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 September 30, 2002
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or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 000-30401
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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)
N/A
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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 [ ] No [X]
State the numbers of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date: 5,873,395 shares of Common Stock as
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of November 5, 2002.
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Transitional Small Business Disclosure Format: Yes [ ] No [X]
U.S. REALTEL, INC.
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 FORM 10-QSB
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TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements................................................ 1
Item 2. Management's Discussion and Analysis ............................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 25
Item 4. Evaluation of Disclosure Controls and Procedures.................... 25
PART II OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K..................................... 25
Signatures.......................................................... 26
Section 302 Certifications.......................................... 27
Exhibit Index....................................................... 29
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 ANY OBLIGATIONS TO PUBLICLY 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 FORWARD LOOKING 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 SUCH
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 RISKS 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.
Unaudited Condensed Consolidated Balance Sheets at September 30, 2002 and December 31, 2001............ 2
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2002 and 2001 and for the three and nine months ended September 30, 2001
(predecessor).......................................................................................... 3
Unaudited Condensed Consolidated Statement of Stockholders' Equity for the nine months ended
September 30, 2002 .................................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30,
2002 and 2001 and for the nine months ended September 30, 2001 (predecessor) .......................... 5
Notes to Unaudited Condensed Consolidated Financial Statements......................................... 6
CYPRESS COMMUNICATIONS, INC. (PREDECESSOR)
Condensed Consolidated Balance Sheets at January 31, 2002 (acquisition date) (unaudited) and
December 31, 2001...................................................................................... 15
Unaudited Condensed Consolidated Statement of Operations for the period from January 1, 2002
through January 31, 2002 (acquisition date)........................................................... 16
Unaudited Condensed Consolidated Statement of Cash Flow for the period from January 1, 2002
through January 31, 2002 (acquisition date) .......................................................... 17
Notes to Unaudited Condensed Consolidated Financial Statements......................................... 18
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U.S. REALTEL, INC
UNAUDITED CONDENSED CONSOLIDATED
BALANCE SHEETS
December 31, 2001 September 30, 2002
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,061,000 $ 2,117,000
Accounts receivables, net of allowance for doubtful accounts of
$0 and $1,762,000 in December 31, 2001 and September 30, 2002,
respectively 40,000 12,507,000
Prepaid expenses and other current assets 134,000 1,110,000
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TOTAL CURRENT ASSETS 2,235,000 15,734,000
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PROPERTY AND EQUIPMENT, NET 55,000 22,283,000
OTHER ASSETS 92,000 473,000
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$ 2,382,000 $ 38,490,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 463,000 $ 20,795,000
Current notes payable and maturities of capital lease
obligations 100,000 514,000
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TOTAL CURRENT LIABILITIES 563,000 21,309,000
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DEFERRED INCOME 88,000 488,000
LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS 50,000 15,810,000
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value; 5,000,000 shares authorized;
100 issued and outstanding shares -- --
Common stock, $.001 par value; 50,000,000 shares authorized;
6,467,808 issued and outstanding shares 6,000 6,000
Additional paid-in capital 19,599,000 23,169,000
Accumulated deficit (19,294,000) (21,432,000)
Accumulated other comprehensive income 2,170,000 --
------------ ------------
2,481,000 1,743,000
Less: Treasury Stock, at cost; 594,000 shares (800,000) (860,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,681,000 883,000
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$ 2,382,000 $ 38,490,000
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SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
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U.S. REALTEL, INC
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
For the three months ended For the nine months ended
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September 30, September 30,
2001 September 30, September 30, 2001 September 30, September 30,
(predecessor) 2001 2002 (a) (predecessor) 2001 2002 (a)
------------ ----------- ------------ ------------- ------------ ------------
REVENUES $ 4,703,000 $ -- $ 20,515,000 $ 14,111,000 $ -- $ 28,687,000
DIRECT COSTS 5,231,000 -- 10,538,000 20,031,000 -- 16,798,000
------------ ----------- ------------ ------------- ------------ ------------
REVENUES - NET OF DIRECT
COSTS (528,000) -- 9,977,000 (5,920,000) -- 11,889,000
OPERATING EXPENSES
Sales and marketing 2,402,000 2,000 1,223,000 8,585,000 73,000 2,629,000
General and administrative 12,452,000 (15,000) 8,384,000 46,061,000 2,145,000 16,417,000
Restructuring and other charges 27,007,000 -- 60,000 67,534,000 -- 140,000
------------ ----------- ------------ ------------- ------------ ------------
TOTAL OPERATING EXPENSES 41,861,000 (13,000) 9,667,000 122,180,000 2,218,000 19,186,000
------------ ----------- ------------ ------------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 468,000 30,000 15,000 2,304,000 245,000 56,000
Interest expense -- -- (2,348,000) -- (1,000) (4,349,000)
Net gain (loss) on disposal
of assets -- (1,000) (33,000) -- 1,000 (22,000)
------------ ----------- ------------ ------------- ------------ ------------
TOTAL OTHER INCOME (EXPENSE)
468,000 29,000 (2,366,000) 2,304,000 245,000 (4,315,000)
------------ ----------- ------------ ------------- ------------ ------------
Gain (loss) from continuing
operations (41,921,000) 42,000 (2,056,000) (125,796,000) (1,973,000) (11,612,000)
GAIN (LOSS) FROM DISCONTINUED
OPERATIONS -- (1,068,000) (2,000) -- (2,872,000) 2,034,000
------------ ----------- ------------ ------------- ------------ ------------
Loss before extraordinary gain (41,921,000) (1,026,000) (2,058,000) (125,796,000) (4,845,000) (9,578,000)
EXTRAORDINARY GAIN -- -- -- -- -- 7,440,000
------------ ----------- ------------ ------------- ------------ ------------
NET LOSS $(41,921,000) $(1,026,000) $ (2,058,000) $(125,796,000) $ (4,845,000) $ (2,138,000)
============ =========== ============ ============= ============ ============
NET LOSS PER COMMON SHARE
BASIC AND DILUTED
Loss from continuing operations $ (8.70) $ 0.01 $ (0.35) $ (26.14) $ (0.31) $ (1.97)
Discontinued operations -- (0.17) -- -- (0.45) 0.35
Extraordinary gain -- -- -- -- -- 1.26
------------ ----------- ------------ ------------- ------------ ------------
NET LOSS PER COMMON
SHARES BASIC AND DILUTED $ (8.70) $ (0.16) $ (0.35) $ (26.14) $ (0.76) $ (0.36)
============ =========== ============ ============= ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, Basic and diluted 4,819,000(b) 6,110,000 5,874,000 4,813,000 6,348,000(b) 5,894,000
============ =========== ============ ============= ============ ============
(a) Includes the operations of Cypress Communications, Inc. from February
1, 2002 through September 30, 2002.
(b) Reflects the 1 - for - 10 reverse Cypress stock split during August
2001.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
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U.S. REALTEL, INC
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY
Accumu-
lated
Other
Additional Compre- Compre-
Common Stock Paid-in Accumu- hensive hensive Treasury Stock
Shares Amount Capital lated Deficit Loss 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
(unaudited) -- -- 1,181,000 -- -- -- -- -- 1,181,000
Beneficial
conversion
feature
(unaudited) -- -- 2,389,000 -- -- -- -- -- 2,389,000
Payment for
treasury
stock
(unaudited) -- -- -- -- -- -- 61,000 (60,000) (60,000)
Net loss
(unaudited) -- -- -- (2,138,000) (2,138,000) -- -- -- (2,138,000)
Cumulative
effect
on exchange
rates
(unaudited) -- -- -- -- (2,170,000) (2,170,000) -- -- (2,170,000)
-----------
$(4,308,000)
============
Other
comprehensive
Loss
(unaudited) -- -- -- -- -- -- -- --
--------- ------ ----------- ------------ ----------- ------- --------- -----------
Balance, at
September 30,
2002
(unaudited) 6,468,000 $6,000 $23,169,000 $(21,432,000) $ -- 594,000 $(860,000) $883,000
========= ====== =========== ============ =========== ======= ========= ===========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
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U.S. REALTEL, INC.
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
For the nine months ended
--------------------------------------------------
September 30,
2001 September 30, September 30,
(predecessor) 2001 2002 (a)
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Cash flows from operating activities:
Net income (loss) $(125,796,000) $(4,845,000) $(2,138,000)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 23,322,000 116,000 645,000
Bad debt expense -- -- 142,000
Restructuring charges 65,702,000 -- 80,000
Stock warrants in connection with acquisition -- -- 713,000
Net loss (gain) on disposal of assets -- 7,000 (22,000)
Extraordinary gain -- -- (7,440,000)
Discontinued operations -- 282,000 (2,206,000)
Other non-cash items 445,000 -- 85,000
Changes in assets and liabilities, net of assets acquired:
(Increase) decrease in accounts receivable (547,000) 9,000 (9,392,000)
(Increase) decrease in prepaid expenses and
other current assets 1,495,000 (30,000) (656,000)
(Increase) decrease in other assets 322,000 (4,000) 350,000
Decrease in accounts payable and accrued expenses (9,667,000) (563,000) 10,836,000
Deferred income -- -- 134,000
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Net cash used in operating activities (44,724,000) (5,028,000) (8,869,000)
------------- ------------- -------------
Cash flows from investing activities:
Sale of short-term investment 36,931,000 -- --
Investment in subsidiary -- (600,000) (18,645,000)
Capital expenditures (14,672,000) (11,000) (22,851,000)
Sale of property and equipment 6,669,000 -- --
Cash acquired in acquisitions -- -- 32,680,000
------------- ------------- -------------
Net cash provided by (used in) investing activities 28,928,000 (611,000) (8,816,000)
============= ============= =============
Cash flows from financing activities:
Return of investment (2,333,000) -- --
Proceeds from note payable in connection with acquisition -- -- 16,436,000
Repayment of note payable in connection with acquisition -- -- (16,436,000)
Borrowings of long-term debt -- -- 26,284,000
Principal payments of long-term debt (340,000) -- (8,483,000)
Payment for release of warrants -- (150,000) --
Payment for acquisition of treasury stock -- (800,000) (60,000)
------------- ------------- -------------
Net cash used in financing activities (2,673,000) (950,000) 17,741,000
------------- ------------- -------------
Effect of Exchange Rates Changes on Cash (120,000) -- --
------------- ------------- -------------
Net Increase (Decrease) in Cash and
Cash Equivalents (18,589,000) (6,589,000) 56,000
Cash and Cash Equivalents, at
beginning of period 28,108,000 9,425,000 2,061,000
------------- ------------- -------------
Cash and Cash Equivalents, at end of period $ 9,519,000 $ 2,836,000 $ 2,117,000
============= ============= =============
(a) Includes the operations of Cypress Communications, Inc. from February
1, 2002 through September 30, 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 wholly owned
telecommunications services subsidiary Cypress Communications, Inc., its
71%-owned Argentinean and 89% owned Brazilian telecommunications rights
subsidiaries, each of which is in process of liquidation and whose results of
operations are reported as discontinued operations. 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 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 is a holding company of certain telecommunications
businesses in North America. The Company was originally formed as a development
stage company in 1997 and its first 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, including
among others, one of our former directors and officers and a market maker of our
common stock.
In December 2000, the Company sold its North American
telecommunications rights 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. Following 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 Communications ") (Note 4). As a result of this
acquisition, the Company entered into its current 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. As a result of such acquisition the Company no longer
is considered to be a development stage company.
In March 2002, the Company decided to discontinue its
telecommunications rights operations in Latin America (Note 5). As a result of
this decision, the Company's operations are now limited to its current
telecommunications services business in the United States.
In July 2002, the Company, through its wholly owned subsidiary, Cypress
Communications, completed the purchase of certain assets of Intermedia Advanced
Building Networks, the shared tenant telecommunications services business of
WorldCom, Inc. (Note 4).
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.
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.
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 expenses ad 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.
-6-
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 former
efforts to develop a telecommunications rights business in Argentina and Brazil,
its corporate cash flow requirements, which include existing commitments entered
into prior to the sale of its former North American telecommunications rights
assets, and a declining economy in Argentina, which was the Company's principal
telecommunications rights market, all have negatively affected the Company's
cash position.
Beginning in the first quarter of 2002, the Company initiated certain
actions intended to improve liquidity and operating results. Such actions
included, among other things, (i) completing the acquisition of Cypress
Communications and making certain adjustments to Cypress Communications'
staffing levels and cost structure (Note 4), (ii) discontinuing operations in
Argentina and Brazil (Note 5), (iii) completing the purchase of certain assets
of Intermedia Advanced Building Networks and the shared tenant
telecommunications services business of WorldCom, Inc. (Note 4), and (iv)
raising $28 million in connection with such asset acquisition. As of September
30, 2002, the Company had cash and cash equivalents of approximately $2.1
million.
While the Company's cash position has declined over recent periods,
including, but not limited to, the repayment of its outstanding senior secured
revolving credit facility from Silicon Valley Bank (Notes 4 and 8), the Company
believes that its cash position should stabilize by the end of year 2002 or the
beginning of 2003 due to the acquisition of Cypress Communications and the
restructuring of the Company's consolidated operations, the discontinuance of
the Company's Latin American operations, and, most recently, the asset purchase
and related financing referred to in the prior paragraph. The Company cannot,
however, give any assurance that it will be able to achieve additional revenues
from its Cypress Communications telecommunications services business, the assets
acquired from Intermedia Advanced Building Networks, or the shared tenant
telecommunications services business acquired from WorldCom, Inc. Likewise, the
Company cannot give any assurances that the costs of disposing of the Company's
former Latin American operations, will continue to be immaterial (as the Company
currently projects), that the Company will continue to be successful in reducing
the cash used in its continuing 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.
Despite our efforts and those of our advisors, to date, we have not
been able to obtain sufficient historical data to provide the necessary
financial statements pursuant to the SEC Form 8-K. A number of factors have led
to the inability of the Company to obtain the necessary financial information
related to the ABN/STS assets acquired, including, but not limited to, (i) the
bankruptcy filing by WorldCom, Inc. following the acquisition of the assets,
(ii) the resignation of Arthur Andersen as the auditors for WorldCom, Inc., and
(iii) the fact that the assets acquired were spread among various divisions and
entities all under the control of WorldCom, Inc. The Company's inability to
provide the necessary financial statements pursuant to SEC Form 8-K may have an
adverse impact on the Company's future ability to raise capital, especially to
the extent such capital raising activity would require the filing of a
registration statement with the SEC, until two years of financial information
with respect to the acquired assets have been included in the Company's
audited financial statements.
4. ACQUISITIONS
CYPRESS COMMUNICATIONS
In February 2002, the Company completed the acquisition of Cypress
Communications, a U.S. based operation that provides a full range of
telecommunications services to businesses in multi-tenant office buildings
located in selected major metropolitan markets within the United States. The
acquisition of Cypress Communications allows 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 Communications' prior investment in telecommunications and broadband
infrastructure is expected to 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 of Cypress Communications was completed through a
tender offer for outstanding Cypress Communications common stock and a short
form merger of a new wholly-owned acquisition subsidiary of U.S. RealTel into
Cypress Communications. The purchase price was $3.50 per share, in cash, for a
total purchase price of approximately $18.7 million, which included cash paid
for options to purchase shares of Cypress Communications under option plans in
the amount of $58,000 and expenses incurred in connection with the acquisition
of approximately $1,447,000. As a result of such acquisition, the Company, at
the subsidiary level, acquired 100% of Cypress Communications' assets, including
cash and its telecommunications services infrastructure, and succeeded to all of
the liabilities of Cypress Communications, 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 Communications common stock and
complete the merger through a loan from the LaSalle Bank, which was facilitated
by the Oliver Estate, a private entity affiliated with Ross J. Mangano, 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
-7-
an exercise price of $1 per share. The warrants are exercisable through February
2005 and, based on the Black-Scholes pricing model, were valued by the Company
at $646,000. Assumptions used for the Black-Scholes option-pricing model
included: no dividend 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 also have been treated as interest expense.
The acquisition of Cypress Communications was accounted for by the
purchase method of accounting and resulted in negative goodwill. Based on the
preliminary estimate, after the elimination of all long-term assets of Cypress
Communications in an aggregate amount of $27.2 million, the transaction resulted
in an extraordinary gain associated with the acquisition in the amount of
$7,440,000. The Unaudited Condensed Consolidated Statements of Operations
include the operations of Cypress Communications from February 1, 2002 through
September 30, 2002.
ACQUISITION COSTS $ 18,688,000
NET BOOK VALUE OF CYPRESS COMMUNICATIONS 53,311,000
---------------
NEGATIVE GOODWILL - BEFORE ASSET REDUCTION (34,623,000)
REDUCTION OF LONG TERM ASSETS
Property and equipment 26,771,000
Other assets 412,000 27,183,000
--------------- ---------------
EXTRAORDINARY GAIN $ 7,440,000
===============
INTERMEDIA ADVANCED BUILDING NETWORKS
In July 2002, the Company, through its wholly owned subsidiary, Cypress
Communications, completed the purchase of certain assets of Intermedia Advanced
Building Networks, the shared tenant telecommunications services business of
WorldCom, Inc (ABN/STS). The acquired assets included all customer contracts,
in-building networks and the associated building access rights, as well as the
necessary employees to support these assets. The acquisition of ABN/STS has
allowed the Company to extend its telecommunication services operations to over
5,700 small and medium sized business customers in 25 major metropolitan U.S.
markets. Cypress Communications paid $29 million in cash at closing to the
sellers, assumed various commitments arising out of the operation of the
business after the closing, assumed accrued but unpaid liabilities incurred by
the sellers in the operation of the business prior to the closing in an amount
up to a maximum of $2 million, assumed vehicle lease obligations of
approximately $284,000 and paid expenses incurred in connection with the
acquisition of approximately $899,000.
The acquisition was accounted for as a purchase, and accordingly, the
results of operations of ABN/STS have been included since the date of
acquisition in the accompanying statements of operations. The allocation of the
purchase price as of July 17, 2002 was as follows:
ACQUISITION COSTS $ 32,183,000
===============
COST ALLOCATION
CURRENT ASSETS 10,662,000
PROPERTY AND EQUIPMENT 22,703,000
DEFERRED REVENUES (1,182,000)
----------------
TOTAL $ 32,183,000
===============
The useful lives of the assets acquired from ABN/STS are as follows:
Network Equipment Seven years
Vehicles One year
The Company has engaged a valuation firm to assist in valuing the
assets purchased. The allocation hereon is considered preliminary pending the
outcome of the valuation.
-8-
Concurrently with the closing, Cypress Communications entered into an
Omnibus Post-Closing Services Agreement with the sellers and certain of their
affiliates. The Omnibus Post-Closing Service Agreement has a term of three years
commencing July 2002. Under the Omnibus Agreement, the sellers and their
affiliates agreed to provide Cypress Communications:
(i) specified transition services;
(ii) specified wholesale international, interstate, intrastate and
local telecommunications services and Internet services;
(iii) access to the sellers' U.S. Internet collocation facilities
and support services;
(iv) access to the sellers' network collocation facilities; and
(v) access to certain buildings of the sellers in which the
purchased assets are located pending the receipt of certain
consents from building owners and federal and state
regulators.
Additionally, the Omnibus Post-Closing Services Agreement has minimum
annual volume commitments in which the Company is required to purchase services
of $16.5 million during the first twelve months, $13.5 million during the second
twelve months and $11.0 million during the third twelve months. In the event
that in any contract year, the total service charges do not meet or exceed the
minimum annual volume commitment, the Company is required to pay (the shortfall
between the commitment and Total Services and) an underutilization charge equal
to the same shortfall.
In connection with such acquisition, the Company and Cypress
Communications raised $28 million to finance the acquisition. The $28 million
financing included:
(i) a $10 million senior secured revolving credit facility from
Silicon Valley Bank (the "Senior Credit Facility");
(ii) an $8 million bridge loan (the "Bridge Loan") from the J.
Oliver Cunningham Trust (the "JOC Trust"), the Anne C. McClure
Trust (the "ACM Trust"), the Jane C. Warriner Trust (the "JCW
Trust"), Noro-Moseley Partners V, L.P.("Noro-Moseley"), and
the Wakefield Group III, LLC ("Wakefield"); and
(iii) the sale of $10 million of Fixed Rate Convertible Notes due
July 1, 2009 (the "Convertible Notes") to the JOC Trust, the
ACM Trust, the JCW Trust, Noro-Moseley and Wakefield.
The JOC Trust, the ACM Trust and the JCW Trust are affiliates of
certain stockholders of the Company and of Ross J. Mangano, a director and
Chairman of the Board of the Company and of Cypress Communications.
PRO FORMA INFORMATION
The following Unaudited Pro Forma Condensed Consolidated Statements of
Operations for the nine months ended September 30, 2002 and 2001 assume the
Cypress and the ABN/STS acquisitions occurred at the beginning of each period.
Adjustments have been made to depreciation expense, interest revenue and
interest expense to reflect the effect of such acquisitions.
-9-
September 30, 2001 September 30, 2002
------------------ ------------------
Revenues $ 85,574,000 $ 75,040,000
============= ============
Loss from continuing operations $(155,118,000)(1) $(68,459,000)
============= ============
Net loss $(150,550,000) $(58,985,000)
============= ============
Loss per common share from
continuing operations $ (32.23) (11.62)
============= ============
Net loss per common shares
basic and diluted $ (31.28) $ (10.01)
============= ============
Weighted average common shares
outstanding 4,813,000 (2) 5,894,000
============= ============
(1) Includes a non-recurring charge for restructuring costs in the amount
of $67,534,000.
(2) Reflects the 1 - for - 10 reverse Cypress stock split during August
2001.
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. Prior to the decision to discontinue such operations,
the Company had received immaterial revenues from such business. Discontinuing
the Company's operations in Latin America has helped the Company to preserve
existing capital and allowed it to dedicate its resources to its new
telecommunications services business in the United States. 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 have been, and will continue to be, offset by the benefits associated with
reduced expenditures for such operations and the ability to redeploy the
Company's assets in its telecommunications services business. Discontinuation of
the Company's Latin American operations also eliminated risks associated with
international operations, including substantial foreign currency exchange risks,
which risks resulted in currency translation losses in 2001.
6. STOCK OPTIONS
In March 2002, the Company's board of directors approved an amendment
to the 1999 Employee Equity Incentive Plan (the "Option Plan"). By this
amendment, the number of shares of common stock reserved for issuance under the
Option Plan was increased to 3,200,000 shares, subject to automatic annual
adjustment to an amount equal to 30% of our outstanding common stock on a fully
diluted basis, up to a maximum of 5,000,000. The amendment was approved by the
Company's shareholders at the Annual Meeting of Shareholders on June 26, 2002.
In August 2002, the Company's board of directors approved a second amendment to
the Option Plan. By this amendment, the number of shares of common stock
reserved for issuance under the Option Plan was increased to 4,200,000 shares,
subject to the existing automatic annual adjustment contained in the Option
Plan, and increasing to 1,500,000 the aggregate limit on the number of options
that may be granted to anyone optionee during the term of the Option Plan. As of
September 30, 2002, after giving effect to the issuance of additional options
following adoption of the amendment, options to purchase 3,832,388 shares were
outstanding under such plan.
7. SEVERANCE AGREEMENT
In February 2002, the Company entered into severance arrangements with
certain officers and employees of the Company. Under these arrangements, the
Company paid out severance of approximately $400,000 during the first quarter.
8. FINANCING
SENIOR CREDIT FACILITY
The Senior Credit Facility, in the amount of $10 million revolving
credit facility, was obtained by Cypress Communications pursuant to a Loan and
Security Agreement, dated July 12, 2002 between Cypress Communications and
Silicon Valley Bank. The Senior Credit Facility accrues interest at the prime
rate (with a floor of 4.75%) plus 2% per annum and matures on July 12, 2004,
unless terminated earlier. Borrowings under the Senior
-10-
Credit Facility are collaterized by all of the assets of Cypress Communications
and are unconditionally guaranteed by the Company. As of September 30, 2002 the
Company has no outstanding amounts under the Senior Credit Facility.
BRIDGE LOAN
The Bridge Loan, in the amount of $8 million term loan, was obtained by
the Company and Cypress Communications pursuant to a Loan Agreement dated July
16, 2002 among the Company, Cypress Communications, the JOC Trust, the ACM
Trust, the JCW Trust, Noro-Moseley and Wakefield (each, acting in such capacity,
a "Bridge Lender" and collectively, the "Bridge Lenders"). The Bridge Loan
accrues interest at 14% per annum, and matures on the earlier to occur of (i)
one business day following the maturity of the Senior Credit Facility and (ii)
July 16, 2005. Each Bridge Lender was entitled to receive an initial loan fee
equal to 2.5% of that portion of the Bridge Loan that was funded by such Bridge
Lender. Because the Bridge Loan was outstanding 60 days after the closing, the
Company and Cypress Communications became obligated to pay each Bridge Lender an
additional loan fee equal to 1.25% of the then outstanding principal balance of
such Bridge Lender's share of the Bridge Loan. Because the Bridge Loan has been
outstanding 90 days after the closing, the Company and Cypress Communications
became obligated subsequent to the end of the quarterly period ended September
30, 2002 to pay each Bridge Lender an additional loan fee equal to 1.25% of the
then outstanding principal balance of such Bridge Lender's share of the Bridge
Loan. If the Bridge Loan is outstanding 120 days after the closing, the Company
and Cypress Communications would become obligated to pay to each Bridge Lender
an additional loan fee equal to 1.00% of the then outstanding principal balance
of such Bridge Lender's share of the Bridge Loan. The loan fees described above
are cumulative and are payable on the earlier to occur of the maturity date of
the Bridge Loans or the date on which the Bridge Loans are paid in full. The
Company has accrued $280,000 for this fees, which were treated as interest
expense in the accompanying Unaudited Condensed Consolidated Statements of
Operations.
At the closing of the Bridge Loan, the Company issued the Bridge
Lenders warrants to purchase an aggregate of 400,000 shares of the Company's
common stock at an exercise price of $1.13 per share. These warrants are
exercisable for a term of 10 years and, based on the Black-Scholes pricing
model, were valued by the Company at $535,000. Assumptions used for the
Black-Scholes option-pricing model included: no dividend yield for all years,
expected volatility of 159 percent, risk-free interest rate of 5.08 percent and
expected life of 10 years. The debt discount will be treated as interest expense
and amortized over the earliest maturity date of the Bridge Loan. During the
three months ended September 30, 2002, the Company recorded additional interest
expense in the approximate amount of $67,000.
CONVERTIBLE NOTES
The Convertible Notes, in the amount of $10 million convertible notes,
were issued by the Company and Cypress Communications pursuant to a Purchase
Agreement dated July 16, 2002 among the Company, Cypress Communications, the JOC
Trust, the ACM Trust, the JCW Trust, Noro-Moseley and Wakefield (each, acting in
such capacity, a "Purchaser" and collectively, the `Purchasers"). The
Convertible Notes accrue interest at the rate of 7.5% per annum, compounded
quarterly, and payable at maturity of the notes, whether upon their stated
maturity of July 1, 2009, or earlier as a result of acceleration in the event of
a default or upon redemption of the Convertible Notes. The principal of and
accrued interest on the Convertible Notes is convertible into the Company's
common stock at $1.13 per share. The Convertible Notes are redeemable by the
Company or Cypress Communications at any time by payment of the outstanding
principal balance and accrued interest. In the event that the Convertible Notes
are redeemed, the Purchasers have been issued warrants which will then be
eligible for exercise to purchase the number of shares of common stock of the
Issuer that the Convertible Notes were convertible into on the redemption date
at a conversion price of $1.13 per share. In connection with the issuance of the
Convertible Notes, the Company, the Purchasers and the Bridge Lenders entered
into a registration rights agreement, which provides for the registration of the
common stock issuable upon (i) the conversion of the Convertible Notes; (ii) the
exercise of the Warrants issued in connection with the Bridge Loan; and (iii)
the exercise of the Warrants exercisable upon the redemption of the Convertible
Notes.
In connection with the issuance of the Convertible Notes, the
Purchasers were issued a total of 100 shares of the Company's Series A Preferred
Stock (the "Series A Preferred") without additional consideration. The rights of
the Series A Preferred are set forth in a Certificate of Designations adopted by
the Company's board of directors. The holders of a majority of the Series A
Preferred are entitled to elect two members of the Company's board of directors
and the holders of the Series A Preferred are entitled to receive dividends and
distributions equal to those payable to the holders of an equivalent number of
shares of the Company's common stock. In addition, the Company may not, without
the prior written consent of holders of a majority of the Series A Preferred,
(i) increase or decrease (other than by redemption or conversion) the authorized
number of shares of Series A Preferred; (ii)
-11-
cancel or modify the voting rights of the holders of Series A Preferred; (iii)
cancel or modify the rights of the holders of Series A Preferred; or (iv) amend,
waive, alter, modify or repeal any provision of the Certificate of Incorporation
or Bylaws of the Corporation, if such amendment, alternation, modification or
repeal would adversely affect the Series A Preferred, including the issuance of
preferred stock with voting rights senior to or pari passu with the Series A
Preferred. The Series A Preferred is redeemable by the Company in the event
that:
(a) at least 75% of the principal amount of the Convertible Notes
is converted into shares of common stock of the Company;
(b) at least 75% of the principal amount of the Convertible Notes
is redeemed;
(c) the Company has submitted an application in good faith to
apply for listing on AMEX, NASDAQ or another national exchange
to register its securities on such exchange, the average daily
trading price per share of the common stock as reported in
such application is at least $4.00 per share, and the Company
subsequently receives a comment from such exchange that its
application for listing will not be accepted so long as the
Series A Preferred remains outstanding with the voting rights
described herein; or
(d) the outstanding principal and interest on the Convertible
Notes are paid in full on the maturity date of the Convertible
Notes.
The redemption price for the Series A Preferred is $0.001 per share.
At the closing of the Convertible Notes, the Company issued the
Convertible Note Lenders warrants to purchase the number of shares of the
Company's common stock in to which the Convertible Note Lenders would be
convertible immediately prior to the redemption of such note at a price of
$1.13 per share. These warrants are exercisable if the Convertible Notes are
redeemed and have a life of 7 years. Due to the contingency noted above, the
Company will not record any charge until notes are redeemed. The Company has
estimated that based on the terms of the Convertible Notes that if the Company
redeemed the Convertible Notes it would redeem the entire amount. Therefore,
based on the Black-Scholes pricing model, the warrants were valued by the
Company at $12,035,000. Assumptions used for the Black-Scholes option-pricing
model included: no dividend yield for all years, expected volatility of 159
percent, risk-free interest rate of 4.81 percent and expected life of 7 years.
The Bridge Lenders and the Purchasers entered into an Intercreditor
(Subordination) Agreement, which, among other things, provides that under
certain limited circumstances, all amounts payable by the Company and Cypress
Communications under the Bridge Loan and the Convertible Notes will be payable,
pro rata among the Bridge Lenders and the Purchasers, on a pari passu basis. To
induce the JOC Trust, the ACM Trust and the JCW Trust to enter into the
Intercreditor (Subordination) Agreement, the Company and Cypress Communications
entered into a Letter Agreement. Pursuant to the Letter Agreement, the Company
and Cypress Communications agreed to pay the Bridge Lenders and the Purchasers,
in proportion to the amounts lent by them under the Bridge Loan, a fee of
$1,000,000 (the "Risk Allocation Fee"). The Risk Allocation Fee is payable to
certain of the Bridge Lenders and the Purchasers upon the earlier to occur of
the achievement of certain earnings milestones set forth in the Letter Agreement
or June 30, 2003.
As the exercise price on the convertible notes was less than the fair
market value of the stock on the consummation date, a beneficial conversion
feature was created. The Company has calculated the beneficial conversion
feature embedded in the Convertible Notes in accordance with EITF No. 98-5 and
EITF No. 00-27 and recorded approximately $2.400,000 as a debt discount. This
discount is being amortized over the seven-year life of the Convertible Notes.
During the three months ended September 30, 2002, the Company recorded
approximately $85,000 in additional interest expense.
FUTURE ANNUAL COMMITMENTS
Future annual payments under capital leases and long term debt, net of
discounts, as of September 30, 2002 are as follows:
2002 $ 131,000
2003 454,000
2004 29,000
2005 8,014,000
2006 --
Thereafter 7,696,000
-------------
Total 16,324,000
Less current portion (514,000)
-------------
Long-term portion $ 15,810,000
============
-12-
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 required 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 provides a single accounting model
for 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 amended 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 has affected the
Company `s financial presentation 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 rescinded 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 rescinded FASB Statement No. 44, Accounting for Intangible Assets
of Motor Carriers. This Statements amended 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 amended 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 must be applied in fiscal
year beginning after May 15, 2002. The provisions of this Statement related to
Statement 13 will be applicable 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.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires the recording
of costs associated with exit or disposal activities at their fair values
-13-
when a liability has been incurred. Under previous guidance, certain exit costs
were accrued upon management's commitment to an exit plan, which is generally
before an actual liability has been incurred. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company does not expect the adoption of SFAS 146 will have a significant
impact on its consolidated results of operations, financial position or cash
flows.
-14-
CYPRESS COMMUNICATIONS, INC.
(PREDECESSOR)
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 2002
December 31, 2001 (a) (unaudited)
----------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (includes $770,000 of restricted cash) $ 33,757,000 $ 32,680,000
Accounts receivables, net 3,136,000 3,217,000
Prepaid expenses and other current assets 259,000 320,000
------------- -------------
TOTAL CURRENT ASSETS 37,152,000 36,217,000
------------- -------------
PROPERTY AND EQUIPMENT, NET 27,190,000 26,771,000
OTHER ASSETS 1,192,000 412,000
------------- -------------
$ 65,534,000 $ 63,400,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & accrued liabilities 10,018,000 $ 9,110,000
Current notes payable & long term portion of long term debt 446,000 347,000
------------- -------------
TOTAL CURRENT LIABILITIES 10,464,000 9,457,000
------------- -------------
LONG TERM DEBT 335,000 632,000
------------- -------------
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 (508,739,000) (516,703,000)
Accumulated other comprehensive income (47,000) 181,000
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 54,735,000 53,311,000
------------- -------------
$ 65,534,000 $ 63,400,000
============= =============
(a) Represents the date Cypress Communications was acquired by U.S.
RealTel, Inc. for accounting purposes.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-15-
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 DILUTED $ (1.56)
=================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,926,000 (b)
=================
(a) Represents the date Cypress Communications 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.
-16-
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) Represents the date Cypress Communications was acquired by U.S.
RealTel, Inc. for accounting purposes.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-17-
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
Communications") provide a full range of communications services to businesses
in multi-tenant office buildings located in selected major metropolitan markets
within the United States. Cypress Communications' 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 Communications
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.
In February 2002, Cypress Communications was acquired by U.S. RealTel,
Inc. ("U.S. RealTel") (Note 2). During 2002, Cypress Communications will be
considered the predecessor and, therefore, U.S. RealTel's reporting includes
prior year financial statements for Cypress Communications as well as for U.S.
RealTel for purposes of comparability.
The condensed consolidated financial statements included herein are
unaudited and include all 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 and such adjustments consist of
only normal recurring adjustments. 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 Communications' 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 Communications entered into a definitive
agreement providing for the sale of Cypress Communications 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 Cypress Communications, 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
$18.9 million, which included cash paid for options to purchase shares of
Cypress Communications under option plans in the amount of $58,000 and expenses
incurred in connection with the acquisition of approximately $1,136,000. 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 Communications, with Cypress Communications 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 Communications were vested to permit the
holders to tender the shares that were the subject of such awards. In connection
with the acquisition of Cypress Communications, deferred compensation in the
amount of $6,141,000 was expensed. In addition, upon the effectiveness of the
merger, each then-outstanding option to purchase shares of Cypress
Communications common stock under any option plan, program or arrangement (each
an "Option"), whether or not such Option was 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
tender offer price over the applicable per share exercise price of such Option
and (ii) the number of shares subject to such Option.
-18-
All other rights to acquire equity in Cypress Communications, including
outstanding warrants held by property owners and operators and the warrants
issued in connection with the hiring of Cypress Communications' former CEO,
although not canceled in connection with the merger, are expected to expire
unexercised because of the high exercise prices at which such warrants were
issued.
In connection with its acquisition by U.S. RealTel and the resulting
change of control, Cypress Communications paid out severance of $400,000 to its
former CEO under a severance and separation arrangement that existed at December
31, 2001.
Please see 8-K/A dated May 7, 2002 for more information related to our
Predecessor.
-19-
PART I
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
information set forth in our Consolidated Financial Statements and Notes thereto
included in "Item 1. Financial Statements" and the "Statement Regarding Forward
Looking Statements" appearing in Item 1.
OVERVIEW
Beginning in February 2002 with our acquisition of Cypress
Communications, Inc. ("Cypress Communications"), 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. Also,
during the nine month period ended September 30, 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.
Except for a 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 $7.4 million on the acquisition of Cypress
Communications, under purchase accounting, we have incurred significant
operating losses and experienced negative cash flows from operations since
inception. Moreover, we expect to continue to incur costs as part of our efforts
to achieve profitability. Losses from continuing operations for the nine months
ended September 30, 2002 were $11.5 million. As of September 30, 2002, we had
cash and cash equivalents of approximately $2.1 million.
The Unaudited Condensed Consolidated Statements for the nine months
ended September 30, 2002 include operations of Cypress Communications from
February 1, 2002, the date of its acquisition for accounting purposes.
RESULTS OF OPERATIONS
U.S. RealTel three months ended September 30, 2002 compared to Cypress
Communications (predecessor) three months ended September 30, 2001
REVENUES. For the three months ended September 30, 2002, revenues of
our Cypress Communications telecommunications services business represented
substantially all of our consolidated revenues. Revenues from this business
increased to approximately $20.5 million for the three months ended September
30, 2002 from approximately $4.7 million for the three months ended September
30, 2001. The increase in revenues primarily resulted from management fees
related to the customer base we acquired in July 2002 from ABN/STS and a
marginal increase in customer base.
Revenues from our discontinued Latin American operations are included
net of operating costs under loss from discontinued operations. Revenues in
Argentina for the three months ended September 30, 2001 were approximately
$74,000. No revenues were recorded in Argentina for the three months ended
September 30, 2002 due to the closing of the operations in March 2002. Our
Brazilian operations had no revenues.
REVENUES-NET. Revenues-net (after direct costs) increased to
approximately $10.0 million for the three months ended September 30, 2002 from a
loss of approximately $528,000 for the three months ended September 30, 2001.
Margins increased to approximately 49% in 2002 from approximately (11%) in 2001,
due to cost reductions through employee reductions and other measures and the
additional revenues-net provided by the customer base we acquired in July 2002
from ABN/STS, as discussed above.
Revenues-net in Argentina, which are included in the loss from
discontinued operations, for the three months ended September 30, 2001 were
approximately $67,000. No revenues or direct costs were recorded in Argentina
for the three months ended September 30, 2001 due to the closing of the
operations in March 2002, as discussed above.
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OPERATING EXPENSES. Operating expenses decreased to approximately
$9,667,000 for the three months ended September 30, 2002 from approximately
$41,861,000 for the three months ended September 30, 2001. The decrease in
operating expenses resulted from tighter cost controls net of the effect of the
additional expenses related to the operation of the assets acquired from
ABN/STS. Sales and marketing expenses decreased to approximately $1,223,000 for
the three months ended September 30, 2002 from approximately $2,402,000 for the
three months ended September 30, 2001 due to reduced marketing activities during
the first quarter 2002. General and administrative expenses decreased to
approximately $8.4 million for the three months ended September 30, 2002 from
approximately $12.4 million for the three months ended September 30, 2001.
General and administrative expenses for the three months ended September 30,
2001 included depreciation and amortization expense of approximately $6,765,000.
Depreciation and amortization expense for the three months ended September 30,
2002 was approximately $643,000. The decrease is due to the write down of all
long-term assets of Cypress Communications in an aggregate amount of $27.2
million resulting from the application of the purchase method of accounting on
the Cypress Communications acquisition net of the increase due to the assets
acquired from ABN/STS. Restructuring and other charges decreased to
approximately $60,000 for the three months ended September 30, 2002 from
approximately $27 million for the three months ended September 30, 2001.
OTHER INCOME AND (EXPENSE). Other income and (expense) was
approximately ($2,366,000) during three months ended September 30, 2002, as
compared with $468,000 for the three months ended September 30, 2001. Other
income for the three months ended September 30, 2001 represented interest
revenue from excess cash invested by Cypress Communications. Interest expense
for the three months ended September 30, 2002 consisted primarily of interest
and finance charges incurred by Cypress Communications in connection with the
acquisition of certain assets of Intermedia Advanced Building Networks, the
shared tenant telecommunications services business of WorldCom, Inc.
INCOME TAXES. For the three months ended September 30, 2002 and 2001,
no income tax benefit from the Company's net operating losses was recognized
because of uncertainty as to whether the benefit from such net operating losses
will be realized.
NET LOSS. Our net loss for the three months ended September 30, 2002
was approximately $2,058,000 ($0.35 per basic and diluted common share). For the
three months ended September 30, 2001, the net loss was approximately
$41,921,000. The decrease in net loss resulted from the implementation of the
strategy and cost containment plan of Cypress Communications net of the effect
of the ABN/STS acquisition, as discussed above.
U.S. RealTel nine months ended September 30, 2002 compared to Cypress
Communications (predecessor) nine months ended September 30, 2001
REVENUES. For the nine months ended September 30, 2002, revenues of our
Cypress Communications telecommunications services business represented
substantially all of our consolidated revenues. Revenues from this business
increased to approximately $28.7 million for the nine months ended September 30,
2002 from approximately $14.1 million for the nine months ended September 30,
2001. The increase in revenues resulted from management fees related to the
customer base we acquired in July 2002 from Intermedia Advanced Building
Networks, the shared tenant telecommunications services business of WorldCom,
Inc (ABN/STS).
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 nine months ended September 30, 2002
from approximately $182,000 for the nine months ended September 30, 2001. The
decrease in revenues resulted from the devaluation of the Argentinean peso after
the Argentinean currency crashed in January 2002 and the closing of our
Argentinean operations in March 2002. Our Brazilian operations had no revenues.
REVENUES-NET. Revenues-net (after direct costs) increased to
approximately $11.9 million for the nine months ended September 30, 2002 from a
loss of approximately $5.9 million for the nine months ended September 30, 2001.
Margins increased to approximately 42% in 2002 from approximately (42%) in 2001,
due to the increased revenue volumes acquired in July 2002, and reduced network
costs.
Revenues-net for Argentina, which are included in the loss from
discontinued operations, decreased to approximately $13,000 for the nine months
ended September 30, 2002 from approximately $86,000 for the nine months ended
September 30, 2001. The decrease in revenues-net resulted from the devaluation
of the Argentinean peso after the Argentinean currency crashed in January 2002
and the closing of the Argentinean operations in March 2002.
-21-
OPERATING EXPENSES. Operating expenses decreased to approximately
$19,186,000 for the nine months ended September 30, 2002 from approximately
$122,180,000 for the nine months ended September 30, 2001. The decrease in
operating expenses occurred due to lower employment levels from January, 2002,
and there were no write downs of assets in 2002 as had occurred in 2001 net of
the effect of additional expenses related to the operation of assets acquired
from ABN/STS. Sales and marketing expenses decreased to approximately $2,629,000
for the nine months ended September 30, 2002 from approximately $8,585,000 for
the nine months ended September 30, 2001 due to substantially fewer employees in
sales and marketing roles and tighter cost controls during the year 2002.
General and administrative expenses decreased to approximately $16.4 million for
the nine months ended September 30, 2002 from approximately $46.1 million for
the nine months ended September 30, 2001. General and administrative expenses
for the nine months ended September 30, 2001 included depreciation and
amortization expense of approximately $21,325,000. Depreciation and amortization
expense for the nine months ended September 30, 2002 was approximately $645,000.
The decrease was due to the write down of all long-term assets of Cypress
Communications in an aggregate amount of $27.2 million resulting from the
application of the purchase method of accounting on the Cypress Communications
acquisition net of the increase due to the assets acquired from ABN/STS.
Restructuring and other charges decreased to approximately $140,000 for the nine
months ended September 30, 2002 from approximately $67.5 million for the nine
months ended September 30, 2001.
OTHER INCOME AND (EXPENSE). Other income and (expense) was
approximately ($4,315,000) during nine months ended September 30, 2002, as
compared with $2,304,000 for the nine months ended September 30, 2001. Other
income for the nine months ended September 30, 2001 represented interest revenue
from excess cash invested by Cypress Communications. Interest expense for the
nine months ended September 30, 2002 consisted primarily of approximately $4.3
million in interest and finance charges incurred by U.S. RealTel in connection
with the acquisition of Cypress Communications, and $2.8 in interest and finance
charges incurred by Cypress Communications in connection with the acquisition of
certain assets of ABN/STS.
EXTRAORDINARY GAIN. The nine months ended September 30, 2002 includes
an extraordinary gain of approximately $7,440,000, which resulted after the
elimination of all long-term assets of Cypress Communications in an aggregate
amount of approximately $27.2 million (Note 4 to Unaudited Condensed
Consolidated Financial Statements).
INCOME TAXES. For the nine months ended September 30, 2002 and 2001, no
income tax benefit of the Company's consolidated net operating losses was
recognized because of uncertainty as to whether the benefit from such net
operating losses will be realized.
NET LOSS. Our net loss for the nine months ended September 30, 2002 was
approximately $2,138,000 ($.36 per basic and diluted common share). For the nine
months ended September 30, 2001, the net loss was approximately $125,796,000.
The decrease in net loss resulted from the implementation of the strategy and
cost containment plan of Cypress Communications and the ABN/STS acquisition, as
discussed above, net of the effect of reduced interest income, increased finance
charges, and an extraordinary gain of $7,440,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in our operations was approximately $8,869,000 for the
nine months ended September 30, 2002 versus approximately $44,724,000 for the
nine months ended September 30, 2001. The decrease in net cash used for
operating activities in 2002 was primarily due to lower employee counts from
January 2002 and reduced operating expenses, combined with the net benefits
resulting from the use of the assets we acquired in July 2002 from
ABN/STS.
Cash used by investing activities was approximately $8,816,000 for the
nine months ended September 30, 2002, as compared with cash provided of
approximately $28,928,000 for the nine months ended September 30, 2001. Cash
used in 2002 was for the acquisition of Cypress Communications and certain
assets from ABN/STS, net of approximately $32.7 million in cash acquired on the
Cypress acquisition. Cash provided in 2001 was primarily from the sale of
short-term investments and property and equipment, net of capital expenditures.
Our primary sources of liquidity have been proceeds from the issuance
of common stock, convertible debentures, lines of credit and bridge loans, as
well as proceeds from the sale of our former North American telecommunications
rights operations in December 2000, and cash acquired though the acquisition of
Cypress Communications. Cash provided from financing activities was
approximately $17,741,000 for the nine months
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ended September 30, 2002, as compared to cash used of approximately $2,673,000
for the nine months ended September 30, 2001. Cash used during the nine months
ended September 30, 2002 was to pay a bridge loan for approximately $16.4
million, in connection to the Cypress Communications acquisition, to pay a
credit line for approximately $8 million, in connection to the ABN/STS
acquisition, to pay for capital lease obligations of Cypress Communications and
for the acquisition of treasury stock, net of the effect of financing raised of
approximately $26 million in connection to the ABN/STS acquisition (Notes 4 and
8 to Unaudited Condensed Consolidated Financial Statements). Cash used during
the nine months ended September 30, 2001 was to return an investment to Cypress
Communications' partner in its Canadian subsidiary of approximately $2,333,000
and to pay capital lease obligations of approximately $340,000.
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) completing the acquisition of Cypress Communications and
making certain adjustments to Cypress Communications' staffing
levels and cost structure (Note 4 to Unaudited Condensed
Consolidated Financial Statements),
(ii) discontinuing operations in Argentina and Brazil (Note 5 to
Unaudited Condensed Consolidated Financial Statements),
(iii) completing the purchase of certain assets of Intermedia
Advanced Building Networks and the shared tenant
telecommunications services business of WorldCom, Inc. (Note 4
to Unaudited Condensed Consolidated Financial Statements), and
(iv) raising $26 million in connection to such acquisition.
As of September 30, 2002, we had cash and cash equivalents of
approximately $2.1 million. We believe that by capitalizing on the
infrastructure and the customer bases we acquired through our acquisitions of
Cypress Communications and the assets of ABN/STS. (Note 4 to Unaudited Condensed
Consolidated Financial Statements), and reducing our operating costs, we will be
able to return to cash flow-positive operations by the fourth quarter of the
year 2002.
However, in the short run, the disposition of our international
operations along with our efforts to develop the Cypress Communications
telecommunications services business, the purchase of certain of the assets of
ABN/STS and the addition of new debt service in connection with the financing
raised for the most recent acquisition, may continue to adversely impact our
cash position. No assurance can be given that we will be able to operate on a
profitable basis. Likewise, no assurance can be given that we can achieve
sufficient profitability to support the debt service for the new debt raised in
connection with our acquisition of certain assets from ABN/STS. Furthermore, the
terms of the indebtedness we incurred in connection with the acquisition of
certain assets of ABN/STS contain restrictive covenants that limit our ability
to incur additional indebtedness, pay dividends or undertake certain other
transactions. We have also pledged certain assets as security under our senior
credit facility. Therefore, we must devote a substantial portion of our cash
flow to service our 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 such financial
statements were prepared based on the assumption that we 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 include the Cypress Communications
and the ABN/STS acquisitions 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 such that
seasonality would cause any material liquidity issues.
ADDITIONAL RISKS
The Company acquired all of the ABN/STS assets shortly before WorldCom
and certain of its subsidiary corporations, filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code on July 21, 2002. In
connection with the transaction, the Company entered into a variety of
agreements under an Omnibus Post-Closing Service Agreement pursuant to which,
among other things, WorldCom and its affiliates are to provide the Company with
certain significant services. The Bankruptcy Code entitles a debtor to reject
"executory" contracts, that is, contracts where some future act remains to be
done, as in the case with the agreement with WorldCom. A party to a rejected
agreement may be entitled to damages from the debtor for breach of contract.
However, such a claim would likely be an unsecured claim. WorldCom's bankruptcy
case is in its early stages. WorldCom has indicated that it intends to seek
approval to assume our agreement under the Bankruptcy Code, but if WorldCom
rejected this agreement or otherwise failed to meet its commitments under this
agreement, the Company would have to pursue alternative strategies to obtain
similar services that could result in delays, interruptions or additional
expenses associated with the offering of our services. This could potentially
have a material adverse effect on our business and results of operations until
such strategies are implemented. In addition, while the Company is not aware of
any claims or challenges to its acquisition of the ABN/STS assets or its related
contracts, the transaction remains subject to review by the creditors of
WorldCom or the bankruptcy court.
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 we
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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. Upon adoption of SFAS 142, we
were required 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. Under SFAS 142 we must 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 will 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. Under SFAS 142 we must complete a transitional goodwill
impairment test nine months from the date we adopt it. We also must reassess the
useful lives of other intangible assets within the first interim quarter after
our adoption of SFAS 142.
We adopted SFAS Nos. 141 and 142 during the first quarter 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. While the provision of this statement
will affect us in 2002 because of the discontinuation of our Latin American
operations. The exact extend of such effect has not been determined.
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.
Among other things, 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 are
applicable in fiscal years beginning after May 15, 2002. The provisions of this
Statement related to Statement 13 should be for transactions occurring after May
15, 2002. Early application of the provisions of this Statement is encouraged.
We do not expect the adoption of SFAS 145 will have a significant impact on our
consolidated results of operations, financial position or cash flows.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes, primarily as a result any
borrowing under our senior credit facility. No action has been taken to cover
interest rate market risk, and we are not a party to any interest rate market
risk management activities.
ITEM 4. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures - Our Chief Executive
Officer and our Chief Financial Officer, after evaluating the effectiveness of
the Company's "disclosure controls and procedures" (as defined in the Securities
Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c). as of a date (the
"Evaluation Date") within 90 days before the filing date of this quarterly
report, have concluded that as of the Evaluation Date, our disclosure controls
and procedures were adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made to them by others
within those entities.
(b) Changes in internal controls - There were no significant changes in our
internal controls or to our knowledge, in other factors that could significantly
affect our disclosure controls and procedures subsequent to the Evaluation Date.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certificate of Charles B. McNamee, Chief Executive Officer
pursuant to 18 U.S.C., Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certificate of Gregory P. McGraw, President, Chief Financial
Officer and Chief Operating Officer pursuant to 18 U.S.C.,
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
Two reports on Form 8-K were filed during the quarter for which this
report is filed.
Date Item Reported On
--------------------------------------------------------------------------------
September 30, 2002 Item 4. Changes In Registrant's Certifying Accountant.
July 31, 2002 Item 2. Acquisition or Disposition of Assets.
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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: November 19, 2002 By: /s/ Charles B. McNamee
--------------------- -------------------------------------
Charles B. McNamee
Chief Executive Officer
Dated: November 19, 2002 By: /s/ Gregory P. McGraw
--------------------- -------------------------------------
Gregory P. McGraw
President, Chief Financial Officer
and Chief Operating Officer
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CERTIFICATIONS
I, Charles B. McNamee, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. RealTel, Inc. (the
"Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report.
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this quarter
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Charles B. McNamee
-------------------------------------
Charles B. McNamee
Chief Executive Officer
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CERTIFICATIONS
I, Gregory P. McGraw, certify that:
1. I have reviewed this quarterly report on Form 10-Q of U.S. RealTel, Inc. (the
"Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report.
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this quarter
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the Registrant's ability to record, process,
summarize and report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Gregory P. McGraw
-----------------------------------------
Gregory P. McGraw
President, Chief Financial Officer and
Chief Operating Officer
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EXHIBIT INDEX
99.1 Certificate of Charles B. McNamee, Chief Executive Officer pursuant to
18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certificate of Gregory P. McGraw, President, Chief Financial Officer
and Chief Operating Officer pursuant to 18 U.S.C., Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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