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 March 31, 2003
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 incorporation (I.R.S. Employer
or organization) Identification No.)
50 Monument Road, Bala Cynwyd, Pennsylvania 19004
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 668-3000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark whether the registrant is an accelerated filer (As
defined in Rule 12b-2 of the Exchange Act). Yes___ No X
The number of shares outstanding of the issuer's common stock as of March 31,
2003 was 30,000,054.
ATX Communications, Inc.
Index
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2003 (Unaudited) and December 31, 2002 ........................................ 2
Condensed Consolidated Statements of Operations -
Three months ended March 31, 2003 and 2002 (Unaudited) .................................. 3
Condensed Consolidated Statement of Shareholders' Deficiency -
Three months ended March 31, 2003 (Unaudited) ........................................... 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2002 (Unaudited) .................................. 5
Notes to the Condensed Consolidated Financial Statements (Unaudited) ....................... 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition ..................................................... 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................. 30
Item 4. Controls and Procedures..................................................................... 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 32
Item 5. Other Information .......................................................................... 38
Item 6. Exhibits and Reports on Form 8-K ........................................................... 39
SIGNATURES .............................................................................................. 40
CERTIFICATIONS .......................................................................................... 41
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
March 31, 2003 December 31, 2002
-----------------------------------------------
(Unaudited) (See Note)
Assets
Current assets:
Cash and cash equivalents $ 9,815,000 $ 9,959,000
Accounts receivable-trade, less allowance for doubtful
accounts of $8,579,000 (2003) and $8,755,000 (2002) 33,833,000 35,150,000
Due from NTL Incorporated 1,688,000 1,120,000
Other 4,843,000 4,845,000
-----------------------------------------------
Total current assets 50,179,000 51,074,000
Fixed assets, net 35,643,000 37,861,000
Goodwill 79,558,000 79,558,000
Other, net of accumulated amortization of
$2,081,000 (2003) and $1,871,000 (2002) 10,699,000 10,570,000
-----------------------------------------------
$ 176,079,000 $ 179,063,000
===============================================
Liabilities and shareholders' deficiency Current liabilities:
Accounts payable $ 62,329,000 $ 65,799,000
Accrued expenses 58,356,000 53,060,000
Current portion of long-term debt, less unamortized discount 5,906,000 1,512,000
Current portion of capital lease obligations 9,031,000 9,534,000
Deferred revenue 21,211,000 21,928,000
-----------------------------------------------
Total current liabilities 156,833,000 151,833,000
Long-term debt, less unamortized discount 142,292,000 145,809,000
Notes payable to NTL Incorporated, less unamortized discount 18,114,000 17,632,000
Commitments and contingent liabilities
Shareholders' 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 1,030,613,000
Deficit (1,171,338,000) (1,166,389,000)
-----------------------------------------------
(140,425,000) (135,476,000)
Treasury stock at cost, 333,000 (735,000) (735,000)
-----------------------------------------------
(141,160,000) (136,211,000)
-----------------------------------------------
$ 176,079,000 $ 179,063,000
===============================================
Note: The balance sheet at December 31, 2002 has been derived from the audited balance sheet at that date.
See accompanying notes.
2
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended March 31,
2003 2002
--------------------------------------------
Revenues $ 70,959,000 $ 74,311,000
Costs and expenses
Operating 45,960,000 48,038,000
Selling, general and administrative 19,575,000 22,313,000
Corporate 2,097,000 1,698,000
Recapitalization costs -- 1,182,000
Depreciation 3,765,000 8,881,000
Amortization -- 84,000
--------------------------------------------
71,397,000 82,196,000
--------------------------------------------
Operating loss (438,000) (7,885,000)
Other income (expense)
Interest expense and other, net (4,511,000) (3,769,000)
--------------------------------------------
Net loss $ (4,949,000) $ (11,654,000)
============================================
Basic and diluted net loss per common share $ (0.17) $ (0.39)
============================================
Weighted average number of shares 29,667,000 30,000,000
============================================
See accompanying notes.
3
Condensed Consolidated Statement of Shareholders' Deficiency
(Unaudited)
Common Stock Additional Treasury Stock
--------------------------- ------------------------------
Shares Par Paid-In Capital Deficit Shares Amount
------------ -------------- ------------------- ------------------- --------------- --------------
Balance, December 31, 2002 30,000,000 $ 300,000 $ 1,030,613,000 $ (1,166,389,000) 333,000 $ (735,000)
Net loss -- -- -- (4,949,000) -- --
------------ -------------- ------------------- ------------------- --------------- --------------
Balance, March 31, 2003 30,000,000 $ 300,000 $ 1,030,613,000 $ (1,171,338,000) 333,000 $ (735,000)
============ ============== =================== =================== =============== ==============
See accompanying notes.
4
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
2003 2002
------------------------------------------
Net cash provided by operating activities $ 1,530,000 $ 4,544,000
Investing activities
Purchase of fixed assets (1,377,000) (2,405,000)
------------------------------------------
Net cash used in investing activities (1,377,000) (2,405,000)
Financing activities
Principal payments of capital lease obligations (297,000) (264,000)
------------------------------------------
Net cash used in financing activities (297,000) (264,000)
------------------------------------------
Increase (decrease) in cash and cash equivalents (144,000) 1,875,000
Cash and cash equivalents at beginning of period 9,959,000 24,966,000
------------------------------------------
Cash and cash equivalents at end of period $ 9,815,000 $ 26,841,000
==========================================
Supplemental disclosure of cash flow information
Cash paid for interest $ 1,700,000 $ 2,727,000
==========================================
Supplemental schedule of non-cash investing activities
Liabilities incurred to acquire fixed assets $ 170,000 $ 93,000
==========================================
See accompanying notes.
5
ATX Communications, 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 Securities
and Exchange Commission, known as 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 months
ended March 31, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. For further information, refer
to the consolidated financial statements and footnotes thereto included in Item
8 of ATX Communications, Inc.'s annual report on Form 10-K for the year ended
December 31, 2002.
Certain amounts have been reclassified to conform to the 2003 presentation.
Note 2. ATX Recapitalization
In July 2002, ATX Communications, Inc., referred to herein as ATX or the
Company, completed a recapitalization, which began in December 2001. Pursuant to
the terms of the recapitalization, the Company eliminated approximately $600
million of debt and preferred stock and more than $100 million of other
liabilities and future obligations. The Company incurred costs, which consisted
primarily of legal, accounting and printing fees, in connection with the
recapitalization of $1,182,000 during the three months ended March 31, 2002.
Note 3. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Such estimates and assumptions impact, among others, the following: the amount
of uncollectible accounts receivable, the amount to be paid to terminate certain
agreements included in reorganization costs, the amount to be paid to settle
certain toll and interconnection liabilities, the amount to be paid as a result
of certain sales and use tax audits, potential liabilities arising from other
sales tax matters and estimates related to the value of long-lived assets,
goodwill and other intangible assets. Actual results could differ from those
estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.
6
ATX Communications, Inc.
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 3. Significant Accounting Policies (continued)
Contingent Liabilities
The Company's determination of the treatment of contingent liabilities is based
on a view of the expected outcome of the applicable contingency. The Company's
legal counsel is consulted on matters related to litigation. Experts both within
and outside the Company are consulted with respect to other matters that arise
in the ordinary course of business. Examples of matters that are based on
assumptions, judgments and estimates are the amount to be paid to terminate some
agreements included in reorganization costs, the amounts to be paid to settle
some toll and interconnection liabilities, the amount to be paid as a result of
some sales and use tax audits and potential liabilities arising from other sales
tax matters. A liability is accrued if the likelihood of an adverse outcome is
probable of occurrence and the amount is estimable.
Net Loss Per Share
The Company reports its basic and diluted net loss per share in accordance with
Financial Accounting Standards Board, referred to as FASB, Statement of
Financial Accounting Standards, referred to as SFAS, No. 128, "Earnings Per
Share." The weighted average shares used in the computation of net loss per
share reflects the stock split in 2001 on a retroactive basis.
Revenue Recognition and Certain Cost Classifications
Revenues are recognized at the time the service is rendered to the customer or
the performance of the service has been completed. Charges for services that are
billed in advance are deferred and recognized when earned.
Operating costs includes direct costs of sales and network costs. Direct cost of
sales includes the costs directly incurred primarily with other
telecommunications carriers in order to render services to customers. Network
costs include the costs of fiber and access, points of presence, repairs and
maintenance, rent, utilities and property taxes of the telephone, Internet and
data network, as well as salaries and related expenses of network personnel.
7
ATX Communications, Inc.
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 3. Significant Accounting Policies (continued)
Stock-Based Compensation
The Company's employees participate in the ATX stock option plan. ATX applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", known herein as APB Opinion No. 25, and related interpretations.
When applying APB Opinion No. 25, compensation expense for compensatory plans is
measured based on "intrinsic value" (i.e., the excess of the market price of the
stock over the exercise price on the measurement date). Under the intrinsic
value method, compensation is determined on the measurement date; that is, the
first date on which both the number of shares the employee is entitled to
receive and the exercise price, if any, are known. Compensation expense, if any,
generally is recognized over the equity award's vesting period. Compensation
expense associated with awards that immediately are vested or attributable to
past services is recognized when granted.
The following table provides pro forma information regarding net loss as if the
Company had accounted for its employee stock options under the fair value method
pursuant to SFAS No. 123 "Accounting for Stock Based Compensation."
Three Months Ended March 31,
---------------------------------------------
2003 2002
---------------------------------------------
Net loss - as reported $ (4,949,000) $ (11,654,000)
Stock based compensation expenses
Under SFAS No. 123 (901,000) (895,000)
---------------------------------------------
Pro forma net loss $ (5,850,000) $ (12,549,000)
=============================================
Basic and diluted per share information:
Net loss - as reported $ (0.17) $ (0.39)
Stock based compensation expense
Under SFAS No. 123 (0.03) (0.03)
---------------------------------------------
Pro forma net loss per share $ (0.20) $ (0.42)
=============================================
8
ATX Communications, Inc.
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 4. Recent Accounting Pronouncements
In July 2002, the FASB issued Statement of Financial Accounting Standards,
referred to as SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," effective for the Company on January 1, 2003. SFAS 146
addresses the accounting and reporting for costs associated with exit or
disposal activities. The adoption of this new standard did not have a
significant effect on the Company's results of operations, financial condition
or cash flows.
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 adoption of this new standard did not have a significant effect on the
results of operations, financial condition or cash flows of the Company.
Note 5. Revenues
Three Months Ended March 31,
--------------------------------------
2003 2002
--------------------------------------
Local Exchange Services............................... $24,069,000 $26,272,000
Internet, Data and Web-related Services............... 20,962,000 23,444,000
Toll-related Telephony Services....................... 18,031,000 17,689,000
Other (a)............................................. 7,897,000 6,906,000
--------------------------------------
$70,959,000 $74,311,000
=======================================
- --------------------------------
(a) Other includes carrier access billing, reciprocal compensation, wireless,
paging and information services.
Note 6. Fixed Assets
Fixed assets consist of:
March 31, December 31,
-----------------------------------------
2003 2002
-----------------------------------------
Operating equipment..................................................... $30,641,000 $30,204,000
Computer hardware and software.......................................... 7,579,000 6,929,000
Other equipment......................................................... 5,659,000 5,634,000
Construction-in-progress................................................ 772,000 337,000
-----------------------------------------
44,651,000 43,104,000
-----------------------------------------
Accumulated depreciation................................................ (9,008,000) (5,243,000)
-----------------------------------------
$35,643,000 $37,861,000
=========================================
9
ATX Communications, Inc.
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 7. Accrued Expenses
Accrued expenses consist of:
March 31, December 31,
-------------------- ---------------------
2003 2002
-------------------- ---------------------
Toll and interconnect...................................................... $26,475,000 $23,016,000
Taxes, including income taxes.............................................. 11,128,000 11,473,000
Other...................................................................... 7,361,000 6,255,000
Payroll and related........................................................ 6,399,000 5,792,000
Reorganization costs....................................................... 4,165,000 4,542,000
Accrued interest........................................................... 1,911,000 797,000
Professional fees.......................................................... 917,000 1,185,000
-------------------- ---------------------
$58,356,000 $53,060,000
==================== =====================
Note 8. Long-Term Debt
Long-term debt consists of:
March 31, December 31,
------------------------------------------
2003 2002
------------------------------------------
Senior secured credit facility, less unamortized discount of
$9,908,000 (2003) and $10,291,000 (2002)................................ $146,192,000 $145,809,000
6% Convertible Notes, less unamortized discount of $2,352,000 (2003)
$2,846,000 (2002)........................................................ 2,006,000 1,512,000
------------------------------------------
148,198,000 147,321,000
Less current portion.................................................... (5,906,000) (1,512,000)
------------------------------------------
$142,292,000 $145,809,000
==========================================
The Company's consolidated balance sheet includes $4,358,000 aggregate principal
amount of CCL Historical, Inc.'s 6% Convertible Subordinated Notes, which were
included upon the completion of the merger of CCL Historical, Inc., referred to
herein as 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 semi-annual interest payments that
were due under the outstanding notes since April 1, 2002 have not been made and
CCL is in default under these notes. As such, the notes and the accrued interest
thereon are currently due and payable in full. These notes are obligations of
CCL and do not represent obligations of the Company.
10
ATX Communications, Inc.
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 8. Long-Term Debt (continued)
On March 31, 2003, the Company entered into an amendment to its senior secured
credit facility. Under this amendment, the lenders under the facility agreed to
defer interest payments on the outstanding loans during the period beginning
March 12, 2003, and ending on February 2, 2004, during which time the loans will
accrue interest at a rate of 5.5% 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. As of March 31, 2003, this rate was 9.75%. In addition, the required
principal payments originally scheduled for 2003, which totaled $1,950,000, were
deferred to February 2, 2004. The lenders have also agreed to waive and/or amend
certain financial covenants set forth in the credit agreement until January 31,
2004, and added other financial covenants, in order to better reflect the
Company's current operations. The Company incurred deferred financing costs of
$557,000, which consist primarily of legal and consulting fees, in connection
with this amendment. These deferred financing costs will be amortized during the
effective term of this amendment. The current portion of long-term debt includes
principal payments due under the senior secured credit facility within one year.
Note 9. Related Party Transactions
Notes payable to related parties consists of:
March 31, December 31,
------------------ -------------------
2003 2002
------------------ -------------------
10.75% Unsecured Convertible PIK Notes Due April 2011, plus accrued
interest, less unamortized discount of $317,000 (2003) and $327,000
(2002)............................................................. $18,114,000 $17,632,000
================== ===================
Some of the directors of the Company were or are officers or directors of NTL
Incorporated, referred to herein 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. In addition, in April 2001, CCL
issued warrants to NTL, and CCL and the Company entered into a network and
software agreement with NTL. The estimated value of the warrants of $397,000 was
recorded as a debt discount in April 2001.
Until 2002, NTL provided the Company with management, financial, legal and
technical services, access to office space and equipment and use of supplies.
Amounts charged to the Company by NTL consist of salaries and direct costs
allocated to the Company where identifiable, and a percentage of the portion of
NTL's corporate overhead, which could not be specifically allocated to NTL.
Effective January 1, 2001, the percentage used to allocate estimated corporate
overhead was reduced. It is not practicable to determine the amounts of these
expenses that would have been incurred had the Company operated as an
unaffiliated entity. For the three months ended March 31, 2002, NTL charged the
Company $84,000, which is included in corporate expenses.
11
ATX Communications, Inc.
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 9. Related Party Transactions (continued)
A subsidiary of the Company provides billing and software development services
to subsidiaries of NTL. During the third quarter of 2002, the Company began
recording the billings for these services as revenue. The Company recorded
revenues for these billings, totaling $731,000, for the three months ended March
31, 2003. The Company historically recorded these billings as a reduction of
selling, general and administrative expenses. Selling, general and
administrative expenses were reduced by $312,000 for the three months ended
March 31, 2002 for these billings.
In 2001, the Company and NTL entered into a license agreement whereby NTL was
granted an exclusive, irrevocable, perpetual license to use certain billing
software developed by the Company for telephony rating, digital television
events rating, fraud management and other tasks. The Company recorded the $12.8
million received as deferred revenue to be recognized over a period of three
years, which was the estimated amount of time the Company expected to provide
services under this arrangement. The Company recognized $1,068,000 of this
revenue during each of the three months ended March 31, 2003 and 2002.
The Company leases office space and a network facility from entities controlled
by an individual who owns 34% of the outstanding shares of the Company's common
stock. Rent expense for these leases for each of the three months ended March
31, 2003 and 2002 was approximately $450,000.
The Company engaged B/G Enterprises, LLC, a company affiliated with a director
of the Company, to provide travel related services. The cost of these services
totaled $81,000 during the three months ended March 31, 2003.
Notes 10. Reorganization Costs
The Company recorded no reorganization costs in the first quarter of 2003. In
2001, the Company announced that it was taking actions to reorganize, re-size
and reduce operating costs and create greater operating efficiencies. The major
actions involved in the 2001 reorganization included: (1) consolidation of
functions such as network operations, customer service and finance, (2)
initiatives to increase gross margins and (3) agreements with vendors to reduce
or eliminate purchase commitments. Charges for these actions included lease exit
costs and agreement termination charges. All of these actions were completed
during 2002 and the remaining liability is expected to be paid through 2005.
12
ATX Communications, Inc.
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Notes 10. Reorganization Costs (continued)
The following table summarizes the reorganization charges incurred and utilized
during the three months ended March 31, 2003:
Lease
Exit Agreement
Costs Terminations Total
------------------------------------------------
(in thousands)
------------------------------------------------
Balance, December 31, 2002....... $ 1,384 $ 3,158 $ 4,542
Utilized......................... (349) (28) (377)
------------------------------------------------
Balance, March 31, 2003.......... $ 1,035 $ 3,130 $ 4,165
================================================
Note 11. Commitments and Contingent Liabilities
As of March 31, 2003, the Company had purchase commitments of approximately
$2,058,000 outstanding, of which all are due during 2003. Additionally, the
Company had standby letters of credit of approximately $3,696,000 outstanding as
of March 31, 2003, which are fully collateralized by certificates of deposit.
The Company is involved in various disputes, arising in the ordinary course of
its business, which may result in pending or threatened litigation. None of
these matters are expected to have a material adverse effect on the Company's
financial position, results of operations or cash flows. Some of these disputes,
regardless of their merit, could subject the Company to costly litigation and
the diversion of technical and/or management personnel. Additionally, in light
of the Company's ongoing litigation with the local exchange carriers, on which
the Company depends for certain services, from time to time, those carriers have
and will likely continue to threaten service disruptions or terminations. Any
service disruptions or terminations, if actually implemented, could have a
material adverse effect on the Company's business.
Currently, the Company has the following outstanding matters, which if resolved
unfavorably, could have a material adverse effect on the Company:
o On August 12, 2002, Verizon Communications, Inc. and several of its
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, referred to herein as the defendants, seeking
payment of approximately $37 million allegedly owed to Verizon under
various contracts and state and federal law. Verizon also asked the Court
to issue a declaratory ruling that it has not violated the antitrust laws.
13
ATX Communications, Inc.
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 11. 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, the defendants believe the
figure specified in the complaint includes payments that have been made by
the defendants to Verizon (including in excess of $14 million paid soon
after the filing of the complaint), credits that Verizon has issued to the
defendants since the filing of the complaint, and additional disputes 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 against Verizon, including claims seeking
damages for breach of contract and treble damages for violating the
antitrust laws. The defendants have also moved to dismiss Verizon's request
for a declaratory ruling on the antitrust claims, which Verizon has
opposed.
On November 18, 2002, Verizon filed a motion to dismiss defendants'
antitrust counterclaims, relying heavily on a decision by the United States
Court of Appeals for the 7th Circuit in Goldwasser v. Ameritech Corp., 222
F.3d 390 (7th Cir. 2000) dismissing antitrust claims brought on behalf of a
class of consumers who had purchased services from Ameritech in Illinois.
On January 9, 2003, the defendants filed their opposition to Verizon's
motion, noting not only that the Goldwasser case is distinguishable from
the defendants' antitrust claims, but also that the appellate court's
rationale in Goldwasser had been effectively repudiated by the appellate
courts of the 2nd and 11th circuits, as well as by a federal trial court in
the antitrust claim raised by the Company against SBC/Ameritech in the
United States District Court for the Northern District of Ohio.
On March 20, 2003, the Court issued an order denying the parties'
respective motions without prejudice to renew, pending a decision by the
United States Supreme Court in Verizon Communications, Inc. vs. Law Office
of Curtis Trinko, LLP, Supreme Court Docket No. 02-682 (cert. granted March
10, 2002). By order of the Court issued May 6, 2003, the parties have been
directed to proceed with discovery on all issues. The Company and its
subsidiaries intend to pursue all available remedies and counterclaims and
defend themselves vigorously; however, they cannot be certain how or when
these matters will be resolved or the outcome of the litigation.
14
ATX Communications, Inc.
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 11. Commitments and Contingent Liabilities (continued)
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. Verizon has 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. 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 subsequently amended its complaint to specify
a revised claim of $1.1 million. CoreComm Massachusetts ceased offering
local telephone services in Massachusetts in December 2002 and is presently
withdrawing from the market. CoreComm Massachusetts' withdrawal from
providing telephone services in Massachusetts has not had any material
adverse affect on the Company's consolidated business.
o By letter dated April 4, 2003, the Company received a notice from Verizon
claiming that Verizon is owed approximately $8.4 million by one of its
subsidiaries, CoreComm New York, Inc., for services allegedly purchased in
the state of New York, including approximately $5.1 million of charges that
Verizon contends were mistakenly credited to the accounts of CoreComm New
York, Inc. in connection with the acquisition out of bankruptcy of certain
assets of USN Communications, Inc. in May 1999. In response, CoreComm New
York, Inc. has challenged the accuracy of Verizon's figures and has
provided formal written notice that it is disputing Verizon's right to
payment of the amounts specified in Verizon's April 4 letter. CoreComm New
York has identified a number of gaps and errors in the accounting
information provided by Verizon, many of which Verizon has acknowledged.
Although CoreComm New York, Inc. intends to defend itself vigorously and to
pursue all available counterclaims and remedies, it is not presently able
to determine what amount, if any, is properly owed to Verizon or to predict
how these matters will be resolved. The operations of CoreComm New York,
Inc. do not represent a material component of the Company's revenue,
profits or operations.
15
ATX Communications, Inc.
Notes to the Condensed Consolidated Financial Statements (continued)
(Unaudited)
Note 11. Commitments and Contingent Liabilities (continued)
o The Company and CoreComm Newco, Inc., an indirect, wholly-owned subsidiary
of the Company, are currently in litigation with SBC Corp., Ameritech Ohio
and other SBC subsidiaries over various billing and performance issues,
including SBC/Ameritech's alleged violation of the antitrust laws and the
adequacy of SBC/Ameritech's performance under a 1998 contract between
CoreComm Newco and Ameritech Ohio. 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. On October 9, 2001, Ameritech filed an
amended complaint in the United States District Court, Northern District of
Ohio seeking a total of approximately $14.4 million in alleged outstanding
charges.
On December 26, 2001, CoreComm Newco filed its answer to Ameritech's
amended complaint and simultaneously filed three counterclaims against SBC
Corp., Ameritech Ohio and certain of their respective subsidiaries and
affiliates, alleging breach of contract, antitrust violations, and
fraudulent or negligent misrepresentation claims. On July 25, 2002, the
Court issued a decision denying a motion to dismiss from Ameritech and
upholding CoreComm Newco's right to proceed with its antitrust, breach of
contract and misrepresentation claims against all counter-defendants. On
January 21, 2003, CoreComm Newco amended its complaint to include the
Company and other affiliates as additional claimants and to add additional
allegations supporting its claims, and on February 17, 2003, SBC/Ameritech
filed its answer to the amended complaint.
The Company believes that CoreComm Newco has meritorious defenses to
Ameritech's amended complaint that could reduce the amount currently in
dispute. For example, the figure specified in Ameritech's complaint may not
account for various amounts that have been properly disputed by CoreComm
Newco as a result of billing errors and other improper charges, various
refunds that Ameritech contends it has already credited to CoreComm Newco's
accounts since the filing of the complaint, and 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 the Company and CoreComm Newco are
seeking to obtain from SBC/Ameritech under their counterclaims. The Company
and CoreComm Newco intend to pursue all available remedies and to defend
themselves vigorously. However, it is impossible at this time to predict
the outcome of the litigation.
16
Note 11. Commitments and Contingent Liabilities (continued)
o On April 16, 2003, SBC Ohio (formerly known as SBC Ameritech Ohio) filed
with the Public Utilities Commission of Ohio, known as the PUCO, a third
supplement to its application for review of an order entered by a PUCO
Hearing Examiner barring SBC Ohio from refusing to process new service
orders from CoreComm Newco pending the resolution of various billing
disputes at issue between the parties. Among other things, the April 16
supplement contends that the Hearing Examiner's entry provided CoreComm
Newco with a competitive advantage by allowing it to withhold payment on
approximately $8.7 million of alleged undisputed charges for local and
collocation services in Ohio as of March 31, 2003. On May 2, 2003, CoreComm
Newco submitted a reply to the April 16 supplement in which it disputed the
accuracy of SBC Ohio's claims and explained that the outstanding balance of
approximately $1.9 million is consistent with common practice considering
SBC Ohio's billing problems and the numerous payment cycles at issue.
CoreComm Newco has already identified and lodged millions of dollars worth
of billing and performance disputes and is continuing to identify charges
that it believes are not properly owed to SBC Ohio. CoreComm Newco intends
to defend itself vigorously and to pursue all available remedies and
counterclaims. However, it is not possible to predict the outcome of this
matter at this time.
o By letters dated April 23, 2003, and April 25, 2003, SBC/Midwest demanded
payment from certain of the Company's subsidiaries of approximately $9.5
million of alleged undisputed, past due charges for wholesale services
allegedly provided to its operating subsidiaries in Illinois, Michigan,
Indiana and Wisconsin, and threatened to pursue further collection
activities against those entities. The letters regarding Michigan and
Wisconsin requested that the recipients pay into escrow an unspecified sum
for Michigan and approximately $135,240 for Wisconsin in connection with
charges that SBC Midwest contends the Company's subsidiaries have disputed
in those states. In response the Company's subsidiaries have notified SBC
Midwest that they are disputing the accuracy of the figures set forth in
its letters as well as its right to request an escrow deposit to cover
disputed charges, and that they are prepared to engage in further
discussions regarding the various amounts at issue. The Company's
subsidiaries intend to contest any charges that they believe are not
properly owed and to vigorously pursue all claims and defend themselves
against any collections action. However, the Company is not currently able
to predict how or when these matters will be resolved or what amount, if
any, will need to be paid at the time of resolution.
o On December 3, 2001, General Electric Capital Corp., referred to as GECC,
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. Thereafter, on May 1, 2002, the complaint was amended to add the
Company as an additional defendant. Although neither CCL nor the Company
are parties to the agreement between Ascend and MegsINet, the complaint
contends that CCL and/or the Company should be held responsible for
MegsINet's obligations under an "alter ego" theory of liability. CCL and
the Company are contesting this claim and do not believe that the
obligations of MegsINet are obligations of CCL or the Company.
17
Note 11. Commitments and Contingent Liabilities (continued)
Subsequent to filing of its initial complaint, 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. MegsINet has
allowed GECC to take possession of the equipment, which has not had any
material impact on the Company's business or operations. On April 23, 2003,
GECC filed a motion for summary judgment asking the Court to rule in its
favor, without the need for trial, that MegsINet, CCL and the Company
breached their alleged contractual obligations to make required lease
payments to GECC and awarding GECC damages in the amount of $9,100,053 plus
attorneys' fees and interest. MegsINet, CCL and the Company do not believe
that it would be appropriate for the Court to resolve this litigation
through summary judgment as requested by GECC and they 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. MegsINet does not represent a material component of the
Company's revenue, profits or operations. All of the assets of the Company
and its subsidiaries, including those of MegsINet, are subject to a first
priority security interest in favor of the senior lenders under the $156
million senior credit facility.
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. 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. On March 27, 2002, certain of the defendants initiated
litigation against several former principals of MegsINet seeking
indemnification and contribution against KMC's claims for breach of various
representations and warranties made under the merger agreement pursuant to
which MegsINet became a subsidiary of the Company. Defendants have also
initiated coverage under an insurance policy designed to protect against
such claims; the insurance carrier has initially declined coverage and it
may be necessary to pursue litigation to obtain coverage in the event of a
loss under the policy.
18
Note 11. Commitments and Contingent Liabilities (continued)
o On September 24, 2002, GATX Technologies, Inc., known herein 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 allegedly owed under an equipment lease
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. 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 an equipment lease. 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.
o On March 1, 2002, Easton Telecom Services, LLC initiated litigation in the
Northern District of Ohio against CoreComm Internet Group, Inc. seeking
payment of approximately $4.9 million, primarily in respect of alleged
early termination penalties for telecommunications services purportedly
provided under alleged contracts. On August 23, 2002, the Court issued an
order dismissing approximately $4 million of Easton's claims as invalid.
Upon the conclusion of a jury trial that ended on November 8, 2002, Easton
obtained a judgment against CoreComm Internet Group, Inc., Voyager
Information Networks, Inc. and MegsINet in the total amount of $1,085,000.
On February 4, 2003, the defendants filed an appeal in this matter with the
United States Court of Appeals for the Sixth Circuit, and the plaintiff has
filed a cross-appeal. Plaintiff is currently pursuing discovery in aid of
execution on its judgment against defendants. All of the assets of the
Company and its subsidiaries, including those of the defendants, are
subject to a first priority security interest in favor of the senior
lenders under the $156 million senior credit facility.
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 a
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, which has been accrued in the Company's
consolidated financial statements. 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.
19
Note 11. Commitments and Contingent Liabilities (continued)
o On January 3, 2003, the Company and its indirect subsidiary, MegsINet,
Inc., filed a complaint against Broadwing in the U.S. District Court for
the Eastern District of Pennsylvania seeking the return of approximately
$700,000 in taxes billed by Broadwing in alleged violation of two Master
Service Agreements. On February 24, 2003, Broadwing filed a motion to stay
the action pending their request to arbitrate the matter before the
American Arbitration Association. The matter is still pending before the
Court, and plaintiffs intend to pursue their claims vigorously.
o On February 28, 2003, Focal Communications Corp. and certain of its
subsidiaries initiated adversarial proceedings in Focal's Chapter 11 case
under the U.S. Bankruptcy laws against the Company and certain of its
subsidiaries seeking payment of approximately $802,687 in charges for
interstate and intrastate switched access services allegedly provided by
Focal's subsidiaries in Illinois, Pennsylvania, Delaware and New York. The
defendants are currently reviewing Focal's claims and intend to defend
themselves vigorously and pursue all available counterclaims, including
claims for any amounts owed by Focal to any of the defendants. However, it
is not possible at this time to predict how or when this matter will be
resolved.
20
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
Historical, Inc. (formerly named CoreComm Limited, known herein as CCL). As a
result of the recapitalization transactions completed in December 2001 and on
July 1, 2002, CCL has been merged into one of our wholly-owned subsidiaries.
Prior to our recapitalization, CCL operated the same businesses that we
currently operate.
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 and 2002, 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 and install our
products and 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 improved our operating efficiency
through improved pricing terms and the elimination of duplicative or unnecessary
network facilities. We have also 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 our
facilities without substantially affecting our service area by leasing enhanced
extended local loops from the incumbent local exchange carriers.
Three Months Ended March 31, 2003 and 2002
The decrease in revenues to $70,959,000 from $74,311,000 was primarily
attributable to a decrease in local exchange revenues and Internet, data and web
related services offset by an increase in toll-related telephony services and
other revenue.
Operating costs include direct cost of sales, network costs and salaries and
related expenses of network personnel. Operating costs decreased to $45,960,000
from $48,038,000 due to a decrease in costs as a result of optimization of our
network and facilities and reduced headcount.
Selling, general and administrative expenses decreased to $19,575,000 from
$22,313,000 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 our officers and headquarters staff,
operating our headquarters and costs incurred for strategic planning and
evaluation of business opportunities. Corporate expenses increased to $2,097,000
from $1,698,000 due to increased costs incurred for strategic planning and other
corporate activities.
21
In connection with our recapitalization, we incurred costs, which consisted
primarily of legal, accounting and printing fees, of $1,182,000 during the three
months ended March 31, 2002.
Depreciation expense decreased to $3,765,000 from $8,881,000 primarily as a
result of the reduction in the carrying value of our fixed assets during the
fourth quarter of 2002 as determined by a fair value analysis performed in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets.
Amortization expense has been eliminated due to the reduction in the carrying
value of our intangible assets as determined by a fair value analysis performed
on October 1, 2002 in accordance with SFAS No. 144.
Interest expense and other increased to $4,511,000 from $3,769,000 primarily due
to the net effect of an increase in the effective interest rate on our senior
secured credit facility and the amortization of debt discount associated with
CCL's 6% Convertible Subordinated Notes. The effective interest rate on our
senior secured credit facility during the three months ended March 31, 2003 and
2002 was 7.01% and 6.86%, respectively.
Recent Accounting Pronouncements
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." Effective for us on January 1, 2003, SFAS 146
addresses the accounting and reporting for costs associated with exit or
disposal activities. The adoption of this new standard did not have a
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. SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible fixed assets and the associated asset retirement costs. The adoption of
this new standard did not have a significant effect on our results of
operations, financial condition or cash flows.
22
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 2003. 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, forgo business opportunities or take other actions, which could
adversely affect our business, results of operations and financial condition. In
addition, we are also involved in litigation, which if resolved unfavorably to
us, could have a material adverse effect on our business, financial condition
and results of operations, including our ability to fund our operations.
As of March 31, 2003, we had long-term debt, which consisted of a $156.1 million
senior secured credit facility, approximately $18.4 million in principal amount
of 10.75% Unsecured Convertible PIK Notes due 2011 and approximately $9.0
million of capital leases. In addition, as of March 31, 2003, CCL had $4.4
million of 6% Convertible Subordinated Notes outstanding.
On March 31, 2003, we entered into an amendment to our senior secured credit
facility. Under this amendment, the lenders under the facility agreed to defer
interest payments on the outstanding loans during the period beginning March 12,
2003 and ending on February 2, 2004, during which time the loans are accruing
interest at prime plus 5.5% (9.75% at March 31, 2003). In addition, the required
principal payments originally scheduled for 2003, which totaled $1.95 million,
were deferred until February 2, 2004. The lenders have also agreed to waive
and/or amend certain financial covenants set forth in the credit agreement until
February 2, 2004, and also added other financial and operating covenants during
2003, in order to better reflect our current operations. As of March 31, 2003,
we are in compliance with all of the required ratios and covenants contained in
our agreement. We intend to utilize the increased liquidity afforded by the
amendment to invest in several areas of our core operations. In addition, during
this period, we intend to seek and consider strategic alternatives in order to
reduce our overall indebtedness, including amounts under the senior secured
credit facility. Such strategic alternatives may include, among other things,
debt or equity financings or refinancings, recapitalizations, restructurings,
mergers and acquisitions or other transactions. It is likely that any of such
transactions, if implemented, would result in material dilution to common
stockholders.
Although the amendment has been designed to provide us with significant relief
from cash obligations under the senior secured credit facility until February 2,
2004, there can be no assurance that the financial and other covenants under the
facility will continue to be met or that we will be successful in identifying or
implementing one or more strategic alternatives to reduce our indebtedness. In
addition, based on our current business plan, we do not expect that we will have
the cash available to fund the required deferred interest and principal payments
on or before February 2, 2004, the date on which such payments become due.
Accordingly, there can be no assurance that there will not be an event of
default under the credit facility at that time, or that we will be able to enter
into additional amendments to the senior secured credit facility by that time.
23
Taking the amendment into effect, debt service on the senior secured credit
facility includes approximately $1.7 million in cash interest expense paid or to
be paid in 2003, $23.0 million due in 2004 and $8.6 million due in 2005, on an
annualized basis, based on current interest rates, as well as quarterly
amortization and principal reductions which total $0 in 2003, $11.7 million in
2004, and $25.4 million in 2005. The 10.75% Unsecured Convertible PIK Notes due
2011 have no cash interest payments, and are not due until 2011. As of March 31,
2003, our current liabilities exceed our current assets by approximately $107
million.
Under our current business plan, capital expenditures have been significantly
reduced from prior levels. Total actual capital expenditures for the three
months ended March 31, 2003, described as cash used to purchase fixed assets in
our cash flow statement, were approximately $1.4 million. According to our
current plans, capital expenditures are expected to be approximately $7.5
million during the remainder of 2003, $8.9 million in 2004, and $10.2 million in
2005. 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.
For the first three months of 2003, net cash provided by operations was
approximately $1.5 million. If we are unable to continue to generate cash from
operations and/or raise additional financing, it 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.
Our capital requirements in 2003 and thereafter will depend on the success of
the continued 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 will not
generate sufficient cash flow from operations to repay at maturity the entire
principal amount of our outstanding indebtedness. In addition, based on our
current business plan, we do not expect that we will have the cash available to
fund the required deferred interest and principal payments on or before February
2, 2004, the date on which such payments become due. In addition, we anticipate
that we may be required to raise additional capital in the future in order to
fund the capital expenditures and other working capital requirements that exceed
net cash provided by operating activities.
24
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 or (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.
In addition, 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 11 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;
(d) 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;
(e) we will be able to refinance our indebtedness as it comes due;
(f) we will be able to sell our assets or businesses (the net proceeds
from a sale may be required to be used to repay certain indebtedness);
(g) we will not be adversely affected by interest rate fluctuations; or
(h) we will be able to access the cash flow of our subsidiaries.
25
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 2005.
Nine Months Ended For the Year Ended
December 31, December 31,
----------------------------------------
2003 2004 2005 Source of Funds
--------------------------------------------------------------------------------------
(in millions)
Cash interest expense on $ 0.5 $ 23.3 $ 8.9 For 2003: cash and cash equivalents on hand
existing long-term debt (1) and cash from operations; for 2004 and
2005: cash and cash equivalents on hand,
cash from operations and, if required,
refinancing or other sources of financing
(4)
Estimated capital 7.5 8.9 10.2 Cash and cash equivalents on hand and cash
expenditures (2) from operations
Principal payments on existing - 25.4 Cash and cash equivalents on hand, cash
long-term debt (3) 11.7 from operations and, if required,
refinancing or other sources of financing
(4)
Payments on Capital Leases 9.0 - - Approximately $8.1 million of these capital
leases are obligations of our subsidiary
MegsINet Internet, Inc. and are not our
obligations. The source of funds for the
remaining amounts: cash and cash
equivalents on hand and cash from
operations (5)
----------------------------------------
$ 17.0 $ 43.9 $ 44.5
========================================
(1) During the remainder of 2003, the only long-term debt that requires cash
interest expense is CCL's $4.4 million 6% Convertible Subordinated Notes.
(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 during these years.
(3) Principal payments indicated are principal reductions under our senior
secured credit facility. The 2003 amount excludes the outstanding $4.4
million 6% Convertible Subordinated Notes due 2006 of CCL. CCL is in
default on these notes.
(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 Internet, Inc. are the subject of current litigation, as
described in Part II, Item I of this Quarterly Report on Form 10-Q entitled
"Legal Proceedings."
26
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 quarterly report, we can give no assurance that our plans, intentions
and expectations will be achieved in a timely manner if at all.
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.
Contractual Obligations and Commercial Commitments
Our contractual obligations and commercial commitments are summarized below, and
are fully disclosed in the Notes to the Condensed Consolidated Financial
Statements.
The following table includes aggregate information about our contractual
obligations as of March 31, 2003 and the periods in which payments are due:
Payments Due by Period
-----------------------------------------------------------------
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
- ---------------------------------------------------- -----------------------------------------------------------------
(in thousands)
Long-Term Debt (1) $ 178,889 $ 8,258 $ 46,800 $ 85,800 $ 38,031
Capital Lease Obligations 9,031 9,031 - - -
Operating Lease Obligations 25,549 7,246 8,845 6,114 3,344
Unconditional Purchase Obligations - - - - -
Other Long-Term Obligations.... - - - - -
------------- ------------ ----------- ------------ -------------
Total Contractual Cash Obligations $ 213,469 $ 24,535 $ 55,645 $ 91,914 $ 41,375
============= ============ =========== ============ =============
(1) Long-term debt includes the senior secured credit facility of $156,100,000,
10.75% Unsecured Convertible PIK Notes due April 2011 of $18,431,000,
including accrued PIK interest, and CCL's 6% Convertible Subordinated Notes
due 2006 of $4,358,000. The Convertible Subordinated Notes due 2006 of
$4,358,000 have been reflected as due in less than one year because CCL is
currently in default of this obligation.
27
The following table includes aggregate information about our commercial
commitments as of March 31, 2003 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
----------------------------------------------------------------
Less than 1 - 3 4 - 5 Over 5
Other Commercial Commitments Total 1 Year Years Years Years
- ----------------------------------------------------- ----------------------------------------------------------------
(in thousands)
Guarantees $ - $ - $ - $ - $ -
Lines of Credit - - - - -
Standby Letters of Credit 3,696 3,696 - - -
Standby Repurchase Obligations - - - - -
Other Commercial Commitments 2,058 2,058 - - -
------------- ------------ ------------ ----------- ------------
Total Commercial Commitments $ 5,754 $ 5,754 $ - $ - $ -
============= ============ ============ =========== ============
Consolidated Statement of Cash Flows
For the three months ended March 31, 2003, cash provided by operating activities
was $1,530,000 in comparison to cash provided by operating activities of
$4,544,000 for the three months ended March 31, 2002. The change in cash
provided by operating activities is primarily due to changes in our operating
assets and liabilities.
For the three months ended March 31, 2003, cash used to purchase fixed assets
decreased to $1,377,000 from $2,405,000 for the three months ended March 31,
2002, reflecting decreased purchases of operating equipment.
28
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, Inc. and its subsidiaries
and affiliates. These 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 these forward-looking statements.
These 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 or any future litigation with
Verizon and SBC/Ameritech; 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.
We encourage you to review the risk factors relating to our business and our
industry set forth in Item 1 of our Annual Report on Form 10-K for the year
ended December 31, 2002.
29
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
The SEC's rule relating 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 March 31, 2003
Principal Amount by Expected Maturity
Average Interest Rate
April 1, 2003
to
December 31, For the Years Ending December 31,
----------------------------------------------------------- Fair
2003 2004 2005 2006 2007 Thereafter Total Value
---------------------------------------------------------------------------------------------
Long-term debt,
including current
portion:
Fixed rate $ 4,358 $-- $-- $-- $-- $47,525(a) $51,883 $20,437
Average interest rate 6.00% 10.75%
Variable rate $-- $11,700 $25,350 $50,700 $39,000 $29,350 $156,100 $156,100
Average interest rate
Base rate Libor + Libor + Libor + Libor + Libor +
+ 5.5%(b) 4.5% or 4.5% or 4.5% or 4.5% or 4.5% or
base rate base rate base rate Base rate base rate
+ 3.5%(b) + 3.5% + 3.5% + 3.5% + 3.5%
(a) Represents the value at maturity of 10.75% Unsecured Convertible PIK Notes
due April 2011.
(b) On March 31, 2003, we entered into an amendment to our senior secured
credit facility. Under this amendment, the lenders under the facility
agreed to defer interest payments on the outstanding loans during the
period beginning March 12, 2003 and ending on February 2, 2004, during
which time the loans will accrue interest at the base rate plus 5.5%.
30
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.
31
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Through our various operating subsidiaries, we purchase goods and services from
a wide variety of vendors under contractual and other arrangements that
sometimes give rise to litigation in the ordinary course of business. Our
subsidiaries also provide 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 us
to costly litigation and the diversion of technical and/or management personnel.
Additionally, in light of our ongoing litigation with the local exchange
carriers, on which we depend for certain services, from time to time, those
carriers have and will likely continue to threaten service disruptions or
terminations. Any service disruptions or terminations, if actually implemented,
could have a material adverse effect on our business. Additionally, liabilities
from litigation that are not covered by insurance or that exceed such coverage
could have a material adverse effect on our business, financial condition and/or
operating results.
Currently, we have the following outstanding matters, which if resolved
unfavorably to us, could have a material adverse effect on us:
o On August 12, 2002, Verizon Communications, Inc. and several of its
subsidiaries filed a complaint in the United States District Court for the
District of Delaware against us and several of our indirect wholly-owned
subsidiaries, referred to herein as the defendants, seeking payment of
approximately $37 million allegedly owed to Verizon under various contracts
and 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, the defendants believe the
figure specified in the complaint includes payments that have been made by
the defendants to Verizon (including in excess of $14 million paid soon
after the filing of the complaint), credits that Verizon has issued to the
defendants since the filing of the complaint, and additional disputes 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 against Verizon, including claims seeking
damages for breach of contract and treble damages for violating the
antitrust laws. The defendants have also moved to dismiss Verizon's request
for a declaratory ruling on the antitrust claims, which Verizon has
opposed.
32
On November 18, 2002, Verizon filed a motion to dismiss defendants'
antitrust counterclaims, relying heavily on a decision by the United States
Court of Appeals for the 7th Circuit in Goldwasser v. Ameritech Corp., 222
F.3d 390 (7th Cir. 2000) dismissing antitrust claims brought on behalf of a
class of consumers who had purchased services from Ameritech in Illinois.
On January 9, 2003, the defendants filed their opposition to Verizon's
motion, noting not only that the Goldwasser case is distinguishable from
the defendants' antitrust claims, but also that the appellate court's
rationale in Goldwasser had been effectively repudiated by the appellate
courts of the 2nd and 11th circuits, as well as by a federal trial court in
the antitrust claim raised by us against SBC/Ameritech in the United States
District Court for the Northern District of Ohio.
On March 20, 2003, the Court issued an order denying the parties'
respective motions without prejudice to renew, pending a decision by the
United States Supreme Court in Verizon Communications, Inc. vs. Law Office
of Curtis Trinko, LLP, Supreme Court Docket No. 02-682 (cert. granted March
10, 2002). By order of the Court issued May 6, 2003, the parties have been
directed to proceed with discovery on all issues. We and our subsidiaries
intend to pursue all available remedies and counterclaims and defend
ourselves vigorously; however, we and our subsidiaries 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 ours, 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. Verizon has 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. 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 subsequently amended its complaint to specify
a revised claim of $1.1 million. CoreComm Massachusetts ceased offering
local telephone services in Massachusetts in December 2002 and is presently
withdrawing from the market. CoreComm Massachusetts' withdrawal from
providing telephone services in Massachusetts has not had any material
adverse affect on our consolidated business.
33
o By letter dated April 4, 2003, we received a notice from Verizon claiming
that Verizon is owed approximately $8.4 million by one of our subsidiaries,
CoreComm New York, Inc., for services allegedly purchased in the state of
New York, including approximately $5.1 million of charges that Verizon
contends were mistakenly credited to the accounts of CoreComm New York,
Inc. in connection with the acquisition out of bankruptcy of certain assets
of USN Communications, Inc. in May 1999. In response, CoreComm New York,
Inc. has challenged the accuracy of Verizon's figures and has provided
formal written notice that it is disputing Verizon's right to payment of
the amounts specified in Verizon's April 4 letter. CoreComm New York has
identified a number of gaps and errors in the accounting information
provided by Verizon, many of which Verizon has acknowledged. Although
CoreComm New York, Inc. intends to defend itself vigorously and to pursue
all available counterclaims and remedies, it is not presently able to
determine what amount, if any, is properly owed to Verizon or to predict
how these matters will be resolved. The operations of CoreComm New York,
Inc. do not represent a material component of our revenue, profits or
operations.
o We and CoreComm Newco, Inc., an indirect, wholly-owned subsidiary of ours,
are currently in litigation with SBC Corp., Ameritech Ohio and other SBC
subsidiaries over various billing and performance issues, including
SBC/Ameritech's alleged violation of the antitrust laws and the adequacy of
SBC/Ameritech's performance under a 1998 contract between CoreComm Newco
and Ameritech Ohio. 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. On October 9, 2001, Ameritech filed an
amended complaint in the United States District Court, Northern District of
Ohio seeking a total of approximately $14.4 million in alleged outstanding
charges.
On December 26, 2001, CoreComm Newco filed its answer to Ameritech's
amended complaint and simultaneously filed three counterclaims against SBC
Corp., Ameritech Ohio and certain of their respective subsidiaries and
affiliates, alleging breach of contract, antitrust violations, and
fraudulent or negligent misrepresentation claims. On July 25, 2002, the
district Court issued a decision denying a motion to dismiss from Ameritech
and upholding CoreComm Newco's right to proceed with its antitrust, breach
of contract and misrepresentation claims against all counter-defendants. On
January 21, 2003, CoreComm Newco amended its complaint to include the
Company and other affiliates as additional claimants and to add additional
allegations supporting its claims, and on February 17, 2003, SBC/Ameritech
filed its answer to the amended complaint.
34
We believe that CoreComm Newco has meritorious defenses to Ameritech's
amended complaint that could reduce the amount currently in dispute. For
example, the figure specified in Ameritech's complaint may not account for
various amounts that have been properly disputed by CoreComm Newco as a
result of billing errors and other improper charges, various refunds that
Ameritech contends it has already credited to CoreComm Newco's accounts
since the filing of the complaint, and payments that were made by CoreComm
Newco in the ordinary course after the time of Ameritech's submission.
However, we cannot be certain how or when the matter will be resolved. We
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 and we are seeking to obtain from SBC/Ameritech under
their counterclaims. CoreComm Newco and we intend to pursue all available
remedies and to defend themselves vigorously. However, it is impossible at
this time to predict the outcome of the litigation.
o On April 16, 2003, SBC Ohio (formerly known as SBC Ameritech Ohio) filed
with the Public Utilities Commission of Ohio, known as the PUCO, a third
supplement to its application for review of an order entered by a PUCO
Hearing Examiner barring SBC Ohio from refusing to process new service
orders from CoreComm Newco pending the resolution of various billing
disputes at issue between the parties. Among other things, the April 16
supplement contends that the Hearing Examiner's entry provided CoreComm
Newco with a competitive advantage by allowing it to withhold payment on
approximately $8.7 million of alleged undisputed charges for local and
collocation services in Ohio as of March 31, 2003. On May 2, 2003, CoreComm
Newco submitted a reply to the April 16 supplement in which it disputed the
accuracy of SBC Ohio's claims and explained that the outstanding balance of
approximately $1.9 million is consistent with common practice considering
SBC Ohio's billing problems and the numerous payment cycles at issue.
CoreComm Newco has already identified and lodged millions of dollars worth
of billing and performance disputes and is continuing to identify charges
that it believes are not properly owed to SBC Ohio. CoreComm Newco intends
to defend itself vigorously and to pursue all available remedies and
counterclaims. However, it is not possible to predict the outcome of this
matter at this time.
35
By letters dated April 23, 2003, and April 25, 2003, SBC/Midwest demanded
payment from certain of the Company's subsidiaries approximately $9.5
million of alleged undisputed, past due charges for wholesale services
allegedly provided to our operating subsidiaries in Illinois, Michigan,
Indiana and Wisconsin, and threatened to pursue further collection
activities against those entities. The letters regarding Michigan and
Wisconsin requested that the recipients pay into escrow an unspecified sum
for Michigan and approximately $135,240 for Wisconsin in connection with
charges that SBC Midwest contends our subsidiaries have disputed in those
states. In response, our subsidiaries notified SBC Midwest that they are
disputing the accuracy of the figures set forth in its letters as well as
its right to request an escrow deposit to cover disputed charges, and that
they are prepared to engage in further discussions regarding the various
amounts at issue. Our subsidiaries intend to contest any charges that they
believe are not properly owed and to vigorously pursue all claims and
defend themselves against any collections action. However, we are not
currently able to predict how or when these matters will be resolved or
what amount, if any, will need to be paid at the time of resolution.
o On December 3, 2001, General Electric Capital Corp., referred to as GECC,
filed a civil lawsuit in the Circuit Court of Cook County, Illinois against
CCL and MegsINet, Inc., an indirect subsidiary of ours, seeking
approximately $8 million in allegedly past due amounts and the return of
equipment under a capital equipment lease agreement between Ascend and
MegsINet. Thereafter, on May 1, 2002, the complaint was amended to add us
as an additional defendant. Although neither CCL nor we are parties to the
agreement between Ascend and MegsINet, the complaint contends that CCL
and/or we should be held responsible for MegsINet's obligations under an
"alter ego" theory of liability. CCL and we are contesting this claim and
do not believe that the obligations of MegsINet are obligations of CCL or
us.
Subsequent to the filing of its initial complaint, GECC filed a second
complaint in the Circuit Court of Cook County, Illinois against MegsINet,
CCL and us 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. MegsINet has
allowed GECC to take possession of the equipment, which has not had any
material impact on our business or operations. On April 23, 2003, GECC
filed a motion for summary judgment asking the Court to rule in its favor,
without the need for trial, that MegsINet, CCL and ATX breached their
alleged contractual obligations to make required lease payments to GECC and
awarding GECC damages in the amount of $9,100,053 plus attorneys' fees and
interest. MegsINet, CCL and us do not believe that it would be appropriate
for the court to resolve this litigation through summary judgment as
requested by GECC and they 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. MegsINet does not represent
a material component of our revenue, profits or operations. All of our
assets and those of our subsidiaries, including those of MegsINet, are
subject to a first priority security interest in favor the senior lenders
under the $156 million Senior Credit Facility.
36
o On May 25, 2001, KMC Telecom, Inc. and some of our 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. 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. On March 27, 2002, certain of the defendants initiated
litigation against several former principals of MegsINet seeking
indemnification and contribution against KMC's claims for breach of various
representations and warranties made under the merger agreement pursuant to
which MegsINet became a subsidiary of ours. Defendants have also initiated
coverage under an insurance policy designed to protect against such claims;
the insurance carrier has initially declined coverage and it may be
necessary to pursue litigation to obtain coverage in the event of a loss
under the policy.
o On September 24, 2002, GATX Technologies, Inc., known herein as GATX, filed
an action in the Thirteenth Judicial Circuit in Florida against
CoreComm-Voyager, Inc., an indirect wholly-owned subsidiary of ours,
seeking recovery of amounts allegedly owed under an equipment lease
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. 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 an equipment lease. 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.
o On March 1, 2002, Easton Telecom Services, LLC initiated litigation in the
Northern District of Ohio against CoreComm Internet Group, Inc. seeking
payment of approximately $4.9 million, primarily in respect of alleged
early termination penalties for telecommunications services purportedly
provided under alleged contracts. On August 23, 2002, the Court issued an
order dismissing approximately $4 million of Easton's claims as invalid.
Upon the conclusion of a jury trial that ended on November 8, 2002, Easton
obtained a judgment against CoreComm Internet Group, Inc., Voyager
Information Networks, Inc. and MegsINet in the total amount of $1,085,000.
On February 4, 2003, the defendants filed an appeal in this matter with the
United States Court of Appeals for the Sixth Circuit, and the plaintiff has
filed a cross-appeal. Plaintiff is currently pursuing discovery in aid of
execution on its judgment against defendants. All of our assets and those
of our subsidiaries, including those of the defendants, are subject to a
first priority security interest in favor of the senior lenders under the
$156 million senior credit facility.
37
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 a
petition for review of a decision by a lower administrative authority
relating to our alleged liability for sales and use tax for the period
September 1, 1997 through July 31, 2000. Pursuant to the June 7 order, we
have been assessed sales and use tax for the period at issue in the amount
of $631,429, which has been accrued in our consolidated financial
statements. On July 8, 2002, we filed a petition for review of the board's
order in the Commonwealth Court of Pennsylvania seeking a further reduction
of the assessment. We believe that we have meritorious defenses and that
the assessment should be reduced; however it is not possible to predict how
this matter will be resolved
o On January 3, 2003, we and our indirect subsidiary, MegsINet, Inc., filed a
complaint against Broadwing in the U.S. District Court for the Eastern
District of Pennsylvania seeking the return of approximately $700,000 in
taxes billed by Broadwing in alleged violation of two Master Service
Agreements. On February 24, 2003, Broadwing filed a motion to stay the
action pending their request to arbitrate the matter before the American
Arbitration Association. The matter is still pending before the Court, and
plaintiffs intend to pursue their claims vigorously.
o On February 28, 2003, Focal Communications Corp. and certain of its
subsidiaries initiated adversarial proceedings in Focal's Chapter 11 case
under the U.S. Bankruptcy laws against us and certain of our subsidiaries
seeking payment of approximately $802,687 in charges for interstate and
intrastate switched access services allegedly provided by Focal's
subsidiaries in Illinois, Pennsylvania, Delaware and New York. The
defendants are currently reviewing Focal's claims and intend to defend
themselves vigorously and pursue all available counterclaims, including
claims for any amounts owed by Focal to any of the defendants. However, it
is not possible at this time to predict how or when this matter will be
resolved.
ITEM 5. OTHER INFORMATION
On May 13, 2003, the Board of Directors approved an Amended and Restated Charter
of the Audit Committee of the Board of Directors which is attached hereto as
Exhibit 99.2.
38
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certification dated May 13, 2003 pursuant to 18 U.S.C. Section 1350 of
CEO and CFO pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Thomas J. Gravina,
Chief Executive Officer, and Michael A. Peterson, Executive Vice
President, Chief Operating Officer and Chief Financial Officer
99.2 Amended and Restated Charter of the Audit Committee
(b) Reports on Form 8-K.
During the quarter ended March 31, 2003, ATX Communications filed the
following reports on Form 8-K:
(i) Report dated March 14, 2003, reporting under Item 5, Other
Events, that ATX Communications, Inc. and the lenders under ATX
Communications, Inc.'s senior credit facility are currently in
discussions regarding modifications to the senior credit facility
that would provide ATX Communications, Inc. increased liquidity
to invest in its operations.
(ii) Report dated March 31, 2003, reporting under Item 5, Other
Events, that ATX Communications, Inc. and its subsidiaries
entered into a Fourth Amendment and Waiver to its Credit
Agreement dated as of September 28, 2000, as amended and restated
as of April 11, 2001, and amended by the First Amendment dated as
of October 31, 2001, the Second Amendment dated as of December
14, 2001 and the Third Amendment dated as of March 29, 2002,
among CCL Historical, Inc., formerly named CoreComm Limited, ATX
Communications, Inc. CoreComm Communications, Inc., the lenders
party thereto and the administrative agent and collateral agent
party thereto.
No financial statements were filed with these reports.
39
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: May 13, 2003 By: /s/ Michael A. Peterson
-----------------------------------
Michael A. Peterson
Executive Vice President -
Chief Operating Officer and
Chief Financial Officer
Date: May 13, 2003 By: /s/ Neil Peritz
-----------------------------
Neil Peritz
Senior Vice President - Controller and Treasurer
(Principal Accounting Officer)
40
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
41
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: May 13, 2003 By: /s/ Thomas J. Gravina
-----------------------------
Thomas J. Gravina
President - Chief Executive Officer
42
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
43
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: May 13, 2003 By: /s/ Michael A. Peterson
------------------------------
Michael A. Peterson
Executive Vice President -
Chief Operating Officer and
Chief Financial Officer
44