Form 8-K for CHOICE ONE COMMUNICATIONS INC
12-Nov-2004
Bankruptcy or Receivership, Sale of Equity, Material Modifications,
ITEM 1.03 BANKRUPTCY OR RECEIVERSHIP.
As previously disclosed, on October 5, 2004, Choice One Communications Inc. (the "Company") and each of its direct and indirect subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Debtors continued to operate their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.
On November 9, 2004, the Bankruptcy Court entered an order (the "Confirmation Order") (i) approving the Disclosure Statement (the "Disclosure Statement") relating to the Debtors' pre-packaged chapter 11 plan of reorganization (the "Plan") and (ii) confirming the Plan. The Disclosure Statement was attached as Exhibit 99.1 to the Company's Current Report on Form 8-K filed on September 15, 2004. A copy of the Confirmation Order, with a copy of the Plan as confirmed attached thereto, is attached hereto as Exhibit 2.1 and is incorporated herein by reference.
The following is a summary of the matters to occur pursuant to the Plan. This summary only highlights certain of the substantive provisions of the Plan and is not intended to be a complete description of, or a substitute for a full and complete reading of, the Plan. This summary is qualified in its entirety by reference to the full text of the Plan.
The Plan provides for a financial restructuring (the "Restructuring") of the Company's senior and subordinated indebtedness. The Restructuring involves a significant reduction of the Company's outstanding indebtedness and a conversion of the balance of such indebtedness into 100% of the Company's equity. Pursuant to the Plan, (i) the holders of the Company's senior indebtedness under its senior credit facility in the aggregate amount of approximately $404 million will receive new senior secured notes in the aggregate principal amount of $175 million and 90% of the Company's common stock to be issued upon consummation of the Plan, (ii) the holders of the Company's subordinated notes in the aggregate amount of approximately $252 million will receive 10% of the common stock of the Company to be issued upon consummation of the Plan and warrants (the "Warrants") to acquire additional shares of the common stock of the Company, and (iii) the currently outstanding shares of the Company's common and preferred stock will be cancelled without any distribution to be made to the holders of such shares. The Warrants will expire after seven years and will be issued in two series, one for 657,567 shares of the Company's common stock at an exercise price of $13.50 per share, and the other for 2,401,592 shares of the Company's common stock at an exercise price of $20.00 per share. The common stock, Warrants and shares of common stock to be issued upon exercise of the Warrants are exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 1145 of the Bankruptcy Code.
The equity securities of the Company to be outstanding as of the effective date of the Plan will be only those securities issued under the Plan, which will consist of
20,000,000 shares of common stock. In addition, 3,059,159 shares of common stock will be reserved for issuance upon exercise of the Warrants and 1,261,329 shares of common stock will be reserved for issuance as restricted stock or upon the exercise of options pursuant to a new management equity incentive plan.
The Plan provides that other general unsecured claims will be unimpaired. Administrative expense claims and priority claims will be paid in full.
Information regarding the assets and liabilities of the Debtors is contained in the Disclosure Statement.
Although the Bankruptcy Court entered the Confirmation Order on November 9, 2004, the Plan is not yet effective. The Plan provides that it will become effective upon the satisfaction or waiver of certain conditions precedent, including the (i) receipt of all requisite regulatory approvals and
(ii) execution and delivery by the parties thereto of all agreements, instruments or other documents necessary to implement the terms and provisions of the Plan, including, among others, the new credit agreement to be entered into by the Debtors, which will provide for a new $30 million revolving credit facility. The terms of the new credit agreement have been fully negotiated and documented and the Company has a commitment from lenders to provide the new revolving credit facility. The Company anticipates that the effective date of the Plan will occur on or about November 18, 2004.
Following consummation of the Plan, the Company will be filing a Form 15 with the Securities and Exchange Commission to withdraw the registration of its common stock under the Securities Exchange Act of 1934, as amended.
ITEM 3.02. UNREGISTERED SALES OF EQUITY SECURITIES.
The information provided in Item 1.03 of this Current Report on Form 8-K is incorporated by reference into this Item 3.02.
ITEM 3.03. MATERIAL MODIFICATION TO RIGHTS OF SECURITY HOLDERS.
The information provided in Item 1.03 of this Current Report on Form 8-K is incorporated by reference into this Item 3.03.
ITEM 5.01. CHANGES IN CONTROL OF REGISTRANT.
The information provided in Item 1.03 of this Current Report on Form 8-K is incorporated by reference into this Item 5.01.
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
2.1 Order of the Bankruptcy Court, dated November 9, 2004, confirming the Debtors' Joint Plan of Reorganization, together with such Joint Plan of Reorganization, as so confirmed.
____________________________________________________________________
ROCHESTER, N.Y.--(BUSINESS WIRE)--Nov. 10, 2004--Choice One Communications (OTCBB: CWON - News):
* Company expected to successfully emerge from "prepackaged" chapter 11 proceedings on or about November 18, 2004
* Company to exit chapter 11 with $30 million of new financing
* Restructuring will reduce Choice One's debt from over $1 billion to approximately $205 million, strengthen its balance sheet, and increase its liquidity
* Company's client base has continued to grow and normal operations have continued without interruption throughout the chapter 11 proceeding
* Reduced debt, new financing, and continued growth from operations enable company to remain a premier telecommunications provider
Choice One Communications (OTCBB: CWON - News), an Integrated Communications Provider offering facilities-based voice and data telecommunications services, including Internet solutions, to clients in 29 Northeast and Midwest markets, today announced that the U.S. Bankruptcy Court for the Southern District of New York has approved its "prepackaged" financial restructuring plan, which when consummated will substantially reduce the Company's debt, strengthen its balance sheet, and increase its liquidity. As a result, Choice One anticipates that its Plan of Reorganization will become effective and the Company will emerge from its chapter 11 proceedings on or about November 18, 2004.
Reflecting the fundamental strength of its operations and its future growth and earnings potential, Choice One's Plan of Reorganization was accepted by 100% of its lenders prior to the Company's voluntary chapter 11 filing on October 5, 2004. Under the Plan of Reorganization, which was confirmed by the Court following a hearing on November 8, Choice One will (i) convert approximately $404 million of outstanding senior debt into $175 million of new senior secured term notes with a six-year term and 90% of the common stock of the reorganized Company; (ii) convert approximately $252 million of outstanding subordinated debt into the other 10% of such common stock and into two series of seven-year warrants to purchase additional shares of common stock from the reorganized Company; and (iii) upon completion of the restructuring, obtain a revolving credit facility of $30 million from a subset of its existing lenders to provide for ongoing working capital requirements.
"We are pleased that the Court has confirmed our Plan of Reorganization, an important milestone that keeps us on track to execute our 'prepackaged' financial restructuring as planned in less than 45 days from start to finish," said Steve Dubnik, Chairman and Chief Executive Officer. "I am excited to report that our business has continued to grow during this time and we are grateful to our colleagues, clients, lenders and suppliers, whose support has allowed us to move through the reorganization process very quickly, efficiently and effectively. Our ability to achieve such a significant financial restructuring in less than two months is virtually unprecedented in our industry and will leave Choice One well positioned to capitalize on future growth opportunities."
Dubnik concluded that, "Successful completion of this process greatly enhances our ability to remain a premier provider of telecommunications services, to continue to provide great service to our clients, and to grow our business, now and in the future."
About Choice One Communications
Headquartered in Rochester, New York, Choice One Communications Inc. (OTCBB: CWON - News) is a leading integrated communications provider offering voice and data services including Internet solutions, to businesses in 29 metropolitan areas (markets) across 12 Northeast and Midwest states. Choice One reported $323 million of revenue in 2003, has more than 100,000 clients and employs approximately 1,200 colleagues.
Choice One's markets include: Hartford and New Haven, Connecticut; Rockford, Illinois; Bloomington/Evansville, Fort Wayne, Indianapolis, South Bend/Elkhart, Indiana; Springfield and Worcester, Massachusetts; Portland/Augusta, Maine; Grand Rapids and Kalamazoo, Michigan; Manchester/Portsmouth, New Hampshire; Albany (including Kingston, Newburgh, Plattsburgh and Poughkeepsie), Buffalo, Rochester and Syracuse (including Binghamton, Elmira and Watertown), New York; Akron (including Youngstown), Columbus and Dayton, Ohio; Allentown, Erie, Harrisburg, Pittsburgh and Wilkes-Barre/Scranton, Pennsylvania; Providence, Rhode Island; Green Bay (including Appleton and Oshkosh), Madison and Milwaukee, Wisconsin.
For further information about Choice One, visit our web site at choiceonecom.com or contact us at 1-888-832-5800.
Contact:
Choice One
Phil Yawman, 585/530-2604
pyawman@choiceonecom.com
I've seen these things play for a ton in a single day in the past people. Be on this thing!!!!!!!!!
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'wid ma mind on ma money an' ma money on ma MIND!!!!!!!
Do Da Due!!!
RUFF!!!
Dog
Example of how CWON could react:
http://www.allstocks.com/stockmessageboard/ubb/Forum8/HTML/001909.html
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'wid ma mind on ma money an' ma money on ma MIND!!!!!!!
Do Da Due!!!
RUFF!!!
Dog
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'wid ma mind on ma money an' ma money on ma MIND!!!!!!!
Do Da Due!!!
RUFF!!!
Dog
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'wid ma mind on ma money an' ma money on ma MIND!!!!!!!
Do Da Due!!!
RUFF!!!
Dog
The Plan provides for a financial restructuring (the "Restructuring") of the Company's senior and subordinated indebtedness. The Restructuring involves a significant reduction of the Company's outstanding indebtedness and a conversion of the balance of such indebtedness into 100% of the Company's equity. Pursuant to the Plan, (i) the holders of the Company's senior indebtedness under its senior credit facility in the aggregate amount of approximately $404 million will receive new senior secured notes in the aggregate principal amount of $175 million and 90% of the Company's common stock to be issued upon consummation of the Plan, (ii) the holders of the Company's subordinated notes in the aggregate amount of approximately $252 million will receive 10% of the common stock of the Company to be issued upon consummation of the Plan and warrants (the "Warrants") to acquire additional shares of the common stock of the Company, and (iii) the currently outstanding shares of the Company's common and preferred stock will be cancelled without any distribution to be made to the holders of such shares. The Warrants will expire after seven years and will be issued in two series, one for 657,567 shares of the Company's common stock at an exercise price of $13.50 per share, and the other for 2,401,592 shares of the Company's common stock at an exercise price of $20.00 per share. The common stock, Warrants and shares of common stock to be issued upon exercise of the Warrants are exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 1145 of the Bankruptcy Code.
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'wid ma mind on ma money an' ma money on ma MIND!!!!!!!
Do Da Due!!!
RUFF!!!
Dog
90% of the Company's common stock to be issued upon consummation of the Plan, (ii) the holders of the Company's subordinated notes in the aggregate amount of approximately $252 million will receive 10% of the common stock of the Company to be issued upon consummation of the Plan and warrants (the "Warrants") to acquire additional shares of the common stock of the Company, and (iii) the currently outstanding shares of the Company's common and preferred stock will be cancelled without any distribution to be made to the holders of such shares.
JMHO-- MY 2 CENTS WORTH--
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DIANA
quote:
Originally posted by sunny:
Okay...speak english...LOL Does that mean if we buy in, our shares are safe?
Safe until the 18th when they cancell your shares and leave you with NOTHING!!
BEWARE!!!
quote:
Originally posted by midnight302:
Up 60%%%%!!!!
VOLUME LOW--REMEMBER--MUST BE A BUYER TO SELL SHARES!! BUYER BEWARE FOR NOW...
KEEP ON THE WATCH FOR THE 18TH!! MIGHT BE WORTH THE CHASE. KMART WENT FROM 15.00+ TO 90.00+.
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DIANA
Good Luck,
Steve
t
[This message has been edited by timberman (edited November 14, 2004).]
[This message has been edited by timberman (edited November 14, 2004).]
Ric
FYI - I am impressed by the amount of knowledge you all share, you guys offer share more information than my last stock broker did with me. Special thanks to all!!!
Brian
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'wid ma mind on ma money an' ma money on ma MIND!!!!!!!
Do Da Due!!!
RUFF!!!
Dog
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'wid ma mind on ma money an' ma money on ma MIND!!!!!!!
Do Da Due!!!
RUFF!!!
Dog
Cheers Dadog for your work.
Josep
Cheers Dadog for your work.
Josep
[This message has been edited by BJ (edited November 18, 2004).]
quote:
Originally posted by BJ:
Thats what etrade is doing. what gives?[This message has been edited by BJ (edited November 18, 2004).]
May not switch till the opening bell.
poorman, thanks for the reply on opening bell
Someone explain please...
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
Certain statements contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations", and elsewhere in this Form 10-Q and in other filings with the Securities and Exchange Commission ("SEC") constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the "safe harbor" provisions created thereby. The words "believes", "expects", "estimates", "anticipates", "will", "will be", "could", "may" and "plans" and the negative or other similar words or expressions identify forward-looking statements made by or on behalf of the Company.
These forward-looking statements are subject to many uncertainties and factors that may cause our actual results to be materially different from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties and factors include, but are not limited to:
o The ability to effect a Financial Restructuring described under the caption "Chapter 11 Proceeding /Going Concern Matter" below that will significantly reduce the amount of our indebtedness,
o Compliance with covenants for borrowings under our debtors-in- possession ("DIP") Credit Agreement, the credit facility to be entered into as part of the Financial Restructuring and any subsequently negotiated financing and the willingness of the lenders thereunder to cooperate with us in connection with any non-compliance,
o The impact that the Financial Restructuring may have on our business,
o Availability of additional capital or financing,
o Availability of significant operating cash flows,
o Continued availability of regulatory approvals,
o The number of potential customers and average revenue for such customers in a market,
o The existence or continuation of strategic alliances or relationships,
o Technological, regulatory or other developments in our business,
o Changes in the competitive climate in which we operate, and
o The emergence of future opportunities.
All of these could cause our actual results and experiences to vary significantly from our current business plan and to differ materially from anticipated results and expectations expressed in the forward-looking statements contained herein. These and other applicable risks are summarized under the caption "Risk Factors" and elsewhere in our Annual Report on Form 10-K, filed on March 30, 2004. You should consider all of our written and oral forward-looking statements only in light of such cautionary statements. You should not place undue reliance on these forward-looking statements and you should understand that they represent management's view only as of the dates we make them.
OVERVIEW
We are an integrated communications provider offering facilities-based voice and data telecommunications services. We market and provide these services to small and medium-sized businesses in 29 second and third tier markets in 12 states in the northeastern and midwestern United States. Our services include:
o local exchange and long distance service; and
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o high-speed data and Internet services.
Our principal competitors are incumbent local exchange carriers, such as the regional Bell operating companies, other integrated communications providers, and voice over internet protocol providers.
We seek to become the leading integrated communications provider in each of our markets by offering a single source for competitively priced, high quality, customized telecommunications services. A key element of our strategy has been to be one of the first integrated communications providers to provide comprehensive network coverage in each of the markets we serve. We achieve comprehensive coverage in the markets we serve by installing both voice and data equipment in multiple established telephone company central offices, a process known as collocation. All of our collocations also include equipment to provide digital subscriber loop ("DSL") services.
We have connected approximately 95% of our clients directly to our own switches, which allows us to more efficiently route traffic, ensure quality of service and control costs. Our networks reach approximately 5.7 million business lines, which constitute approximately 72% of the estimated business lines in the markets we serve. While our network allows us to reach this number of business lines, the number of business lines that we actually service will depend on our ability to sell telecommunications services to customers and our success in winning market share from our competitors. We have no current plans to expand into additional markets.
We evaluate the growth of our business by focusing on various operational data in addition to financial data. Lines in service represent the lines sold that are now being used by our clients subscribing to our services. On average, our business clients have 5 lines. We plan to continue to focus primarily on small- to medium-sized business clients.
The table below provides selected key operational data as of:
September 30, 2004 September 30, 2003
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Lines in service ........................................... 550,831 514,314
Total central office collocations .......................... 505 505
Markets in operation ....................................... 29 29
Markets with operational intra-city fiber .................. 19 19
Number of voice switches ................................... 25 25
Number of data switches .................................... 63 63
CHAPTER 11 PROCEEDING/GOING CONCERN MATTER
On October 5, 2004, we filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") seeking relief under the provisions of Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). We continue to operate our business as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of Chapter 11 and the orders of the Bankruptcy Court. Our financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The report of independent accountants dated March 25, 2004 concerning our financial statements for the year ended December 31, 2003, included in our annual report filed on Form 10-K, noted that we had suffered recurring losses from operations and had a net capital deficiency that raised substantial doubt about our ability to continue as a going concern.
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We had net losses applicable to common stockholders of $67.7 million and $35.2 million for the three months ended September 30, 2004 and September 30, 2003, respectively. We had net losses applicable to common stockholders of $152.9 million for the nine months ended September 30, 2004 and $148.3 million and $524.1 million for the years ended December 31, 2003 and 2002, respectively. At September 30, 2004, we had $6.9 million in cash and cash equivalents and had drawn all available funding under our senior credit facility. We generated negative cash flows from both operating and investing activities during the years ended December 31, 2003 and 2002. We had a total stockholders' deficit of $781.9 million as of September 30, 2004. These factors raise substantial doubt about our ability to continue as a going concern.
On July 30, 2004, August 30, 2004 and September 30, 2004, we failed to make certain interest and principal payments in the aggregate amounts of $5.1 million, $2.1 million and $2.0 million, respectively, that were then due under our senior credit facility. Such failures constituted events of default under the senior credit facility and the subordinated notes and would permit our obligations under the senior credit facility and the subordinated notes to be declared to be immediately payable. The requisite majority of both the lenders under the senior credit facility and the holders of the subordinated notes entered into standstill agreements and, in the case of our subordinated notes, waiver agreements on July 30, 2004 and August 30, 2004, subject to certain conditions, pursuant to which they agreed not to take any action before September 30, 2004 with respect to such default or events of default so as to provide us with additional time to facilitate the negotiation and initiation of the Financial Restructuring (as defined below). As a result of the events of default, our long-term debt has been reclassified to short-term in the consolidated balance sheet as of September 30, 2004.
On August 9, 2004, we entered into an amendment and waiver to the interest rate swap agreement with the counterparty under the interest rate swap agreement pursuant to which a payment of approximately $1.8 million due to be paid to the counterparty on August 9, 2004 was deferred until September 30, 2004 or such earlier date on which we obtain debtor-in-possession ("DIP") financing in connection with the proposed Financial Restructuring (as defined below). In the amendment and waiver the counterparty also waived certain defaults under the interest rate swap agreement until September 30, 2004. The Company had not entered into DIP financing by September 30, 2004 and did not make the required payment by such date. As a result of this event, the interest rate swap liability has been classified as current in the consolidated balance sheet as of September 30, 2004. The interest due of $1.8 million was subsequently paid on October 7, 2004, bringing us current with payments due under the interest rate swap agreements.
On August 2, 2004, we announced that we reached an agreement in principle with ad hoc committees of the lenders under our senior credit facility and the holders of our subordinated notes to restructure and substantially reduce our outstanding indebtedness (the "Financial Restructuring"). The Financial Restructuring will consist of: (i) the conversion of approximately $404.0 million of outstanding debt under our senior credit facility into $175.0 million of new senior secured term notes payable over six years and 90% of our outstanding common stock following the Financial Restructuring; (ii) the conversion of our approximately $252.0 million of outstanding subordinated notes into the remaining 10% of such common stock and into two series of seven-year warrants to purchase additional shares of common stock following the Financial Restructuring; and (iii) the establishment of a new revolving credit facility of $30.0 million from a subset of the lenders under our senior credit facility to provide for ongoing working capital requirements.
Upon completion of the Financial Restructuring, certain restricted stock and/or stock option grants are expected to be made to our management in amounts and subject to conditions to be determined. The rights of our existing preferred and common stockholders and the existing holders of options and warrants to purchase our common stock will be extinguished in connection with the Financial Restructuring and the holders of such securities will not receive any recovery. The rights of our vendors will not be impaired by the Financial Restructuring.
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On August 30, 2004, we entered into a Lock Up Agreement with certain of the our existing lenders pursuant to which the lenders agreed to vote in favor of and support our proposed Financial Restructuring plan including, among other things, our filing of the plan under Chapter 11 of the United States Bankruptcy Code ("Chapter 11"), subject to the terms and conditions contained in the Lock Up Agreement.
On September 15, 2004, we commenced a solicitation of consents in support of our Financial Restructuring, which is in the form of a "prepackaged" proceeding under Chapter 11. All of the lenders under our senior credit facility and the holders of our subordinated notes voted to approve our Financial Restructuring.
On October 5, 2004, we filed voluntary petitions in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") seeking relief under the provisions of Chapter 11. We continue to operate our business as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of Chapter 11 and the orders of the Bankruptcy Court. In addition, we entered into a Senior Secured, Super-Priority DIP Credit Agreement (the "DIP Credit Agreement"), with General Electric Capital Corporation, as agent and lender and the lenders from time to time party thereto. Certain of our existing lenders are also lenders under the DIP Credit Agreement. The DIP Credit Agreement received final approval by the Bankruptcy Court on October 25, 2004 and provides for a $20.0 million commitment of DIP financing to fund our working capital requirements during the Chapter 11 proceedings.
The DIP Credit Agreement contains certain financial and other covenants including, but not limited to, affirmative and negative covenants with respect to additional indebtedness, new liens, declaration or payment of dividends, sales of assets, acquisitions, loans, investments, capital expenditures and compliance with the Company's operating budget. Payment under the DIP Credit Agreement may be accelerated following certain events of default including, but not limited to, dismissal of any of the Chapter 11 proceedings or conversion to Chapter 7 of the United States Bankruptcy Code, appointment of a trustee or examiner with enlarged powers, failure to make payments when due, noncompliance with covenants, breaches of representations and warranties, failure to confirm a plan of reorganization within 120 days of the commencement of the Chapter 11 proceeding, the expiration or termination of the Debtors' exclusive right to file a plan of reorganization, or entry of any order permitting holders of security interests to foreclose on any of the Debtors' assets which have an aggregate value in excess of $0.5 million. The DIP Credit Agreement matures on April 5, 2005.
The Company's Plan of Reorganization, which implements the Financial Restructuring, was confirmed by the Bankruptcy Court on November 8, 2004. It is anticipated that it will be consummated on or about November 18, 2004, subject to obtaining certain regulatory approvals and the closing of the new revolving credit facility. During the restructuring process we have continued to pay all accrued and accruing interest on our existing senior debt and to make all scheduled swap payments, as well as all interest payments on the DIP facility. On October 7, 2004 we paid $7.9 million of accrued interest under the senior credit facility and interest rate swap.
If the Financial Restructuring is completed as currently anticipated, our balance sheet may be materially impacted, our debt will be significantly reduced and our liquidity will be improved. We expect to implement fresh start accounting under Statement of Position ("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code", upon emergence from the Financial Restructuring, requiring us to record our assets and liabilities at fair value, which may vary materially from the carrying value as of September 30, 2004.
Our net operating loss carryforwards, which were subject to annual use limitations, may be significantly reduced as a result of the Financial Restructuring. Furthermore, other tax attributes, including the tax basis of certain assets, could also be reduced as a result of the cancellation of indebtedness as part of the Financial Restructuring. In addition, Section 382 of the Internal Revenue Code of 1986, which generally applies after a more than 50 percentage point ownership change has occurred, may impose other
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limitations on the annual utilization of any remaining net operating losses. We believe that we will experience such an ownership change as a result of the completion of our Financial Restructuring. However, because we will be under the jurisdiction of the Bankruptcy Court under Chapter 11 at the time of the ownership change, various alternatives pertaining to the application of Section 382 are available. At this time, we have not yet determined the full impact of all limitations.
Our ability to function as a going concern after the completion of our Financial Restructuring will depend on our obtaining and retaining a significant number of customers, generating significant and sustained growth in our cash flows from operating activities, and managing our costs and capital expenditures to be able to meet our reduced debt service obligations. Our ability to do so will depend on a number of uncertainties and factors outside our control, including those previously described.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2003
EBITDA
In this filing, we include references to and analyses of earnings before interest, income taxes, depreciation and amortization ("EBITDA") amounts that are not calculated and presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). EBITDA is used by management and certain investors as an indicator of a company's liquidity and should not be substituted for cash flow provided by/(used in) operations determined in accordance with GAAP, the most directly comparable financial measure under GAAP. Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other provisions of the Securities Exchange Act of 1934 define and prescribe the conditions for use of certain non-GAAP financial information in SEC filings.
EBITDA highlights trends that may not otherwise be apparent when relying solely on GAAP financial measures, because this non-GAAP financial measure eliminates from net cash used in operating activities financial items that have less bearing on our liquidity. Management believes that the presentation of EBITDA is meaningful because it is an indicator of our ability to service existing debt, to sustain potential increases in debt, and to satisfy capital requirements. EBITDA is also used as a factor in the calculation of management's variable compensation.
Investors or potential investors are urged to read our consolidated financial statements and notes thereto in conjunction with their consideration of our EBITDA. They should not rely solely on a single financial measure to evaluate our business. EBITDA information is presented for the limited purpose of supplementing our GAAP results to provide a more complete understanding of the factors and trends affecting our business. EBITDA as presented may not be comparable to other similarly titled measures used by other companies.
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The following table shows the differences between our net cash provided by operating activities, as determined in accordance with GAAP, and our EBITDA for the three months ended (in thousands):
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
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Net cash provided by operating activities .................. $ 726 $ 4,760
Adjustments to reconcile:
Changes in assets and liabilities ....................... (22,858) (1,558)
Non-cash stock-based compensation ....................... (94) (145)
Restructuring costs ..................................... (413) --
Cumulative effect of a change in accounting principle ... (1,594) --
Loss on disposition of assets ........................... (3,189) (154)
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Subtotal ................................................ (28,148) (1,857)
Net interest expense (net of other income) ............ 41,910 29,956
Interest payable in-kind on long-term debt ............ (8,158) (8,027)
Amortization of deferred financing costs .............. (966) (1,080)
Amortization of discount on long-term debt ............ (318) (285)
Accretion of preferred stock .......................... (3,641) (2,902)
Dividends on preferred stock .......................... (12,001) (10,458)
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Net cash interest expense ............................... 16,826 7,204
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EBITDA ..................................................... $ (10,596) $ 10,107
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During the three months ended September 30, 2004, our EBITDA was impacted by a number of factors. We recorded an increase of $6.0 million in network cost dispute reserve relating to outstanding disputes with certain of our network providers.
Selling, general and administrative expenses increased due to increases in professional services and salary and benefits expense. Professional services increased $4.5 million for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 primarily due to the engagement of consultants and other advisors to guide and facilitate our efforts with respect to our lenders. For the three months ended September 30, 2004, salary and benefits expense increased approximately $2.8 million as compared to the three months ended September 30, 2003. Included within salary and benefits expense for the three months ended September 30, 2004 were withholding tax payments on non-recourse executive loans, which had been impaired during the three months ended June 30, 2004.
We had a loss on disposition of assets for $3.2 million primarily related to the disposal of unrecoverable leasehold improvements and office and computer equipment in connection with the negotiated lease terminations under our operational restructuring described in Restructuring Costs below.
On September 23, 2004, we implemented an operational restructuring plan that includes the reduction of costs and improvements in efficiency in back-office and sales operations necessitating a reduction in workforce. On that date, we announced a reduction in our workforce by 193. All affected positions were notified of the plan and termination benefits for these positions are included in the restructuring costs.
During September 2004, we negotiated lease terminations with several of our landlords. Included in these terminations was the sale to the landlords of certain assets located within the leased locations. Both the lease termination costs and losses on the asset sales are included in the restructuring costs for the three months ended September 30, 2004. In connection with this plan, we recorded restructuring costs of approximately $1.2 million for lease terminations, $0.8 million for
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employee termination benefits, and $0.4 million for losses on assets sold related to lease contract terminations. We anticipate incurring additional charges under the restructuring as we consolidate our sales and network locations.
REVENUE
We generated $81.8 million in revenue for the three months ended September 30, 2004, a 1.2% increase as compared to revenue for the three months ended September 30, 2003.
Revenue for the three months ended September 30, 2004 increased as compared to the three months ended September 30, 2003 primarily as a result of the increase in lines in service offset by reductions in access revenue and the loss of a large wholesale customer. Our total lines in service increased from September 30, 2003 by approximately 7.1% to 550,831 lines at September 30, 2004. The increase in revenue from having more lines in service was offset by a decrease in access revenue attributable to reduced interstate per minute rates that we charge other carriers as FCC mandated per minute rate reductions took effect in June 2004. The loss of the wholesale customer negatively impacted revenue by approximately $1.8 million for the three months ended September 30, 2004. Average revenue per line for the three months ended September 30, 2004 decreased by approximately 4.7% as compared to the three months ended September 30, 2003. We expect total revenue to be relatively stable over the last quarter of 2004. We expect per minute rate reductions for access and reciprocal compensation to continue to occur annually.
Our churn rate for the three months ended September 30, 2004, of our facilities-based business clients, was 1.4% per month. This compares to 1.3% per month for the three months ended September 30, 2003. We seek to minimize churn by providing superior client care, by offering a competitively priced portfolio of local, long distance and Internet services, by signing a significant number of clients to multi-year service agreements, and by focusing on offering our own facilities-based services.
Network Costs
Network costs for the three months ended September 30, 2004 were $45.4 million, representing a 16.8% increase from network costs of $38.8 million for the three months ended September 30, 2003. Network costs as a percentage of total revenues were 55.4% at September 30, 2004, an increase compared to 48.1% for the three months ended September 30, 2003. This increase is directly attributable to an increase of $6.0 million in network cost dispute reserve relating to outstanding disputes with certain of our network providers. Since the announcement of our Chapter 11 filing, we have received many more inquiries from our network providers regarding our outstanding disputes. Based on that, and the current status of those disputes, we expect to pay amounts in excess of what we had accrued as of June 30, 2004, and have increased our accrual accordingly.
The improvements in network costs as a percentage of revenue reflects the continuing benefits of our fiber network implementation and other network optimization initiatives. These initiatives included least cost routing, replacing leased capacity with alternative technologies and grooming and capacity sizing of our network facilities. As a result, for the three months ended September 30, 2004, our average cost per line, excluding increases in network cost dispute reserve, declined approximately 4.7% as compared to the three months ended September 30, 2003. These changes highlight the effectiveness of our network optimization initiatives and the benefits of leasing fiber. Amortization of the cost of assets under the capital leases for fiber is included in depreciation and amortization expense which is not a component of network costs.
Our network costs include:
o Leases of high-capacity digital lines that interconnect our network with established telephone company networks;
. . .
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Choice One Communications Successfully Completes Financial Restructuring, Exits Chapter 11 Just Six Weeks after Filing
Thursday November 18, 5:03 pm ET
ROCHESTER, N.Y.--(BUSINESS WIRE)--Nov. 18, 2004--Choice One Communications Inc. (OTCBB:CWONQ - News)
Company completes "prepackaged" financial restructuring in just six weeks
Reduces debt from over $1 billion to just over $205 million
Obtains $30 million of new financing
Achieves stronger balance sheet and increased liquidity
Remains a premier telecommunications provider
Is now a privately held company
Choice One Communications, an Integrated Communications Provider offering facilities-based voice and data telecommunications services, including Internet solutions, to clients in 29 Northeast and Midwest markets, today announced that it has successfully completed its previously announced "prepackaged" financial restructuring and has emerged from chapter 11 as a strategically, operationally and financially strong company well-positioned for the long term.
As a result of the restructuring process--which began on October 6, 2004 and took just six weeks from start to finish--the Company now enjoys substantially reduced debt, a stronger balance sheet and increased liquidity, enabling Choice One to remain a premier telecommunications provider. To support its future business activities and as part of the financial restructuring, the Company has obtained $30 million of new financing provided by a subset of the Company's existing lenders.
"We are grateful to our employees, customers, lenders and suppliers, whose strong and continued support allowed us to move through the reorganization process quickly, efficiently and effectively," said Steve Dubnik, President and Chief Executive Officer. "Our ability to achieve such a significant financial restructuring in less than two months is virtually unprecedented in our industry and leaves Choice One very well positioned to continue to serve our customers, create a dynamic work environment for our colleagues, and pursue additional opportunities for profitable growth."
Choice One's Plan of Reorganization became effective today. Under the Plan, which was confirmed by the U.S. Bankruptcy Court for the Southern District of New York on November 8, Choice One has (i) converted approximately $404 million of outstanding senior debt into $175 million of new senior secured term notes with a six-year term and 90% of the common stock of the reorganized Company; (ii) converted approximately $252 million of outstanding subordinated debt into the other 10% of such common stock and into two series of seven-year warrants to purchase additional shares of common stock from the reorganized Company; and (iii) obtained a revolving credit facility of $30 million from a subset of its existing lenders to provide for ongoing working capital requirements.
As previously indicated and in accordance with its Plan of Reorganization, the Company's preferred and common stockholders did not receive any recovery and all of Choice One's previously issued preferred and common stock has now been cancelled. The reorganized company's new equity will be privately held.
About Choice One Communications
Headquartered in Rochester, New York, Choice One Communications Inc. is a leading integrated communications provider offering voice and data services including Internet solutions, to businesses in 29 metropolitan areas (markets) across 12 Northeast and Midwest states. Choice One reported $323 million of revenue in 2003, has more than 100,000 clients and employs approximately 1,200 colleagues.
Choice One's markets include: Hartford and New Haven, Connecticut; Rockford, Illinois; Bloomington/Evansville, Fort Wayne, Indianapolis, South Bend/Elkhart, Indiana; Springfield and Worcester, Massachusetts; Portland/Augusta, Maine; Grand Rapids and Kalamazoo, Michigan; Manchester/Portsmouth, New Hampshire; Albany (including Kingston, Newburgh, Plattsburgh and Poughkeepsie), Buffalo, Rochester and Syracuse (including Binghamton, Elmira and Watertown), New York; Akron (including Youngstown), Columbus and Dayton, Ohio; Allentown, Erie, Harrisburg, Pittsburgh and Wilkes-Barre/Scranton, Pennsylvania; Providence, Rhode Island; Green Bay (including Appleton and Oshkosh), Madison and Milwaukee, Wisconsin.
For further information about Choice One, visit our web site at choiceonecom.com or contact us at 1-888-832-5800.
Contact:
Choice One
Phil Yawman, 585-530-2604
pyawman@choiceonecom.com
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'wid ma mind on ma money an' ma money on ma MIND!!!!!!!
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