UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended MARCH 31, 2002
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to ____________________
Commission file number 000-30401
U.S. REALTEL, INC.
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(Name of small business issuer in its charter)
DELAWARE 36-4166222
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(State or other jurisdiction (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)
(404) 869-2500
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(Issuer's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the numbers of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date:
5,875,075 SHARES OF COMMON STOCK AS OF MAY 15, 2002
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Transitional Small Business Disclosure Format: Yes [ ] No [X]
U.S. REALTEL, INC.
QUARTERLY PERIOD ENDED MARCH 31, 2002 FORM 10-QSB
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.......................................... 2
Item 2. Management's Discussion and Analysis ......................... 16
PART II OTHER INFORMATION
Item 6. Exhibits List and Reports on Form 8-K......................... 20
Signatures.................................................... 20
PART I
ITEM 1 - FINANCIAL STATEMENTS
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS
REGARDING FUTURE EVENTS OR OUR FUTURE FINANCIAL AND OPERATIONAL PERFORMANCE.
FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING MARKETS FOR OUR
SERVICES; TRENDS IN REVENUES, GROSS PROFITS AND ESTIMATED EXPENSE LEVELS;
LIQUIDITY AND ANTICIPATED CASH NEEDS AND AVAILABILITY; AND ANY STATEMENT THAT
CONTAINS THE WORDS "ANTICIPATE," "BELIEVE," "PLAN," "INTEND," "ESTIMATE,"
"EXPECT," "SEEK" AND OTHER SIMILAR EXPRESSIONS. THE FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS REPORT REFLECT OUR CURRENT EXPECTATIONS AND BELIEFS, AND WE DO
NOT UNDERTAKE PUBLICLY TO UPDATE OR REVISE THESE STATEMENTS, EVEN IF EXPERIENCE
OR FUTURE CHANGES MAKE IT CLEAR THAT ANY PROJECTED RESULTS EXPRESSED IN THIS
REPORT, ANNUAL OR QUARTERLY REPORTS TO SHAREHOLDERS, PRESS RELEASES OR COMPANY
STATEMENTS WILL NOT BE REALIZED. IN ADDITION, THE INCLUSION OF ANY STATEMENT IN
THIS REPORT DOES NOT CONSTITUTE AN ADMISSION BY US THAT THE EVENTS OR
CIRCUMSTANCES DESCRIBED IN SUCH STATEMENT ARE MATERIAL. FURTHERMORE, WE WISH TO
CAUTION AND ADVISE READERS THAT THESE STATEMENTS ARE BASED ON ASSUMPTIONS THAT
MAY NOT MATERIALIZE AND MAY INVOLVE RISKS AND UNCERTAINTIES, MANY OF WHICH ARE
BEYOND OUR CONTROL, THAT COULD CAUSE ACTUAL EVENTS OR PERFORMANCE TO DIFFER
MATERIALLY FROM THOSE CONTAINED OR IMPLIED IN THESE FORWARD-LOOKING STATEMENTS.
THESE RISKS AND UNCERTAINTIES INCLUDE OUR ABILITY TO ACHIEVE POSITIVE CASH FLOW
BY INCREASING REVENUES AND REDUCING EXPENSES IN OUR NEWLY-ACQUIRED
TELECOMMUNICATIONS SERVICES BUSINESS IN THE U.S., THE COSTS THAT MAY BE
ASSOCIATED DISCONTINUING OUR LATIN AMERICAN TELECOMMUNICATIONS RIGHTS BUSINESS,
AND OUR ABILITY TO OBTAIN ADDITIONAL OUTSIDE FINANCING. INVESTORS ARE DIRECTED
TO CONSIDER THE OTHER RISK AND UNCERTAINTIES DISCUSSED IN OUR SECURITIES AND
EXCHANGE COMMISSION FILINGS, INCLUDING THOSE DISCUSSED UNDER THE CAPTION "RISK
FACTORS THAT MAY AFFECT FUTURE RESULTS" IN OUR ANNUAL REPORT ON FORM 10-KSB FOR
THE YEAR ENDED DECEMBER 31, 2001.
U.S. REALTEL, INC
Condensed Consolidated Balance Sheets at March 31, 2002
(unaudited) and December 31, 2001 ..................................... 2
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2002 and 2001 and for
the three months ended March 31, 2001 (predecessor) ................... 3
Unaudited Condensed Consolidated Statement of Stockholders'
Equity for the three months ended
March 31, 2002 ........................................................ 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31,
2002 and 2001 and for the three months ended
March 31, 2001 (predecessor) .......................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements .......... 6
CYPRESS COMMUNICATIONS, INC
Condensed Consolidated Balance Sheets at January 31, 2002
(acquisition date) (unaudited) and December 31, 2001 .................. 11
Unaudited Condensed Consolidated Statement of Operations
for the period from January 1, 2002
through January 31, 2002 (acquisition date) .......................... 12
Unaudited Condensed Consolidated Statement of Cash Flow for
the period from January 31, 2002
through January 31, 2002 (acquisition date) .......................... 13
Notes to Unaudited Condensed Consolidated Financial Statements .......... 14
-1-
U.S. REALTEL, INC
CONDENSED CONSOLIDATED
BALANCE SHEETS
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MARCH 31, 2002
(UNAUDITED) DECEMBER 31, 2001
---------------- --------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (includes $770,000 of
restricted cash) $ 10,643,000 $ 2,061,000
Accounts receivables, net 2,711,000 40,000
Prepaid expenses and other current assets 1,065,000 134,000
------------ ------------
TOTAL CURRENT ASSETS 14,419,000 2,235,000
------------ ------------
PROPERTY AND EQUIPMENT, NET 18,000 55,000
OTHER ASSETS -- 92,000
------------ ------------
$ 14,437,000 $ 2,382,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & accrued expenses $ 9,154,000 $ 463,000
Current notes payable and current portion of
long term debt 584,000 100,000
------------ ------------
TOTAL CURRENT LIABILITIES 9,738,000 563,000
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DEFERRED INCOME 36,000 88,000
LONG TERM DEBT 538,000 50,000
STOCKHOLDERS' EQUITY
Common stock 6,000 6,000
Additional paid-in capital 20,353,000 19,599,000
Accumulated deficit (15,385,000) (19,294,000)
Accumulated other comprehensive income (49,000) 2,170,000
------------ ------------
4,925,000 2,481,000
Less: Treasury Stock (800,000) (800,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,125,000 1,681,000
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$ 14,437,000 $ 2,382,000
============ ============
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SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-2-
U.S. REALTEL, INC
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
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FOR THE THREE
FOR THE THREE FOR THE THREE MONTHS ENDED
MONTHS ENDED MONTHS ENDED MARCH 31, 2001
MARCH 31, 2002(a) MARCH 31, 2001 (PREDECESSOR)
----------------- -------------- ----------------
REVENUES $ 3,234,000 $ -- $ 4,657,000
DIRECT COSTS 2,286,000 -- 8,168,000
------------ ------------ ------------
REVENUES - NET OF DIRECT COSTS 948,000 -- (3,511,000)
------------ ------------ ------------
OPERATING EXPENSES
Sales and marketing 597,000 9,000 3,703,000
General and administrative 5,018,000 620,000 18,575,000
Restructuring and other unusual charges -- -- 35,910,000
------------ ------------ ------------
TOTAL OPERATING EXPENSES 5,615,000 629,000 58,188,000
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 5,000 164,000 1,141,000
Interest expense (1,713,000) (1,000) --
Net loss on disposal of assets (6,000) -- --
------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) - NET (1,714,000) 163,000 1,141,000
------------ ------------ ------------
Loss from continuing operations (6,381,000) (466,000) (60,558,000)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS
(includes loss from diposition in
the amount of $66,000) 2,104,000 (812,000) --
------------ ------------ ------------
Loss before extraordinary gain (4,277,000) (1,278,000) (60,558,000)
EXTRAORDINARY GAIN 8,186,000 -- --
------------ ------------ ------------
NET INCOME (LOSS) $ 3,909,000 $ (1,278,000) $(60,558,000)
============ ============ ============
NET (INCOME) LOSS PER COMMON SHARE
BASIC AND DILUTED
Loss from continuing operations $ (1.07) $ (0.07) $ (12.38)
Discontinued operations $ .35 $ (0.13) --
Extraordinary gain 1.38 -- --
------------ ------------ ------------
NET INCOME (LOSS) PER COMMON
SHARES BASIC AND DILUTED $ 0.66 $ (0.20) $ (12.38)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 5,935,000 6,462,000 4,890,000(b)
============ ============ ============
================================================================================
(a) Includes the operations of Cypress Communications, Inc. from February 1,
2002 through March 31, 2002.
(b) Reflects the 1 - for - 10 reverse stock split during August 2001.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-3-
U.S. REALTEL, INC
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY
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ACCUMU-
LATED
OTHER
COMMON STOCK ADDITIONAL COMPRE- COMPRE- TREASURY STOCK
------------------ PAID-IN ACCUMULATED HENSIVE HENSIVE --------------------
SHARES AMOUNT CAPITAL DEFICIT INCOME INCOME SHARES AMOUNT TOTAL
--------- ------- ----------- ------------ ----------- --------- --------- --------- ------------
Balance, at
December 31, 2001 6,468,000 $6,000 $19,599,000 $(19,294,000) -- $ 2,170,000 533,000 $(800,000) $ 1,681,000
Stock warrants -- -- 754,000 -- -- -- -- -- 754,000
(unaudited)
Net income (unaudited) -- -- -- 3,909,000 3,909,000 -- -- -- 3,909,000
Cumulative effect on
exchange rates
(unaudited) -- -- -- -- (2,219,000) (2,219,000) -- -- (2,219,000)
-----------
Other comprehensive
income (unaudited) -- -- -- -- $ 1,690,000 -- -- -- --
--------- ------ ----------- ------------ =========== ----------- ------- --------- -----------
Balance, at March 31,
2001 (unaudited 6,468,000 $6,000 $20,353,000 $(15,385,000) $ (49,000) 533,000 $(800,000) $ 4,125,000
========= ====== =========== ============ =========== ======= ========= ===========
================================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-4-
U.S. REALTEL, INC.
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
FOR THE THREE
FOR THE THREE FOR THE THREE MONTHS ENDED
MONTHS ENDED MONTHS ENDED MARCH 31, 2001
MARCH 31, 2002(a) MARCH 31, 2001 (PREDECESSOR)
----------------- ----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 3,909,000 $(1,278,000) $(60,558,000)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization -- 9,000 8,378,000
Restructuring charges -- -- 35,049,000
Stock warrants issued with debt 754,000 -- --
Other non-cash items -- -- 165,000
Net loss on disposal of assets 37,000 -- --
Deferred income (52,000) -- --
Extraordinary gain (8,186,000) -- --
Discontinued operations (2,170,000) 6,000 --
Changes in assets and liabilities, net
of assets acquired:
Decrease (increase) in accounts receivable 546,000 17,000 (432,000)
(Increase) decrease in prepaid expenses and
other current assets (611,000) 14,000 (48,000)
Decrease (increase) in other assets 11,000 -- (15,000)
Decrease in accounts payable and accrued
expenses (419,000) (411,000) (4,419,000)
------------ ----------- ------------
Net cash used in operating activities (6,181,000) (1,643,000) (21,880,000)
------------ ----------- ------------
Cash flows from investing activities:
Sale of short-term investment -- -- 22,105,000
Investment in subsidiary (17,861,000) (600,000) --
Capital expenditures -- (11,000) (8,754,000)
Cash acquired in acquisitions 32,680,000 -- --
------------ ----------- ------------
Net cash provided by (used in)
investing activities 14,819,000 (611,000) 13,351,000
------------ ----------- ------------
Cash flows from financing activities:
Return of investment -- -- (2,333,000)
Proceeds from note payable in connection
to acquisition 16,436,000 -- --
Repayment of note payable in connection
to acquisition (16,436,000) -- --
Principal payments of long-term debt (7,000) -- (83,000)
------------ ----------- ------------
Net cash (used in) financing activities (7,000) -- (2,416,000)
------------ ----------- ------------
Effect of Exchange Rates Changes on Cash (49,000) -- (177,000)
------------ ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents 8,582,000 (2,254,000) (11,122,000)
Cash and Cash Equivalents, at beginning of period 2,061,000 9,425,000 28,108,000
------------ ----------- ------------
Cash and Cash Equivalents, at end of period $ 10,643,000 $ 7,171,000 $ 16,986,000
============ =========== ============
================================================================================
(a) Includes the operations of Cypress Communications, Inc. from February 1,
2002 through March 31, 2002.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-5-
U.S. REALTEL, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include U.S.
RealTel, Inc. ("U.S. RealTel" or the "Company"), its inactive finance
subsidiary, its 71%-owned Argentinean subsidiary in process of liquidation
(discontinued operations), its 89%-owned Brazilian subsidiary in process of
liquidation (discontinued operations), its wholly owned telecommunications
subsidiary Cypress Communications, Inc. and its wholly owned consulting
subsidiary (which was incorporated in October 1999 and has limited activities).
All intercompany accounts and transactions have been eliminated in
consolidation.
The condensed consolidated financial statements included herein are
unaudited and include all normal recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. Certain information
and footnote disclosures normally included in the consolidated financial
statements, prepared in accordance with U.S. generally accepted accounting
principles, have been condensed or omitted. These unaudited condensed
consolidated financial statements should be read in conjunction with the
Company's December 31, 2001 annual consolidated financial statements. The
results of operations for the interim periods are not necessarily indicative of
the operating results for the whole year.
2. THE COMPANY
The Company's original business was leasing telecommunication rights
from owners of real property in North America for sublease to telecommunications
providers requiring access to real estate for their services to reach building
occupants and/or for placement of antenna networks. During 1998, the Company
established a separate wholly owned finance subsidiary (inactive) and a
71%-owned Argentinean subsidiary. In February 2000, the Company established an
89%-owned Brazilian subsidiary. The minority interests of both international
subsidiaries are substantially owned by related parties. For purposes of the
accompanying consolidated financial statements, the Company has expensed all
amounts advanced to the Argentinean and Brazilian subsidiaries until they became
operational and such advances are considered recoverable. Accordingly, no
minority interest is recognized in the consolidated financial statements.
In December 2000, the Company sold its North American operations and
entered into a two-year noncompete agreement with respect to future business in
this market segment in North America, Mexico and certain parts of Europe. As a
result of this sale, the Company's operations were conducted entirely outside of
the U.S., in Argentina and Brazil.
In February 2002, the Company completed its acquisition of Cypress
Communications, Inc. ("Cypress") (Note 4). As a result of this acquisition, the
Company entered into a new business--providing comprehensive data, voice and
video communications services to businesses located in commercial office
buildings in selected major metropolitan markets within the United States, and
is therefore no longer considered to be in a development stage. In March 2002,
the Company decided to discontinue the operations in Latin America (Note 5). As
a result of this decision, the Company's operations are now limited to the new
telecommunications services business the Company entered in connection with the
Cypress acquisition.
Initially, the Company's efforts were devoted to raising capital,
recruiting and training personnel, and acquiring leases of telecommunications
rights and subleasing these rights--first in North America and later in Latin
America. In late 2000 and throughout 2001, the Company focused on repositioning
itself, selling its old North American operations and seeking to develop its
international telecommunications rights business. Most recently, the Company has
focused on acquiring Cypress (Note 4), discontinuing the Company's
telecommunications rights operations in Latin America (Note 5), and realigning
the Company's business to concentrate on providing property-specific
telecommunications services. To date, the Company has received
-6-
marginal net revenues from its U.S. telecommunications services business. No
assurance can be given as to when, or if, the Company will be able to attain
profitable operations.
3. LIQUIDITY
As reflected in the accompanying unaudited condensed consolidated
financial statements, the Company has cumulative losses and has negative cash
flows from operations. Operating costs associated with the Company's efforts to
develop its telecommunications rights business in Argentina and Brazil, its
corporate cash flow requirements, which include existing commitments entered
into prior to the sale of the North American assets, and a declining economy in
the Company's principal telecommunications rights market, Argentina, all
negatively affected the Company's cash position.
During the first quarter of 2002, Management initiated certain actions
intended to improve liquidity and operating results. Such actions included,
among other things, (i) completing the acquisition of Cypress and making certain
adjustments to Cypress' staffing levels and cost structure (Note 4), and (ii)
discontinuing operations in Argentina and Brazil (Note 5). As of March 31, 2002,
the Company had cash and cash equivalents of approximately $10.6 million,
including cash from of Cypress in the amount of $10 million.
With the acquisition of Cypress and restructuring of its operations,
and the discontinuance of the Company's Latin America operations, the Company
believes that its cash position, even though it will continue to erode in the
near term, should stabilize by the end of year 2002 or the beginning of 2003.
The Company cannot, however, give any assurance that it will be able to achieve
additional revenues from its newly acquired Cypress telecommunications services
business in the U.S., that the costs of disposing of the Company's Latin
American operations, will be immaterial (as the Company currently projects),
that the Company will be successful in reducing the cash used in operating
activities, or that the Company will be able to obtain additional outside
funding. The consolidated financial statements do not include any adjustments
that might result from these uncertainties.
4. ACQUISITION
In February 2002, the Company completed the acquisition of Cypress, a
U.S. based operation that provides a full range of telecommunications services
to businesses in multi-tenant office buildings located in select major
metropolitan markets within the United States. The acquisition of Cypress will
allow the Company to concentrate its resources and expertise on providing
premium communications services to over 2,500 small and medium sized business
customers in seven major metropolitan U.S. markets: Atlanta, Boston, Chicago,
Dallas, Houston, Los Angeles and Seattle. Cypress' investment in
telecommunications and broadband infrastructure will enable the Company to
provide bundled communications services to businesses located in multi-tenant
office buildings in a manner that is both reliable and cost effective for its
customers.
The acquisition was completed through a tender offer for outstanding
Cypress common stock and a short form merger of a new wholly-owned acquisition
subsidiary of U.S. RealTel into Cypress. The purchase price was $3.50 per share,
in cash, for a total purchase price of approximately $17.9 million, which
included cash paid for options to purchase shares of Cypress under option plans
in the amount of $58,000 and expenses incurred in connection with the
acquisition of approximately $638,000. As a result of the acquisition, the
Company, at the subsidiary level, acquired 100% of Cypress' assets, including
cash and its telecommunications infrastructure, and succeeded to all of the
liabilities of Cypress, including 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 Cypress common stock and complete the merger through a loan from
the LaSalle Bank, which was facilitated by Oliver Estate, a private entity
affiliated with a director of the Company. The loan was repaid in February 2002,
with interest of approximately $3,000. In connection to the loan, the Company
paid a commission fee to the Oliver Estate of $875,000 and issued warrants to
purchase up to 850,000 shares of the Company's common stock at an exercise price
of $1 per share. The warrants are exercisable through February 2007 and, using
the Black-Scholes pricing model, were valued by the Company at $754,000.
Assumptions used for the Black-Scholes option-pricing model include: no
dividends yield for all years, expected volatility of 120 percent, risk-free
interest rate of 4.75 percent and expected life of 5 years. The commission and
the value of the warrants were treated as interest expense in the accompanying
Unaudited Condensed Consolidated Statements of Operations. In addition, the
Company paid bank fees and interest of approximately $55,000, which are also
treated as interest expense.
-7-
The transaction was accounted for by the purchase method of accounting
and resulted in negative goodwill. After the elimination of all long-term assets
of Cypress in an aggregate amount of $27.2 million, the transaction resulted in
an extraordinary gain associated with the acquisition in the amount of
$8,186,000. The Unaudited Condensed Consolidated Statements of Operations
include the operations of Cypress from February 1, 2002 through March 31, 2002.
ACQUISITION COSTS $ 17,942,000
NET BOOK VALUE OF CYPRESS 53,311,000
------------
NEGATIVE GOODWILL - BEFORE REDUCTION
OF LONG-TERM ASSETS 35,369,000
REDUCTION OF LONG-TERM ASSETS
Property and equipment 26,771,000
Other assets 412,000 27,183,000
---------- ------------
EXTRAORDINARY GAIN $ 8,186,000
============
The following Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the three months ended March 31, 2002 and 2001, assume the
transaction occurred at January 1, 2001 and depreciation expense attributed to
Cypress' property and equipment has been eliminated:
MARCH 31, 2002 MARCH 31, 2001
-------------- ---------------
Revenues $ 4,799,000 $ 4,657,000
============ ============
Loss from continuing operations $(13,415,000)(1) $(60,020,000)(2)
============ ============
Net loss $ (3,125,000) $(60,832,000)
============ ============
Loss per common share from
continuing operations $ (2.26) $ (9.29)
============ ============
Net loss per common
shares basic and diluted $ (0.53) $ (9.41)
============ ============
Weighted average common shares
outstanding 5,935,000 6,462,000
============ ============
(1) Includes a non-recurring charge for the acceleration of deferred
compensation in the amount of $6,141,000.
(2) Includes a non-recurring charge for restructuring costs in the amount
of $35,910,000.
5. DISCONTINUED OPERATIONS
In March 2002, the Company decided to discontinue its
telecommunications rights operations in Latin America, which are now in the
process of liquidation. Discontinuing the Company's operations in Latin America
is expected to help the Company preserve existing capital and dedicate its
resources to its new telecommunications services business in the U.S. Balances
in the 2001 financial statements have been reclassified to reflect our Latin
American business as discontinued operations.
The Company expects to incur various costs in connection with the
disposition or termination of its Latin American operations, which in the
estimation of the management should not be material. The Company believes such
costs will be immediately offset by the benefits associated with reduced
expenditures for such operations and the ability to redeploy the Company's
assets in its new telecommunications services business. Discontinuation of the
Company's Latin America operations will also eliminate risks associated with
international operations, including substantial foreign currency exchange risks,
which risks resulted in currency translation losses in 2001.
-8-
6. STOCK OPTIONS
In March 2002, the Company's Board of Directors approved an amendment
to the 1999 Employee Equity Incentive Plan. By this amendment, the number of
shares of common stock reserved to be issued under the plan was increased to
3,200,000 shares. As of March 31, 2002, after giving effect to the issuance of
additional options following adoption of the amendment, options to purchase
2,337,388 shares were outstanding under the plan.
7. SEVERANCE ARRANGEMENT
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.
8. SUBSEQUENT EVENT
On April 1, 2002, U.S. RealTel announced that its Board of Directors
had approved the use of up to $500,000 for repurchase of its common stock. Under
this stock repurchase program, as of May 15, 2002, the Company had purchased
59,500 shares of the Company's common stock at fair value for approximately
$58,000. These shares will be accounted for as treasury stock.
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 141, Business Combinations (SFAS 141), and FASB Statement No. 142,
Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of
the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. It also requires the Company, upon adoption of SFAS 142, to reclassify
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company adopted SFAS Nos. 141 and 142 during the first quarter of
2002.
In August 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-Lived Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business
(as previously defined in that Opinion). This Statement also amends ARB No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The provisions of this Statement
generally are to be applied prospectively. During 2002, the provision of this
statement will affect the Company because of the discontinuation of the Latin
American operations.
-9-
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements
SFAS 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical corrections.
This Statement rescinds Statement No. 4, Reporting Gains and Losses from
Extinguishments of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statements amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provision of this
Statement related to the rescission of Statement No. 4 shall be applied in
fiscal year beginning after May 15, 2002. The provisions of this Statement
related to Statement No. 13 should be for transactions occurring after May 15,
2002. Early application of the provisions of this Statement is encouraged. The
Company does not expect the adoption of SFAS 145 will have a significant impact
on its consolidated results of operations, financial position or cash flows.
-10-
CYPRESS COMMUNICATIONS, INC.
(PREDECESSOR)
CONDENSED CONSOLIDATED BALANCE
SHEETS
================================================================================
JANUARY 31, 2002(a)
(UNAUDITED) DECEMBER 31, 2001
---------------- ------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (includes $770,000 of
restricted cash) $ 32,680,000 $ 33,757,000
Accounts receivables, net 3,217,000 3,136,000
Prepaid expenses and other current assets 320,000 259,000
------------- -------------
TOTAL CURRENT ASSETS 36,217,000 37,152,000
------------- -------------
PROPERTY AND EQUIPMENT, NET 26,771,000 27,190,000
OTHER ASSETS 412,000 1,192,000
------------- -------------
$ 63,400,000 $ 65,534,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & accrued liabilities $ 9,110,000 10,018,000
Current notes payable & current portion of
long term debt 347,000 446,000
------------- -------------
TOTAL CURRENT LIABILITIES 9,457,000 10,464,000
------------- -------------
LONG TERM DEBT 632,000 335,000
------------- -------------
STOCKHOLDERS' EQUITY
Common stock 6,000 6,000
Additional paid-in capital 569,827,000 569,827,000
Deferred compensation -- (6,312,000)
Accumulated deficit (516,703,000) (508,739,000)
Accumulated other comprehensive income 181,000 (47,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 53,311,000 54,735,000
------------- -------------
$ 63,400,000 $ 65,534,000
============= =============
================================================================================
(a) Date Cypress was acquired by U.S. RealTel, Inc. for accounting purposes.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-11-
CYPRESS COMMUNICATIONS, INC.
(PREDECESSOR)
UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
================================================================================
FOR THE PERIOD FROM
JANUARY 1, 2002 THROUGH
JANUARY 31, 2002(a)
-----------------------
REVENUES $ 1,565,000
DIRECT COSTS 1,318,000
-----------
REVENUES - NET OF DIRECT COSTS 247,000
-----------
OPERATING EXPENSES
Sales and marketing 270,000
General and administrative 7,752,000
-----------
TOTAL OPERATING EXPENSES 8,022,000
-----------
OPERATING LOSS (7,775,000)
-----------
OTHER INCOME
Interest income 70,000
-----------
TOTAL OTHER INCOME 70,000
-----------
NET LOSS $(7,705,000)
===========
NET LOSS PER COMMON SHARE BASIC AND DILITED $ (1.56)
===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,926,000(b)
===========
================================================================================
(a) Date Cypress was acquired by U.S. RealTel, Inc. for accounting purposes.
(b) Reflects the 1 - for - 10 reverse stock split during August 2001.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-12-
CYPRESS COMMUNICATIONS, INC.
(PREDECESSOR)
UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOW
================================================================================
For the period from
January 1, 2002
through
January 31, 2002(a)
--------------------
Cash Flows From Operating Activities
Net loss $ (7,705,000)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 671,000
Deferred compensation 6,141,000
Other non-cash items (73,000)
Changes in assets and liabilities
Increase in accounts receivable, net (81,000)
Increase in prepaid expenses and other current
assets (61,000)
Decrease in other assets 780,000
Decrease in accounts payable and accrued expenses (908,000)
------------
Net cash used in operating activities (1,236,000)
------------
Cash Flows From Investing Activities
Capital expenditures (8,000)
------------
Net cash used in investing activities (8,000)
------------
Cash Flows From Financing Activities
Notes payable and long term debt 198,000
------------
Net cash provided by financing activities 198,000
------------
Effect of Exchange Rates Changes in Cash (31,000)
------------
Net Decrease in Cash and Cash Equivalents (1,077,000)
Cash and Cash Equivalents, at beginning of period 33,757,000
------------
Cash and Cash Equivalents, at end of period $ 32,680,000
============
================================================================================
(a) Date Cypress was acquired by U.S. RealTel, Inc. for accounting purposes.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-13-
CYPRESS COMMUNICATIONS, INC.
(PREDECESSOR)
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
Cypress Communications, Inc. and its subsidiaries ("Cypress ") provide
a full range of communications services to businesses in multi-tenant office
buildings located in select major metropolitan markets within the United States.
Cypress's telecommunications 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. Cypress delivers these services over state-of-the-art fiber optic,
digital, and broadband networks that Cypress designs, constructs, owns and
operates inside large and medium-sized office buildings.
In February 2002, Cypress was acquired by U.S. RealTel, Inc. ("U.S.
RealTel") (Note 2). During 2002, Cypress will be considered the predecessor and,
therefore, U.S. RealTel's reporting includes prior year financial statements for
Cypress as well as for U.S. RealTel for purposes of comparability.
The condensed consolidated financial statements included herein are
unaudited and include all normal recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. Certain information
and footnote disclosures normally included in the consolidated financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted. These unaudited condensed
consolidated financial statements should be read in conjunction with the
Cypress' December 31, 2001 annual consolidated financial statements. The results
of operations for the interim periods are not necessarily indicative of the
operating results for the whole year.
The December 31, 2001 balance sheet was derived from audited financial
statements as of that date.
2. ACQUISITION
In January 2002, Cypress 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 of the outstanding shares of common
stock of the Company, including the associated rights to purchase preferred
stock, at a purchase price of $3.50 per share, in cash. The transaction was
completed in February 2002 for approximately $17.9 million, which included cash
paid for options to purchase shares of Cypress under option plans in the amount
of $58,000 and expenses incurred in connection with the acquisition of
approximately $638,000. The acquisition was completed immediately after the
closing of the tender offer through a merger of a new wholly-owned acquisition
subsidiary of U.S. RealTel into Cypress, with Cypress surviving as a wholly
owned subsidiary of U.S. RealTel.
Immediately prior to the initial expiration date of the tender offer,
all restricted stock awards of Cypress were vested to permit the holders to
tender the shares that were the subject of such awards. In connection with this
acquisition deferred compensation in the amount of $6,141,000 was expensed. In
addition, the merger agreement provided that upon effectiveness of the merger,
each then-outstanding option to purchase shares of Cypress common stock under
any option plan, program or arrangement (each an "Option"), whether or not such
Option was then exercisable or vested, would be converted into an obligation of
Cypress to pay to the option holder a cash amount equal to the product of (i)
the excess, if any, of the tender offer price over the applicable per share
exercise price of such Option and (ii) the number of shares subject to such
Option.
All other rights to acquire equity in Cypress, including outstanding
warrants held by property owners and operators and the warrant issued in
connection with the hiring of Cypress's former CEO, although not canceled in
connection with the merger, are expected to expire unexercised because of the
high strike prices at which they were issued.
-14-
In connection with the merger and resulting change of control, Cypress
paid out severance of $400,000 to the Company's former CEO under a severance and
separation arrangement that existed at December 31, 2001.
-15-
PART I
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
INFORMATION SET FORTH IN OUR UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED IN "ITEM 1. FINANCIAL STATEMENTS" AND THE
"STATEMENT REGARDING FORWARD LOOKING STATEMENTS" APPEARING IN ITEM 1.
OVERVIEW
During the three-month period ended March 31, 2002, U.S. RealTel, Inc.
("U.S. RealTel") provided, or sought to provide, site access and usage rights,
which are referred to as "telecommunications rights," to telecommunications
companies in Latin America through our 71%-owned Argentinean subsidiary and our
89%-owned Brazilian subsidiary. Both operations are currently in process of
liquidation and have been reflected as discontinued operations. In addition,
since our February 2002 acquisition of Cypress Communication, Inc. ("Cypress"),
we have provided comprehensive data, voice and video communications services,
referred to as "telecommunications services," to businesses located in
commercial office buildings in selected major metropolitan markets within the
United States.
Except for the net gain of approximately $15.5 million on the sale of
our old North American telecommunications rights operations in December 2000 and
an extraordinary gain of approximately $8.2 million on the acquisition of
Cypress, under purchase accounting, we have incurred significant operating
losses and experienced negative cash flows from operations since inception. Our
ability to continue as a going concern is contingent upon our ability to obtain
additional financing or positive cash flow from operations. Moreover, we expect
to continue to incur development costs as part of our efforts to achieve
profitability. These costs could increase as we pursue new sources of revenues.
Loss from continuing operations for the three months ended March 31, 2002
amounted $6,381,000. As of March 31, 2002, we had cash and cash equivalents of
approximately $10.6 million, including cash from Cypress of $10 million, and
working capital of approximately $4.7 million.
The Unaudited Condensed Consolidated Statements for the three months
ended March 31, 2002 include the operations of Cypress from the date of
acquisition (February 1, 2002).
U.S. REALTEL THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO CYPRESS (PREDECESSOR)
THREE MONTHS ENDED MARCH 31, 2001
REVENUES. For the three months ended March 31, 2002, revenues of our
newly acquired Cypress telecommunications services business represented
substantially all of our consolidated revenues. Revenues from this business
decreased to approximately $3,234,000 for the three months ended March 31, 2002
from approximately $4,657,000 for the three months ended March 31, 2001.
Revenues for the three months ended March 31, 2002 include results from
operations from Cypress from the date of acquisition (February 1, 2002). If
revenues for January 2002 were included, revenues would increase to $4,799,000
due to an increase in customer base net of a decrease in revenues resulting from
the implementation of a strategy approved by Cypress' board of directors in
December 2000, which included Cypress' exit from several unprofitable markets,
as well as cost reductions through employee reductions and other measures.
Revenues from our Latin American operations are included net of
operating costs under loss from discontinued operations. Revenues for Argentina
decreased to approximately $31,000 for the three months ended March 31, 2002
from approximately $75,000 for the three months ended March 31, 2001. The
decrease in revenues resulted from the devaluation of the Argentinean peso after
the Argentinean currency crashed in January 2002. Our Brazilian operations had
no revenues.
REVENUES-NET. Revenues-net (after direct costs) increased to
approximately $948,000 for the three months ended March 31, 2002 from a loss of
approximately ($3,511,000) for the three months ended March 31, 2001. Margins
increased to approximately 29% in 2002 from approximately (75%) in 2001, due to
the implementation of the strategy approved by Cypress' board of directors in
December 2000, as discussed above.
Revenues-net for Argentina decreased to approximately $13,000 for the
three months ended March 31, 2002 from approximately $32,000 for the three
months ended March 31, 2001. The decrease in revenues-net resulted from the
devaluation of the Argentinean peso after the Argentinean currency crashed in
January 2002.
-16-
OPERATING EXPENSES. Operating expenses decreased to approximately
$5,615,000 for the three months ended March 31, 2002 from approximately
$58,188,000 for the three months ended March 31, 2001. The decrease in operating
expenses resulted from the implementation of the strategy approved by Cypress'
board of directors in December 2000, as discussed above. Operating expenses for
the three months ended March 31, 2001 included restructuring and impairment
charges of approximately $35.9 million. Sales and marketing expenses decreased
to approximately $597,000 for the three months ended March 31, 2002 from
approximately $3,703,000 for the three months ended March 31, 2001 due to
reduced marketing activities during the first quarter 2002. General and
administrative expenses decreased to approximately $5 million for the three
months ended March 31, 2002 from approximately $18.6 million for the three
months ended March 31, 2001. General and administrative expenses for the three
months ended March 31, 2001 includes depreciation and amortization expense of
approximately $7,621,000.
OTHER INCOME AND (EXPENSE). Other income and expense was approximately
($1,714,000) during three months ended March 31, 2002, as compared with
$1,141,000 for the three months ended March 31, 2001. Other income for the three
months ended March 31, 2001 represented interest income from excess cash
invested by Cypress. Other expense for the three months ended March 31, 2002
consisted primarily of approximately $1.7 million in interest and finance
charges primarily incurred by U.S. RealTel in connection with the acquisition of
Cypress.
EXTRAORDINARY GAIN. The three months ended March 31, 2002 includes an
extraordinary gain of approximately $8,186,000, which resulted after the
elimination of all long-term assets of Cypress in an aggregate amount of
approximately $27 million (Note 4 to Unaudited Condensed Consolidated Financial
Statements).
INCOME TAXES. For the three months ended March 31, 2002 and 2001, no
income tax benefit of the losses was recognized because of uncertainty as to
whether the benefit from the net operating losses will be realized.
NET INCOME (LOSS). Our net income for the three months ended March 31,
2002 was approximately $3,909,000 ($0.66 per basic and diluted common share).
For the three months ended March 31, 2001, the net loss was approximately
$60,558,000. The increase in net income resulted from the implementation of the
approved plan by Cypress' board of directors in December 2001, as discussed
above, net of the effect of reduced interest income, and extraordinary gain of
$8,186,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in our operations was approximately $6,181,000 for the
three months ended March 31, 2002 versus approximately $21,880,000 for the three
months ended March 31, 2001. The decrease in net cash used for operating
activities in 2002 was primarily due to the reduction in operating costs
resulting from the implementation of a strategy approved by Cypress' board of
directors in December 2000, which included the Cypress' exit from several
markets, as well as cost reductions through employee reductions and other
measures.
Proceeds from investing activities were approximately $14,819,000 for
the three months ended March 31, 2002, as compared with proceeds of
approximately $13,351,000 for the three months ended March 31, 2001. Cash
provided in 2002 resulted from the acquisition of Cypress, net of approximately
$17.9 million in acquisition costs. Cash provided in 2001 was primarily from the
sale of short-term investments.
Our primary sources of liquidity have been proceeds from the issuance
of common stock and convertible debentures, as well as proceeds from the sale of
our old North American operations in December 2000 and cash acquired though the
acquisition of Cypress. Cash used in financing activities was approximately
$7,000 for the three months ended March 31, 2002, as compared to approximately
$2,416,000 for the three months ended March 31, 2001. Cash used during the first
quarter of 2002 was to pay capital lease obligations of Cypress totaling
approximately $7,000 to which we succeeded as a consequence of the acquisition,
while cash used during the first quarter of 2001 was to return an investment to
Cypress' partner in its Canadian subsidiary of approximately $2,333,000 and to
pay capital lease obligations of approximately $83,000.
Operating costs associated with our efforts to develop our
telecommunications rights business in Argentina and Brazil, our corporate cash
flow requirements, which include existing commitments entered into prior to the
sale of the old North American operations, coupled with a declining economy in
Argentina, all negatively affected our cash position during 2001. During the
first quarter of 2002, we initiated certain actions intended to improve
liquidity and operating results. Such actions included, among other things, (i)
-17-
completing the acquisition of Cypress and making certain adjustments to Cypress'
staffing levels and cost structure (Note 4 to Unaudited Condensed Consolidated
Financial Statements) and (ii) discontinuing operations in Argentina and Brazil
(Note 5 to Unaudited Condensed Consolidated Financial Statements).
As of March 31, 2002, the Company had cash and cash equivalents of
approximately $10.6 million, including cash from Cypress of $10 million. We
believe that by capitalizing on Cypress' infrastructure and its customer base,
while reducing its operating costs, we will be able to turn this newly acquired
subsidiary into a cash flow-positive operation. We are also exploring other
acquisition opportunities that may have a positive impact on our operating
results.
However, in the short run, disposition of our international operations
and our efforts to develop the Cypress telecommunications services business may
continue to adversely impact the Company's cash position and may cause a
shortfall in the Company's cash position during 2002. We are therefore pursuing
various sources of additional debt and/or equity financing to fund our U.S.
operations and corporate overhead, as well as the cost of future acquisitions,
until we become profitable. No assurance can be given that we will be able to
obtain additional financing on terms acceptable to the Company or at all. If we
are unable to obtain adequate funds on acceptable terms, our ability to fund our
expansion, respond to competitive pressures, become profitable or continue as a
going concern would be significantly impaired. Furthermore, if we decide to
borrow funds in the future to fund our business, the terms of those borrowings
would likely contain restrictive covenants that would limit our ability to incur
additional indebtedness, pay dividends or undertake certain other transactions.
We could also be required to pledge assets as security for the borrowings. If we
leverage our business by incurring significant debt, we may be required to
devote a substantial portion of our cash flow to service that indebtedness.
Accordingly, there can be no assurance that our business plan will be achieved
or that we will ever become profitable. The unaudited condensed consolidated
financial statements do not include any adjustments that might result from these
uncertainties and were prepared based on the assumption that the Company will
continue as a going concern. However, we note that the report issued by our
Independent Certified Public Accountants with respect to our financial
statements for the year ended December 31, 2001 (which did not reflect the
Cypress acquisition or the discontinuation of our Latin American operations)
raised substantial doubt about the Company's ability to continue as a going
concern.
We do not consider our business seasonal in nature causing any unusual
liquidity issues.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 141, Business Combinations (SFAS 141), and FASB Statement No. 142,
Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of
the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. It also requires the Company, upon adoption of SFAS 142, to reclassify
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141. SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company adopted SFAS Nos. 141 and 142 during the first quarter of
2002.
In August 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-Lived Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
-18-
reporting provisions of APB Opinion No. 30, "Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business
(as previously defined in that Opinion). This Statement also amends ARB No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of
this Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The provisions of this Statement
generally are to be applied prospectively. During 2002, the provision of this
statement will affect the Company because of the discontinuation of the Latin
American operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements
SFAS 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical corrections.
This Statement rescinds Statement No. 4, Reporting Gains and Losses from
Extinguishments of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statements amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The provision of this
Statement related to the rescission of Statement No. 4 shall be applied in
fiscal year beginning after May 15, 2002. The provisions of this Statement
related to Statement No. 13 should be for transactions occurring after May 15,
2002. Early application of the provisions of this Statement is encouraged. The
Company does not expect the adoption of SFAS 145 will have a significant impact
on its consolidated results of operations, financial position or cash flows.
-19-
PART II
ITEM 6. EXHIBIT LIST AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K:
Two reports on Form 8-K and one amended report on Form 8-K/A were
filed.
Date Item Reported On
---- ----------------
January 22, 2002 Item 5. Other Events. The Company
announced that it had entered into an
Agreement and Plan of Merger with Cypress
Communications, Inc. on January 10, 2002.
March 1, 2002 Item 2. Acquisition or Disposition
of Assets. The Company announced the
consummation of the acquisition of Cypress
Communications, Inc.
March 7, 2002 Item 7. Financial Statements and Exhibits.
The Company revised Item 7. in the Form 8-K
originally filed March 1, 2002 to include
the historical and pro forma financial
information related to the acquisition
of Cypress Communications, Inc.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
U.S. REALTEL, INC.
Dated: MAY 20, 2002 By: /s/ PERRY H. RUDA
------------------------------------
Perry H. Ruda
President
Dated: MAY 20, 2002 By: /s/ EDGARDO VARGAS
------------------------------------
Edgardo Vargas
Vice President & Controller
(Chief Accounting Officer)
-20-