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 JUNE 30, 2002
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ______________ to _____________
Commission file number 000-30401
U.S. REALTEL, INC.
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(Name of small business issuer in its charter)
DELAWARE 36-4166222
----------------------------------- -----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 PIEDMONT CENTER, SUITE 100, ATLANTA, GEORGIA 30305
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(Address of principal executive offices)
(404) 869-2500
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(Issuer's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the numbers of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date: 5,873,587 shares of common stock as
of August 14, 2002
Transitional Small Business Disclosure Format: Yes [ ] No [X]
U.S. REALTEL, INC.
QUARTERLY PERIOD ENDED JUNE 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 .................................. 18
PART II OTHER INFORMATION
Item 4 Submission of Matters to a Vote of Security holders.................... 23
Item 5 Other Information...................................................... 25
Item 6. Exhibit and Reports on Form 8-K........................................ 25
Signatures............................................................. 27
PART I
ITEM 1 - FINANCIAL STATEMENTS
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS
REGARDING FUTURE EVENTS OR OUR FUTURE FINANCIAL AND OPERATIONAL PERFORMANCE.
FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING MARKETS FOR OUR
SERVICES; TRENDS IN REVENUES, GROSS PROFITS AND ESTIMATED EXPENSE LEVELS;
LIQUIDITY AND ANTICIPATED CASH NEEDS AND AVAILABILITY; AND ANY STATEMENT THAT
CONTAINS THE WORDS "ANTICIPATE," "BELIEVE," "PLAN," "INTEND," "ESTIMATE,"
"EXPECT," "SEEK" AND OTHER SIMILAR EXPRESSIONS. THE FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS REPORT REFLECT OUR CURRENT EXPECTATIONS AND BELIEFS, AND WE DO
NOT UNDERTAKE PUBLICLY TO UPDATE OR REVISE THESE STATEMENTS, EVEN IF EXPERIENCE
OR FUTURE CHANGES MAKE IT CLEAR THAT ANY PROJECTED RESULTS EXPRESSED IN THIS
REPORT, ANNUAL OR QUARTERLY REPORTS TO SHAREHOLDERS, PRESS RELEASES OR COMPANY
STATEMENTS WILL NOT BE REALIZED. IN ADDITION, THE INCLUSION OF ANY STATEMENT IN
THIS REPORT DOES NOT CONSTITUTE AN ADMISSION BY US THAT THE EVENTS OR
CIRCUMSTANCES DESCRIBED IN SUCH STATEMENT ARE MATERIAL. FURTHERMORE, WE WISH TO
CAUTION AND ADVISE READERS THAT THESE STATEMENTS ARE BASED ON ASSUMPTIONS THAT
MAY NOT MATERIALIZE AND MAY INVOLVE RISKS AND UNCERTAINTIES, MANY OF WHICH ARE
BEYOND OUR CONTROL, THAT COULD CAUSE ACTUAL EVENTS OR PERFORMANCE TO DIFFER
MATERIALLY FROM THOSE CONTAINED OR IMPLIED IN THESE FORWARD-LOOKING STATEMENTS.
THESE RISKS AND UNCERTAINTIES INCLUDE OUR ABILITY TO ACHIEVE POSITIVE CASH FLOW
BY INCREASING REVENUES AND REDUCING EXPENSES IN OUR NEWLY ACQUIRED
TELECOMMUNICATIONS SERVICES BUSINESS IN THE U.S., THE COSTS THAT MAY BE
ASSOCIATED DISCONTINUING OUR LATIN AMERICAN TELECOMMUNICATIONS RIGHTS BUSINESS,
AND OUR ABILITY TO OBTAIN ADDITIONAL OUTSIDE FINANCING. INVESTORS ARE DIRECTED
TO CONSIDER THE OTHER 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.
Condensed Consolidated Balance Sheets at June 30, 2002 (unaudited) and December 31, 2001 ........... 2
Unaudited Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2002 and 2001 and for the three and six months ended June 30, 2001 (predecessor)......... 3
Unaudited Condensed Consolidated Statement of Stockholders' Equity for the six months ended
June 30, 2002..................................................................................... 4
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002
and 2001 and for the six months ended June 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................................................................................. 13
Unaudited Condensed Consolidated Statement of Operations for the period from January 1, 2002
through January 31, 2002 (acquisition date)...................................................... 14
Unaudited Condensed Consolidated Statement of Cash Flow for the period from January 31, 2002
through January 31, 2002 (acquisition date)...................................................... 15
Notes to Unaudited Condensed Consolidated Financial Statements ..................................... 16
-1-
U.S. REALTEL, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
================================================================================
June 30, 2002 December 31, 2001
------------- -----------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,301,000 $ 2,061,000
Accounts receivables, net 2,639,000 40,000
Prepaid expenses and other current assets 1,113,000 134,000
------------ ------------
TOTAL CURRENT ASSETS 11,053,000 2,235,000
------------ ------------
PROPERTY AND EQUIPMENT, NET 61,000 55,000
OTHER ASSETS 263,000 92,000
------------ ------------
$ 11,377,000 $ 2,382,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 10,516,000 $ 463,000
Current notes payable and long term debt 250,000 100,000
------------ ------------
TOTAL CURRENT LIABILITIES 10,766,000 563,000
------------ ------------
DEFERRED INCOME 301,000 88,000
LONG TERM DEBT 185,000 50,000
STOCKHOLDERS' EQUITY
Common stock 6,000 6,000
Additional paid-in capital 20,353,000 19,599,000
Accumulated deficit (19,374,000) (19,294,000)
Accumulated other comprehensive income -- 2,170,000
------------ ------------
985,000 2,481,000
Less: Treasury Stock (860,000) (800,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 125,000 1,681,000
------------ ------------
$ 11,377,000 $ 2,382,000
============ ============
================================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-2-
U.S. REALTEL, INC
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
================================================================================
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
-------------------------------------------- --------------------------------------------
JUNE 30, JUNE 30,
JUNE 30, JUNE 30, 2001 JUNE 30, JUNE 30, 2001
2002 (a) 2001 (PREDECESSOR) 2002 2001 (PREDECESSOR)
------------ ------------ ------------ ------------ ------------ ------------
REVENUES $ 8,172,000 $ -- $ 9,408,000 $ 4,938,000 $ -- $ 4,751,000
DIRECT COSTS 6,260,000 -- 14,800,000 3,974,000 -- 6,632,000
------------ ------------ ------------ ------------ ------------ ------------
REVENUES - NET OF DIRECT COSTS
1,912,000 -- (5,392,000) 964,000 -- (1,881,000)
OPERATING EXPENSES
Sales and marketing 1,406,000 71,000 6,183,000 809,000 62,000 2,480,000
General and administrative 8,033,000 2,143,000 33,609,000 3,015,000 1,523,000 15,034,000
Restructuring and other
charges 80,000 -- 40,527,000 80,000 -- 4,617,000
------------ ------------ ------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 9,519,000 2,214,000 80,319,000 3,904,000 1,585,000 22,131,000
------------ ------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 41,000 215,000 1,836,000 36,000 51,000 695,000
Interest expense (2,001,000) (1,000) -- (288,000) -- --
Net loss on disposal of assets 11,000 (4,000) -- 17,000 (4,000) --
------------ ------------ ------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) -
NET (1,949,000) 210,000 1,836,000 (235,000) 47,000 695,000
------------ ------------ ------------ ------------ ------------ ------------
Loss from continuing operations (9,556,000) (2,004,000) (83,875,000) (3,175,000) (1,538,000) (23,317,000)
GAIN (LOSS) FROM DISCONTINUED
OPERATIONS 2,036,000 (1,815,000) -- (68,000) (1,003,000) --
------------ ------------ ------------ ------------ ------------ ------------
Loss before extraordinary gain (7,520,000) (3,819,000) (83,875,000) (3,243,000) (2,541,000) (23,317,000)
EXTRAORDINARY GAIN (LOSS) 7,440,000 -- -- (746,000) -- --
------------ ------------ ------------ ------------ ------------ ------------
NET LOSS $ (80,000) $ (3,819,000) $(83,875,000) $ (3,989,000) $ (2,541,000) $(23,317,000)
============ ============ ============ ============ ============ ============
NET LOSS PER COMMON SHARE
BASIC AND DILUTED
Loss from continuing operations $ (1.62) $ (0.31) $ (17.44) $ (0.54) $ (0.24) $ (4.84)
Discontinued operations 0.35 (0.28) -- (0.01) (0.15) --
Extraordinary gain 1.26 -- -- (0.13) -- --
------------ ------------ ------------ ------------ ------------ ------------
NET LOSS PER COMMON
SHARES BASIC AND DILUTED $ (0.01) $ (0.59) $ (17.44) $ (0.68) $ (0.39) $ (4.84)
============ ============ ============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 5,913,000 6,468,000 4,810,000(b) 5,891,000 6,468,000 4,814,000(b)
============ ============ ============ ============ ============ ============
================================================================================
(a) Includes the operations of Cypress Communications, Inc. from
February 1, 2002 through June 30, 2002.
(b) Reflects the 1-for-10 reverse stock split during August 2001.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-3-
U.S. REALTEL, INC
UNAUDITED CONDENSED CONSOLIDATED STATEMENT
OF CHANGES IN STOCKHOLDERS' EQUITY
================================================================================
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREAUSRY STOCK
----------------- PAID-IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE ----------------
SHARES AMOUNT CAPITAL 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 -- -- 754,000 -- -- -- -- -- 754,000
(unaudited)
Payment for treasury
stock
(unaudited) -- -- -- -- -- -- 61,000 (60,000) (60,000)
Net loss (unaudited) -- -- -- (80,000) (80,000) -- -- -- (80,000)
Cumulative effect on
exchange rates -- -- -- -- (2,170,000) (2,170,000) -- -- (2,170,000)
(unaudited)
Other comprehensive
Loss (unaudited) -- -- -- -- $(2,250,000) -- -- -- --
--------- ------ ----------- ------------ =========== ----------- ------- --------- -----------
Balance, at
June 30, 2001
(unaudited) 6,468,000 $6,000 $20,353,000 $(19,374,000) $ -- 594,000 $(860,000) $ 125,000
========= ====== =========== ============ =========== ======= ========= ===========
================================================================================
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-4-
U.S. REALTEL, INC.
UNAUDITED CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
================================================================================
FOR THE SIX MONTHS ENDED
-------------------------------------------------
JUNE 30,
JUNE 30, JUNE 30, 2001
2002(a) 2001 (PREDECESSOR)
------------ ----------- ------------
Cash flows from operating activities:
Net income (loss) $ (80,000) $(3,819,000) $(83,875,000)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 2,000 69,000 15,942,000
Bad debt expense 70,000 -- --
Restructuring charges 80,000 -- 38,890,000
Stock warrants in connection with
acquisition 754,000 -- --
Net loss on disposal of assets 37,000 6,000 --
Extraordinary gain (7,440,000) -- --
Discontinued operations (2,206,000) 342,000 --
Other non-cash items -- -- (6,000)
Changes in assets and liabilities,
net of assets acquired:
(Increase) decrease in accounts
receivable 548,000 9,000 (431,000)
(Increase) decrease in prepaid
expenses and other current assets (659,000) 57,000 951,000
(Increase) decrease in other assets 92,000 -- --
Decrease in accounts payable and
accrued expenses 557,000 (550,000) (8,489,000)
Deferred income (53,000) -- --
------------ ----------- ------------
Net cash used in operating activities (8,298,000) (3,886,000) (37,018,000)
------------ ----------- ------------
Cash flows from investing activities:
Sale of short-term investment -- -- 35,231,000
Investment in subsidiary and
capitalized costs (18,645,000) (600,000) --
Capital expenditures (45,000) (13,000) (13,840,000)
Sale of property and equipment -- -- 5,813,000
Cash acquired in acquisitions 32,680,000 -- --
------------ ----------- ------------
Net cash provided by (used in) investing
activities 13,990,000 (613,000) 27,204,000
------------ ----------- ------------
Cash flows from financing activities:
Return of investment -- -- (2,333,000)
Proceeds from note payable in connection
to acquisition 16,436,000 -- --
Repayment of note payable in connection
with acquisition (16,436,000) -- --
Principal payments of long-term debt
and capital leases (392,000) -- (240,000)
Payment for release of warrants -- (50,000) --
Payment for acquisition of treasury stock (60,000) -- --
------------ ----------- ------------
Net cash used in financing activities (452,000) (50,000) (2,573,000)
------------ ----------- ------------
Effect of Exchange Rates Changes on Cash -- -- (112,000)
------------ ----------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 5,240,000 (4,549,000) (12,499,000)
Cash and Cash Equivalents, at
beginning of period 2,061,000 9,425,000 28,108,000
------------ ----------- ------------
Cash and Cash Equivalents, at end of period $ 7,301,000 $ 4,876,000 $ 15,609,000
============ =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
NON CASH TRANSACTIONS:
ACCOUNTS PAYABLE IN CONNECTION WITH CYPRESS
ACQUISITION $ 306,000 -- --
================================================================================
(a) Includes the operations of Cypress Communications, Inc. from
February 1, 2002 through June 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 inactive finance
subsidiary, its 71%-owned Argentinean subsidiary in process of liquidation
(discontinued operations), its 89%-owned Brazilian subsidiary in process of
liquidation (discontinued operations), its wholly owned telecommunications
subsidiary Cypress Communications, Inc. and its inactive wholly owned consulting
subsidiary. 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's original business was leasing telecommunication rights
from owners of real property in North America for sublease to telecommunications
providers requiring access to real estate for their services to reach building
occupants and/or for placement of antenna networks. During 1998, the Company
established a separate wholly owned finance subsidiary (inactive) and a
71%-owned Argentinean subsidiary. In February 2000, the Company established an
89%-owned Brazilian subsidiary. The minority interests of both international
subsidiaries are substantially owned by related parties including among others,
a former officer and director of the Company and a market maker of our common
stock.
In December 2000, the Company sold its North American operations and
entered into a two-year noncompete agreement with respect to future business in
this market segment in North America, Mexico and certain parts of Europe. As a
result of this sale, the Company's operations were conducted entirely outside of
the U.S., in Argentina and Brazil.
In February 2002, the Company completed its acquisition of Cypress
Communications, Inc. ("Cypress Communications ") (Note 4). As a result of this
acquisition, the Company entered into a new business--providing comprehensive
data, voice and video communications services to businesses located in
commercial office buildings in select major metropolitan markets within the
United States, and is therefore no longer considered to be in a development
stage. In March 2002, the Company decided to discontinue the operations in Latin
America (Note 5). As a result of this decision, the Company's operations are now
limited to the new telecommunications services business the Company entered in
connection with the Cypress Communications acquisition.
Initially, the Company's efforts were devoted to raising capital,
recruiting and training personnel, and acquiring leases of telecommunications
rights and subleasing these rights--first in North America and later in Latin
America. In late 2000 and throughout 2001, the Company focused on repositioning
itself, selling its old North American operations and seeking to develop its
international telecommunications rights business. Most recently, the Company has
focused on acquiring Cypress Communications (Note 4), discontinuing the
Company's telecommunications rights operations in Latin America (Note 5), and
realigning the Company's business to concentrate on providing property-specific
telecommunications services. To date, the Company has received insignificant
revenues net of direct costs from its telecommunications rights business and has
received minimal revenues net of direct costs from its U.S. telecommunications
services business. No assurance can be given as to when, or if, the Company will
be able to attain profitable operations.
-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 its telecommunications rights business in Argentina and
Brazil, its corporate cash flow requirements, which include existing commitments
entered into prior to the sale of the North American assets, and a declining
economy in 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, the shared tenant telecommunications
services business of WorldCom, Inc. (Note 8 - Subsequent Events), and (iv)
raising $28 million in connection with such asset acquisition. As of June 30,
2002, the Company had cash and cash equivalents of approximately $7.3 million.
With the acquisition of Cypress Communications and the restructuring of
the Company's consolidated operations, the discontinuance of the Company's Latin
America operations, and, most recently, the asset purchase and related financing
referred to in the prior paragraph (Note 8 - Subsequent Event), the Company
believes that its cash position, although it will continue to erode in the near
term, should stabilize by the end of year 2002 or the beginning of 2003. The
Company cannot, however, give any assurance that it will be able to achieve
additional revenues from its newly acquired Cypress Communications
telecommunications services business, or the assets acquired from Intermedia
Advanced Building Networks, the shared tenant telecommunications services
business of WorldCom, Inc. Likewise, the Company cannot give any assurances that
the costs of disposing of the Company's Latin American operations, will be
immaterial (as the Company currently projects), that the Company will be
successful in reducing the cash used in operating activities, or that the
Company will be able to obtain additional outside funding. The consolidated
financial statements do not include any adjustments that might result from these
uncertainties.
4. ACQUISITION
In February 2002, the Company completed the acquisition of Cypress
Communications, a U.S. based operation that provides a full range of
telecommunications services to businesses in multi-tenant office buildings
located in select major metropolitan markets within the United States. The
acquisition of Cypress 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 $1,136,000. As a result of such acquisition, the Company, at
the subsidiary level, acquired 100% of Cypress Communications' assets, including
cash and its telecommunications 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 an exercise price of $1 per share. The warrants
are exercisable through February 2007 and, based on the Black-Scholes pricing
model, were valued by the Company at $754,000. 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
-7-
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.
During the second quarter of 2002, the Company recorded additional
expenses in connection with the acquisition of approximately $746,000, of which,
$440,000 were included in General and Administrative for the 3 months ended
March 31, 2002. These expenses have been correctly reclassified to extraordinary
gain as of June 30, 2002.
The transaction 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, and the elimination of all stockholders' equity
accounts of Cypress Communications, 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 June 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
===============
The following unaudited pro forma condensed consolidated statements of
operations for the six months ended June 30, 2002 and 2001, assume the
transaction occurred at January 1, 2001 and depreciation expense attributed to
Cypress Communications' property and equipment has been eliminated:
June 30, 2001
June 30, 2002 (Predecessor)
------------ ------------
Revenues $ 9,737,000 $ 9,408,000
============ ============
Loss from continuing operations $(16,590,000)(1) $(66,379,000)(2)
============ ============
Net loss $ (7,114,000) $(66,379,000)
============ ============
Loss per common share from
continuing operations $ (2.81) $ (10.26)
============ ============
Net loss per common shares
basic and diluted $ (1.20) $ (10.26)
============ ============
Weighted average common shares
outstanding 5,913,000 6,468,000(3)
============ ============
(1) Includes a non-recurring charge for the acceleration of deferred
compensation in the amount of $38,890,000.
(2) Includes a non-recurring charge for restructuring costs in the amount
of $40,527,000.
(3) Reflects the 1-for-10 reverse stock split during August 2001.
-8-
5. DISCONTINUED OPERATIONS
In March 2002, the Company decided to discontinue its
telecommunications rights operations in Latin America, which are now in the
process of liquidation. Discontinuing the Company's operations in Latin America
is expected to help the Company preserve existing capital and dedicate its
resources to its new telecommunications services business in the U.S. Balances
in the 2001 financial statements have been reclassified to reflect our Latin
American business as discontinued operations.
The Company expects to incur various costs in connection with the
disposition or termination of its Latin American operations, which in the
estimation of the management should not be material. The Company believes such
costs will be immediately offset by the benefits associated with reduced
expenditures for such operations and the ability to redeploy the Company's
assets in its new telecommunications services business. Discontinuation of the
Company's Latin America operations will also eliminate risks associated with
international operations, including substantial foreign currency exchange risks,
which risks resulted in currency translation losses in 2001.
6. STOCK OPTIONS
In March 2002, the Company's board of directors approved an amendment
to the 1999 Employee Equity Incentive Plan. By this amendment, the number of
shares of common stock reserved for issuance under the 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 shares. The amendment was approved by the Company's shareholders at
the Annual Meeting of Shareholders on June 26, 2002. As of June 30, 2002, after
giving effect to the issuance of additional options following adoption of the
amendment, options to purchase 2,137,388 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,
which was changed to operations.
8. SUBSEQUENT EVENT
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.. 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. Cypress Communications paid $29 million in
cash at closing to the sellers and assumed various commitments arising out of
the operation of the business after the closing and accrued but unpaid network
service expenses incurred by the sellers in the operation of the business prior
to the closing, up to a maximum of $2 million. Such transaction will be
accounted for by the purchase method of accounting.
Concurrently with the closing, Cypress Communications entered into an
Omnibus Post-Closing Services Agreement with the sellers and certain of their
affiliates. 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.
-9-
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.(the "Noro-Mosley"), and
the Wakefield Group III, LLC (the "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.
The Senior 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. The Senior Credit Facility is
collaterized by all of the assets of Cypress Communications and is
unconditionally guaranteed by the Company.
The Bridge 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. If the Bridge Loan is
outstanding 60 days after the closing, the Company and Cypress Communications
must 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 90 days after the closing, the Company and
Cypress Communications must 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 must 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. 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.
The 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 July 1, 2009, by acceleration or otherwise upon redemption of the
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
-10-
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) cancel or modify the voting rights of the holders of Series A
Preferred; cancel or modify the rights of the holders of
Series A Preferred; or
(iii) 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 or pari
passu to the Series A Preferred.
The Series A Preferred is redeemable by the Company in the event that:
(i) at least 75% of the principal amount of the Convertible Notes
is converted into shares of common stock of the Company;
(ii) at least 75% of the principal amount of the Convertible Notes
is redeemed;
(iii) 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
(iv) 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.
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
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.
In July 2002, by resolution of their respective boards of directors,
the number of directors of the Company and Cypress Communications was changed to
five members. In connection with the election of the designees of the Series A
Preferred holders to the respective boards and the election of Charles B.
McNamee to the respective boards, Perry H. Ruda, Jordan E. Glazov and Mark J.
Grant each resigned as members of the Company's board of directors, and Messrs.
Ruda and Grant resigned as members of Cypress Communications' board of
directors, in each case effective as of July 16, 2002. The vacancies resulting
from the foregoing resignations and changes in the size of the respective boards
have been filled by Charles B. McNamee, Steve G. Nussrallah and Michael F.
Elliott. Mssrs. McNamee, Nussrallah and Elliot join existing board members
Gerald H. Sweeney and Ross J. Mangano on the board of directors of both the
Company and Cypress Communications.
In addition, effective upon the closing of the acquisition of certain
assets of Intermedia Advanced Building Networks, the shared tenant
telecommunications services business of WorldCom, the Company suspended its
stock repurchase program.
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
-11-
combinations completed on or after July 1, 2001. It also requires the Company,
upon adoption of SFAS 142, to reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The company adopted SFAS Nos. 141 and 142 during the first quarter of
2002.
In August 2001, the FASB issued SFAS 144, Accounting for Impairment or
Disposal of Long-Lived Assets. This Statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business
(as previously defined in that Opinion). This Statement also 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 will affect the Company because of the discontinuation of the Latin
American operations.
In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements
SFAS 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical corrections.
This Statement 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.
-12-
CYPRESS COMMUNICATIONS, INC.
(PREDECESSOR)
CONDENSED CONSOLIDATED BALANCE SHEETS
================================================================================
January 31, 2002(a) December 31, 2001
------------------- -----------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 32,680,000 $ 33,757,000
Accounts receivables, net 3,217,000 3,136,000
Prepaid expenses and other current assets 320,000 259,000
------------- -------------
TOTAL CURRENT ASSETS 36,217,000 37,152,000
------------- -------------
PROPERTY AND EQUIPMENT, NET 26,771,000 27,190,000
OTHER ASSETS 412,000 1,192,000
------------- -------------
$ 63,400,000 $ 65,534,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable & accrued liabilities $ 9,110,000 10,018,000
Current notes payable & long term portion
of long term debt 347,000 446,000
------------- -------------
TOTAL CURRENT LIABILITIES 9,457,000 10,464,000
------------- -------------
LONG TERM DEBT AND DEFERRED INCOME 632,000 335,000
------------- -------------
STOCKHOLDERS' EQUITY
Common stock 6,000 6,000
Additional paid-in capital 569,827,000 569,827,000
Deferred compensation -- (6,312,000)
Accumulated deficit (516,703,000) (508,739,000)
Accumulated other comprehensive income 181,000 (47,000)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 53,311,000 54,735,000
------------- -------------
$ 63,400,000 $ 65,534,000
============= =============
================================================================================
(a) Date Cypress Communications was acquired by U.S. RealTel, Inc. for
accounting purposes.
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
-13-
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) 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.
-14-
CYPRESS COMMUNICATIONS, INC.
(PREDECESSOR)
UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF CASH FLOW
================================================================================
For the period from
January 1, 2002
through
January 31, 2002(a)
--------------------
Cash Flows From Operating Activities
Net loss $ (7,705,000)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation and amortization 671,000
Deferred compensation 6,141,000
Other non-cash items (73,000)
Changes in assets and liabilities
Increase in accounts receivable, net (81,000)
Increase in prepaid expenses and other current
assets (61,000)
Decrease in other assets 780,000
Decrease in accounts payable and accrued expenses (908,000)
------------
Net cash used in operating activities (1,236,000)
------------
Cash Flows From Investing Activities
Capital expenditures (8,000)
------------
Net cash used in investing activities (8,000)
------------
Cash Flows From Financing Activities
Notes payable and long term debt 198,000
------------
Net cash provided by financing activities 198,000
------------
Effect of Exchange Rates Changes in Cash (31,000)
------------
Net Decrease in Cash and Cash Equivalents (1,077,000)
Cash and Cash Equivalents, at beginning of period 33,757,000
------------
Cash and Cash Equivalents, at end of period $ 32,680,000
============
================================================================================
(a) Date Cypress 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)
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 select major metropolitan markets
within the United States. Cypress's telecommunications services include high
speed Internet access and data services, local and long-distance voice services,
feature-rich digital telephone systems, digital satellite business television,
voicemail, e-mail, web site hosting, security/monitoring services, and other
advanced communications services. Cypress 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 normal recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of the consolidated financial
position and results of operations for the interim periods. Certain information
and footnote disclosures normally included in the consolidated financial
statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted. These unaudited condensed
consolidated financial statements should be read in conjunction with the Cypress
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
$18.7 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 $1,136,000. 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.
-16-
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 Communication's 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 severance and separation arrangement that existed at December
31, 2001.
-17-
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
During the six-month month period ended June 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. In
addition, since our February 2002 acquisition of Cypress Communication, 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.
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. Our ability to continue as a going concern is contingent upon our
ability to obtain additional financing or positive cash flow from operations.
Moreover, we expect to continue to incur costs as part of our efforts to achieve
profitability. These costs could increase as we pursue new sources of revenues.
Loss from continued operations for the six months ended June 30, 2002 was
$9,556,000. As of June 30, 2002, we had cash and cash equivalents of
approximately $7.3 million, and working capital of approximately $287,000.
The Unaudited Condensed Consolidated Statements for the six months
ended June 30, 2002 include operations of Cypress Communications from the date
of acquisition (February 1, 2002).
U.S. REALTEL SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO CYPRESS COMMUNICATIONS
(PREDECESSOR) SIX MONTHS ENDED JUNE 30, 2001
REVENUES. For the six months ended June 30, 2002, revenues of our newly
acquired Cypress Communications telecommunications services business represented
substantially all of our consolidated revenues. Revenues from this business
decreased to approximately $8,172,000 for the six months ended June 30, 2002
from approximately $9,408,000 for the six months ended June 30, 2001. The
decrease in revenues resulted from the implementation of a strategy and cost
containment plan approved by Cypress Communications' board of directors in
December 2000, which included Cypress Communications' exit from several
unprofitable markets, as well as cost reductions through employee reductions and
other measures.
Revenues from our Latin American operations are included, net of
operating costs, under loss from discontinued operations. Revenues for Argentina
decreased to approximately $31,000 for the six months ended June 30, 2002 from
approximately $108,000 for the six months ended June 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 $1,912,000 for the six months ended June 30, 2002 from a loss of
approximately ($5,392,000) for the six months ended June 30, 2001. Margins
increased to approximately 23% in 2002 from approximately (57%) in 2001, due to
the implementation of the strategy approved by Cypress Communications' board of
directors in December 2000, as discussed above.
Revenues-net for Argentina, which are included in the loss from
discontinued operations, decreased to approximately $13,000 for the six months
-18-
ended June 30, 2002 from approximately $19,000 for the six months ended June 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.
OPERATING EXPENSES. Operating expenses decreased to approximately
$9,519,000 for the six months ended June 30, 2002 from approximately $80,319,000
for the six months ended June 30, 2001. The decrease in operating expenses
resulted from the implementation of the strategy approved by Cypress
Communications' board of directors in December 2000, as discussed above. Sales
and marketing expenses decreased to approximately $1,406,000 for the six months
ended June 30, 2002 from approximately $6,183,000 for the six months ended June
30, 2001 due to reduced marketing activities during the first quarter 2002.
General and administrative expenses decreased to approximately $8.0 million for
the six months ended June 30, 2002 from approximately $33.6 million for the six
months ended June 30, 2001. General and administrative expenses for the six
months ended June 30, 2001 included depreciation and amortization expense of
approximately $15,942,000. Depreciation and amortization expense for the six
months ended June 30, 2000 was approximately $2,000. 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. Restructuring and other
charges decreased to approximately $80,000 for the six months ended June 30,
2002 from approximately $40.5 million for the six months ended June 30, 2001.
OTHER INCOME AND (EXPENSE). Other income and (expense) was
approximately ($1,949,000) during six months ended June 30, 2002, as compared
with $1,836,000 for the six months ended June 30, 2001. Other income for the six
months ended June 30, 2001 represented interest revenue from excess cash
invested by Cypress Communications. Other expense for the three months ended
June 30, 2002 consisted primarily of approximately $1.7 million in interest and
finance charges, primarily incurred by U.S. RealTel in connection with the
acquisition of Cypress Communications, and approximately $300,000 in commitment
fees, for an expired facility, 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. , which
transaction was completed in July 2002.
EXTRAORDINARY GAIN. The six months ended June 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 six months ended June 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 six months ended June 30, 2002 was
approximately $80,000 ($0.01 per basic and diluted common share). For the six
months ended June 30, 2001, the net loss was approximately $83,875,000. The
decrease in net loss resulted from the implementation of the strategy and cost
containment plan of Cypress Communications, as discussed above, net of the
effect of reduced interest income, and extraordinary gain of $7,440,000.
U.S. REALTEL THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO CYPRESS COMMUNICATIONS
(PREDECESSOR) THREE MONTHS ENDED JUNE 30, 2001
REVENUES. For the three months ended June 30, 2002, revenues of our
Cypress Communications telecommunications services business represented
substantially all of our consolidated revenues. Revenues from this business
increased to approximately $4,938,000 for the three months ended June 30, 2002
from approximately $4,751,000 for the three months ended June 30, 2001. The
increase in revenues resulted from a marginal increase in customer base combined
with the benefits from tighter control over credits and revenue leakage.
Revenues from our Latin American operations are included net of
operating costs under loss from discontinued operations. Revenues in Argentina
for the three months ended June 30, 2001 were approximately $33,000. No revenues
were recorded in Argentina for the three months ended June 30, 2002 due to the
closing of the operations in March 2002. Our Brazilian operations had no
revenues.
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REVENUES-NET. Revenues-net (after direct costs) increased to
approximately $964,000 for the three months ended June 30, 2002 from a loss of
approximately ($1,881,000) for the three months ended June 30, 2001. Margins
increased to approximately 20% in 2002 from approximately (40%) in 2001, due to
the implementation of the strategy and cost containment plan approved by Cypress
Communications' board of directors in December 2000, as discussed above.
Revenues-net in Argentina, which are included in the loss from
discontinued operations, for the three months ended June 30, 2001 were
approximately ($13,000). No revenues or direct costs were recorded in Argentina
for the three months ended June 30, 2001 due to the closing of the operations in
March 2002, as discussed above.
OPERATING EXPENSES. Operating expenses decreased to approximately
$3,904,000 for the three months ended June 30, 2002 from approximately
$22,131,000 for the three months ended June 30, 2001. The decrease in operating
expenses resulted from the implementation of the strategy and cost containment
plan approved by Cypress Communications' board of directors in December 2000, as
discussed above. Sales and marketing expenses decreased to approximately
$809,000 for the three months ended June 30, 2002 from approximately $2,480,000
for the three months ended June 30, 2001 due to reduced marketing activities
during the first quarter 2002. General and administrative expenses decreased to
approximately $3.0 million for the three months ended June 30, 2002 from
approximately $15 million for the three months ended June 30, 2001. General and
administrative expenses for the three months ended June 30, 2001 included
depreciation and amortization expense of approximately $8,321,000. Depreciation
and amortization expense for the three months ended June 30, 2000 was
immaterial. 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. Restructuring and other charges decreased to
approximately $80,000 for the three months ended June 30, 2002 from
approximately $4.6 million for the three months ended June 30, 2001.
OTHER INCOME AND (EXPENSE). Other income and (expense) was
approximately ($235,000) during three months ended June 30, 2002, as compared
with $695,000 for the three months ended June 30, 2001. Other income for the
three months ended June 30, 2001 represented interest revenue from excess cash
invested by Cypress Communications. Other expense for the three months ended
June 30, 2002 consisted primarily of approximately $300,000 in commitment fees,
for an expired facility, 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. which
transaction was completed in July 2002.
EXTRAORDINARY GAIN. The three months ended June 30, 2002 includes an
extraordinary loss of approximately $746,000, which resulted from subsequent
adjustments to the extraordinary gain recorded on the acquisition of Cypress
Communications (Note 4 to Unaudited Condensed Consolidated Financial
Statements).
INCOME TAXES. For the three months ended June 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 June 30, 2002 was
approximately $3,989,000 ($0.68 per basic and diluted common share). For the
three months ended June 30, 2001, the net loss was approximately $23,317,000.
The decrease in net loss resulted from the implementation of the strategy and
cost containment plan by Cypress Communications, as discussed above, net of the
effect of reduced interest income, and extraordinary loss of $746,000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in our operations was approximately $8,298,000 for the
six months ended June 30, 2002 versus approximately $37,018,000 for the six
months ended June 30, 2001. The decrease in net cash used for operating
activities in 2002 was primarily due to the reduction in operating costs
resulting from the implementation of a strategy and cost containment plan
approved by Cypress Communications' board of directors in December 2000, which
included Cypress Communications' exit from several markets, as well as cost
reductions through employee reductions and other measures.
Cash provided by investing activities were approximately $13,990,000
for the six months ended June 30, 2002, as compared with $27,204,000 for the six
months ended June 30, 2001. Cash provided in 2002 resulted from
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the acquisition of Cypress Communications, net of approximately $18.7 million in
acquisition costs. 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 and bridge loans, as well as proceeds
from the sale of our old North American operations in December 2000 and cash
acquired though the acquisition of Cypress Communications. Cash used in
financing activities was approximately $452,000 for the six months ended June
30, 2002, as compared to approximately $2,573,000 for the six months ended June
30, 2001. Cash used during the six months ended June 30, 2002 was to pay a
bridge loan for approx $16.4 million in connection to the Cypress Communications
acquisition, to pay for long term debt of Cypress Communications totaling
approximately $392,000 to which we succeeded as a consequence of our acquisition
of Cypress Communications and approximately $60,000 for the acquisition of
treasury stock. Cash used during the six months ended June 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 $240,000.
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 service business of WorldCom, Inc. (Note 8
to Unaudited Condensed Consolidated Financial Statements), and
(iv) raising $28 million in connection to such acquisition.
As of June 30, 2002, we had cash and cash equivalents of approximately
$7.3 million. We believe that by capitalizing on the infrastructure and the
customer base we acquired through our acquisition of Cypress Communications,
reducing our operating costs, and adding certain assets of Intermedia Advanced
Building Networks, the shared tenant telecommunications services business of
WorldCom, Inc. (Note 8 to Unaudited Condensed Consolidated Financial
Statements), we will be able to return to cash flow-positive operations by the
year 2003.
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
Intermedia Advanced Building Networks, the shared tenant telecommunications
services business of WorldCom, Inc. 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. We are therefore continuing our
implementation of cost control procedures while at the same time we are pursuing
various sources of additional debt and/or equity financing to replace the
existing bridge loan and to fund any cash shortfalls in our U.S. operations and
corporate overhead, as well as the cost of future acquisitions, until we become
profitable. No assurance can be given that we will be able to 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 Intermedia Advanced
Building Networks, the shared tenant telecommunications business of WorldCom,
Inc. We will likely need to obtain additional financing and no assurance can be
given that we will be able to do so on terms acceptable to us, if at all. If we
are unable to generate sufficient cash flow from operations or other sources of
additional capital on terms acceptable to us to support our current outstanding
debt or any additional debt acquired in the future, our ability to fund our
expansion, respond to competitive pressures, become profitable or continue as a
going concern all would be significantly impaired. Furthermore, the terms of the
indebtedness we incurred in connection with the acquisition of certain assets of
Intermedia Advanced Building Networks, the shared tenant telecommunications
services business of WorldCom, Inc 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 the
senior credit facility. Therefore, we must devote a substantial portion of our
cash flow to service our
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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 acquisition or the discontinuation of
our Latin American operations) raised substantial doubt about the Company's
ability to continue as a going concern.
We do not consider our business seasonal in nature such that
seasonality would cause any material liquidity issues.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued FASB
Statement No. 141, Business Combinations (SFAS 141), and FASB Statement No. 142,
Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the use of
the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that we 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 will be 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 most complete
a transitional goodwill impairment test six 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 extent 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
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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.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At our Annual Meeting of Shareholder's held on June 26, 2002, the
following proposals were adopted and the votes with respect thereto were as
indicated below.
(a) The following individuals were elected to our board of directors:
Perry H. Ruda, Mark J. Grant, Jordan E. Glazov, Ross J. Mangano, Gerard H.
Sweeney. The tabulation of votes for each director nominee was as follows:
VOTES FOR VOTES WITHHELD
--------- --------------
Perry H. Ruda 5,476,284 9,000
Mark J. Grant 5,285,284 246,900
Jordan E. Glazov 5,238,384 0
Ross J. Mangano 5,485,284 0
Gerard H. Sweeney 5,485,284 200,000
In July 2002, by resolution of their respective boards of directors,
the number of directors of the Company and Cypress Communications was changed to
five members. In connection with the election of the designees of the Series A
Preferred holders to the respective boards and the election of Charles B.
McNamee to the respective boards, Perry H. Ruda, Jordan E. Glazov and Mark J.
Grant each resigned as members of the Company's board of directors, and Messrs.
Ruda and Grant resigned as members of Cypress Communications' board of
directors, in each case effective as of July 16, 2002. The vacancies resulting
from the foregoing resignations and/or changes in Board size were filled by
Charles B. McNamee, Steve G. Nussrallah and Michael F. Elliott. Mssrs. McNamee,
Nussrallah and Elliot joined existing board members Gerald H. Sweeney and Ross
J. Mangano on the board of directors of both the Company and Cypress
Communications.
(b) The appointment of BDO Seidman, LLP as our independent auditors for
fiscal year 2002 was ratified as follows:
VOTES FOR VOTES WITHHELD ABSTAINING BROKER NON-VOTES
--------- -------------- ---------- ----------------
5,485,284 0 0 0
(c) An amendment (the "First Amendment") to the 1999 Employee Equity
Incentive Plan (the "Plan") was ratified as follows:
VOTES FOR VOTES WITHHELD ABSTAINING BROKER NON-VOTES
--------- -------------- ---------- ----------------
3,807,492 737,059 13,100 927,633
The First Amendment to the Plan increased the number of shares for
issuance under the Plan. Under the Plan as originally adopted, 484,655 shares
were reserved for issuance. Because of the number of outstanding options under
the Plan, many of which are held by former employees, the board of directors
determined that the initial number of shares authorized under the Plan was
insufficient to provide appropriate equity incentive compensation to current
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employees. The board of directors, therefore, adopted the First Amendment to the
Plan on March 20, 2002, increasing the number of shares of common stock
available for issuance under the Plan 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 shares.
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ITEM 5. OTHER INFORMATION
The following changes in the officers of the Company were approved at
the meeting of the Company's board of directors on August 6, 2002:
Charles B. McNamee Chief Executive Officer
Gregory P. McGraw President, Chief Financial Officer and
Chief Operating Officer
Salvatore W. Collura Executive Vice President Field Operations
Edgardo Vargas Senior Vice President and
Corporate Controller
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.4 Asset Purchase Agreement, dated May 31, 2002, by and among Intermedia Communications, Inc. Shared Technologies
Fairchild, Inc., Shared Technologies Fairchild Telecom, Inc., MCI WorldCom Communications, Inc., WorldCom, Inc., and
Cypress Communications, Inc. (the "Asset Purchase Agreement") (incorporated by reference to U.S. RealTel, Inc.'s
Form 8-K filed July 31, 2002)
2.4.1 Amendment No. 1 to Asset Purchase Agreement and Waiver, dated July 16, 2002 by and among Intermedia Communications,
Inc. Shared Technologies Fairchild, Inc., Shared Technologies Fairchild Telecom, Inc., MCI WorldCom Communications,
Inc., WorldCom, Inc., and Cypress Communications, Inc. (incorporated by reference to U.S. RealTel, Inc.'s Form 8-K
filed July 31, 2002)
2.4.2 Omnibus Post-Closing Agreement by and among Intermedia Communications, Inc. Shared Technologies Fairchild, Inc.,
Shared Technologies Fairchild Telecom, Inc., MCI WorldCom Communications, Inc., WorldCom, Inc., and Cypress
Communications, Inc. (incorporated by reference to U.S. RealTel, Inc.'s Form 8-K filed July 31, 2002)
3.2 Amended and Restated Bylaws of U.S. RealTel, Inc., as amended on August 6, 2002
4 Certificate of Designations for Series A Preferred Stock (incorporated by reference to U.S. RealTel, Inc.'s Form
8-K filed July 31, 2002)
10.9 Loan and Security Agreement between Silicon Valley Bank and Cypress Communications, Inc. dated July 12, 2002
(incorporated by reference to U.S. RealTel, Inc.'s Form 8-K filed July 31, 2002)
10.10 Loan Agreement, dated July 16, 2002, among the J. Oliver Cunningham Trust, the Ann C. McClure Trust, the Jane C.
Warriner Trust, Noro-Moseley Partners V, L.P. and Wakefield Group III, LLC, as the Lenders and U.S. RealTel, Inc.
and Cypress Communications, Inc. as the Borrowers (the "Loan Agreement") (incorporated by reference to Exhibit 1 to
Noro-Moseley Partners V, L.P. Schedule 13D filed on July 26, 2002)
10.11 Form of Common Stock Purchase Warrant of U.S. RealTel, Inc. issued to the J. Oliver Cunningham Trust, the Ann C.
McClure Trust, the Jane C. Warriner Trust, Noro-Moseley Partners V, L.P. and Wakefield Group III, LLC, in connection
with the Loan Agreement dated July 16, 2002 (incorporated by reference to Exhibit 2 to Noro-Moseley Partners V, L.P.
Schedule 13D filed on July 26, 2002)
10.12 Purchase Agreement dated July 16, 2002 among the J. Oliver Cunningham Trust, the Ann C. McClure Trust, the Jane C.
Warriner Trust, Noro-Moseley Partners V, L.P. and Wakefield Group III, LLC, as the Purchasers and U.S. RealTel, Inc.
and Cypress Communications, Inc. as the Issuers (incorporated by reference to Exhibit 3 to Noro-Moseley Partners V,
L.P. Schedule 13D filed on July 26, 2002)
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10.13 Registration Rights Agreement, dated as of July 16, 2002 by and among U.S. RealTel, Inc., Cypress Communications,
Inc., Noro-Moseley Partners V, L.P., Wakefield Group III, LLC, the J. Oliver Cunningham Trust, the Ann C. McClure
Trust and the Jane C. Warriner Trust (incorporated by reference to Exhibit 4 to Noro-Moseley Partners V, L.P.
Schedule 13D filed on July 26, 2002)
10.14 Letter Agreement dated as of July 16, 2002 by and among U.S. RealTel, Inc., Cypress Communications, Inc., the J.
Oliver Cunningham Trust, the Ann C. McClure Trust and the Jane C. Warriner Trust (incorporated by reference to U.S.
RealTel, Inc.'s Form 8-K filed July 31, 2002)
99.1 Certification 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 Certification 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 and one amended report on Form of 8-K/A were
filed during the quarter for which this report is filed.
Date Item Reported On
-------------------------------------------------------------------------------------------------------------------------------
June 6, 2002 Item 5. Other Events and Regulation FD Disclosure. The Company announced that we had entered into
a definitive agreement with WorldCom, Inc. ("WorldCom") to purchase certain assets of Advanced
Building Networks, WorldCom's shared tenant telecommunications services business.
May 7, 2002 Item 7. Financial Statements and Exhibits. On March 1, 2002 we filed a current report on Form 8-K
describing our acquisition of Cypress Communications , Inc. This amendment was filed to revise
Item 7 in our Form 8-K originally filed March 1, 2002 to include the historical and pro forma
financial information required by paragraphs (a) and (b) of Item 7 which were omitted from the
report as initially filed in accordance with paragraph (a)(4) of Item 7.
April 3, 2002 Item 5. Other Events and Regulation FD Disclosure. We announced that our board of directors had
authorized the use of up to $500,000 for repurchase of our common stock.
-26-
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: AUGUST 14, 2002 By: /s/ CHARLES B. MCNAMEE
--------------- --------------------------------------
Charles B. McNamee
Chief Executive Officer
Dated: AUGUST 14, 2002 By: /s/ GREGORY P. MCGRAW
--------------- --------------------------------------
GREGORY P. MCGRAW
President, Chief Financial Officer
and Chief Operating Officer
-27-
EXHIBIT INDEX
2.4 Asset Purchase Agreement, dated May 31, 2002, by and among Intermedia Communications, Inc. Shared Technologies Fairchild,
Inc., Shared Technologies Fairchild Telecom, Inc., MCI WorldCom Communications, Inc., WorldCom, Inc., and Cypress
Communications , Inc. (the "Asset Purchase Agreement") (incorporated by reference to U.S. RealTel, Inc.'s Form 8-K filed
July 31, 2002)
2.4.1 Amendment No. 1 to Asset Purchase Agreement and Waiver, dated July 16, 2002 by and among Intermedia Communications, Inc.
Shared Technologies Fairchild, Inc., Shared Technologies Fairchild Telecom, Inc., MCI WorldCom Communications, Inc.,
WorldCom, Inc., and Cypress Communications , Inc. (incorporated by reference to U.S. RealTel, Inc.'s Form 8-K filed
July 31, 2002)
2.4.2 Omnibus Post-Closing Agreement by and among Intermedia Communications, Inc. Shared Technologies Fairchild, Inc., Shared
Technologies Fairchild Telecom, Inc., MCI WorldCom Communications, Inc., WorldCom, Inc., and Cypress Communications, Inc.
(incorporated by reference to U.S. RealTel, Inc.'s Form 8-K filed July 31, 2002)
3.2 Amended and Restated Bylaws of U.S. RealTel, Inc., as amended on August 6, 2002
4 Certificate of Designations for Series A Preferred Stock (incorporated by reference to U.S. RealTel, Inc.'s Form 8-K filed
July 31, 2002)
10.9 Loan and Security Agreement between Silicon Valley Bank and Cypress Communications, Inc. dated July 12, 2002 (incorporated
by reference to U.S. RealTel, Inc.'s Form 8-K filed July 31, 2002)
10.10 Loan Agreement, dated July 16, 2002, among the J. Oliver Cunningham Trust, the Ann C. McClure Trust, the Jane C. Warriner
Trust, Noro-Moseley Partners V, L.P. and Wakefield Group III, LLC, as the Lenders and U.S. RealTel, Inc. and Cypress
Communications, Inc. as the Borrowers (the "Loan Agreement") (incorporated by reference to Exhibit 1 to Noro-Moseley
Partners V, L.P. Schedule 13D filed on July 26, 2002)
10.11 Form of Common Stock Purchase Warrant of U.S. RealTel, Inc. issued to the J. Oliver Cunningham Trust, the Ann C. McClure
Trust, the Jane C. Warriner Trust, Noro-Moseley Partners V, L.P. and Wakefield Group III, LLC, in connection with the Loan
Agreement dated July 16, 2002 (incorporated by reference to Exhibit 2 to Noro-Moseley Partners V, L.P. Schedule 13D filed
on July 26, 2002)
10.12 Purchase Agreement dated July 16, 2002 among the J. Oliver Cunningham Trust, the Ann C. McClure Trust, the Jane C. Warriner
Trust, Noro-Moseley Partners V, L.P. and Wakefield Group III, LLC, as the Purchasers and U.S. RealTel, Inc. and Cypress
Communications, Inc. as the Issuers (incorporated by reference to Exhibit 3 to Noro-Moseley Partners V, L.P. Schedule 13D
filed on July 26, 2002)
10.13 Registration Rights Agreement, dated as of July 16, 2002 by and among U.S. RealTel, Inc., Cypress Communications, Inc.,
Noro-Moseley Partners V, L.P., Wakefield Group III, LLC, the J. Oliver Cunningham Trust, the Ann C. McClure Trust and the
Jane C. Warriner Trust (incorporated by reference to Exhibit 4 to Noro-Moseley Partners V, L.P. Schedule 13D filed on
July 26, 2002)
10.14 Letter Agreement dated as of July 16, 2002 by and among U.S. RealTel, Inc., Cypress Communications, Inc., the J. Oliver
Cunningham Trust, the Ann C. McClure Trust and the Jane C. Warriner Trust (incorporated by reference to U.S. RealTel,
Inc.'s Form 8-K filed July 31, 2002)
99.1 Certification 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 Certification 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