UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
February 21, 2002
-------------------------------------------------------------
Date of Report (Date of earliest event reported)
U.S. REALTEL, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 0-30401 36-4166222
--------------------------------- ------------------------ ------------------
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
15 PIEDMONT CENTER, SUITE 100, ATLANTA, GEORGIA 30305
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(Address of principal executive offices) (Zip Code)
(404) 869-2500
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(Issuer's telephone number, including area code)
N/A
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(Former name or former address, if changed since last report)
On March 2, 2002 the Registrant filed a current report on Form 8-K
describing its acquisition of Cypress Communications, Inc. ("Cypress
Communications"). This amendment is being filed to revise Item 7 in the
Registrant's Form 8-K originally filed March 1, 2002 to include the historical
and pro forma financial information required by paragraphs (a) and (b) of Item
7 which were omitted from the report as initially filed in accordance with
paragraph (a)(4) of Item 7.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired
The following historical financial statements and notes thereto are of
Cypress Communications, Inc. and Subsidiaries prior to the consummation of the
acquisition and are attached hereto at pages F-1 to F-21.
- Report of Independent Public Accountants
- Consolidated Balance Sheets as of December 31, 2000 and 2001
- Consolidated Statements of Operations for the years ended
December 31, 2000 and 2001
- Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2000 and 2001
- Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 2001
- Notes to Consolidated Financial Statements
(b) Unaudited Pro Forma Financial Information
The following unaudited pro forma condensed financial statements and
notes thereto are attached hereto at pages PF-1 to PF-4.
- Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of December 31, 2001
- Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the year ended December 31, 2001
- Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
(c) Exhibits
99.1 Assurance Letter from Cypress Communications, Inc. Regarding
Representations of Arthur Andersen LLP
CYPRESS COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants............................................................... F-2
Consolidated Balance Sheet............................................................................. F-3
Consolidated Statements of Operations.................................................................. F-4
Consolidated Statements of Stockholders' Equity........................................................ F-5
Consolidated Statements of Cash Flows.................................................................. F-6
Notes to Consolidated Financial Statements............................................................. F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cypress Communications, Inc.:
We have audited the accompanying consolidated balance sheets of CYPRESS
COMMUNICATIONS, INC. (a Delaware corporation) AND SUBSIDIARIES as of December
31, 2000 and 2001 and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cypress Communications, Inc.
and subsidiaries as of December 31, 2000 and 2001 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 11 to the financial statements, in February 2002, Cypress
Communications, Inc. was acquired by U.S. RealTel, Inc. and Cypress
Communications, Inc. became a wholly-owned subsidiary of U.S. RealTel, Inc.
Certain liquidity matters related to U.S. RealTel, Inc. and U.S. RealTel,
Inc.'s business plans with regard to such matters are described in Note 11.
/s/ ARTHUR ANDERSEN, LLP
Atlanta, Georgia
May 3, 2002
F-2
CYPRESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
ASSETS
2000 2001
------------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 28,108,000 $ 11,180,000
Short-term investments 67,809,000 22,577,000
Accounts receivable, net of allowance for doubtful accounts of $470,000
and $415,000 in 2000 and 2001, respectively 2,499,000 2,423,000
Other receivables 397,000 713,000
Prepaid expenses and other 606,000 259,000
------------- -------------
Total current assets 99,419,000 37,152,000
------------- -------------
PROPERTY AND EQUIPMENT, NET (NOTES 3 AND 10) 101,368,000 27,190,000
------------- -------------
OTHER ASSETS:
Real estate access rights, net (Notes 7 and 10) 121,117,000 0
Other intangible assets, net (Note 10) 6,743,000 0
Other 2,758,000 1,192,000
------------- -------------
Total other assets 130,618,000 1,192,000
------------- -------------
Total assets $ 331,405,000 $ 65,534,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,081,000 $ 593,000
Accrued expenses and other (Note 2) 21,403,000 9,425,000
Current portion of capital lease obligations 195,000 446,000
------------- -------------
Total current liabilities 25,679,000 10,464,000
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS 235,000 335,000
------------- -------------
Total liabilities 25,914,000 10,799,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTES 8, 10, AND 11)
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value; 150,000,000 shares authorized; 4,854,000 and
4,926,000 shares issued and outstanding in 2000 and 2001,
respectively 5,000 6,000
Additional paid-in capital 580,630,000 569,827,000
Deferred compensation (19,663,000) (6,312,000)
Other comprehensive income (loss) 345,000 (47,000)
Accumulated deficit (255,826,000) (508,739,000)
------------- -------------
Total stockholders' equity 305,491,000 54,735,000
------------- -------------
Total liabilities and stockholders' equity $ 331,405,000 $ 65,534,000
============= =============
The accompanying notes are an integral part
of these consolidated balance sheets.
F-3
CYPRESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
2000 2001
------------- -------------
REVENUES $ 13,724,000 $ 18,731,000
------------- -------------
OPERATING EXPENSES:
Cost of services, exclusive of depreciation expense 19,758,000 24,620,000
Sales and marketing, including noncash compensation expense of
$862,000 and $702,000 in 2000 and 2001, respectively 17,314,000 10,692,000
General and administrative, including noncash compensation expense
of $4,765,000 and $1,847,000 in 2000 and 2001, respectively 52,065,000 29,686,000
Amortization of real estate access rights 16,270,000 11,713,000
Depreciation and other amortization 9,724,000 15,921,000
Restructuring and impairment charges (Note 10) 64,746,000 181,579,000
------------- -------------
Total operating expenses 179,877,000 274,211,000
------------- -------------
OPERATING LOSS (166,153,000) (255,480,000)
INTEREST INCOME, NET 9,236,000 2,567,000
------------- -------------
LOSS BEFORE INCOME TAXES (156,917,000) (252,913,000)
INCOME TAX BENEFIT 0 0
------------- -------------
NET LOSS $(156,917,000) $(252,913,000)
============= =============
The accompanying notes are an integral part of these consolidated statements.
F-4
CYPRESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
ADDITIONAL OTHER
COMMON STOCK PAID-IN DEFERRED COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION INCOME (LOSS) DEFICIT
--------- ------ ------------ ------------ -------------- -------------
BALANCE, DECEMBER 31, 1999 276,000 $ 0 $132,741,000 $(27,124,000) $ 0 $ (98,909,000)
Sale of common stock 1,150,000 1,000 179,551,000 0 0 0
Conversion of preferred stock (Note 4) 3,282,000 3,000 100,276,000 0 0 0
Sale of common stock under ESPP 6,000 0 164,000 0 0 0
Exercise of common stock options 30,000 0 250,000 0 0 0
Issuance of restricted stock 50,000 0 3,000,000 (3,000,000) 0 0
Purchase of SiteConnect (Note 5) 60,000 1,000 7,908,000 0 0 0
Amortization of deferred compensation 0 0 0 5,412,000 0 0
Issuance of warrants, net 0 0 161,789,000 0 0 0
Forfeiture of unvested options 0 0 (5,049,000) 5,049,000 0 0
Unrealized gain on short-term
investments 0 0 0 0 436,000 0
Foreign currency translation adjustment 0 0 0 0 (91,000) 0
Net loss 0 0 0 0 0 (156,917,000)
Comprehensive loss
--------- ------ ------------ ------------ --------- -------------
BALANCE, DECEMBER 31, 2000 4,854,000 5,000 580,630,000 (19,663,000) 345,000 (255,826,000)
Issuance of restricted stock 66,000 1,000 703,000 (704,000) 0 0
Amortization of deferred compensation 0 0 0 2,549,000 0 0
Sale of common stock under ESPP 6,000 0 0 0 0 0
Forfeiture of unvested options 0 0 (11,506,000) 11,506,000 0 0
Unrealized loss on short-term
investments 0 0 0 0 (392,000) 0
Net loss 0 0 0 0 0 (252,913,000)
Comprehensive loss
--------- ------ ------------ ------------ --------- -------------
BALANCE, DECEMBER 31, 2001 4,926,000 $6,000 $569,827,000 $ (6,312,000) $ (47,000) $(508,739,000)
========= ====== ============ ============ ========= =============
STOCKHOLDERS' COMPREHENSIVE
EQUITY LOSS
------------- ---------------
BALANCE, DECEMBER 31, 1999 $ 6,708,000 $ 0
Sale of common stock 179,552,000 0
Conversion of preferred stock (Note 4) 100,279,000 0
Sale of common stock under ESPP 164,000 0
Exercise of common stock options 250,000 0
Issuance of restricted stock 0 0
Purchase of SiteConnect (Note 5) 7,909,000 0
Amortization of deferred compensation 5,412,000 0
Issuance of warrants, net 161,789,000 0
Forfeiture of unvested options 0 0
Unrealized gain on short-term
investments 436,000 436,000
Foreign currency translation adjustment (91,000) (91,000)
Net loss (156,917,000) (156,917,000)
-------------
Comprehensive loss $(156,572,000)
------------- =============
BALANCE, DECEMBER 31, 2000 305,491,000
Issuance of restricted stock 0 $ 0
Amortization of deferred compensation 2,549,000 0
Sale of common stock under ESPP 0 0
Forfeiture of unvested options 0 0
Unrealized loss on short-term
investments (392,000) (392,000)
Net loss (252,913,000) (252,913,000)
-------------
Comprehensive loss $(253,305,000)
------------- =============
BALANCE, DECEMBER 31, 2001 $ 54,735,000
=============
The accompanying notes are an integral part of these consolidated statements
F-5
CYPRESS COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, AND 2001
2000 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(156,917,000) $(252,913,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 25,994,000 27,634,000
Amortization of deferred compensation 5,627,000 2,549,000
Restructuring and impairment charges 64,746,000 181,579,000
Other (849,000) 780,000
Changes in operating assets and liabilities:
Accounts receivable, net (677,000) 152,000
Prepaid expenses and other current assets (1,610,000) 2,185,000
Other assets (2,374,000) 1,076,000
Accounts payable and accrued expenses 8,259,000 (13,506,000)
------------- -------------
Net cash used in operating activities (57,801,000) (50,464,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (99,545,000) (10,613,000)
Sales of property and equipment 0 2,756,000
(Purchases) sales of short-term investments, net (66,524,000) 44,299,000
Cash acquired in acquisitions 295,000 0
Other (252,000) 0
------------- -------------
Net cash (used in) provided by investing activities (166,026,000) 36,442,000
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investment in Cypress Canada by minority interest 2,450,000 0
Return of investment in Cypress Canada to minority interest 0 (2,333,000)
Proceeds from exercise of stock options 250,000 0
Proceeds from initial public offering, net of offering costs 179,875,000 0
Proceeds from employee stock purchase plan 164,000 0
Principal payments on capital lease obligations (194,000) (451,000)
------------- -------------
Net cash provided by (used in) financing activities 182,545,000 (2,784,000)
------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (85,000) (122,000)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS (41,367,000) (16,928,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 69,475,000 28,108,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 28,108,000 $ 11,180,000
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 54,000 $ 120,000
============= =============
Assets acquired under capital leases $ 0 $ 802,000
============= =============
Common stock issued to acquire SiteConnect (Note 5) $ 7,909,000 $ 0
============= =============
The accompanying notes are an integral part of these consolidated statements.
F-6
CYPRESS COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 2001
1. ORGANIZATION AND NATURE OF BUSINESS
Cypress Communications, Inc. and its subsidiaries ("Cypress Communications" or
the "Company") provide a full range of communications services to businesses in
multi-tenant office buildings located in select major metropolitan markets
within the United States. In February 2002, the Company was acquired by U.S.
RealTel, Inc. ("U.S. RealTel") (Note 11). The Company's communications services
include high speed Internet access and data services, local and long-distance
voice services, feature-rich digital telephone systems, digital satellite
business television, voicemail, e-mail, web site hosting, security/monitoring
services, and other advanced communications services. The Company delivers
these services over state-of-the-art fiber optic, digital, and broadband
networks that Cypress Communications designs, constructs, owns, and operates
inside large- and medium-sized office buildings.
LIQUIDITY
The Company has experienced operating losses and generated negative cash flows
from operations since its inception and has limited access to capital. At
December 31, 2001, the Company has an accumulated deficit of $508.7 million and
is subject to various commitments (Note 8). Upon acquisition by U.S. RealTel in
February 2002, approximately $17 million of the Company's cash on hand was used
by U.S. RealTel to repay certain short-term financing. Management of U.S.
RealTel believes that by capitalizing on Cypress Communications' infrastructure
and its customer base, while reducing Cypress Communications' operating costs,
it will be able to improve operations at Cypress Communications. Management
believes that its current cash on hand will be adequate to fund operations
through at least December 31, 2002 and that it could reduce or delay
expenditures, if necessary, to remain a going concern through at least December
31, 2002. There can be no assurance as to when or if the Company will achieve
or maintain positive cash flows and, even if achieved, whether such operations
will meet the Company's business and liquidity objectives. See note 11
regarding the financial condition and liquidity of U.S. RealTel.
OTHER RISK FACTORS
The Company faces certain other risk factors, including lack of abundant
resources or financing, dependence on key personnel, dependence on third-party
suppliers of equipment and communications services, dependence on relationships
with certain property owners or operators, competition from other providers of
communications services, and potential disruption of services due to system
failures.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements are presented on the accrual basis of
accounting using accounting principles generally accepted in the United States.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
The accompanying financial statements have been retroactively restated for the
stocks splits discussed in Note 4.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries, all of which are wholly owned. All significant intercompany
transactions and balances have been eliminated in consolidation.
F-7
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual amounts could differ from these estimates,
and such differences could be material.
REVENUE RECOGNITION
The Company's revenues include recurring charges for local access,
long-distance, equipment rental, Internet access, digital satellite business
television, voicemail, inbound 800, and other enhanced voice and data services,
which are recognized as services are provided. Revenues also include
nonrecurring charges for installations and moves, adds, and changes.
Installation fees represent the initial cost charged by Cypress Communications
for installing voice phone lines, data lines, and Business TV in the tenant's
premises. Move, add, and change ("MAC") charges are for the Company's labor and
materials related to moving, adding, or changing a customer's services.
Installation and certain MAC charges are recognized when the services are
provided as they represent separate earnings process. Other MAC charges, which
are not separate earnings process, are generally deferred and amortized over 24
months. At December 31, 2001, approximately $267,000 of deferred revenue is
recorded in accrued expenses and other in the accompanying balance sheet. All
related up front costs have been expensed as incurred.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original maturity
of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments generally mature between three months and five years
from the purchase date. All short--term investments are classified as available
for sale and are recorded at market using the specific identification method.
Unrealized gains and losses are reflected in other comprehensive income.
Realized gains and losses were not significant.
FOREIGN CURRENCIES
Foreign operations relate only to the Company's operations in Canada, which
ceased in 2001 (Note 6). Assets and liabilities recorded in foreign currencies
are translated at the exchange rate in effect on the balance sheet date.
Translation adjustments resulting from this process are charged or credited to
other comprehensive income. Revenue and expenses are translated at average
rates of exchange prevailing during the year. Gains and losses on foreign
currency transactions are included in other expenses and were not significant.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, except for assets determined to be
impaired under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," ("SFAS No. 121") (Notes 3 and 10).
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets (generally three to seven years). Leasehold
improvements are depreciated over the lesser of the average lease term (or the
term of the related license agreement) or the assets' useful lives.
Depreciation expense was $9,003,000 and $15,025,000 for the years ended
December 31, 2000 and 2001, respectively. Maintenance and repairs are charged
to expense as incurred. Gains or losses on disposal of property and equipment
are recognized in operations in the year of disposition.
INCOME TAXES
Income taxes have been provided for using the liability method in accordance
with SFAS No. 109, "Accounting for Income Taxes" (Note 9). Deferred income
taxes are recorded using enacted tax laws and rates for the years in which the
taxes are expected to be paid. Deferred income taxes are provided for items
when there is a temporary difference in recording such items for financial
reporting and income tax reporting.
F-8
INTANGIBLES
Goodwill and certain identifiable intangibles were recorded in connection with
the Company's purchase of substantially all of the assets of MTS Communications
Company, Inc. and the purchase of all of the outstanding common stock of
SiteConnect, Inc. ("SiteConnect") (Notes 5 and 10). These costs are being
amortized using the straight-line method over three to ten years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including property and equipment and
intangibles, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset should be assessed. An impairment
is recognized when the undiscounted future net cash flows estimated to be
generated by the asset are insufficient to recover the current carrying value
of the asset. Estimates of future cash flows are based on many factors,
including current operating results, expected market trends, and competitive
influences. In 2000 and 2001, the Company recorded charges for property and
equipment and real estate access rights impaired by management's decisions to
reduce operations in certain buildings and markets and based on the results of
impairment tests completed in accordance with SFAS No. 121 (Note 10). An
impairment loss is recognized for the difference between the carrying value of
the asset and its estimated fair value. Management believes that the remaining
long-lived assets in the accompanying financial statements are appropriately
valued as of December 31, 2000 and 2001. However, changes in the Company's
business or cash flows may significantly impact the realizability of such
assets in the future.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheets approximate the fair values
for cash, short-term investments, and capital lease obligations.
SEGMENT REPORTING
The Company provides an integrated package of communication products to small-
and medium-sized businesses and manages its business on an integrated basis.
ACCRUED EXPENSES AND OTHER
Accrued expenses relate to the following at December 31 2000 and 2001:
2000 2001
------------ ------------
Restructuring (Note 10) $ 7,267,000 $ 5,260,000
Network costs 2,610,000 1,491,000
Taxes 255,000 732,000
Compensation 3,179,000 368,000
Property and equipment additions 4,652,000 0
Liability to investor in Cypress Canada (Note 6) 2,450,000 0
Other 990,000 1,574,000
------------ ------------
$ 21,403,000 $ 9,425,000
============ ============
STOCK COMPENSATION
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations and has adopted the disclosure option of SFAS No.
123, "Accounting for Stock-Based Compensation" ("SFAS No.123") (Note 4).
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," ("SFAS No. 141") effective July 1, 2001 and SFAS
No. 142, "Goodwill and Other Intangible Assets," ("SFAS
F-9
No. 142") effective for the Company on January 1, 2002. SFAS No. 141 prohibits
pooling-of-interests accounting for acquisitions initiated after June 30, 2001
and broadens the criteria for recording intangible assets separate from
goodwill. SFAS No. 142 requires the Company to cease amortizing goodwill that
existed at June 30, 2001 for all periods after December 31, 2001, and any
goodwill resulting from acquisitions completed after June 30, 2001 will not be
amortized. SFAS No. 142 also establishes a new method of testing goodwill for
impairment. The Company adopted the provisions of SFAS No. 142 on January 1,
2002. The Company's goodwill and intangibles were determined to be impaired
prior to adoption of this standard and were written down to zero (Note 10).
SFAS No. 143, "Accounting for Asset Retirement Obligations," ("SFAS No. 143")
was issued in June 2001. SFAS No. 143 applies to legal obligations associated
with the retirement of certain tangible long-lived assets. This statement is
effective for fiscal years beginning after June 15, 2002. Accordingly, the
Company will adopt this statement on January 1, 2003. The Company is currently
assessing the impact of the adoption of SFAS No. 143 on its consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144 is effective for
the Company effective January 1, 2002. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
It supersedes SFAS No. 121 and requires that discontinued operations be
measured at the lower of the carrying amount or fair value less cost to sell.
The Company does not expect its adoption to have a material impact on the
results of its operations or financial position.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2000 and 2001:
2000 2001
------------- ------------
System infrastructure $ 39,183,000 $ 6,702,000
System equipment 20,363,000 12,914,000
Computer and office equipment 11,503,000 2,287,000
Leasehold improvements 15,374,000 2,498,000
Undeployed equipment 26,682,000 2,789,000
------------- ------------
113,105,000 27,190,000
Less accumulated depreciation and amortization (11,737,000) 0
------------- ------------
$ 101,368,000 $27,190,000
============= ===========
As discussed in Note 10, the Company recorded certain impairment charges in
2000 and 2001 related to property and equipment. As a result of these charges,
property and equipment was recorded at their estimated fair value at December
31, 2001 and such amounts became their new cost bases.
Undeployed equipment includes excess equipment that the Company utilizes in its
network as necessary. Additionally, the Company is actively trying to sell such
equipment in connection with its restructuring (Note 10).
4. CAPITAL TRANSACTIONS
STOCK OPTION PLANS
In July 1997, the Company adopted the 1997 Management Option Plan (the "1997
Option Plan"). The 1997 Option Plan provides for the granting of either
incentive stock options or nonqualified stock options to purchase shares of the
Company's common stock to officers, directors, and key employees responsible
for the direction and management of the Company. The options expire ten years
after the date of grant and vest 20% upon the first anniversary of the date of
grant and 5% each subsequent quarter measured from the first anniversary of the
date of grant.
On December 21, 1999, the Company's board of directors adopted the 2000 Stock
Option Plan (the "2000 Option Plan"), which was approved subsequently by the
stockholders on December 23, 1999. All officers, directors, and
F-10
key persons are eligible to participate in the 2000 Option Plan, subject to the
discretion of a committee appointed by the board of directors. Under the 2000
Option Plan, the options expire ten years after the date of grant, and vest 25%
upon the first anniversary of the date of grant, and 6.25% each subsequent
quarter measured from the first anniversary of the date of grant. The board of
directors reserved a combined 11.7 million shares for issuance under the 1997
Option Plan and the 2000 Option Plan.
A summary of the activity related to the option plans is as follows for the
years ended December 31, 2000 and 2001:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE EXERCISE
SHARES PRICE
-------- --------
Balance at December 31, 1999 582,000 $16.40
Granted 313,200 94.20
Forfeited (97,400) 76.50
Exercised (30,500) 8.40
-------- --------
Balance at December 31, 2000 767,300 41.50
Granted 191,157 11.32
Forfeited (572,073) 47.76
-------- --------
Balance at December 31, 2001 386,384 $ 9.78
======== ========
The following table summarizes information about the stock options outstanding
at December 31, 2001:
NUMBER WEIGHTED
OF OPTIONS AVERAGE WEIGHTED EXERCISABLE
OUTSTANDING AT REMAINING AVERAGE AS OF
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31,
PRICE 2001 LIFE PRICE 2001
---------------- -------------- ----------- -------- ------------
(In Years)
$1.50 to $1.70 29,775 9.8 $ 1.60 0
$2.70 to $3.00 11,200 9.6 2.76 0
$4.40 to $5.00 20,850 9.4 4.70 0
$6.70 to $9.40 132,529 8.5 6.86 103,834
$10.70 to $12.80 192,030 8.1 12.07 78,688
--------------
386,384
==============
The Company recorded deferred compensation of approximately $2.3 million in
1998 and approximately $26.3 million in 1999, which represents the difference
between the exercise price per option and the fair value of the Company's
common stock at the dates of grant. All options granted in 2000 and 2001 were
made with exercise prices equal to the fair market value of the Company's
common stock at the grant dates. Deferred compensation is amortized over the
vesting period of the stock options, which is generally four or five years. In
2000 and 2001, the Company reversed approximately $5 million and $11.5 million,
respectively, of deferred compensation related to the forfeiture of unvested
options. In 2000 and 2001, the Company also reduced noncash compensation
expense, which is recorded in sales and marketing and general and
administrative expenses in the accompanying statements of operations, by
approximately $539,000 and $165,000, respectively, as a result of these
forfeitures. In connection with the acquisition of the Company in February 2001
by U.S. RealTel, the Company's option plans were terminated (Note 11).
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net loss would have been
the pro forma amounts indicated below. The pro forma net loss is calculated
using the Black-Scholes option pricing model using the following assumptions:
risk-free interest rates of 6.35% for 2000 and 3.59% for 2001; expected life of
3.5 years for 2000 and 2001; dividend yield of 0%, expected volatility of 65%
for 2000 and 50% for 2001. The weighted average fair value of options granted
during the years ended December 31, 2000 and 2001 was $4.85 and $4.52 per
option, respectively.
F-11
2000 2001
------------- -------------
Net loss, as reported $(156,917,000) $(252,913,000)
Net loss, pro forma (158,436,000) (253,111,000)
SHAREHOLDER RIGHTS PLAN
In December 1999, the Company approved a stockholder rights plan. Subject to
certain limited exceptions, this plan entitled the stockholders to rights to
acquire additional shares of the Company's common stock when a third party
acquired 15% of the Company's common stock or commenced or announced its intent
to commence a tender offer for at least 15% of the Company's common stock. This
plan was amended in January 2002 to allow for the acquisition of the Company if
the Company's board of directors approved the acquisition in advance. In
January 2002, the Company's board approved the proposed merger with U.S.
RealTel (Note 11) for all purposes under the stockholder rights plan, as
amended. As a result, stockholders acquired no additional rights under the
stockholder rights plan.
EMPLOYEE STOCK PURCHASE PLAN
In December 1999, the board of directors and stockholders approved an employee
stock purchase plan. Up to 90,000 shares of common stock may be issued under
this plan. Under this plan, eligible employees may contribute up to 10% of
their compensation toward the purchase of the Company's common stock at a price
that is the lesser of 85% of the closing price on either the first or last day
of each offering period. During 2000, employees purchased approximately 6,000
shares under this plan at an average price of $26.90 per share. During 2001,
employees purchased approximately 6,000 shares under this plan at an average
price of $0.48 per share. In July 2001, the employee stock purchase plan was
suspended.
STOCK OPTION REPRICING
On February 16, 2001, the Company's board of directors approved a plan to
reprice certain existing stock options having an exercise price of greater than
$25.20 per share. Pursuant to the plan, options to purchase 156,679 shares of
common stock, having an original weighted average exercise price of $102.50 per
share, were repriced to an exercise price of $12.80 per share. In addition,
options to purchase 161,950 shares of common stock held by certain executive
officers of the Company, having an original weighted average exercise price of
$50.10 per share, were converted into (i) options to purchase 91,000 shares of
common stock at $12.80 per share and (ii) 49,670 shares of restricted common
stock. The Company recorded deferred compensation of $529,000 for the
restricted stock, which is being amortized over the three-year vesting period.
The vesting schedules applicable to the employee stock options affected by this
repricing and conversion did not change. The Company accounts for the repriced
stock options under the variable accounting method. During 2001, Cypress
Communications was not required to record any incremental compensation expense
related to the repriced options, as the fair value of the Company's common
stock was below $12.80 per share as of December 31, 2001.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
In February 2000, the Company amended and restated its certificate of
incorporation to, among other things, increase the total number of authorized
common stock and preferred stock to 15,000,000 and 2,100,000, respectively. The
amendment designated 100,000 shares of the preferred stock as Series Z Junior
Participating Cumulative Preferred Stock.
In August 2001, the Company amended its second amended and restated certificate
of incorporation to combine and reclassify each ten shares of existing common
stock as one share of issued outstanding new common stock.
STOCK SPLITS
In February 2000, a committee appointed by the Company's board of directors
approved a 4.5-for-1 stock split with respect to its outstanding common stock.
All shares of common stock and per-share amounts in the accompanying financial
statements have been retroactively adjusted to reflect this split.
F-12
In August 2001, the Company's board of directors approved a 1-for-10 reverse
stock split with respect to its outstanding common stock. All shares of common
stock and per share amounts in the accompanying financial statements have been
retroactively adjusted to reflect this split.
INITIAL PUBLIC OFFERING
On February 15, 2000, the Company completed its initial public offering. The
Company sold an aggregate of 1,150,000 shares of common stock (including
150,000 shares which were issued upon the exercise of the underwriters'
over-allotment option) at a per share price of $170, for an aggregate offering
price of approximately $195.5 million. After deducting offering expenses, the
Company received approximately $179.6 million in net proceeds from the initial
public offering. Simultaneous with the closing of the Company's initial public
offering, all outstanding shares of the Company's preferred stock automatically
converted into 3,282,000 shares of common stock.
EXECUTIVE COMPENSATION
In May 2000, in connection with an executive compensation arrangement for the
Company's new Chief Executive Officer ("CEO"), the Company issued the CEO an
option to acquire 100,000 shares of common stock with an exercise price of $60
per share, the fair market value of the Company's common stock on the date of
grant. These options vest 25% upon the first anniversary of the date of grant
and 6.25% each subsequent quarter measured from the first anniversary of the
date of grant. Additionally, in May 2000, the Company granted the new CEO
50,000 shares of restricted common stock, which vest five years from the grant
date. In connection therewith, the Company recorded deferred compensation
expense of $3 million, which is being amortized over the five-year vesting
period. The Company also recorded charges of approximately $1.4 million,
included in general and administration expense, in May 2000 related to the
recruitment of the new CEO. This charge included $215,000 for the estimated
fair value of a warrant issued to an executive search firm that allows the
holder to purchase 11,667 shares of the Company's common stock at $110 per
share. This warrant expires on May 30, 2003.
On February 16, 2001, Cypress Communications granted 16,500 shares of
restricted common stock under an executive compensation agreement with its
Chief Executive Officer and, in connection therewith, recorded deferred
compensation expense of $175,000, which is being amortized over the vesting
period of approximately four years. According to the terms of the agreement,
one-half of the shares would vest if and when the Company's management
established, and the Company's board of directors approved, a fully funded
business plan. The vesting of the remaining half of the shares will be
accelerated if the Company's closing sales price of common stock exceeds $60
dollars per share adjusted for stock split, stock dividend, or
recapitalization. On March 21, 2001, one-half of the shares vested as a result
of the Company's board of director's approval of the Company's fully funded
business plan. For the year ended December 31, 2001, the Company recorded
amortization expense of $105,000 for these restricted shares.
5. ACQUISITIONS
In April 2000, the Company acquired all of the outstanding common stock of
SiteConnect, a Seattle-based, in-building communications service provider, in
exchange for an aggregate of 63,565 shares of the Company's common stock. The
acquisition was accounted for as a purchase, and accordingly, the results of
operations of SiteConnect have been included since the date of acquisition in
the accompanying statements of operations. The allocation of the purchase price
was as follows:
Current assets $ 491,000
Property and equipment 602,000
Intangible assets:
Real estate access rights 1,470,000
Customers 219,000
Goodwill 5,407,000
Current liabilities (280,000)
----------
Total $7,909,000
==========
F-13
The useful lives of the intangible assets acquired from SiteConnect are as
follows:
Real estate access rights Ten years
Customers Three years
Goodwill Ten years
See Note 10 regarding impairment charges recorded in 2001 related to these
intangible assets.
6. CYPRESS CANADA
In September 2000, Cypress Communications and e-ffinity properties, inc. formed
Cypress Canada Communications Inc. ("Cypress Canada") to provide in-building
communications services in Canada. Cypress Communications and e-ffinity owned
51% and 49%, respectively, of Cypress Canada. Cypress Canada was originally
capitalized with a total of $5 million in cash contributed by Cypress
Communications and e-ffinity based on each party's respective ownership
percentage.
In January 2001, Cypress Communications and e-ffinity agreed to cease the
operations of Cypress Canada and for Cypress Communications to return
e-ffinity's original investment in the joint venture. As a result of this
agreement, Cypress Communications recorded an accrued liability of $2,450,000
at December 31, 2000 for this expected payment and reflected 100% of the net
loss of Cypress Canada in the Company's statement of operations for the year
ended December 31, 2000. In 2001, this liability was settled in cash for
$2,333,000 reflecting current exchange rates at that time.
7. REAL ESTATE ACCESS RIGHTS
In November and December 1999, the Company entered into master license
agreements and stock warrant agreements with several property owners and
operators (the "1999 Warrant Program"). Under the terms of these agreements,
the Company agreed to issue warrants to purchase up to an aggregate of
approximately 1.1 million shares of the Company's common stock at a price of
$40.22 per share. These warrants are exercisable for periods of five to ten
years. The number of warrants earned was based on the gross leasable area of
the buildings subject to the master license agreements. Upon the completion of
a due-diligence period and the finalization of the building schedules in the
master license agreements, the final number of warrants earned was determined
and the warrants were nonforfeitable. As such, in accordance with Emerging
Issues Task Force Issue 96-18, the Company recorded the fair value of these
warrants as an intangible asset, real estate access rights, which is being
amortized on a straight-line basis over the terms of the related license
agreements, which are generally ten years. As of December 31, 1999, the Company
had recorded approximately $23.4 million for the fair value of warrants earned
through December 31, 1999. During 2000, the Company recorded an additional
$163.4 million for the fair value of all remaining warrants earned under the
1999 Warrant Program.
In 2000, the Company entered into additional master license agreements and
stock warrant agreements with certain property owners or operators (the "2000
Warrant Program"). During the three months ended June 30, 2000, the Company
entered into agreements with four property owners and operators. Under the
terms of these agreements, the Company agreed to issue warrants to purchase up
to an aggregate of 64,209 shares of the Company's common stock at a weighted
average exercise price of $111.10 per share. During the three months ended
September 30, 2000, the Company entered into agreements with two property
owners and operators. Under the terms of these agreements, the Company agreed
to issue warrants to purchase up to an aggregate of 25,681 shares of the
Company's common stock at a weighted average exercise price of $48.10 per
share. The warrants under the 2000 Warrant Program are exercisable for a period
of ten years. The exact number of shares of common stock underlying the
warrants, which is based on the gross leasable area of the buildings set forth
in the master license agreements, was determined upon the completion of a
due-diligence period and the finalization of the building schedules. Warrants
earned under the 2000 Warrant Program are forfeitable until a specific
communications license agreement ("CLA") is signed for a particular building.
As such, in accordance with EITF 96-18, the measurement date for valuing the
warrants is the dates upon which the property owners and operators enter into a
CLA with the Company. Upon signing a CLA, the fair value of the warrants
attributable to such CLA is recorded as real estate access rights and is
amortized over the terms of the related CLA, which is expected to be ten years.
Through December 31, 2000, approximately $1 million has been recorded related
to 36,606 warrants earned under the 2000 Warrant Program. No additional
warrants were issued in 2001.
F-14
As of December 31, 2000, property owners had voluntarily returned warrants to
purchase 19,274 shares of our common stock that were attributable to buildings
that such owners failed to deliver in accordance with their master license
agreements. The weighted average price of such returned warrants was $152.10
per share. The Company reduced its recorded real estate access rights by $2.9
million to reflect the returned warrants.
In December 2000 and during the year ended 2001, the Company recorded
impairment charges in accordance with SFAS No. 121 of $47.7 million and $109.4
million, respectively, to write-off the value of real estate access rights
(Note 10).
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company is obligated under several operating and capital lease agreements,
primarily for office space and equipment. Future annual minimum rental payments
under these leases as of December 31, 2001 are as follows:
OPERATING CAPITAL
---------- ---------
2002 3,007,000 $ 516,000
2003 3,124,000 327,000
2004 3,224,000 25,000
2005 2,836,000 16,000
2006 1,662,000 0
Thereafter 903,000 0
---------- ---------
Total 14,756,000 884,000
Less amount representing interest and taxes 103,000
---------
Present value of future minimum capital lease payments 781,000
Less current portion (446,000)
---------
Long-term portion $ 335,000
=========
Minimum commitments under operating leases above are net of cash due to the
Company under subleases of $1,023,000, $ 772,000, $521,000, $438,000, $38,000,
and $5,000 for 2002, 2003, 2004, 2005, 2006, and thereafter, respectively.
Rental expense was $4,087,000 and $3,782,000 for the years ended December 31,
2000 and 2001, respectively.
OBLIGATIONS UNDER LICENSE AGREEMENTS
The Company has entered into license agreements with property owners and/or
operators of several office buildings whereby the Company has the right to
provide communications services in these buildings. Under the terms of the
agreements, the Company is generally obligated to pay a commission based on the
greater of a base fee or a percentage of revenue earned in the related building
or development. At December 31, 2001, the Company's aggregate minimum
obligation under these agreements were as follows:
2002 $1,169,000
2003 1,164,000
2004 1,147,000
2005 539,000
2006 316,000
Thereafter 862,000
----------
$5,197,000
==========
The commitments above exclude an estimated total of $2.4 million of potential
obligations under license agreements in buildings in which the Company's
communications network has not been constructed. In the opinion of management,
such amounts will not be owed as the Company is not providing services in those
buildings.
F-15
OBLIGATIONS UNDER COMMUNICATIONS SERVICE AGREEMENTS
At December 31, 2001, the Company had contracts with several communications
providers with minimum purchase obligations for leased voice and data
transport, equipment collocation, and other services. As of December 31, 2001,
approximate future minimum purchase commitments under these agreements were as
follows:
2002 $2,109,000
2003 340,000
2004 213,000
2005 86,000
2006 4,000
Thereafter 9,000
----------
$2,761,000
==========
The above amounts do not include minimum commitments with several
communications providers for leased circuits that the Company is actively
negotiating to terminate in connection with its restructuring (Note 10). The
Company has accrued at December 31, 2001 approximately $3.1 million which
represents management's estimate of potential amounts due under these
agreements. However, the actual amounts due upon termination of these
commitments may differ significantly from this amount.
EMPLOYEE BENEFIT PLAN
In 1997, the Company adopted a 401(k) defined contribution plan. Participants
may elect to defer 15% of compensation up to a maximum amount determined
annually pursuant to Internal Revenue Service regulations. The Company may
provide matching contributions under this plan but has not done so in the
periods presented.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company had an employment agreement with its former CEO that provided for
severance compensation in the event a change in control terminates the CEO's
employment within 24 months of such change in control. The agreement provided
for a lump-sum severance payment of six times the executive's base salary and
three times the value of any savings and retirement benefits, welfare, and
fringe benefits provided to the CEO during the 12-month period prior to
termination. In December 2001, this employment agreement was terminated, and
the Company and the CEO entered into a new severance agreement. Under this
agreement, the CEO continued to receive his base salary. Additionally, under
certain conditions, the CEO was eligible for a separation payment of $400,000.
In February 2002, the Company was acquired by U.S. RealTel (Note 11), and the
CEO received this payment in accordance with the terms of this agreement.
In December 2001, the Company entered into severance arrangements with two
officers of the Company. Under these arrangements, these officers earned
severance payments totaling $360,000. Prior to December 31, 2001, $45,000 of
such payments were made, and $315,000 was recorded in accrued expenses in the
accompanying balance sheet at December 31, 2001. Such amounts were paid
subsequent to December 31, 2001. See Note 11 for further discussion of
severance arrangements paid in connection with the acquisition of the Company
by U.S. RealTel.
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims, including employment
and other matters that arise in the ordinary course of business. There are no
pending legal proceedings to which the Company is a party that management
believes will have a material adverse effect on the financial position, results
of operations, or cash flows of the Company.
9. INCOME TAXES
The income tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective income
tax bases, which give rise to deferred tax assets and liabilities, are as
follows as of December 31, 2000 and 2001:
F-16
2000 2001
------------ -------------
Deferred income tax assets:
Net operating loss carryforwards $ 41,217,000 $ 125,023,000
Allowance for doubtful accounts 183,000 162,000
Property and equipment 0 4,497,000
Accrued expenses 6,567,000 2,051,000
Real estate access rights 18,583,000 31,885,000
Other 250,000 0
------------ -------------
Total deferred income tax assets 66,800,000 163,618,000
Deferred income tax liabilities:
Property and equipment (1,625,000) 0
Valuation allowance (65,175,000) (163,618,000)
------------ -------------
Net deferred income taxes $ 0 $ 0
============ =============
The Company has provided a valuation allowance against its net deferred tax
assets. The Company has estimated net operating loss carryforwards of
approximately $328 million. The net operating loss carryforwards begin to
expire in the year 2017 if not previously utilized. Additionally, use of the
Company's net operating losses is limited due to certain ownership changes as
defined in Section 382 of the Internal Revenue Code. Utilization of existing
net operating loss carryforwards may be further limited in future years if
significant ownership changes occur.
The components of the provision for income taxes for the years ended December
31, 2000 and 2001 are as follows:
2000 2001
------------ -------------
Current $ 0 $ 0
Deferred (58,798,000) (98,443,000)
Increase in valuation allowance 58,798,000 98,443,000
------------ -------------
Total income tax benefit $ 0 $ 0
============ =============
The differences between the federal statutory income tax rate and the Company's
effective rate for the years ended December 31, 2000 and 2001 are as follows:
2000 2001
---- ----
Federal statutory rate (34)% (34)%
State income taxes, net of federal benefit (5) (5)
Permanent differences 1 0
Increase in valuation allowance 38 39
--- ---
Effective rate 0% 0%
=== ===
10. RESTRUCTURING AND IMPAIRMENT CHARGES
In December 2000, the Company's board of directors approved a revised business
strategy that included several initiatives that were designed to extend the
Company's need for additional funding into the second quarter of 2002. The
revised strategy included the Company's exit from several markets, as well as
cost reductions through employee reductions and other measures. This strategy
would focus the Company's retail operations in 13 markets including Atlanta,
Boston, Chicago, Dallas, Denver, Houston, New Orleans, Phoenix, San Francisco,
Seattle, Southern California (Los Angeles and Orange County), South Florida,
and Washington D.C. The Company had originally targeted 28 metropolitan retail
markets. The Company also decided to implement wholesale operations in all 28
markets where it had constructed in-building networks whereby the Company would
sell access to its in-building networks to other communications providers. In
December 2000, the Company recorded restructuring and impairment charges
totaling $64.7 million as a result of this revised business plan.
In March 2001, the Company continued to revise its strategy and adopted a plan
to further reduce its retail efforts to operate in seven major metropolitan
markets including Atlanta, Boston, Chicago, Dallas, Houston, Southern
F-17
California (Los Angeles and Orange County), and Seattle. During 2001, the
Company also adopted plans to exit service in 30 buildings in markets in which
it was continuing retail operations, as well as adopted plans to rationalize
its network capacity. As part of its restructurings in 2001, the Company
reduced its workforce by approximately 400 employees. In connection with these
further changes in business strategy, the Company recorded additional
restructuring and impairment charges in 2001 as discussed further below.
A detail of the restructuring and impairment charges that the Company recorded
in December 2000 related to its restructuring plans and asset impairments are
as follows:
Impaired real estate access rights $47,650,000
Impaired property and equipment 9,572,000
Circuit termination charges 5,104,000
Office space leases 2,056,000
Severance benefits and other 364,000
-----------
Total $64,746,000
===========
A detail of the restructuring and impairment charges that the Company recorded
during the year ended December 31, 2001 related to its restructuring plans and
asset impairments are as follows:
Impaired real estate access rights $ 109,398,000
Impaired property and equipment 59,987,000
Impaired goodwill and other intangibles 5,847,000
Circuit termination charges (1,351,000)
Office space leases 5,008,000
Severance benefits and other 2,690,000
-------------
Total $ 181,579,000
=============
Impairment charges recorded in accordance with SFAS No. 121 include the write
off the net book value of real estate access rights related to the buildings in
which the Company has suspended retail services. The Company also recorded
impairment charges related to (i) property and equipment that the Company has
not placed in service, no longer plans to use, and expects to sell at a
discount from its net book value and (ii) property and equipment deployed in
buildings in which the Company does not plan to provide retail services and
that the Company believes has no salvage value or a value less than its
carrying value. Property and equipment expected to be sold was written down to
its estimated fair value based upon third-party quotes to purchase such
property and equipment and based on amounts received upon the actual sale of
excess equipment. Additionally, as discussed further below, at December 31,
2001, the Company recorded an additional impairment charge to write-off the
remaining net book value of real estate access rights and other intangibles,
and to record its property and equipment at estimated fair value at December
31, 2001, in accordance with the provisions of SFAS No. 121.
Restructuring charges include the Company's estimate of costs it may incur to
terminate contracts it has with communications service providers to purchase
circuits and connectivity, as well as charges for office space lease
commitments in markets where the Company has exited or reduced retail
operations, net of an estimate for sublease rentals. The restructuring charge
also includes severance benefits for terminated employees. Restructuring costs
were accrued in accordance with EITF 94-3.
In the December 2000 restructuring charge, the Company recorded a $2.1 million
accrual for office space lease commitments in markets in which the Company
suspended retail services, net of estimated sublease revenues. This accrual was
based upon Company estimates that were considered most likely at the time.
During 2001, the Company revised this estimate based on changes in expected
sublease revenues and lease termination charges. Additionally, the Company
recorded additional restructuring charges for excess office space, net of
estimated sublease revenues, based on its 2001 restructuring plans. The total
restructuring charges recorded in 2001 related to excess office space,
including the revision of prior estimates, was $5,008,000.
In December 2000, the Company recorded a charge of $9.6 million related to
property and equipment impaired as described above. In 2001, the Company
recorded $30.4 million of charges for additional property and equipment
impaired as a result of the Company's revised business plans, including amounts
recorded to reflect the revision to the salvage value of certain previously
expensed equipment. A portion of the 2001 property and equipment
F-18
impairment charge relates to the $14 million write off of the net book value of
a new billing, customer service, and provisioning system that the Company
ceased development and implementation of in the third quarter of 2001.
The Company accrued approximately $5.1 million at December 31, 2000 for
estimated costs to terminate excess circuit and connectivity contracts. During
2001, the Company recorded additional restructuring charges related to the
estimated costs to terminate additionally identified excess circuit and
connectivity contracts as a result of further reductions in markets and
buildings served. The Company revised its original estimates for such costs
based on actual invoices received and as a result recorded a net credit to
restructuring charges of $1,351,000 for the year ended December 31, 2001. See
Note 8 for additional discussion related to these commitments.
The Company's prospects and operations continued to decline through December
31, 2001, therefore the Company completed an impairment analysis in accordance
with SFAS No. 121. Based on the results of this analysis, the Company
determined that additional impairments existed at December 31, 2001. As a
result, at December 31, 2001, the Company recorded additional impairment
charges of $81.8 million to write-off the remaining book value of real estate
access rights, an impairment charge of $5.9 million to write-off the remaining
book value of goodwill and other intangibles, as well as a charge of $29.6
million to reduce property and equipment to its estimated fair market value.
The Company estimated the fair value of its property and equipment based on an
analysis that considered current market prices for such equipment and its
expected usage of such property and equipment.
Impaired real estate access rights, goodwill and other intangibles, and
property and equipment charges are noncash charges. Circuit termination
charges, office space leases, and severance benefits are charges expected to be
paid in cash. Restructuring charges were accrued as follows:
2000 2001 Total
---------- ----------- -----------
Circuit termination charges $5,104,000 $(1,351,000) $ 3,753,000
Office space leases 2,056,000 5,008,000 7,064,000
Severance and other 364,000 2,690,000 3,054,000
---------- ----------- -----------
Total $7,524,000 $ 6,347,000 $13,871,000
========== =========== ===========
Cash payments related to these accruals are as follows:
Total
2000 2001 Amount
-------- ---------- ----------
Circuit termination charges $ 0 $ 669,000 $ 669,000
Office space leases 0 4,900,000 4,900,000
Severance and other 257,000 2,785,000 3,042,000
-------- ---------- ----------
Total $257,000 $8,354,000 $8,611,000
======== ========== ==========
Net accrual at December 31, 2001 $5,260,000
==========
11. SUBSEQUENT EVENTS
ACQUISITION OF THE COMPANY
In January 2002, the Company entered into a definitive agreement providing for
the sale of the Company to U.S. RealTel. Pursuant to the agreement, U.S. RealTel
initiated a tender offer for all the outstanding shares of common stock of the
Company, including the associated rights to purchase preferred stock, at $3.50
per share net to the seller, in cash. The transaction was completed in February
2002 for approximately $17 million. The acquisition was completed through the
short-form merger of a wholly owned subsidiary of U.S. RealTel with and into the
Company, with Cypress Communications surviving as a wholly owned subsidiary of
U.S. RealTel.
F-19
The merger agreement provided that at the date of closing, each
then-outstanding option to purchase shares of Cypress Communications common
stock under any option plan, program or arrangement of Cypress Communications
("Option"), whether or not such Option is then exercisable or vested, was
converted into an obligation of Cypress Communications to pay to the option
holder a cash amount equal to the product of (i) the excess, if any, of the
offer price over the applicable per share exercise price of such Option and
(ii) the number of shares subject to such Option.
All warrants and other equity interests of the Company, other than the Options
discussed above, the outstanding warrants held by property owners and
operations (Note 7) and the warrant issued in connection with the hiring of the
Company's former CEO (Note 4), were canceled as of the closing date. Each
restricted stock award of Cypress Communications was, immediately prior to the
initial expiration date of the offer, vested to permit the holders of such
restricted stock awards to tender the shares in the tender offer.
In connection with the merger and resulting change of control, the Company paid
out severance of $400,000 to the Company's former CEO under a severance and
separation arrangements that existed at December 31, 2001 (Note 8).
Additionally, in February 2002, the Company entered into severance arrangements
with certain other officers and employees of the Company. Under these
arrangements, the Company paid out severance of approximately $400,000 upon the
change of control resulting from the acquisition of the Company by U.S.
RealTel.
U.S. REALTEL LIQUIDITY ISSUES
In March 2002, U.S. RealTel decided to discontinue its operations in Latin
America, which represented the majority of its consolidated revenues for the
year ended December 31, 2001 and U.S. RealTel continues to have cumulative
losses since inception and negative cash flows from operations. U.S. RealTel's
Latin America assets are currently held for disposition or in the process of
liquidation. In 2001, operating costs associated with U.S. RealTel's efforts to
develop its markets in Argentina and Brazil, its corporate burn rate, which
included existing commitments entered into prior to the sale of the certain old
North American operations, and a declining economy in Argentina, all negatively
affected its cash position during 2001. Disposition of its international
operations and its efforts to develop its telecommunications services business
may continue to impact U.S. RealTel's cash position and may cause a further
decrease in U.S. RealTel's cash position during 2002.
U.S. RealTel's management believes that the acquisition of Cypress
Communications and its plans to improve Cypress Communication's operations will
ultimately result in additional positive cash flows for U.S. RealTel.
Additionally, U.S. RealTel is pursuing other potential acquisitions, which
could provide additional cash flows, as well as various sources of debt and/or
equity financing to support such acquisitions and to fund its working capital
requirements. There can be no assurance as to when, or if at all, U.S. RealTel
will be able to affect such transactions or improvements in operations and,
even if affected, whether such plans will allow it to achieve its business and
liquidity objectives.
EMPLOYMENT AGREEMENTS
In February 2002, Cypress entered into one-year employment agreements, to
continue year to year unless terminated sooner, with Charles B. McNamee and
Gregory P. McGraw. Pursuant to the employment agreement, Mr. McNamee will serve
as Chief Executive Officer of Cypress Communications and will receive an
annualized salary of $200,000, in addition to options to purchase 900,000
shares of U.S. RealTel's common stock. Pursuant to the employment agreement,
Mr. McGraw will serve as President and Chief Operating Officer of Cypress
Communications and will receive an annualized salary of $200,000, in addition
to options to purchase 900,000 shares of U.S. RealTel's common stock. Under
these employment agreements, Mr. McNamee and Mr. McGraw will also be eligible
for certain bonuses.
F-20
U.S. REALTEL, INC.
INDEX TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements is presented herein:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 2001.............. PF-2
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 2001.......................................................... PF-3
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements.......................................................................... PF-4
The accompanying unaudited pro forma condensed consolidated financial
statements illustrate the effect of the acquisition of the outstanding capital
stock of Cypress Communications, Inc. and Subsidiaries ("Cypress") by a
wholly-owned subsidiary of U.S. RealTel, Inc. ("US RealTel"). In accordance with
the terms of the purchase agreement the acquisition was completed in February
2002 through a tender offer and subsequently the subsidiary was eliminated
through a short form merger. The purchase price was $3.50 per outstanding share
of common stock of Cypress. The total purchase price was approximately
$17,937,000 including $58,000 for options to purchase shares of Cypress
outstanding under its option plan and expenses in connection with the
acquisition of approximately $696,000. As a result of the acquisition, US
RealTel acquired 100% of Cypress assets including cash and telecommunications
infrastructure. Also, US RealTel assumed all of the liabilities of Cypress,
which includes operating lease commitments, primarily related to former office
space, and license agreements with property owners and/or operators of several
office buildings. The Company obtained financing to purchase the shares and
complete the merger through a loan from a private entity affiliated with a
director of the Company. In connection with the purchase, the Company issued a
promissory note in the aggregate principal amount of approximately $16.4 million
and warrants to purchase up to 850,000 shares of US RealTel common stock at an
exercise price of $1 per share. The promissory note had a closing fee of
$875,000 and a commission fee of $58,000, and carried interest at 7% per
annum. The warrants are exercisable through February 2007. US RealTel repaid
this promissory note, including interest and closing fee, in February 2002 from
Cypress's cash. The interest paid on the promissory note was not significant.
The transaction will be accounted for under the purchase method of
accounting. During the upcoming year, Cypress will be considered the
predecessor, and therefore, future reporting will include prior year financial
statements for Cypress as well as US RealTel.
The unaudited pro forma condensed consolidated financial statement of
operations consolidates the historical statements of operations of US RealTel
and Cypress. The unaudited pro forma condensed consolidated balance sheet gives
effect to the merger, including the write down of Cypress fixed assets to fair
value and the extraordinary gain resulting from the application of purchase
accounting, as if it occurred on December 31, 2001. The unaudited pro forma
condensed consolidated statement of operations gives effect to the merger as if
it occurred on January 1, 2001. The historical financial statements have been
derived from the respective audited consolidated historical financial
statements of US RealTel and Cypress.
The unaudited pro forma condensed consolidated financial statements
are presented for illustrative purposes only and are not indicative of the
operating results or financial position that would have actually occurred if
the acquisition had been consummated as of the dates indicated, nor is it
necessarily indicative of the future operating results or financial position of
the consolidated company.
The unaudited pro forma combined condensed financial statements should
be read in conjunction with the historical financial statements and related
notes of U.S. RealTel and Cypress.
PF-1
U.S. REALTEL, INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
AS OF DECEMBER 31, 2001
===============================================================================
HISTORICAL PRO FORMA
---------- -------------------------------------------------
DISCONTINUED
US REALTEL CYPRESS ADJUSTMENTS OPERATIONS CONSOLIDATED
----------- ------------ --------------- ------------ -----------
ASSETS
CURRENT ASSETS
Cash and Short-term $ 2,061,000 $ 33,757,000 $(17,663,000)(1) $ (16,000)(3) $17,206,000
investments (933,000)(2)
Other current assets 174,000 3,395,000 (75,000)(3) 3,494,000
----------- ------------ ------------ --------- ----------
TOTAL CURRENT ASSETS 2,235,000 37,152,000 (18,596,000) (91,000) 20,700,000
PROPERTY AND EQUIPMENT, NET 55,000 27,190,000 (27,190,000)(1) (47,000)(3) 8,000
OTHER ASSETS 92,000 1,192,000 (1,192,000)(1) (7,000)(3) 4,000
(81,000)(1)
----------- ------------ ------------ --------- -----------
$ 2,382,000 $ 65,534,000 $(47,059,000) $(145,000) $20,712,000
=========== ============ ============ ========= ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES $ 563,000 $ 10,464,000 $ 193,000 (1) $(147,000)(3) $11,073,000
DEFERRED INCOME 88,000 -- -- (88,000)(3) --
LONG TERM DEBT 50,000 335,000 -- -- 385,000
STOCKHOLDERS' EQUITY
Common stock 6,000 6,000 (6,000)(1) -- 6,000
Additional paid-in capital 19,599,000 569,827,000 754,000 (2) -- 20,353,000
(569,827,000)(1) -- --
Deferred compensation -- (6,312,000) 6,312,000 (1) -- --
Accumulated deficit (19,294,000) (508,739,000) 8,416,000 (1) 2,260,000 (3) (10,305,000)
(1,687,000)(2)
508,739,000 -- --
Accumulated other
comprehensive income 2,170,000 (47,000) 47,000 (1) (2,170,000)(3) --
----------- ------------ ------------ ---------- -----------
2,481,000 54,735,000 (47,252,000) 90,000 10,054,000
Less: Treasury Stock (800,000) -- -- -- (800,000)
----------- ------------ ------------ --------- -----------
TOTAL STOCKHOLDERS'
EQUITY 1,681,000 54,735,000 (47,252,000) 90,000 9,254,000
----------- ------------ ------------ --------- -----------
$ 2,382,000 $ 65,534,000 $(47,059,000) $(145,000) $20,712,000
=========== ============ ============ ========= ===========
===============================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
PF-2
U.S. REALTEL, INC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
===============================================================================
HISTORICAL PRO FORMA
---------- -----------------------------------------------------
DISCONTINUED
US REALTEL CYPRESS ADJUSTMENTS OPERATIONS CONSOLIDATED
----------- ------------- ----------- ------------ -------------
REVENUES $ 282,000 $ 18,731,000 $ -- $ (253,000)(5) $ 18,760,000
DIRECT COSTS 165,000 24,620,000 (3,073,000)(4) (143,000)(5) 21,569,000
----------- ------------- ----------- ----------- -------------
REVENUES - NET 117,000 (5,889,000) 3,073,000 (110,000) (2,809,000)
----------- ------------- ----------- ----------- -------------
OPERATING EXPENSES 6,397,000 249,591,000 (942,000)(4) (3,235,000)(5) 251,811,000
----------- ------------- ----------- ----------- -------------
OPERATING LOSS (6,280,000) (255,480,000) 4,015,000 3,125,000 (254,620,000)
----------- ------------- ----------- ----------- -------------
OTHER INCOME/(EXPENSE)
Other 189,000 2,567,000 (1,687,000)(6) 17,000(5) 1,086,000
Exchange loss (2,145,000) -- -- 2,145,000(5) --
----------- ------------- ----------- ----------- -------------
TOTAL OTHER INCOME/
(EXPENSE) (1,956,000) 2,567,000 (1,687,000) 2,162,000 1,086,000
----------- ------------- ----------- ----------- -------------
Income/(loss) from continuing
operations $(8,236,000) $(252,913,000) $ 2,328,000 $ 5,287,000 $(253,534,000)
=========== ============= =========== =========== =============
Loss from continuing
operations per Common Share
- Basic and Diluted $ (1.32) $ (40.59)
============ =============
Weighted Average Common
Shares Outstanding 6,245,600 $ 6,245,600
============ =============
===============================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
PF-3
U.S. REALTEL, INC
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
===============================================================================
Reference is made to the introduction paragraph to the pro forma
combined condensed financial statement on page PF-1.
The total acquisition costs of approximately $17.9 millions paid for
the acquisition of Cypress have been allocated on a preliminary basis to assets
and liabilities. It is anticipated that the transaction will generate negative
goodwill. These allocations are subject to transactions that occurred during
the month of January 2002. Since the acquisition will be recorded for
accounting purposes as of February 1, 2002, the impact of any of these
transactions could be material.
NET BOOK VALUE $ 54,735,000
ACQUISITION COSTS
Purchase price 17,241,000
Expenses in connection with the acquisition 696,000 17,937,000
---------- --------------
NEGATIVE GOODWILL - BEFORE ASSET ALLOCATION 36,798,000
ASSET ALLOCATION
Property and equipment 27,190,000
Other assets 1,192,000 28,382,000
---------- ---------------
EXTRAORDINARY GAIN $ 8,416,000
==============
Reclassifications have been made to the historical financial
statements to conform to the presentation of the consolidated companies.
The adjustments to the unaudited pro forma condensed consolidated
balance sheet as of December 31, 2001 are as follows:
(1) To reflect the acquisition of Cypress under FAS 141 and 142.
The promissory note issued upon completion of the purchase
was paid subsequent to the acquisition. To reflect the
payment of all acquisition costs, including $81,000, which
had been paid and capitalized prior to the acquisition and
$193,000, which remains unpaid. To reflect the elimination of
all long-term assets of Cypress in an aggregate amount of
$28,382,000 as a result of the allocation of the negative
goodwill resulting from the acquisition. To reflect the
elimination of all equity accounts of Cypress. To reflect the
extraordinary gain associated with the acquisition in the
amount of $8,416,000.
(2) To reflect the payment of the loan fees and commissions on
the promissory note in the amount of $933,000 and to record
the fair value of $754,000 for the 850,000 warrants issued.
The warrants associated with the promissory note may have a
potential dilution impact on earnings per share in the
future.
(3) To adjust for the removal of the Latin American operations
(discontinued operations) of US RealTel, which occurred
subsequent to the acquisition.
PF-4
The adjustments to the unaudited pro forma condensed consolidated
statement of operations for the year ended December 31, 2001 are as follows:
(4) To reflect the reduction in depreciation of property and
equipment as the result of the elimination of all long-term
assets of Cypress.
(5) To adjust for the removal of the Latin American operations
(discontinued operations) of US RealTel for the year ended
December 31, 2001
(6) To reflect, as interest expense, the effect of the issuance
of warrants in connection with the financing valued at a fair
value of approximately $754,000 and the payment of loan fees
and commissions in the amount of $933,000.
PF-5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report on Form 8-K to be signed on its
behalf by the undersigned hereunto duly authorized.
U.S. REALTEL, INC.
By: /s/ Perry H. Ruda
------------------------------------------
Perry H. Ruda
President
Dated May 7, 2002
EXHIBIT INDEX
99.1 Assurance Letter from Cypress Communications, Inc. Regarding Representations of Arthur Andersen LLP