the
three and nine months ended September 30, 2001.
9
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 3. Recent Accounting Pronouncements (continued)
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective for the Company on January 1, 2002.
This Statement supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and other related
accounting guidance. The adoption of this new standard had no significant effect
on the results of operations, financial condition or cash flows of the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective for the Company on January 1, 2003. This Statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible fixed assets and the associated asset retirement costs.
The Company is in the process of evaluating the financial statement impact of
the adoption of SFAS No. 143.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination that is completed after June 30, 2001. SFAS No. 142 ends the
amortization of goodwill and indefinite-lived intangible assets. Instead, these
assets must be reviewed annually (or more frequently under certain conditions)
for impairment in accordance with this statement. This impairment test uses a
fair value approach rather than the undiscounted cash flow approach previously
required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." The Company adopted SFAS No. 142
on January 1, 2002. The adoption of this new standard had no significant effect
on the results of operations, financial condition or cash flows of the Company,
other than amortization of goodwill ceased as of January 1, 2002.
Upon the adoption of SFAS No. 142, the Company performed an analysis of its
intangible assets acquired before July 1, 2001 to determine whether they should
be classified and accounted for as part of or separate from goodwill. As a
result of the analysis, the Company determined that its identifiable intangible
assets such as customer lists and LMDS licenses do not meet the indefinite life
criteria of SFAS No. 142. Additionally, the Company determined that, with
respect to these assets, no changes in the remaining useful lives of these
assets were required.
The Company also performed an evaluation for impairment of its goodwill as of
January 1, 2002, and determined that no impairment charge was required. The
Company's next evaluation of impairment will be the annual test as of October 1,
2002, which may result in a non-cash impairment charge to reduce the carrying
value of goodwill.
10
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 3. Recent Accounting Pronouncements (continued)
The following table shows the Company's net loss and our basic and diluted loss
per share, had SFAS No. 142 been in effect for the nine months ended September
30, 2001.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------------------------------------------------------------------------
Net loss-- as reported $ (8,595,000) $ (45,511,000) $ (32,768,000) $(373,688,000)
Goodwill amortization -- 20,700,000 -- 75,059,000
Workforce amortization -- -- -- 52,000
---------------------------------------------------------------------------
Net loss-- as adjusted $ (8,595,000) $ (24,811,000) $ (32,768,000) $(298,577,000)
===========================================================================
Basic and diluted loss per share:
Net loss per share-- as reported $ (0.29) $ (1.59) $ (1.10) $ (13.09)
Goodwill amortization -- 0.73 -- 2.63
Workforce amortization -- -- -- --
---------------------------------------------------------------------------
Net loss per share-- as adjusted $ (0.29) $ (0.86) $ (1.10) $ (10.46)
===========================================================================
Note 4. Revenues
Revenue consists of:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------------------------------------------------
Local exchange services $ 27,347,000 $ 23,658,000 $ 79,402,000 $ 71,080,000
Toll-related telephony services 16,688,000 19,254,000 52,598,000 60,876,000
Internet, data and web-related services 21,980,000 23,879,000 68,355,000 69,240,000
Other (a) 7,407,000 7,381,000 22,587,000 18,913,000
------------------------------------------------------------------
$ 73,422,000 $ 74,172,000 $222,942,000 $220,109,000
==================================================================
(a) Other includes carrier access billing, reciprocal compensation, information
services, wireless and paging.
Note 5. Asset Impairments
At March 31, 2001 the Company reduced the carrying amount of goodwill related to
two of its acquisitions by $167,599,000. In connection with the reevaluation of
its business plan and the commencement of the process to potentially sell its
non-CLEC assets and business announced in April 2001, the Company was required
to report all long-lived assets and identifiable intangibles to be disposed of
at the lower of carrying amount or estimated fair value less cost to sell. The
carrying amount of goodwill related to these acquisitions was eliminated before
reducing the carrying amounts of other assets. The estimated fair value of these
businesses was determined based on information provided by the investment bank
retained for the purpose of conducting this sale.
11
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 6. Intangible Assets
Intangible assets consist of:
September 30, December 31,
2002 2001
--------------------------
(unaudited)
LMDS license costs $4,230,000 $4,230,000
Customer lists, net of accumulated amortization of
$1,115,000 (2002) and $864,000 (2001) 1,225,000 1,476,000
--------------------------
$5,455,000 $5,706,000
==========================
Note 7. Fixed Assets
Fixed assets consist of:
September 30, December 31,
2002 2001
---------------------------------
(unaudited)
Operating equipment $ 109,367,000 $ 102,529,000
Computer hardware and software 54,679,000 53,313,000
Other equipment 13,112,000 12,956,000
Construction-in-progress 1,002,000 -
---------------------------------
178,160,000 168,798,000
Accumulated depreciation (108,992,000) (82,076,000)
---------------------------------
$ 69,168,000 $ 86,722,000
=================================
Note 8. Accrued Expenses
Accrued expenses consist of:
September 30, December 31,
2002 2001
----------------------------
(Unaudited)
Payroll and related $ 5,474,000 $ 7,517,000
Professional fees 792,000 935,000
Taxes, including income taxes 14,532,000 16,534,000
Accrued equipment purchases - 385,000
Toll and interconnect 33,400,000 28,668,000
Reorganization costs 5,049,000 7,273,000
Other 7,402,000 6,454,000
----------------------------
66,649,000 $67,766,000
============================
12
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 9. Long-Term Debt
Long-term debt consists of:
September 30, December 31,
2002 2001
---------------------------------
(Unaudited)
6% Convertible Notes of CCL, less unamortized discount of
$3,436,000 (2002) $ 922,000 $ -
Senior secured credit facility, less unamortized discount of
$10,661,000 (2002) and $11,687,000 (2001) 145,439,000 144,413,000
Other - 33,000
---------------------------------
146,361,000 144,446,000
Less current portion (922,000) (33,000)
---------------------------------
$ 145,439,000 $ 144,413,000
=================================
The interest rate on the senior secured credit facility was initially, at the
Company's option, either 3.25% per annum plus the base rate, which is the higher
of the prime rate or the federal funds effective rate plus 0.5% per annum; or
the reserve-adjusted London Interbank Offered Rate plus 4.25% per annum. In
April 2001 the interest rate was amended to, at the Company's option, 3.5% per
annum plus the base rate, which is the higher of the prime rate or the federal
funds effective rate plus 0.5% per annum, or the reserve-adjusted London
Interbank Offered Rate plus 4.5% per annum. Interest is payable monthly on the
facility. The unused portion of the facility is subject to a commitment fee
equal to 1.25% per annum payable quarterly, subject to reduction to 1.00% per
annum based upon the amount borrowed under the facility. At September 30, 2002
and December 31, 2001, the effective interest rate on the amounts outstanding
was 6.75% and 6.86%, respectively. Effective October 11, 2002, the interest rate
on the facility is 6.22%, which will remain in effect until April 11, 2003.
The Company's consolidated balance sheet includes $4,358,000 aggregate principal
amount of CCL's 6% Convertible Subordinated Notes upon the completion of the
merger of CCL on July 1, 2002. The Company recorded the notes at $219,000, their
fair value as of the acquisition date. The resulting discount of $4,139,000 is
being amortized to interest expense over the remaining life of the notes, which
are due October 1, 2006. The Company recorded amortization expense of $703,000
for the three months ended September 30, 2002. The interest payments that were
due under the outstanding 6% Convertible Subordinated Notes on April 1 and
October 1, 2002 have not been made and CCL is in default under these notes.
13
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 10. Related Party Transactions
Some of the officers and directors of the Company are also officers or directors
of NTL Incorporated, referred to as NTL. In April 2001, CCL and the Company as
co-obligors issued to NTL $15 million aggregate principal amount of 10.75%
Unsecured Convertible PIK Notes Due April 2011. At September 30, 2002, and
December 31, 2001 the total amount of the notes outstanding, less the
unamortized discount of $337,000, and $367,000, was $17,154,000 and $15,807,000,
respectively.
NTL provided the Company with management, financial, legal and technical
services, and continues to provide access to office space and equipment and use
of supplies. Amounts charged to the Company by NTL consisted of salaries and
direct costs allocated to the Company where identifiable, and a percentage of
the portion of NTL's corporate overhead, which cannot be specifically allocated
to NTL. It is not practicable to determine the amounts of these expenses that
would have been incurred had the Company operated as an unaffiliated entity. In
the opinion of management, this allocation method is reasonable. These methods
are currently being reviewed and it is expected that the charges for these
services provided by NTL will be reduced following such review. NTL charged the
Company $5,000 and $100,000 for the three months ended September 30, 2002 and
2001, respectively, and $177,000 and $340,000 and for the nine months ended
September 30, 2002 and 2001, respectively, which are included in corporate
expenses.
Until the third quarter of 2001, the Company provided NTL with access to office
space and equipment and the use of supplies for which it charged NTL a
percentage of the Company's total rent and supplies expense. It is not
practicable to determine the amounts of these expenses that would have been
incurred had the Company operated as an unaffiliated entity. In the opinion of
management, this allocation method was reasonable. The Company charged NTL
$233,000 and $340,000 for the three and nine months ended September 30, 2001,
respectively, which reduced corporate expenses.
A subsidiary of the Company provides billing and software development services
to subsidiaries of NTL. The Company historically recorded these billings as a
reduction of general and administrative expenses. Expenses were reduced by
$629,000 for the three months ended September 30, 2001 and $566,000 and
$1,428,000 for the nine months ended September 30, 2002 and 2001, respectively,
as a result of billing for these services. During the three months ended
September 30, 2002, the Company began recording the billings for these services
as revenue, which totaled $707,000.
14
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 10. Related Party Transactions (continued)
In 2001, the Company and NTL entered into a license agreement whereby NTL was
granted an exclusive, irrevocable, perpetual license to certain billing software
developed by the Company for telephony rating, digital television events rating,
fraud management and other tasks. The sales price was cash of $12.8 million. The
billing software was being used by NTL at the time of this agreement, and was
being maintained and modified by the Company under an ongoing software
maintenance and development outsourcing arrangement between the companies. The
Company recorded the aggregate $12.8 million as deferred revenue, to be
recognized over three years, of which $1,068,000 and $3,205,000 was recognized
during the three and nine months ended September 30, 2002, respectively.
In March 2000, the Company and NTL announced that they had entered into an
agreement to link their networks in order to create an international Internet
backbone, which commenced operations in February 2001. The Company recognized
revenue of $255,000 for the network usage in the nine months ended September 30,
2001.
The Company leases office space from entities controlled by an individual who
beneficially owns 34% of the outstanding shares of the Company's common stock.
Rent expense for these leases was approximately $451,000 and $400,000 for the
three months ended September 30, 2002 and 2001, respectively and approximately
$1,352,000 and $1,200,000 for the nine months ended September 30, 2002 and 2001,
respectively.
Note 11. Shareholders' Equity
Stock Split
On April 12, 2002, the Company declared a 3-for-1 stock split by way of a stock
dividend, which was paid on the declaration date. The condensed consolidated
financial statements and the notes thereto give retroactive effect to the stock
split.
Non-Cash Compensation
In April 2000, the Compensation and Option Committee of the CCL Board of
Directors approved the issuance of options to purchase approximately 2,747,000
shares of CCL common stock to various employees at an exercise price of $14.55,
which was less than the fair market value of CCL's common stock on the date of
the grant. In accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees," in April 2000, the Company recorded a non-cash compensation
expense of approximately $29.0 million and a non-cash deferred expense of
approximately $31.3 million. From April 2000 to September 30, 2001, $19.4
million of the deferred non-cash compensation was charged to expense, including
$3.2 and $9.7 million during the three and nine months ended September 30, 2001,
respectively. The remaining portion of deferred non-cash compensation was
charged to expense between October 1 and December 31, 2001.
15
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 11. Shareholders' Equity (continued)
Stockholder Rights Plan
The Company adopted a stockholder rights plan in December 2001. In connection
with the stockholder rights plan, the Board of Directors declared and paid a
dividend of one preferred share purchase right for each share of common stock
outstanding on December 17, 2001. Each right entitles the holder, under certain
potential takeover events, to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock, referred to as Series A
Preferred Stock, at an initial exercise price of $8.82 as determined on July 10,
2002. The exercise price is subject to future adjustment. The rights expire on
December 17, 2011 unless an exchange or redemption or the completion of a merger
occurs first. There are 1,000,000 shares of Series A Preferred Stock authorized
for issuance under the plan. No shares of Series A Preferred Stock are issued or
outstanding.
If any shares of Series A Preferred Stock are issued they will be entitled to a
minimum preferential quarterly dividend payment of an amount equal to the
greater of $.01 per share or 1,000 times the aggregate per share amount of all
dividends declared on the Company's common stock. If any shares of Series A
Preferred Stock are issued they will be entitled to a minimum preferential
quarterly dividend payment of an amount equal to the greater of $.01 per share
or 1,000 times the aggregate per share amount of all dividends declared on the
Company's common stock since the immediately preceding dividend payment date. In
the event of liquidation, the holders of Series A Preferred Stock will be
entitled to a liquidation payment of $1 per share plus accrued and unpaid
dividends. Each share of Series A Preferred Stock will have 1,000 votes on all
matters and will vote as a single class with the holders of the Company's common
stock.
CCL Stock Options
As of September 30, 2002, there were approximately 20.9 million options
outstanding to purchase shares of CCL common stock, with an average weighted
exercise price of $4.80. If such options are exercised, the holder will receive
common stock of CCL, which is currently a wholly-owned subsidiary of the Company
and whose stock is not registered for public trading.
Treasury Stock
CCL owns 332,624 shares of the Company's common stock. Upon CCL becoming a
wholly-owned subsidiary of the Company at the completion of the second phase of
the ATX Communications recapitalization, these shares of common stock have been
recorded by the Company as treasury stock valued at $735,000.
16
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 12. Other Charges
Other charges of $3,910,000 and $37,395,000 during the three and nine months
ended September 30, 2001, respectively, relate to the Company's announcements in
May and July 2001 that it was taking additional actions to reorganize, re-size
and reduce operating costs and create greater efficiency in various areas of the
Company. These costs were related to the termination of approximately 630
employees, of which none were employed by the Company as of September 30, 2002.
The following table summarizes the accrued reorganization charges utilized
during the nine months ended September 30, 2002:
Employee
Severance Lease
And Related Exit Agreement
Costs Costs Terminations Total
-------------------------------------------------
(in thousands)
Balance, December 31, 2001 $ 509 $ 3,106 $ 3,658 $ 7,273
Adjustments 60 2 (64) (2)
Utilized (531) (1,393) (298) (2,222)
-------------------------------------------------
Balance, September, 2002 $ 38 $ 1,715 $ 3,296 $ 5,049
=================================================
Note 13. Gain from Extinguishment of Debt
In September 2001, the Company and the holder of a $3,016,000 principal amount
12.75% note payable for equipment agreed to a modification of the note such that
the principal amount was reduced to $800,000. The Company recorded an
extraordinary gain on the early extinguishments of debt of $2,216,000 for the
difference between the $3,016,000 obligation and the $800,000 payment.
17
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 14. Commitments and Contingent Liabilities
As of September 30, 2002, the Company had purchase commitments of approximately
$5.7 million outstanding.
Fiberstream, Inc. ("FiberCo"), an indirect, wholly-owned subsidiary of CCL, has
an obligation under an agreement with the City of New York (the "City") to pay
an annual franchise fee in the amount of the greater of (a) 5% of gross revenue
(as defined in the agreement) or (b) $200,000. Estimated quarterly payments
begin the earlier of (a) the date that FiberCo completes construction of its
initial backbone or (b) November 2002. Additionally, FiberCo has an obligation
to provide equipment, cash or services to the City of New York with an aggregate
value of not more than $100,000 payable over 15 years. On September 12, 2002,
the United States Court of Appeals for the Second Circuit issued a decision in
TCG of New York, Inc. v. City of White Plains finding that municipalities cannot
impose fees or other requirements on competitive local exchange carriers while
exempting the traditional incumbent telephone companies. Fiberco has initiated
discussions with the City about terminating the franchise and parties'
respective rights and obligations under the Agreement. At present, the parties
are in the initial phase of their discussions and Fiberco cannot predict how or
when the matter will be resolved.
The Company purchases goods and services from a wide variety of vendors under
contractual and other arrangements that sometimes rise to litigation in the
ordinary course of business. The Company also provides goods and services to a
wide range of customers under arrangements that sometimes lead to disputes over
payment, performance and other obligations. Some of these disputes, regardless
of their merit, could subject the Company to costly litigation and the diversion
of the attention of its technical and/or management personnel. Additionally, any
liability from litigation that is not covered by the Company's insurance or
exceeds its coverage could have a material adverse effect on the Company's
business, financial condition and/or results of operation. Currently, the
Company (and/or its subsidiaries) has the following outstanding matters, which,
if resolved unfavorably, could have a material adverse effect on the Company's
business, financial condition and/or results of operations:
o On August 12, 2002, Verizon and several of its other subsidiaries
filed a complaint in the United States District Court for the District
of Delaware against the Company and several of its indirect wholly
owned subsidiaries seeking payment of approximately $37 million
allegedly owed to Verizon under various contracts between Verizon and
the Company and its subsidiaries and under state and federal law.
Verizon also asked the Court to issue a declaratory ruling that it has
not violated the antitrust laws.
18
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 14. Commitments and Contingent Liabilities (continued)
The defendants believe that they have meritorious defenses to the
complaint, and further, that the amounts owed are substantially less
than the amounts claimed by Verizon. For example, defendants believe
the figure specified in the complaint includes payments that have been
made by the defendants to Verizon in excess of $14 million and
disputes in excess of $10 million for which Verizon owes credits to
the defendants. The defendants have filed an answer to Verizon's
complaint denying Verizon's claims, in part, and have asserted various
counterclaims, including claims seeking treble damages against Verizon
for violating the antitrust laws. Defendants have also moved to
dismiss Verizon's request for declaratory ruling on the antitrust
claims, which Verizon has opposed. This action is in its preliminary
pleading stages. The defendants intend to pursue all available
remedies and counterclaims and to defend themselves vigorously.
However, the defendants cannot be certain how or when these matters
will be resolved or the outcome of the litigation.
o On March 7, 2002, CoreComm Massachusetts, Inc., an indirect
wholly-owned subsidiary of the Company, initiated litigation against
Verizon New England d/b/a Verizon Massachusetts in the Suffolk
Superior Court, Massachusetts, alleging breach of contract and seeking
a temporary restraining order against Verizon Massachusetts. On April
1, 2002, Verizon filed its answer to CoreComm Massachusetts' complaint
and filed counterclaims seeking payment of approximately $1.2 million
allegedly owed by CoreComm Massachusetts under the parties'
interconnection agreement and Verizon's tariffs. On April 10, 2002,
CoreComm Massachusetts filed an answer denying Verizon's claims.
During the course of discovery, Verizon conceded that it had
over-billed CoreComm Massachusetts by approximately $800,000. As a
result, CoreComm Massachusetts amended its complaint to include claims
against Verizon for unfair and deceptive acts or practices in
violation of Massachusetts' fair trade practice laws. Verizon amended
its complaint to specify a revised claim of $1.1 million. CoreComm
Massachusetts intends to pursue all available claims and defenses and
to defend itself vigorously. However, it is not presently possible to
predict how these matters will be resolved. On November 1, 2002,
CoreComm Massachusetts notified its customers in Massachusetts and
state and federal regulators that CoreComm Massachusetts would cease
providing telephone services in Massachusetts on or about December 2,
2002. CoreComm Massachusetts' operations in Massachusetts do not
represent a material component of the Company's operations and the
Company does not believe that its withdrawal from providing telephone
services in Massachusetts will have a material adverse affect on the
Company's business, financial condition and/or results of operations.
19
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 14. Commitments and Contingent Liabilities (continued)
o CoreComm Newco, Inc., an indirect, wholly owned subsidiary of the
Company, is currently in litigation with Ameritech Ohio, a supplier
from whom it purchases telecommunications products and services, over
the adequacy of Ameritech's performance under a 1998 contract between
CoreComm Newco and Ameritech, and related issues. This litigation
began in June 2001 when Ameritech threatened to stop processing new
orders following CoreComm Newco's exercise of its right under the
contract to withhold payments for Ameritech's performance failures. In
response to this threat, CoreComm Newco sought and received an order
from an official of the Public Utilities Commission of Ohio barring
Ameritech from refusing to process new CoreComm Newco service orders.
Ameritech has appealed that order to the PUCO and that appeal is still
pending.
On July 5, 2001, Ameritech filed a claim with the PUCO seeking payment
from CoreComm Newco of approximately $8,600,000 allegedly owed under
the contract. On August 8, 2001, Ameritech filed a second claim
against CoreComm Newco in Ohio state court, seeking an additional
approximately $4,300,000 in allegedly improperly withheld amounts. On
August 28, 2001, CoreComm Newco exercised its right to remove the
state court claim to the United States District Court for the Northern
District of Ohio, and the parties then stipulated to a consolidation
of both of Ameritech's claims in the United States District Court. To
consolidate the two claims, on October 9, 2001, Ameritech filed an
amended complaint in the United States District Court, seeking a total
of approximately $14,400,000.
On December 26, 2001, CoreComm Newco filed its answer to Ameritech's
amended complaint and simultaneously filed three counterclaims against
Ameritech and some of its affiliates, alleging breach of contract,
antitrust violations, and fraudulent or negligent misrepresentation.
In lieu of filing an answer to CoreComm Newco's counterclaims,
Ameritech filed a series of motions on March 25, 2002, asking the
Court to dismiss several of CoreComm Newco's counterclaims. On April
17, 2002, CoreComm Newco filed its opposition to Ameritech's requests
for dismissal. On July 25, 2002, the district court issued a decision
denying Ameritech's motion to dismiss and upholding CoreComm Newco's
right to proceed with its antitrust, breach of contract and
misrepresentation claims against all counter-defendants.
20
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 14. Commitments and Contingent Liabilities (continued)
The Company believes that CoreComm Newco has meritorious defenses to
Ameritech's amended complaint, and that the amount currently in
dispute is substantially less than the $14.4 million claimed in
Ameritech's amended complaint. For example, the figure specified in
Ameritech's complaint does not account for (a) more than $4.1 million
in refunds that Ameritech contends it has already credited to CoreComm
Newco's accounts since the filing its complaint, and (b) payments that
were made by CoreComm Newco in the ordinary course after the time of
Ameritech's submission. However, the Company cannot be certain how or
when the matter will be resolved. The Company also believes that, to
the extent Ameritech prevails with respect to any of its claims,
Ameritech's award may be offset in whole or in part by amounts that
CoreComm Newco is seeking to obtain from Ameritech under its
counterclaims. CoreComm Newco intends to pursue all available remedies
and to defend itself vigorously. However, it is impossible at this
time to predict the outcome of the litigation.
o On December 3, 2001, General Electric Capital Corp. filed a civil
lawsuit in the Circuit Court of Cook County, Illinois against CCL and
MegsINet, Inc., an indirect subsidiary of the Company, seeking
approximately $8 million in allegedly past due amounts and the return
of equipment under a capital equipment lease agreement between Ascend
and MegsINet. GECC is seeking all amounts allegedly owed under the
lease as well as repossession of the equipment. On February 19, 2002,
the defendants filed a motion to dismiss several of GECC's claims. In
response, GECC withdrew its original complaint and on May 1, 2002
filed an amended complaint naming the Company as an additional
defendant. On June 5, 2002, defendants filed a motion to dismiss
and/or stay plaintiff's civil complaint, plaintiffs filed a reply and
the court is scheduled to issue a ruling on defendants' motion on or
about November 23, 2002.
Concurrently, on April 12, 2002, GECC filed a second complaint in the
Circuit Court of Cook County, Illinois against MegsINet, CCL and the
Company seeking a court order allowing it to take repossession of its
alleged equipment. On September 24, 2002, the Court issued an order
granting GECC's request for repossession of the equipment and MegsINet
is complying with the Court's order by allowing GECC to take
possession of the equipment, which has not and is not expected to have
any material impact on the Company's business or operations. The civil
action between the parties is currently in the discovery phase.
Defendants intend to defend themselves vigorously and to pursue all
available claims and defenses. However, it is impossible at this time
to predict the outcome of the litigation.
21
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 14. Commitments and Contingent Liabilities (continued)
o On May 25, 2001, KMC Telecom, Inc. and some of its operating
subsidiaries filed an action in the Supreme Court of New York for New
York County against CCL, Cellular Communications of Puerto Rico, Inc.,
CoreComm New York, Inc. and MegsINet. On that same date, KMC filed the
same cause of action in the Circuit Court of Cook County, IL. Upon
defendant's Motion to Stay the New York action, KMC voluntarily
dismissed the Illinois litigation and the matter is currently
proceeding in New York. KMC contends that it is owed approximately $2
million, primarily in respect of alleged early termination
liabilities, under a services agreement and a co-location agreement
with MegsINet. The defendants have denied KMC's claims and have
asserted that the contracts at issue were signed without proper
authorization, that KMC failed to perform under the alleged contracts,
and that the termination penalties are not enforceable. The defendants
have served discovery and intend to defend themselves in coordination
with one of their insurance carriers. On March 27, 2002, certain of
the defendants initiated litigation against several former principals
of MegsINet seeking indemnification and contribution against KMC's
claims.
o On August 13, 2002, the Company (on behalf of its affiliates) issued a
demand to WorldCom, Inc. for payment of approximately $8.1 million,
representing approximately $5.4 million in deposits for services and
approximately $2.7 million in carrier access billing charges owed. On
July 21, 2002, WorldCom filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. On September 18, 2002,
WorldCom sent correspondence to the Company denying the Company's
claims and alleging that the Company (through its affiliates) owes
WorldCom approximately $5.9 million. The parties are currently engaged
in discussions to resolve these claims. The Company intends
aggressively pursue its claims against WorldCom. However, it is not
presently possible to predict how these matters will be resolved. We
do not believe Worldcom's bankruptcy filing will materially impact our
ability to conduct our business operations.
22
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 14. Commitments and Contingent Liabilities (continued)
o On March 1, 2002, Easton Telecom Services, LLC., referred to as Easton
LLC, initiated litigation in the Northern District of Ohio against
CoreComm Internet Group, Inc. asserting that Easton LLC is the
assignee of several rights of Easton Telecom Services, Inc., referred
to as Easton Inc., under an asset purchase agreement approved as part
of the bankruptcy disposition of Teligent, Inc., and demanding payment
of approximately $4.9 million, primarily in respect of alleged early
termination penalties, for telecommunications services purportedly
provided under alleged contracts between Easton and MegsINet.
Subsequently, on April 18, 2002, and August 8, 2002, Easton amended
its complaint to name Voyager Information Networks, Inc. and MegsINet,
as additional defendants in the matter and increasing the amount in
dispute to approximately $5.1 million. On May 7, 2002, defendants'
filed their answer denying Easton LLC's allegations and asserting
multiple defenses, including defenses challenging the validity of the
alleged contracts and plaintiffs claim to alleged damages. On August
23, 2002, the Court issued an order dismissing approximately $4
million of Easton's claims as invalid. Easton has subsequently alleged
additional damages of approximately $1 million in lost profits, for a
revised total claim of approximately $2 million. Upon the conclusion
of a jury trial which ended on November 8, 2002, Easton obtained a
judgment against the defendants in the total amount of $1,085,000.
Although the defendants believe that they have a solid basis to appeal
the jury's decision, they are currently assessing their rights in this
regard and have not yet determined how they will proceed.
o On September 24, 2002, GATX Technologies, Inc., known as GATX, filed
an action in the Thirteenth Judicial Circuit in Florida against
CoreComm - Voyager, Inc., an indirect wholly-owned subsidiary of the
Company, seeking recovery of amounts claimed to be owed under schedule
one of a master equipment lease originally entered into between 3Com
Corporation and CoreComm - Voyager's predecessor in interest totaling
approximately $150,000. On October 21, 2002, CoreComm - Voyager moved
to dismiss GATX's action for lack of jurisdiction. The motion is now
pending with the Court. Since the filing of the motion to dismiss,
GATX has initiated settlement discussions with CoreComm-Voyager. On
October 28, 2002, 3Com Corporation, known as 3Com, filed an action
against the Company in the Court of Common Pleas, Montgomery County,
Pennsylvania seeking payment of approximately $900,000 under a master
equipment lease and three lease schedules originally entered into
between 3Com and the predecessor in interest to CoreComm-Voyager, Inc.
Pursuant to corporate guaranty and payment agreements with GATX
Technologies, Inc., 3Com is asserting subrogation rights to GATX's
claims under the master lease and schedules, excepting a portion of
schedule one. Should either action proceed further, the defendants
will defend themselves vigorously and pursue all available claims.
However, it is not possible at this time to predict how or when either
of these matters will be resolved.
23
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 14. Commitments and Contingent Liabilities (continued)
o On June 7, 2002, the Board of Revenue and Finance of the Commonwealth
of Pennsylvania issued an order granting in part and denying in part
the Company's petition for review of a decision by a lower
administrative authority relating to the Company's alleged liability
for sales and use tax for the period September 1, 1997 through July
31, 2000. Pursuant to the June 7 order, the Company has been assessed
sales and use tax for the period at issue in the amount of $631,429,
all of which is accrued. On July 8, 2002, the Company filed a petition
for review of the board's order in the Commonwealth Court of
Pennsylvania seeking a further reduction of the assessment. The
Company believes that it has meritorious defenses and that the
assessment should be reduced; however it is not possible to predict
how this matter will be resolved.
24
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Until December 2001, we were a direct, wholly-owned subsidiary of CCL. As a
result of the recapitalization transactions completed in December 2001 and on
July 1, 2002, CCL has been merged into a wholly-owned subsidiary of the Company.
Prior to the ATX Communications recapitalization, CCL operated the same
businesses that we currently operate.
From 1998 to 2000, we were in the process of building infrastructure to support
a national roll-out according to our original business plan. This business plan
required significant capital to fund capital expenditures, operating expenses
and debt service. As a result, we historically experienced substantial operating
and net losses. In early 2001, we still required significant funds to complete
our business plan as originally intended. However, adverse changes in the
capital markets, particularly in the telecommunications sector, made it
extremely difficult to raise new capital, and we could no longer finance our
original business plan. As a result, in 2001, we significantly revised our
business plan to focus on our most profitable businesses and geographic areas,
and reduce our operational costs and need for capital.
In 2001, we streamlined our strategy and operations to focus on our two most
successful and promising lines of business. The first is integrated
communications products and other high bandwidth/data/web-oriented services for
the business market. The second is bundled local telephony and Internet products
for the residential market, with a focus on using Internet interfaces, as well
as our call centers, to efficiently sell, to install our products and to service
our customers. As a result of these changes, we are now focused primarily in the
Mid-Atlantic and Mid-West regions of the U.S.
We have implemented cost savings through a variety of means, including facility
consolidation, efficiency improvements, vendor negotiations, network
optimization, and headcount reduction. We have reduced network costs and capital
expenditures by converting many of our local access lines to more profitable
Unbundled Network Element - Platform pricing from Total Service Resale pricing,
which provides higher margins. In addition, we were able to reduce the number of
facilities established without substantially affecting our service area by
leasing enhanced extended local loops from the incumbent local exchange
carriers. We have also improved our operating efficiency through improved
pricing terms and the elimination of duplicative or unneeded network facilities.
25
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
These efficiencies are reflected in the decrease in our expenses of
approximately $155 million on an annualized basis, as shown in the table below:
Three Months Ended
(in thousands)
-----------------------------------
% Reduction September 30, December 31,
Q4'00-Q3'02 2002 2000
----------- ------------- ------------
Operating Expenses 26% $47,927 $65,002
Selling, General and Administrative 52% 18,512 38,414
Corporate Expenses 49% 1,930 3,759
-----------------------------------
Total $68,369 $107,175
===================================
While reducing expenses in all areas of our business, we implemented new low
cost revenue initiatives such as launching business communications service to
several markets in the Great Lakes region and residential service in the East
using existing facilities.
In addition, the recapitalization transactions completed in 2001 have reduced
interest expense and preferred stock dividends from an aggregate annual total of
approximately $53.2 million to approximately $15.2 million, $10.7 million of
which is in cash, based on interest rates as of September 30, 2002.
By the end of 2001, we had completed the implementation of our revised business
plan. Going forward, we will continue to monitor all areas of the business for
additional cost saving and revenue generating opportunities.
Although we continue to engage in efforts to increase our profitability, we are
also investigating other ways to generate cash for our business. In April 2001,
the Company and CCL commenced a process to potentially sell selected assets and
businesses (now owned by the Company) that are not directly related to their
competitive local exchange carrier, referred to as CLEC, business, and retained
advisors for the purpose of conducting this sale. The Company's CLEC assets and
businesses include its local and toll-related telephone services that compete
with the incumbent local exchange carrier, referred to as ILEC, and other
carriers.
Three Months Ended September 30, 2002 and 2001
The decrease in revenues to $73,422,000 from $74,172,000 is due primarily to
decreases in the toll-related telephony services and consumer Internet services
provided by the Company. The Company continued to reduce or eliminate less
profitable services and increase its customer base in its more profitable
segments.
26
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Operating costs include direct cost of sales, network costs and salaries and
related expenses of network personnel. Operating costs decreased to $47,927,000
from $54,760,000 due to a decrease in costs as a result of optimization of our
network, reduced headcount and reduction of our facilities.
Selling, general and administrative expenses decreased to $18,512,000 from
$20,907,000 due to a decrease in costs as a result of reduced headcount,
reduction of our facilities and a revision in our marketing strategies.
Corporate expenses include the costs of some of our officers and corporate
staff, the costs of operating the corporate office and costs incurred for
strategic planning and evaluation of business opportunities. Corporate expenses
increased to $1,930,000 from $944,000 due to increased costs of corporate
activities, and increased compensation expense.
In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in April 2000, we recorded a non-cash compensation expense of
approximately $29.0 million and a non-cash deferred expense of approximately
$31.3 million. From July 1, 2001 to September 30, 2001, $3.2 million of the
deferred non-cash compensation was charged to expense. The remaining portion of
deferred non-cash compensation was charged to expense between October 1, 2001
and December 31, 2001.
We incurred additional costs, which consist primarily of legal fees, accounting
fees and printing fees, in connection with our recapitalization of $373,000
during the three months ended September 30, 2002.
Other charges of $3,910,000 during the three months ended September 30, 2001,
relate to our announcements in May and July 2001 that we were taking additional
actions to reorganize, re-size and reduce operating costs and create greater
efficiency in various areas of the Company. These charges included employee
severance and related costs for approximately 630 employees as well as lease
exit costs.
Depreciation expense decreased to $8,895,000 from $10,972,000 primarily as a
result of the reduction in the carrying value of our fixed assets as of December
31, 2001 as determined by a fair value analysis performed in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
27
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Amortization expense decreased to $84,000 from $20,784,000 due to the reduction
in the carrying value of our intangible assets as of December 31, 2001 as
determined by a fair value analysis performed in accordance with SFAS No. 121 as
well as our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002, which required us to cease amortizing goodwill. Amortization
expense on our goodwill and workforce during the three months ended September
30, 2001 was $20,700,000. Our net loss and our basic and diluted net loss per
common share would have been $24,811,000 and $0.86, respectively, had SFAS No.
142 been in effect during 2001.
Interest expense decreased to $4,503,000 from $6,943,000 due primarily to a
reduction in the effective interest rate on our senior secured credit facility.
The effective interest rate on our senior secured credit facility at September
30, 2002 and 2001 was 6.75% and 9.29%, respectively.
The income tax benefit of $92,000 during 2002 is from state and local income tax
refunds.
Nine Months Ended September 30, 2002 and 2001
The increase in revenues to $222,942,000 from $220,109,000 is due primarily to
customer acquisition, increased pricing, carrier access billing and reciprocal
compensation. In the nine months ended September 30, 2002, the Company billed
and recorded approximately $1,958,000 of revenue that was related to services
provided in prior periods.
Operating costs include direct cost of sales, network costs and salaries and
related expenses of network personnel. Operating costs decreased to $144,723,000
from $175,942,000 due to a decrease in costs as a result of optimization of our
network, reduced headcount and reduction of our facilities.
Selling, general and administrative expenses decreased to $61,049,000 from
$75,021,000 as a result of reduced headcount, reduction of our facilities and a
revision in our marketing strategies. During the nine months ended September 30,
2002, we reduced our estimate of potential sales and use tax based on a
reassessment in an order by the Commonwealth of Pennsylvania, which had the
effect of reducing selling, general and administrative expenses by approximately
$800,000.
Corporate expenses include the costs of some of our officers and corporate
staff, the costs of operating the corporate office and costs incurred for
strategic planning and evaluation of business opportunities. Corporate expenses
increased to $5,244,000 from $3,854,000 due to increased costs of corporate
activities, which consists primarily of compensation expense.
28
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," in April 2000, we recorded a non-cash compensation expense of
approximately $29.0 million and a non-cash deferred expense of approximately
$31.3 million. From January 1, 2001 to September 30, 2001, $9.7 million of the
deferred non-cash compensation was charged to expense. The remaining portion of
deferred non-cash compensation was charged to expense between October 1 and
December 31, 2001.
We incurred additional costs, which consist primarily of employee incentives,
legal fees, accounting fees and printing fees, in connection with our
recapitalization of $5,825,000 during the nine months ended September 30, 2002.
Other charges of $37,395,000 during the nine months ended September 30, 2001,
relate to our announcements in May and July 2001 that we were taking additional
actions to reorganize, re-size and reduce operating costs and create greater
efficiency in various areas of the Company. These charges included employee
severance and related costs for approximately 630 employees as well as lease
exit costs.
Depreciation expense decreased to $26,916,000 from $34,551,000 primarily as a
result of the reduction in the carrying value of our fixed assets as of December
31, 2001 as determined by a fair value analysis performed in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
Amortization expense decreased to $251,000 from $75,390,000 due to the reduction
in the carrying value of our intangible assets as of December 31, 2001 as
determined by a fair value analysis performed in accordance with SFAS No. 121 as
well as our adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" on
January 1, 2002, which required us to cease amortizing goodwill. Amortization
expense on our goodwill and workforce during the six months ended September 30,
2001 was $75,111,000. Our net loss and our basic and diluted net loss per common
share would have been $298,577,000 and $10.46, respectively, had SFAS No. 142
been in effect during 2001.
Interest expense decreased to $12,143,000 from $18,467,000 due primarily to a
reduction in the effective interest rate on our senior secured credit facility.
The effective interest rate on our senior secured credit facility at September
30, 2002 and 2001 was 6.75% and 9.29%, respectively.
The income tax benefit of $92,000 and $33,000 during 2002 and 2001,
respectively, is from state and local income tax refunds.
29
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Recent Accounting Pronouncements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
effective for the Company on January 1, 2003. This Statement rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The adoption
of this standard will require the Company to reclassify its gain from
extinguishment of debt from extraordinary to continuing operations. The
Company's loss before income taxes for the three and nine months ended September
30, 2001 would have been $45,511,000 and $373,721,000, respectively, upon
adoption of SFAS No. 145. The adoption of SFAS No. 145 will not change the
Company's net loss for the three and nine months ended September 30, 2001.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," effective for us on January 1, 2002. This
statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and other related accounting
guidance. The adoption of this new standard had no significant effect on our
results of operations, financial condition or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," effective for us on January 1, 2003. This statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible fixed assets and the associated asset retirement costs.
We are in the process of evaluating the financial statement impact of the
adoption of SFAS No. 143.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination that is completed after June 30, 2001. SFAS No. 142 ends the
amortization of goodwill and indefinite-lived intangible assets. Instead, these
assets must be reviewed annually, or more frequently under some conditions, for
impairment in accordance with this statement. This impairment test uses a fair
value approach rather than the undiscounted cash flow approach previously
required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." We adopted SFAS No. 142 on January
1, 2002. The adoption of this new standard had no significant effect on our
results of operations, financial condition or cash flows, other than
amortization of goodwill ceased as of January 1, 2002.
Upon the adoption of SFAS No. 142, we performed an evaluation for impairment of
our goodwill as of January 1, 2002, and determined that no impairment charge was
required. Our next evaluation of impairment will be the annual test as of
October 1, 2002, which may result in a non-cash impairment charge to reduce the
carrying value of goodwill.
30
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Liquidity and Capital Resources
Based on our current business plan, we anticipate that we will have sufficient
cash and cash equivalents on hand to fund our operations, capital expenditures
and debt service in 2002. Our ability to raise additional capital in the future
will be dependent on a number of factors, such as our results of operations, the
amount of our indebtedness, and also general economic and market conditions,
which are beyond our control. If we are unable to obtain additional financing or
to obtain it on favorable terms, we may be required to further reduce our
operations, forego business opportunities, or take other actions which could
adversely affect our business, results of operations and financial condition. In
addition, as described in detail in Note 14 above, the Company and its various
subsidiaries are also involved in litigation, which if resolved unfavorably to
us, could have a material adverse effect on the Company's business, financial
condition and results of operations, including our ability to fund our
operations.
As of September 30, 2002, we had long-term debt, which consists of a $156.1
million senior secured credit facility, approximately $17.5 million in principal
amount of 10.75% Unsecured Convertible PIK Notes due 2011, and approximately
$9.6 million of capital leases. Debt service on the senior secured credit
facility includes approximately $10.3 million in interest expense in 2002, $9.7
million in 2003 and $9.4 million in 2004, on an annualized basis, based on the
interest rate on the facility of 6.22%, in effect through April 11, 2003, as
well as quarterly amortization and principal reductions which total $0 in 2002,
$1,950,000 in 2003, and $9,750,000 in 2004. We have made interest payments of
approximately $8.1 million under our senior secured credit facility during the
nine months ended September 30, 2002. The 10.75% Unsecured Convertible PIK Notes
due 2011 have no cash interest payments, and are not due until 2011. Our capital
leases have $9.4 million due during the remainder of 2002, and $0.2 million due
for the remainder of their terms. However, approximately $8.1 million of these
capital leases are obligations of one of our subsidiaries and are not
obligations of the Company. In addition, as of September 30, 2002, CCL had $4.36
million of 6% Convertible Subordinated Notes outstanding. As of September 30,
2002, our current liabilities exceed our current assets by approximately $96
million. As of September 30, 2002, we were in compliance with all required
ratios and covenants contained in agreements governing our outstanding
indebtedness.
We continue to have significant expected capital expenditures following the
implementation of our modified business plan. Under our revised business plan,
capital expenditures have been significantly reduced from prior levels. Total
actual capital expenditures for the nine months ended September 30, 2002,
described as cash used to purchase fixed assets in our cash flow statement, were
approximately $8.9 million. According to our current plans, capital expenditures
are expected to be approximately $2.5 million for the remainder of 2002 and $9.5
million and $14.2 million in 2003 and 2004, respectively. These future capital
expenditures will depend on a number of factors relating to our business, in
particular the growth level, geographic location and services provided to new
customers added during these years. Capital expenditures in future years will
also depend on the availability of capital and the amount of cash, if any,
generated by operations, which may impact our capital decisions relating to
initiatives such as, for example, network expansion and the implementation of
upgrades to our information services platforms.
31
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
For the first nine months of 2002, net cash provided by operations was
approximately $0.7 million. An inability to generate cash from operations and/or
raise additional financing may affect our ability to meet our cash requirements,
which may have an adverse affect on us, and potentially our viability as an
ongoing business.
In addition, we are a holding company with no significant assets other than cash
and securities and investments in, and advances to, our subsidiaries. We are,
therefore, likely to be dependent upon receipt of funds from our subsidiaries to
meet our own obligations. However, our subsidiaries' debt agreements prevent the
payment of dividends, loans or other distributions to us, except in limited
circumstances. However, the limited permitted circumstances of distributions
from our subsidiaries may be sufficient for our operations, because nearly all
of the uses of funds described above are cash requirements of our subsidiaries.
Our future capital requirements will depend on the success of the execution of
our business plan, and the amount of capital required to fund future capital
expenditures and other working capital requirements that exceed net cash
provided by operating activities. We anticipate that we and our subsidiaries
will not generate sufficient cash flow from operations to repay at maturity the
entire principal amount of our outstanding indebtedness. In addition, we
anticipate that we will seek modifications or waivers to certain provisions of
the agreements governing our outstanding indebtedness in order to be able to
continue to be in compliance with all required ratios and covenants contained in
such agreements. In addition, we anticipate that we may be required to raise
additional capital in 2003 in order to fund the capital expenditures and other
working capital requirements that exceed net cash provided by operating
activities. Accordingly, we may be required to consider a number of measures,
including: (1) seeking modifications or waivers to certain provisions of the
terms of our indebtedness (2) refinancing all or a portion of our indebtedness,
(3) seeking additional debt financing, which may be subject to obtaining
necessary lender consents, (4) seeking additional equity financing, (5)
completing a recapitalization or restructuring of our indebtedness (6) a
combination of the foregoing. The consideration, timing and implementation of
such measures will depend upon the success of the execution of our business
plan, the amount of capital required to fund our operations in the future, and
the terms of any financings or other transactions that we may consider. We
cannot assure you that:
(a) actual costs will not exceed the amounts estimated in our business
plan or that additional funding will not be required;
(b) we will prevail in our material litigation matters as described in
Note 14 to the financial statements;
(c) we and our subsidiaries will be able to generate sufficient cash from
operations to meet capital requirements, debt service and other
obligations when required, that we will be able to continue to be in
compliance with all required ratios and covenants contained in
agreements governing our outstanding indebtedness, or that we will be
able to modify the requirements or terms of such indebtedness;
(d) we will be able to refinance our indebtedness as it comes due;
(e) we will be able to sell assets or businesses (75% or more of the net
proceeds from a sale may be required to be used to repay certain
indebtedness);
(f) we will not be adversely affected by interest rate fluctuations; or
(g) we will be able to access the cash flow of our subsidiaries.
32
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
The following table shows our aggregate cash interest expense and principal
payments on our existing long term debt, anticipated estimated capital
expenditures, payments on capital leases and other debt, as well as the sources
of funds that we expect to use to meet these cash requirements through 2004.
Three Months
Ended
December 31,
2002 2003 2004 Source of Funds
----------------- ---------- ----------- --------------------------------------
(in millions)
Cash Interest Expense on Cash and cash equivalents on hand
existing Long-term debt(1) $ 2.8 $ 10.0 $ 9.7 and cash from operations
Estimated Capital Cash and cash equivalents on hand
Expenditures(2) 2.5 9.5 14.2 and cash from operations
Principal Payments on
existing Long-term debt(3) 4.4 1.95 9.75 For 2002 and 2003, cash and
cash equivalents on hand and cash
from operations;
for 2004, cash and cash
equivalents on hand, cash from
operations, and, if required,
refinancing sources or other
sources of financing(4).
Approximately $8.1 million of these
Payments on Capital Leases 9.4 0.25 -- capital leases are
obligations of our subsidiary,
MegsINet, Inc. and are not
obligations of the Company.
for the remaining amounts, cash and
cash equivalents on hand and cash
from operations (5)
----- ------ ------
$19.1 $21.70 $33.65
===== ====== ======
(1) Our only long term debt that requires cash interest expense is our $156.1
million senior secured credit facility and $4.4 million 6% Convertible
Subordinated Notes of CCL. The interest expense on our senior secured
credit facility is based on our current interest rate of 6.22%, which is in
effect through April 11, 2003, and assumes principal reductions as required
in the facility.
(2) Future capital expenditures will depend on a number of factors relating to
our business, in particular the growth level, geographic location and
services provided to new customers added during these years.
(3) Principal payments indicated are amortization and principal reductions
under our senior secured credit facility. The 2002 amount represents the
outstanding $4.4 million 6% Convertible Subordinated Notes due 2006 of CCL;
CCL is in default on such notes.
33
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
(4) Refinancing sources may include, for example, a new bank facility used to
repay these amounts; other sources of financing may include capital raised
through new debt or equity financing or asset sales. There can be no
assurance that we will be able to refinance our indebtedness or raise the
required funds.
(5) Approximately $8.1 million of the capital lease and other debt obligations
of MegsINet, Inc. are the subject of current litigation, as described in
the section of Part II, Item I of this Quarterly Report on Form 10-Q
entitled " Legal Proceedings."
Although we believe that our plans, intentions and expectations as reflected in
or suggested by these forward-looking statements are reasonable as of the date
of this of this quarterly report, we can give no assurance that our plans,
intentions and expectations will be achieved in a timely manner if at all.
Our outstanding indebtedness is described in further detail in the subsequent
paragraphs.
In April 2001, CCL and the Company entered into a $156.1 million Amended and
Restated Credit Agreement with The Chase Manhattan Bank that amends and restates
the term loan facility and revolving credit facility that closed in September
2000. As of September 30, 2002, there is $106.1 million outstanding under the
term loan facility and $50.0 million outstanding under the revolving credit
facility. The term loan facility will amortize in quarterly installments of
principal commencing on December 31, 2003 with a final maturity on September 22,
2008. The revolving credit facility shall be automatically and permanently
reduced in increasing quarterly installments of principal commencing on December
31, 2003 with a termination date on September 22, 2008. Total annual principal
payments are as follows: $1,950,000 (2003); $9,750,000 (2004); $25,350,000
(2005); $50,700,000 (2006); $39,000,000 (2007) and $29,350,000 (2008). In the
event that any of the remaining approximately $4.358 million in principal amount
of 6% Convertible Subordinated Notes not owned by us have not been converted or
refinanced on or prior to April 1, 2006, then the facilities become payable in
full on April 1, 2006. The interest rate on both the term loan facility and the
revolving credit facility is, at our option, either 3.5% per annum plus the base
rate, which is the higher of the prime rate or the federal funds effective rate
plus 0.5% per annum, or the reserve-adjusted London Interbank Offered Rate plus
4.5% per annum. Beginning October 12, 2001 and ending April 12, 2002, the
interest rate was 6.86%. Beginning April 13, 2002 and ending October 11, 2002,
the interest rate was 6.75%. Beginning October 11, 2002 and ending April 11,
2003, the interest rate is 6.22%. Interest is payable monthly on the facility.
The commitment fee on the unused portion of the commitments is 1.25% per annum
payable quarterly, subject to reduction to 1% per annum based upon the amount
borrowed under the facilities.
In April 2001, we and CCL issued, as joint and several obligors, to NTL
Incorporated, a convertible note in the aggregate principal amount of $15
million. This note will mature in April 2011. Interest on the note is at an
annual rate of 10.75% payable semiannually on October 15 and April 15 of each
year, commencing October 15, 2001.
34
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
The interest is payable in kind by the issuance of additional unsecured
convertible notes in principal amount equal to the interest payment that is then
due. Additional unsecured convertible PIK notes, dated October 15, 2001, April
15, 2002, and October 15, 2002 were issued in the principal amount of
approximately $0.8 million, $0.9 million, and $0.9 million respectively, as
interest payments. The additional notes issued for interest will have an initial
conversion price equal to the greater of $38.90 and 120% of the weighted average
closing price of the Company's common stock for a specified period. The April
2001 note, the October 2001 note, the April 2002 and the October 2002 note are
each convertible into CCL common stock prior to maturity at a conversion price
of $38.90 per share, subject to adjustment. Pursuant to letter agreements
between us, NTL and CCL, at the completion of the exchange offers on July 1,
2002, the convertibility feature of these notes was altered so that rather than
the notes being convertible into shares of CCL common stock, they are
convertible into shares of our common stock. At that time, the conversion prices
of these notes was equitably adjusted by applying the exchange ratio in the
exchange offer for CCL common stock, which resulted in a new conversion price of
$38.90 per share of our common stock for each of these notes. These notes are
redeemable, in whole or in part, at our option, at any time after April 12,
2003, at a redemption price of 103.429% that declines annually to 100% in April
2007, in each case together with accrued and unpaid interest to the redemption
date.
In October 1999, CCL issued $175 million principal amount of 6% Convertible
Subordinated Notes, and received net proceeds of $168.5 million. In April 2001,
$10,250,000 aggregate principal amount of these notes was converted into
approximately 374,000 shares of CCL's common stock. As part of the ATX
Communications recapitalization, on December 17, 2001, $160 million principal
amount of the 6% Convertible Subordinated Notes were exchanged for 1,456,806
common shares of our common stock and the payment of the October 2001 interest
payment of approximately $4.8 million. The exchange offer that was launched in
February 2002 for the 6% Convertible Subordinated Notes was an offer to exchange
the remaining $4.75 million principal amount of the 6% Convertible Subordinated
Notes not owned by us for an aggregate amount of approximately 43,248 shares of
our common stock and $142,500 in cash. On July 1, 2002, $392,000 principal
amount of the 6% Convertible Subordinated Notes were exchanged for 3,569 shares
of our common stock and a cash payment of approximately $12,000, representing
the past-due interest payment that was due on the notes on April 1, 2002. The
April 1 and October 1, 2002 interest payments on the outstanding 6% Convertible
Subordinated Notes have not been paid and CCL is in default under the these
notes.
On August 13, 2002, the Company (on behalf of its affiliates) issued a demand to
WorldCom, Inc. for payment of approximately $8.1 million, representing
approximately $5.4 million in deposits for services and approximately $2.7
million in carrier access billing charges owed. On July 21, 2002, WorldCom filed
a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. On September 18, 2002, WorldCom sent correspondence to the Company denying
the Company's claims and alleging that the Company (through its affiliates) owes
WorldCom approximately $5.9 million. The parties are currently engaged in
discussions to resolve these claims. The Company intends to aggressively pursue
its claims against WorldCom. However, it is not presently possible to predict
how these matters will be resolved. We do not believe Worldcom's bankruptcy
filing will materially impact our ability to conduct our business operations.
35
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
ATX Communications Recapitalization
On December 28, 2001, we completed the exchange of shares of our common stock
for substantial amounts of the outstanding indebtedness of CCL, substantial
amounts of our outstanding indebtedness as co-obligors with CCL and all of the
outstanding preferred stock of CCL. This exchange was completed under an
exchange agreement with CCL and
(1) holders of 10.75% Unsecured Convertible PIK Notes due 2011 and 10.75%
Senior Unsecured Convertible PIK Notes due 2010, which were a joint
obligation of the Company and CCL, in the initial principal amounts of
$10,000,000 and $16,100,000, respectively,
(2) the holders of Senior Unsecured Notes due September 29, 2003 of CCL in
the principal amount of $105.7 million, and
(3) the holders of all of the preferred stock of CCL, with respect to the
initial liquidation preference of $301 million.
On February 8, 2002, we launched registered public exchange offers whereby we
offered to exchange our shares of common stock to all holders of CCL common
stock and all remaining holders of 6% Convertible Subordinated Notes due 2006 of
CCL for their CCL common stock and their notes, respectively. An additional
$392,000 principal amount of 6% Convertible Subordinated Notes were exchanged.
We completed the exchange offer on July 1, 2002, and issued 3,610,624 shares of
common stock to the former holders of CCL common stock and holders of 6%
Convertible Subordinated Notes due 2006 of CCL. Following the exchange offer,
the Company transferred the shares of CCL common stock that we received in the
exchange offer to a wholly-owned subsidiary. We then merged this subsidiary into
CCL, with CCL surviving the merger as a wholly-owned subsidiary of the Company.
Contractual Obligations and Commercial Commitments
On January 22, 2002, the Securities and Exchange Commission issued FR-61,
Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations. The release sets forth views of the
Securities and Exchange Commission regarding disclosure that should be
considered by registrants. Our contractual obligations and commercial
commitments are summarized below, and are fully disclosed in the Notes to
Consolidated Financial Statements.
36
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
The following table includes aggregate information about our contractual
obligations as of September 30, 2002 and the periods in which payments are due:
Payments Due by Period
--------------------------------------------------------------
Contractual Less than 1 1-3 4-5 After 5
Obligations Total Year Years Years Years
----------- --------------------------------------------------------------
(in thousands)
Long-Term Debt (1) $ 177,949 $ 4,358 $23,400 $93,600 $56,591
Capital Lease Obligations 9,606 9,362 244 -- --
Operating Leases 31,029 7,617 10,955 8,742 3,715
Unconditional Purchase Obligations None -- -- -- --
Other Long-Term Obligations.... None -- -- -- --
--------------------------------------------------------------
Total Contractual Cash Obligations $ 218,584 $21,337 $34,599 $102,342 $60,306
==============================================================
(1) Long-term debt includes the senior secured credit facility of $156,100,000,
10.75% Unsecured Convertible PIK Notes due April 2011 of $17,491,000, which,
including accrued PIK interest and CCL's 6% Convertible Subordinated Notes
due 2006 of $4,358,000.
The following table includes aggregate information about our commercial
commitments as of September 30, 2002 and the periods in which payments are due.
Commercial commitments are items that we could be obligated to pay in the
future. They are not required to be included in the consolidated balance sheet.
Amount of Commitment
Expiration Per Period
------------------------------------------------------------
Other Commercial Total Amounts Less than 1 1 - 3 4 - 5 Over 5
Commitments Committed Year Years Years Years
---------------- --------------------------------------------------------------
(in thousands)
Guarantees $ None $ -- $ -- $ -- $ --
Lines of Credit None -- -- -- --
Standby Letters of Credit 2,169 2,169 -- -- --
Standby Repurchase Obligations None -- -- -- --
Other Commercial Commitments. (1) 5,661 5,661 -- -- --
--------------------------------------------------------------
Total Commercial Commitments. $ 7,830 $7,830 $ -- $ -- $ --
==============================================================
(1) Fiberstream Inc.'s obligations to the City of New York have been excluded.
37
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Consolidated Statement of Cash Flows
For the nine months ended September 30, 2002, cash provided by operating
activities was $735,000 in comparison to cash used in operating activities of
$33,448,000 for the nine months ended September 30, 2001. The change in cash
flow is primarily due to the implementation of our revised business plan.
For the nine months ended September 30, 2002, cash used to purchase fixed assets
increased to $8,861,000 from $4,243,000 in the nine months ended September 30,
2001, which reflects increased purchases of operating equipment.
Proceeds from borrowings, net of financing costs, of $88,679,000 was from the
borrowings under the senior secured credit facility in January 2001 and April
2001 and the issuance of the 10.75% senior unsecured convertible notes in April
2001.
38
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements contained herein, specifically excluding references to the
exchange offers, constitute "forward-looking statements" as that term is defined
under the Private Securities Litigation Reform Act of 1995. When used herein,
the words, "believe," "anticipate," "plan," "will," "expects," "estimates,"
"projects," "positioned," "strategy," and similar expressions identify such
forward-looking statements. All references in this Safe Harbor legend to the
Company shall be deemed to include ATX Communications and its subsidiaries and
affiliates. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from those contemplated, projected, forecasted, estimated or budgeted, whether
expressed or implied, by such forward-looking statements. Such factors include
the following: the Company's ability to obtain trade credit shipments and terms
with vendors and service providers for current orders; the Company's ability to
maintain contracts that are critical to its operations; potential adverse
developments with respect to the Company's liquidity or results of operations;
adverse developments in commercial disputes or legal proceedings, including the
pending any future litigation with Verizon; the Company's ability to fund and
execute its business plan; the Company's ability to attract, retain and
compensate key executives and employees; the Company's ability to attract and
retain customers; general economic and business conditions; industry trends;
technological developments; the Company's ability to continue to design and
build its network, install facilities, obtain and maintain any required
governmental licenses or approvals and finance construction and development, all
in a timely manner, at reasonable costs and on satisfactory terms and
conditions; assumptions about customer acceptance, churn rates, overall market
penetration and competition from providers of alternative services; the impact
of restructuring and integration actions; the impact of new business
opportunities requiring significant up-front investment; interest rate
fluctuations; and availability, terms and deployment of capital. The Company
assumes no obligation to update the forward-looking statements contained herein
to reflect actual results, changes in assumptions or changes in factors
affecting such statements.
39
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
The SEC's rule related to market risk disclosure requires that we describe and
quantify our potential losses from market risk sensitive instruments
attributable to reasonably possible market changes. Market risk sensitive
instruments include all financial or commodity instruments and other financial
instruments, such as investments and debt, that are sensitive to future changes
in interest rates, currency exchange rates, commodity prices or other market
factors. We are not exposed to market risks from changes in foreign currency
exchange rates or commodity prices. We do not hold derivative financial
instruments nor do we hold securities for trading or speculative purposes. Under
our current policies, we do not use interest rate derivative instruments to
manage our exposure to interest rate changes.
The fair-market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. The
carrying amount of the variable rate senior secured credit facility approximates
the fair value. The fair value of our other notes payable are estimated using
discounted cash flow analyses, based on our current incremental borrowing rates
for similar types of borrowing arrangements.
Interest Rate Sensitivity
As of September, 2002
Principal Amount by Expected Maturity
Average Interest Rate
October 1,
2002 to For the Years Ending December 31
December 31, ---------------------------------------------------- Fair Value
2002 2003 2004 2005 2006 Thereafter Total 9/30/02
---------------------------------------------------------------------------------------------------
(in thousands)
Long-term debt,
including current
portion:
Fixed rate $ 4,358 $ -- $ -- $ -- $ -- $47,525(a) $ 51,883 $ 21,775
Average interest rate 6.00% 10.75%
Variable rate $ -- $1,950 $9,750 $25,350 $50,700 $68,350 $156,100 $156,100
Average interest rate
Libor + Libor + Libor + Libor + Libor +
4.5% or 4.5% or 4.5% or 4.5% or 4.5% or
base rate base base rate base rate base rate
rate
+ 3.5% + 3.5% + 3.5% + 3.5% + 3.5%
(a) Represents the value at maturity of 10.75% Unsecured Convertible PIK Notes due April 2011.
40
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures - Under the
supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we
have evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"). Based on such
evaluation, such officers have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are effective
in alerting them on a timely basis to material information relating to
the Company (including its consolidated subsidiaries) required to be
included in the Company's reports filed or submitted under the
Exchange Act.
(b) Changes in Internal Controls - Since the Evaluation Date, there have
not been any significant changes in the Company's internal controls or
in other factors that could significantly affect such controls.
41
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company purchases goods and services from a wide variety of vendors under
contractual and other arrangements that sometimes rise to litigation in the
ordinary course of business. The Company also provides goods and services to a
wide range of customers under arrangements that sometimes lead to disputes over
payment, performance and other obligations. Some of these disputes, regardless
of their merit, could subject the Company to costly litigation and the diversion
of the attention of its technical and/or management personnel. Additionally, any
liability from litigation that is not covered by the Company's insurance or
exceeds its coverage could have a material adverse effect on the Company's
business, financial condition and/or results of operation. Currently, the
Company (and/or its subsidiaries) has the following outstanding matters, which,
if resolved unfavorably, could have a material adverse effect on the Company's
business, financial condition and/or results of operations:
o On August 12, 2002, Verizon and several of its other subsidiaries
filed a complaint in the United States District Court for the District
of Delaware against the Company and several of its indirect wholly
owned subsidiaries seeking payment of approximately $37 million
allegedly owed to Verizon under various contracts between Verizon and
the Company and its subsidiaries and under state and federal law.
Verizon also asked the Court to issue a declaratory ruling that it has
not violated the antitrust laws.
The defendants believe that they have meritorious defenses to the
complaint, and further, that the amounts owed are substantially less
than the amounts claimed by Verizon. For example, defendants believe
the figure specified in the complaint includes payments that have been
made by the defendants to Verizon in excess of $14 million and
disputes in excess of $10 million for which Verizon owes credits to
the defendants. The defendants have filed an answer to Verizon's
complaint denying Verizon's claims, in part, and have asserted various
counterclaims, including claims seeking treble damages against Verizon
for violating the antitrust laws. Defendants have also moved to
dismiss Verizon's request for declaratory ruling on the antitrust
claims, which Verizon has opposed. This action is in its preliminary
pleading stages. The defendants intend to pursue all available
remedies and counterclaims and to defend themselves vigorously.
However, the defendants cannot be certain how or when these matters
will be resolved or the outcome of the litigation.
42
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
o On March 7, 2002, CoreComm Massachusetts, Inc., an indirect
wholly-owned subsidiary of the Company, initiated litigation against
Verizon New England d/b/a Verizon Massachusetts in the Suffolk
Superior Court, Massachusetts, alleging breach of contract and seeking
a temporary restraining order against Verizon Massachusetts. On April
1, 2002, Verizon filed its answer to CoreComm Massachusetts' complaint
and filed counterclaims seeking payment of approximately $1.2 million
allegedly owed by CoreComm Massachusetts under the parties'
interconnection agreement and Verizon's tariffs. On April 10, 2002,
CoreComm Massachusetts filed an answer denying Verizon's claims.
During the course of discovery, Verizon conceded that it had
over-billed CoreComm Massachusetts by approximately $800,000. As a
result, CoreComm Massachusetts amended its complaint to include claims
against Verizon for unfair and deceptive acts or practices in
violation of Massachusetts' fair trade practice laws. Verizon amended
its complaint to specify a revised claim of $1.1 million. CoreComm
Massachusetts intends to pursue all available claims and defenses and
to defend itself vigorously. However, it is not presently possible to
predict how these matters will be resolved. On November 1, 2002,
CoreComm Massachusetts notified its customers in Massachusetts and
state and federal regulators that CoreComm Massachusetts would cease
providing telephone services in Massachusetts on or about December 2,
2002. CoreComm Massachusetts' operations in Massachusetts do not
represent a material component of the Company's operations and the
Company does not believe that its withdrawal from providing telephone
services in Massachusetts will have a material adverse affect on the
Company's business, financial condition and/or results of operations.
o CoreComm Newco, Inc., an indirect, wholly owned subsidiary of the
Company, is currently in litigation with Ameritech Ohio, a supplier
from whom it purchases telecommunications products and services, over
the adequacy of Ameritech's performance under a 1998 contract between
CoreComm Newco and Ameritech, and related issues. This litigation
began in June 2001 when Ameritech threatened to stop processing new
orders following CoreComm Newco's exercise of its right under the
contract to withhold payments for Ameritech's performance failures. In
response to this threat, CoreComm Newco sought and received an order
from an official of the Public Utilities Commission of Ohio barring
Ameritech from refusing to process new CoreComm Newco service orders.
Ameritech has appealed that order to the PUCO and that appeal is still
pending.
On July 5, 2001, Ameritech filed a claim with the PUCO seeking payment
from CoreComm Newco of approximately $8,600,000 allegedly owed under
the contract. On August 8, 2001, Ameritech filed a second claim
against CoreComm Newco in Ohio state court, seeking an additional
approximately $4,300,000 in allegedly improperly withheld amounts. On
August 28, 2001, CoreComm Newco exercised its right to remove the
state court claim to the United States District Court for the Northern
District of Ohio, and the parties then stipulated to a consolidation
of both of Ameritech's claims in the United States District Court. To
consolidate the two claims, on October 9, 2001, Ameritech filed an
amended complaint in the United States District Court, seeking a total
of approximately $14,400,000.
43
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
On December 26, 2001, CoreComm Newco filed its answer to Ameritech's
amended complaint and simultaneously filed three counterclaims against
Ameritech and some of its affiliates, alleging breach of contract,
antitrust violations, and fraudulent or negligent misrepresentation.
In lieu of filing an answer to CoreComm Newco's counterclaims,
Ameritech filed a series of motions on March 25, 2002, asking the
Court to dismiss several of CoreComm Newco's counterclaims. On April
17, 2002, CoreComm Newco filed its opposition to Ameritech's requests
for dismissal. On July 25, 2002, the district court issued a decision
denying Ameritech's motion to dismiss and upholding CoreComm Newco's
right to proceed with its antitrust, breach of contract and
misrepresentation claims against all counter-defendants.
The Company believes that CoreComm Newco has meritorious defenses to
Ameritech's amended complaint, and that the amount currently in
dispute is substantially less than the $14.4 million claimed in
Ameritech's amended complaint. For example, the figure specified in
Ameritech's complaint does not account for (a) more than $4.1 million
in refunds that Ameritech contends it has already credited to CoreComm
Newco's accounts since the filing its complaint, and (b) payments that
were made by CoreComm Newco in the ordinary course after the time of
Ameritech's submission. However, the Company cannot be certain how or
when the matter will be resolved. The Company also believes that, to
the extent Ameritech prevails with respect to any of its claims,
Ameritech's award may be offset in whole or in part by amounts that
CoreComm Newco is seeking to obtain from Ameritech under its
counterclaims. CoreComm Newco intends to pursue all available remedies
and to defend itself vigorously. However, it is impossible at this
time to predict the outcome of the litigation.
o On December 3, 2001, General Electric Capital Corp. filed a civil
lawsuit in the Circuit Court of Cook County, Illinois against CCL and
MegsINet, Inc., an indirect subsidiary of the Company, seeking
approximately $8 million in allegedly past due amounts and the return
of equipment under a capital equipment lease agreement between Ascend
and MegsINet. GECC is seeking all amounts allegedly owed under the
lease as well as repossession of the equipment. On February 19, 2002,
the defendants filed a motion to dismiss several of GECC's claims. In
response, GECC withdrew its original complaint and on May 1, 2002
filed an amended complaint naming the Company as an additional
defendant. On June 5, 2002, defendants filed a motion to dismiss
and/or stay plaintiff's civil complaint, plaintiffs filed a reply and
the court is scheduled to issue a ruling on defendants' motion on or
about November 23, 2002.
Concurrently, on April 12, 2002, GECC filed a second complaint in the
Circuit Court of Cook County, Illinois against MegsINet, CCL and the
Company seeking a court order allowing it to take repossession of its
alleged equipment. On September 24, 2002, the Court issued an order
granting GECC's request for repossession of the equipment and MegsINet
is complying with the Court's order by allowing GECC to take
possession of the equipment, which has not and is not expected to have
any material impact on the Company's business or operations. The civil
action between the parties is currently in the discovery phase.
Defendants intend to defend themselves vigorously and to pursue all
available claims and defenses. However, it is impossible at this time
to predict the outcome of the litigation.
44
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
o On May 25, 2001, KMC Telecom, Inc. and some of its operating
subsidiaries filed an action in the Supreme Court of New York for New
York County against CCL, Cellular Communications of Puerto Rico, Inc.,
CoreComm New York, Inc. and MegsINet. On that same date, KMC filed the
same cause of action in the Circuit Court of Cook County, IL. Upon
defendant's Motion to Stay the New York action, KMC voluntarily
dismissed the Illinois litigation and the matter is currently
proceeding in New York. KMC contends that it is owed approximately $2
million, primarily in respect of alleged early termination
liabilities, under a services agreement and a co-location agreement
with MegsINet. The defendants have denied KMC's claims and have
asserted that the contracts at issue were signed without proper
authorization, that KMC failed to perform under the alleged contracts,
and that the termination penalties are not enforceable. The defendants
have served discovery and intend to defend themselves in coordination
with one of their insurance carriers. On March 27, 2002, certain of
the defendants initiated litigation against several former principals
of MegsINet seeking indemnification and contribution against KMC's
claims.
o On August 13, 2002, the Company (on behalf of its affiliates) issued a
demand to WorldCom, Inc. for payment of approximately $8.1 million,
representing approximately $5.4 million in deposits for services and
approximately $2.7 million in carrier access billing charges owed. On
July 21, 2002, WorldCom filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. On September 18, 2002,
WorldCom sent correspondence to the Company denying the Company's
claims and alleging that the Company (through its affiliates) owes
WorldCom approximately $5.9 million. The parties are currently engaged
in discussions to resolve these claims. The Company intends
aggressively pursue its claims against WorldCom. However, it is not
presently possible to predict how these matters will be resolved. We
do not believe Worldcom's bankruptcy filing will materially impact our
ability to conduct our business operations.
o On September 24, 2002, GATX Technologies, Inc., known as GATX, filed
an action in the Thirteenth Judicial Circuit in Florida against
CoreComm - Voyager, Inc., an indirect wholly-owned subsidiary of the
Company, seeking recovery of amounts claimed to be owed under schedule
one of a master equipment lease originally entered into between 3Com
Corporation and CoreComm - Voyager's predecessor in interest totaling
approximately $150,000. On October 21, 2002, CoreComm - Voyager moved
to dismiss GATX's action for lack of jurisdiction. The motion is now
pending with the Court. Since the filing of the motion to dismiss,
GATX has initiated settlement discussions with CoreComm-Voyager. On
October 28, 2002, 3Com Corporation, known as 3Com, filed an action
against the Company in the Court of Common Pleas, Montgomery County,
Pennsylvania seeking payment of approximately $900,000 under a master
equipment lease and three lease schedules originally entered into
between 3Com and the predecessor in interest to CoreComm-Voyager, Inc.
Pursuant to corporate guaranty and payment agreements with GATX
Technologies, Inc., 3Com is asserting subrogation rights to GATX's
claims under the master lease and schedules, excepting a portion of
schedule one. Should either action proceed further, the defendants
will defend themselves vigorously and pursue all available claims.
However, it is not possible at this time to predict how or when either
of these matters will be resolved.
45
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
o On March 1, 2002, Easton Telecom Services, LLC., referred to as Easton
LLC, initiated litigation in the Northern District of Ohio against
CoreComm Internet Group, Inc. asserting that Easton LLC is the
assignee of several rights of Easton Telecom Services, Inc., referred
to as Easton Inc., under an asset purchase agreement approved as part
of the bankruptcy disposition of Teligent, Inc., and demanding payment
of approximately $4.9 million, primarily in respect of alleged early
termination penalties, for telecommunications services purportedly
provided under alleged contracts between Easton and MegsINet.
Subsequently, on April 18, 2002, and August 8, 2002, Easton amended
its complaint to name Voyager Information Networks, Inc. and MegsINet,
as additional defendants in the matter and increasing the amount in
dispute to approximately $5.1 million. On May 7, 2002, defendants'
filed their answer denying Easton LLC's allegations and asserting
multiple defenses, including defenses challenging the validity of the
alleged contracts and plaintiffs claim to alleged damages. On August
23, 2002, the Court issued an order dismissing approximately $4
million of Easton's claims as invalid. Easton has subsequently alleged
additional damages of approximately $1 million in lost profits, for a
revised total claim of approximately $2 million. Upon the conclusion
of a jury trial which ended on November 8, 2002, Easton obtained a
judgment against the defendants in the total amount of $1,085,000.
Although the defendants believe that they have a solid basis to appeal
the jury's decision, they are currently assessing their rights in this
regard and have not yet determined how they will proceed.
o On June 7, 2002, the Board of Revenue and Finance of the Commonwealth
of Pennsylvania issued an order granting in part and denying in part
the Company's petition for review of a decision by a lower
administrative authority relating to the Company's alleged liability
for sales and use tax for the period September 1, 1997 through July
31, 2000. Pursuant to the June 7 order, the Company has been assessed
sales and use tax for the period at issue in the amount of $631,429,
all of which is accrued. On July 8, 2002, the Company filed a petition
for review of the board's order in the Commonwealth Court of
Pennsylvania seeking a further reduction of the assessment. The
Company believes that it has meritorious defenses and that the
assessment should be reduced; however it is not possible to predict
how this matter will be resolved.
46
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special stockholder meeting held on July 11, 2002, the
stockholders of the Company unanimously approved a change of the name
of the Registrant from "CoreComm Holdco, Inc." to "ATX Communications,
Inc." The name change was made effective on July 15, 2002.
ITEM 5. OTHER INFORMATION
(a) In connection with the ATX Communications recapitalization, on July 2,
2002, Nasdaq transferred CCL's listing on The Nasdaq National Market
to the Company. On May 16, 2002, Nasdaq provided CCL with notice of a
Nasdaq Staff Determination indicating that CCL common stock was
subject to delisting from the Nasdaq National Market because CCL did
not comply with the minimum bid price and the minimum market value of
publicly held shares requirements for continued listing. On August 15,
2002, the Nasdaq Listing Qualifications Panel issued its decision to
delist the Company's common stock. On August 16, 2002, the Company's
Common stock began trading on the OTC Bulletin Board. The Company had
requested a review of the Panel's decision by the NASDAQ listing and
Hearing Review Council and on October 26, 2002, the Listing Council
affirmed the Panel's decision to delist the Company's common stock.
The delisting of our common stock from the Nasdaq National Market,
could, among other things, have a negative impact on the trading
activity and price of the common stock and could make it more
difficult for us to raise equity capital in the future.
(b) On July 31, 2002, we entered into definitive employment agreements
with Thomas J. Gravina, our President and Chief Executive Officer and
Michael A. Peterson, our Executive Vice-President, Chief Financial
Officer and Chief Operating Officer reflecting the terms previously
disclosed.
47
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
During the quarter ended September 30, 2002, ATX Communications filed
the following reports on Form 8-K:
(i) Report dated July 1, 2002, reporting under Item 5, Other Events,
that CCL has completed its two-phase recapitalization plan
announced October 31, 2001 and as a result, CoreComm Holdco,
Inc., a Delaware corporation and former wholly-owned subsidiary
of Limited, has become the parent company and sole stockholder of
Limited.
(ii) Report dated July 15, 2002, reporting under Item 5, Other Events,
that CoreComm Holdco, Inc. announced that it has completed the
process to change the name of the company to ATX Communications,
Inc.
(iii)Report dated July 30, 2002, reporting under Item 9, Regulation
FD Disclosure, stated that ATX Communications applauds the
decision on the US District Court in Cleveland upholding its
anti-trust and misrepresentation claims against Ameritech Ohio
and Ameritech's Texas-based parent company, SBC Communications,
Inc.
(iv) Report dated August 14, 2002, reporting under Item 5, Other
Events, ATX Communications, Inc. has demanded millions of dollars
of credits from Verizon and that it will aggressively pursue all
legal remedies for improperly billed charges to which it is
entitled under its interconnection agreement and applicable law.
(v) Report dated of August 14, 2002, reporting under Item 9, ATX
Communications will be filing the CEO and CFO certifications with
respect to the Company's quarterly report for the quarter ended
June 30.
(vi) Report dated August 16, 2002, reporting under Item 9, ATX
Communications issued a press release announcing that it has
received notification from the Nasdaq Listing Qualifications
Panel that its has denied ATX's request for the continued listing
on the Nasdaq National Market and that its common stock will be
delisted at the opening of business on August 16, 2002.
(vii)Report dated August 28, 2002, reporting under Item 5, ATX
Communications issued a press release announcing that it has
entered into a binding agreement with Verizon that satisfies its
alleged obligations regarding Verizon's pending and threatened
litigation in Pennsylvania and New Jersey.
48
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
(viii) Report dated August 28, 2002, reporting under Item 7, ATX
Communications announced that it has entered into a binding
agreement with Verizon that satisfies its alleged obligations
regarding Verizon's pending and threatened litigation in
Pennsylvania and New Jersey. The agreement resolves all of
Verizon's embargo and service termination threats.
No financial statements were filed with these reports.
49
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
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.
ATX COMMUNICATIONS, INC.
Date: November 14, 2002 By: /s/ Michael A. Peterson
---------------------------
Michael A. Peterson
Executive Vice President -
Chief Operating Officer and
Chief Financial Officer
Date: November 14, 2002 By: /s/ Neil Peritz
--------------------------
Neil Peritz
Senior Vice President - Controller
and Treasurer
(Principal Accounting Officer)
50
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Certification of Principal Executive Officer required by SEC Rule 13a-14 (17 CFR
240.13a-14) or Rule 15d-14 (17 CFR 240.15d-14)
I, Thomas J. Gravina, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ATX
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
51
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ Thomas J. Gravina
-------------------------
Thomas J. Gravina
President - Chief Executive Officer
52
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
Certification of Principal Financial Officer required by SEC Rule 13a-14 (17 CFR
240.13a-14) or Rule 15d-14 (17 CFR 240.15d-14)
I, Michael A. Peterson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ATX Communications,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
53
ATX Communications, Inc. (formerly CoreComm Holdco, Inc.)
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 By: /s/ Michael A. Peterson
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Michael A. Peterson
Executive Vice President -
Chief Operating Officer and
Chief Financial Officer
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