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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 33339884-01
MPOWER HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-2232143
(State of incorporation) (I.R.S. Employer Identification No.)
175 SULLY'S TRAIL, SUITE 300
PITTSFORD, NY 14534
(Address of principal executive offices)
(585) 218-6550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
YES[ x ] NO [ ]
The number of shares outstanding of the issuer's common stock,
as of November 8, 2002:
Common stock (par value $0.001 per share) .... 64,999,025 shares outstanding
MPOWER HOLDING CORPORATION
INDEX
PAGE NO.
PART I-- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
Reorganized Mpower Holding - as of September 30, 2002....................................... 4
Predecessor Mpower Holding - as of December 31, 2001........................................ 4
Consolidated Statements of Operations
Reorganized Mpower Holding - for the period July 31, 2002 to September 30, 2002............. 6
Predecessor Mpower Holding - for the period July 1, 2002 to July 30, 2002................... 6
Predecessor Mpower Holding - for the three months ended September 30, 2001.................. 6
Reorganized Mpower Holding - for the period July 31, 2002 to September 30, 2002............. 7
Predecessor Mpower Holding - for the period January 1, 2002 to July 30, 2002................ 7
Predecessor Mpower Holding - for the nine months ended September 30, 2001.. ................ 7
Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for
the period from December 31, 2000 to September 30, 2002....................................... 8
Consolidated Statements of Cash Flows
Reorganized Mpower Holding - for the period July 31, 2002 to September 30, 2002............. 9
Predecessor Mpower Holding - for the period January 1, 2002 to July 30, 2002................ 9
Predecessor Mpower Holding - for the nine months ended September 30, 2001. ................. 9
Condensed Notes to Unaudited Interim Consolidated Financial Statements........................ 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 41
Item 4. Controls and Procedures ...................................................................... 41
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 42
Item 2. Changes in Securities and Use of Proceeds..................................................... 42
Item 5. Other Information............................................................................. 43
Item 6. Exhibits and Reports on Form 8-K.............................................................. 43
SIGNATURES............................................................................................... 45
CERTIFICATIONS........................................................................................... 46
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
MPOWER HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
REORGANIZED PREDECESSOR
MPOWER HOLDING MPOWER HOLDING
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 14,185 $ 9,136
Investments available-for-sale .......................................................... 42,566 161,144
Restricted investments .................................................................. 10,769 12,640
Accounts receivable, less allowance for doubtful accounts of $5,652 and $4,330 at
September 30, 2002 and December 31, 2001, respectively................................ 23,760 24,825
Prepaid expenses and other current assets................................................ 8,212 5,587
--------- ---------
Total current assets............................................................... 99,492 213,332
Property and equipment, net ................................................................ 74,764 385,872
Deferred financing costs, net of accumulated amortization of $736 and $2,095 at
September 30, 2002 and December 31, 2001, respectively................................... 470 8,400
Intangibles, net of accumulated amortization of $1,157 at
September 30, 2002....................................................................... 21,355 --
Other assets ............................................................................... 10,773 6,043
--------- ---------
Total assets ......................................................................... $ 206,854 $ 613,647
========= =========
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt and capital lease obligations ...................... $ 1,202 $ 7,729
Accounts payable:
Trade................................................................................. 28,759 24,336
Property and equipment ............................................................... 1,458 4,493
Accrued interest ........................................................................ -- 14,023
Accrued sales tax payable ............................................................... 6,224 7,077
Accrued network optimization costs ...................................................... 3,833 13,593
Accrued other expenses .................................................................. 20,938 24,087
--------- ---------
Total current liabilities not subject to compromise................................... 62,414 95,338
Current liabilities subject to compromise ............................................... 22,903 --
--------- ---------
Total current liabilities............................................................. 85,317 95,338
Senior Notes, net of unamortized discount of $370 and $10,686 at September 30, 2002 and
December 31, 2001, respectively.......................................................... 50,576 420,803
Other long-term debt and capital lease obligations.......................................... 539 2,154
--------- ---------
Total liabilities ................................................................. 136,432 518,295
--------- ---------
Commitments and contingencies
Redeemable preferred stock:
Predecessor Mpower Holding 10% Series C convertible preferred stock, 1,250,000 shares
authorized, issued and outstanding at December 31, 2001............................... -- 46,610
Predecessor Mpower Holding 7.25% Series D convertible preferred stock, 3,013,388 shares
authorized, issued and outstanding at December 31, 2001............................... -- 156,220
Stockholders' equity (deficit):
Predecessor Mpower Holding preferred stock, 45,636,612 shares authorized but unissued
at December 31, 2001.................................................................. -- --
Predecessor Mpower Holding Series E preferred stock, 100,000 shares authorized but
unissued at December 31, 2001......................................................... -- --
Predecessor Mpower Holding common stock, $0.001 par value, 300,000,000 shares
authorized, 59,488,843 shares issued and outstanding at December 31, 2001............. -- 59
Reorganized Mpower Holding preferred stock, 50,000,000 shares authorized but unissued
at September 30, 2002 ................................................................ -- --
Reorganized Mpower Holding common stock, $0.001 par value, 1,000,000,000 shares
authorized, 64,999,025 shares issued and outstanding at September 30, 2002............ 65 --
Additional paid-in capital ................................................................. 87,454 712,334
Accumulated deficit ........................................................................ (16,821) (826,615)
Less: Predecessor Mpower Holding treasury stock, 13,710 shares, at cost .................... -- (76)
Predecessor Mpower Holding Notes receivable from stockholders for issuance of common stock.. -- (973)
Accumulated other comprehensive (loss) income............................................... (276) 7,793
-------- ---------
Total stockholders' equity (deficit) .............................................. 70,422 (107,478)
-------- ---------
Total liabilities, redeemable preferred stock and stockholders' equity (deficit)... $ 206,854 $ 613,647
========= =========
See accompanying condensed notes to unaudited interim consolidated
financial statements.
MPOWER HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
REORGANIZED PREDECESSOR PREDECESSOR
MPOWER HOLDING MPOWER HOLDING MPOWER HOLDING
JULY 31, 2002 TO JULY 1, 2002 TO THREE MONTHS ENDED
SEPTEMBER 30, 2002 JULY 30, 2002 SEPTEMBER 30, 2001
------------------ --------------- ------------------
Operating revenues:
Telecommunication services......................... $ 38,485 $ 18,843 $ 49,477
Operating expenses:
Cost of operating revenues
(excluding depreciation and amortization)... 22,799 11,847 38,282
Selling, general and administrative
(excluding depreciation and amortization)... 27,830 12,555 45,396
Reorganization expense............................. -- 245,681 --
Stock-based compensation expense................... 219 100 639
Depreciation and amortization...................... 3,850 6,038 15,151
-------------- -------------- -------------
54,698 276,221 99,468
-------------- -------------- -------------
Loss from operations............................ (16,213) (257,378) (49,991)
Other income (expense):
Gain (loss) on sale of assets, net................. 24 (4) 1,955
Interest income.................................... 593 304 4,433
Interest expense, net of amount capitalized
(contractual interest was $4,681 from July 1,
2002 to July 30, 2002).......................... (1,225) (559) (14,370)
-------------- -------------- -------------
Net loss before extraordinary item.............. (16,821) (257,637) (57,973)
Extraordinary item:
Gain on discharge of debt.......................... -- 315,310 --
-------------- -------------- -------------
Net (loss) income............................... (16,821) 57,673 (57,973)
Accrued preferred stock dividend (contractual
dividend was $1,319 from July 1, 2002 to
July 30, 2002)..................................... -- -- (3,600)
-------------- -------------- -------------
Net (loss) income applicable to common
stockholders....................................... $ (16,821) $ 57,673 $ (61,573)
============== ============== =============
Basic and diluted loss per share of common stock
before extraordinary item......................... $ (0.26) $ (4.33) $ (1.04)
============== ============== =============
Basic and diluted income per share of common
stock applicable to extraordinary item............. $ -- $ 5.30 $ --
============== ============== =============
Basic and diluted (loss) income per share of
common stock....................................... $ (0.26) $ 0.97 $ (1.04)
============== ============== =============
Basic and diluted weighted average
shares outstanding................................. 64,999,025 59,465,233 59,468,984
============== ============== =============
See accompanying condensed notes to unaudited interim consolidated
financial statements.
MPOWER HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
REORGANIZED PREDECESSOR PREDECESSOR
MPOWER HOLDING MPOWER HOLDING MPOWER HOLDING
JULY 31, 2002 TO JANUARY 1, 2002 TO NINE MONTHS ENDED
SEPTEMBER 30, 2002 JULY 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------ ------------------
Operating revenues:
Telecommunication services......................... $ 38,485 $ 128,571 $ 144,908
Operating expenses:
Cost of operating revenues
(excluding depreciation and amortization)... 22,799 88,225 121,045
Selling, general and administrative
(excluding depreciation and amortization)... 27,830 96,045 148,750
Reorganization expense............................. -- 266,383 --
Stock-based compensation expense................... 219 442 2,506
Network optimization cost.......................... -- 19,000 233,083
Depreciation and amortization...................... 3,850 41,344 59,196
-------------- -------------- -------------
54,698 511,439 564,580
-------------- -------------- -------------
Loss from operations............................ (16,213) (382,868) (419,672)
Other income (expense):
Gain on sale of assets, net........................ 24 4,417 4,730
Interest income.................................... 593 3,237 17,805
Interest expense, net of amount capitalized
(contractual interest was $33,470 from
January 1, 2002 to July 30, 2002)............... (1,225) (18,065) (44,029)
-------------- -------------- -------------
Net loss before extraordinary item.............. (16,821) (393,279) (441,166)
Extraordinary item:
Gain on discharge of debt.......................... -- 315,310 32,322
-------------- -------------- -------------
Net loss........................................ (16,821) (77,969) (408,844)
Accrued preferred stock dividend (contractual
dividend was $8,782 from January 1, 2002
to July 30, 2002).................................. -- (3,974) (18,020)
-------------- -------------- -------------
Net loss applicable to common
stockholders....................................... $ (16,821) $ (81,943) $ (426,864)
============== ============== =============
Basic and diluted loss per share of common stock
before extraordinary item.......................... $ (0.26) $ (6.68) $ (7.77)
============== ============== =============
Basic and diluted income per share of common
stock applicable to extraordinary item............. $ -- $ 5.30 $ 0.55
============== ============== =============
Basic and diluted loss per share of common
stock ............................................. $ (0.26) $ (1.38) $ (7.22)
============== ============== =============
Basic and diluted weighted average
shares outstanding................................. 64,999,025 59,461,374 59,142,249
============== ============== =============
See accompanying condensed notes to unaudited interim consolidated
financial statements.
MPOWER HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
COMPREHENSIVE --------------- ------------ PAID-IN ACCUMULATED
LOSS SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---- ------ ------ ------ ------ ------- -------
BALANCE AT DECEMBER 31, 2000 5,390,000 $ 244,886 56,875,870 $ 57 $ 672,031 $ (358,875)
Unrealized loss on investments
available-for-sale ................. $ (1,231) -- -- -- -- -- --
Warrants and options exercised for
common stock ....................... -- -- -- 211,072 -- 72 --
Cancellation of stockholder's
note for common stock .............. -- -- -- (225,000) -- (4,904) --
Stock-based compensation ............ -- -- -- -- -- 3,081 --
Accrued preferred stock dividend .... -- -- 15,157 -- -- (15,157) --
Preferred dividends paid in
common stock ....................... -- -- (2,995) 427,070 -- 2,995 --
7.25% Series D convertible preferred
stock converted to common stock .... (1,126,612) (54,218) 2,199,831 2 54,216 --
Net loss ............................ (467,740) -- -- -- -- -- (467,740)
----------- --------- --------- ----------- ----- ---------- -----------
COMPREHENSIVE LOSS .................. $ (468,971)
===========
BALANCE AT DECEMBER 31, 2001 ........ 4,263,388 202,830 59,488,843 59 712,334 (826,615)
Unrealized loss on investments
available-for-sale ................. $ (5,754) -- -- -- -- -- --
Cancellation of stockholders'
notes for common stock ............. -- -- -- (81,000) -- (435) --
Principal stockholder's short
swing profit ....................... -- -- -- -- -- 588 --
Stock-based compensation ............ -- -- -- -- -- 342 --
Accrued preferred stock dividend .... -- -- 3,974 -- -- (3,974) --
7.25% Series D convertible
preferred stock converted to
common stock ....................... -- (50,000) (2,425) 57,390 -- 2,425 --
New Common issued for exchange
of 2010 Notes ...................... -- -- -- 55,250,000 55 74,150 --
Cancellation of preferred
and common stock ................... -- (4,213,388) (204,379) (59,465,233) (59) 191,267 --
New Common issued for exchange
of Stock ........................... -- -- -- 9,749,025 10 13,085 --
Fresh Start Accounting -- -- -- -- -- (902,547) 904,584
Net loss ............................ (77,969) -- -- -- -- -- (77,969)
----------- --------- --------- ----------- ----- ---------- -----------
COMPREHENSIVE LOSS .................. $ (83,723)
===========
BALANCE AT JULY 30, 2002 ............ -- -- 64,999,025 65 87,235 --
Unrealized loss on investments
available-for-sale ................. $ (276) -- -- -- -- -- --
Stock-based compensation ............ -- -- -- -- -- 219 --
Net loss ............................ (16,821) -- -- -- -- -- (16,821)
----------- --------- --------- ---------- ----- ---------- -----------
COMPREHENSIVE LOSS .................. $ (17,097)
===========
BALANCE AT SEPTEMBER 30, 2002 ....... -- $ -- 64,999,025 $ 65 $ 87,454 $ (16,821)
========= ========= ========== ===== ========== ==========
NOTES ACCUMULATED
RECEIVABLE FROM OTHER TOTAL
TREASURY STOCK STOCKHOLDERS FOR COMPREHENSIVE STOCKHOLDERS'
-------------- ISSUANCE OF INCOME EQUITY
SHARES AMOUNT COMMON STOCK (LOSS) (DEFICIT)
------ ------ ------------ ------ --------
BALANCE AT DECEMBER 31, 2000 13,710 $ (76) $ (5,294) $ 9,024 $ 316,867
Unrealized loss on investments
available-for-sale ................. -- -- -- (1,231) (1,231)
Warrants and options exercised for
common stock ....................... -- -- -- -- 72
Cancellation of stockholder's
note for common stock .............. -- -- 4,321 -- (583)
Stock-based compensation ............ -- -- -- -- 3,081
Accrued preferred stock dividend .... -- -- -- -- (15,157)
Preferred dividends paid in
common stock ....................... -- -- -- -- 2,995
7.25% Series D convertible preferred
stock converted to common stock .... -- -- -- -- 54,218
Net loss ............................ -- -- -- -- (467,740)
------ ------ --------- -------- ----------
COMPREHENSIVE LOSS ..................
BALANCE AT DECEMBER 31, 2001 ........ 13,710 (76) (973) 7,793 (107,478)
Unrealized loss on investments
available-for-sale ................. -- -- -- (5,754) (5,754)
Cancellation of stockholders'
notes for common stock ............. -- -- 435 -- --
Principal stockholder's short
swing profit ....................... -- -- -- -- 588
Stock-based compensation ............ -- -- 100 -- 442
Accrued preferred stock dividend .... -- -- -- -- (3,974)
7.25% Series D convertible
preferred stock converted to
common stock ....................... -- -- -- -- 2,425
New Common issued for exchange
of 2010 Notes ...................... -- -- -- -- 74,205
Cancellation of preferred
and common stock ................... (13,710) 76 -- -- 191,284
New Common issued for exchange
of Stock ........................... -- -- -- -- 13,095
Fresh Start Accounting -- -- 438 (2,039) 436
Net loss ............................ -- -- -- -- (77,969)
------ ------ --------- -------- ----------
COMPREHENSIVE LOSS ..................
BALANCE AT JULY 30, 2002 ............ -- -- -- -- 87,300
Unrealized loss on investments
available-for-sale ................. -- -- -- (276) (276)
Stock-based compensation ............ -- -- -- -- 219
Net loss ............................ -- -- -- -- (16,821)
------ ------ --------- -------- ----------
Comprehensive Loss ..................
BALANCE AT SEPTEMBER 30, 2002 ....... -- $ -- $ -- $ (276) $ 70,422
====== ====== ========= ======== ==========
See accompanying condensed notes to unaudited
interim consolidated financial statements.
MPOWER HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
REORGANIZED PREDECESSOR PREDECESSOR
MPOWER HOLDING MPOWER HOLDING MPOWER HOLDING
JULY 31, 2002 TO JANUARY 1, 2002 NINE MONTHS ENDED
SEPTEMBER 30, 2002 TO JULY 30, 2002 SEPTEMBER 30, 2001
------------------- ---------------- ------------------
Cash flows from operating activities:
Net loss........................................................... $(16,821) $ (77,969) $(408,844)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 3,850 41,344 59,196
Gain on early retirement of debt ................................ -- -- (32,322)
Gain on discharge of debt ....................................... -- (315,310) --
Non-cash reorganization expense ................................. -- 244,669 --
Network optimization cost ....................................... -- 19,000 233,083
Gain on sale of assets, net ..................................... (24) (4,417) (4,730)
Bad debt expense................................................. 1,573 5,454 5,389
Amortization of debt discount ................................... 31 718 1,127
Amortization of deferred debt financing costs ................... 41 608 1,007
Stock-based compensation expense................................. 219 442 2,506
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... (2,530) (2,334) 5,357
Decrease (increase) in prepaid expenses and other
current assets........................................... 646 (3,271) (3,136)
Decrease (increase) in other assets.......................... 171 (5,724) 786
Increase (decrease) in accounts payable - trade ............. 1,448 9,767 (9,577)
Decrease in sales tax payable ............................... (5) (848) (1,338)
Increase (decrease) in accrued network optimization costs ... 151 (3,707) (9,033)
(Decrease) increase in accrued interest and other expenses .. (2,850) 10,544 13,290
-------- --------- ---------
Net cash used in operating activities ..................... (14,100) (81,034) (147,239)
-------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net of payables................ (1,976) (11,298) (78,953)
Proceeds from sale of customer base ............................... -- -- 1,601
Sale of investments available-for-sale, net ....................... 10,615 105,550 286,607
Sale of restricted investments, net................................ 159 1,712 460
-------- --------- ---------
Net cash provided by investing activities ................. 8,798 95,964 209,715
-------- --------- ---------
Cash flows from financing activities:
Proceeds from principal stockholder's short swing profit .......... -- 588 --
Repurchase of Senior Notes......................................... -- -- (14,134)
Proceeds from issuance of common stock............................. -- -- 74
Payments on other long-term debt and capital lease obligations..... (1,051) (4,116) (6,765)
-------- --------- ---------
Net cash used in financing activities ..................... (1,051) (3,528) (20,825)
-------- --------- ---------
Net (decrease) increase in cash ........................... (6,353) 11,402 41,651
Cash and cash equivalents at beginning of period ...................... 20,538 9,136 10,437
-------- --------- ---------
Cash and cash equivalents at the end of period......................... $ 14,185 $ 20,538 $ 52,088
======== ========= =========
Supplemental schedule of non-cash investing and financing activities:
Preferred stock converted to common stock.......................... $ -- $ 2,425 $ 54,170
======== ========= =========
Preferred dividends paid in common stock........................... $ -- $ -- $ 2,995
======== ========= =========
Preferred stock dividends accrued ................................. $ -- $ 3,974 $ 11,395
======== ========= =========
Other disclosures:
Cash paid for interest, net of amounts capitalized ................ $ 3,125 $ 2,150 $ 28,025
======== ========= =========
See accompanying condensed notes to unaudited interim
consolidated financial statements.
MPOWER HOLDING CORPORATION
CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Mpower
Holding Corporation (the "Company"), a Delaware corporation, include the
accounts of the Company and its wholly owned subsidiary, Mpower Communications
Corp. ("Communications") and other subsidiaries of Communications. All
significant inter-company balances and transactions have been eliminated.
These consolidated financial statements reflect all normal recurring
adjustments, which management believes are necessary to present fairly the
financial position, results of operations, and cash flows for the Company for
the respective periods presented. Certain information and footnote disclosures
normally included in the annual consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission for Form 10-Q. These unaudited interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K filed with the Securities and Exchange Commission.
On April 8, 2002, the Company, Communications and Mpower Lease
Corporation ("Mpower LeaseCorp"), a wholly owned subsidiary of Communications
(collectively, the "Debtors"), each filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the District of Delaware. On July 30, 2002, the Company emerged from
the Bankruptcy Court proceedings pursuant to the terms of its First Amended
Joint Plan of Reorganization (the "Plan"). The Plan was filed with the
Bankruptcy Court on May 20, 2002 and was confirmed on July 17, 2002. The
Bankruptcy Court also dismissed the Mpower LeaseCorp Chapter 11 case on July 17,
2002, effective as of July 30, 2002.
During the period from April 8, 2002 to July 30, 2002, the Company
operated as "debtors-in-possession." The unaudited consolidated financial
statements during the period from April 8, 2002 to July 30, 2002, the effective
date of the Plan, have been prepared in accordance with the provisions of
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code." The Debtors adopted the provisions of
SOP 90-7 upon commencement of the Bankruptcy Court proceedings. The consolidated
statements of operations for the periods January 1, 2002 to July 30, 2002 and
July 1, 2002 to July 30, 2002 separately disclose expenses related to the
Chapter 11 proceedings as reorganization expenses. Interest expense on the
Company's 13% Senior Notes due 2010 (the "2010 Notes") and the preferred stock
dividends on the 10% Series C Convertible Redeemable Preferred Stock (the
"Series C Preferred Stock") and 7.25% Series D Convertible Redeemable Preferred
Stock (the "Series D Preferred Stock") ceased to accrue after filing by the
Debtors on April 8, 2002. Interest and dividends ceased by operation of law. See
Note 6 for further discussion on the Chapter 11 proceedings.
Upon emergence from bankruptcy, the Company implemented Fresh Start
Accounting under the provisions of SOP 90-7. Under SOP 90-7, the reorganization
fair value of the Company was allocated to its assets and liabilities, its
accumulated deficit was eliminated, and its new equity was issued according to
the Plan as if it were a new reporting entity. The Company recorded a $244.7
million reorganization charge to adjust the historical carrying value of its
assets and liabilities to fair market value reflecting the allocation of the
Company's $87.3 million estimated reorganized equity value as of July 30, 2002.
The Company also recorded a $315.3 million gain on the cancellation of debt on
July 30, 2002, pursuant to the Plan.
As a result of the reorganization occurring as of July 30, 2002, the
third quarter financial results have been separately presented under the label
"Predecessor Mpower Holding" for periods prior to July 30, 2002 and "Reorganized
Mpower Holding" for the period July 31 to September 30, 2002.
As a result of the reorganization, the financial statements published
for periods following the effectiveness of the Plan will not be comparable to
those published before the effectiveness of the Plan.
The consolidated balance sheet at December 31, 2001 was derived from
the audited consolidated financial statements of the Company, but does not
include all disclosures required under generally accepted accounting principles.
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made in the prior period financial
statements to conform to the current presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
Buildings and property ........................................................ $ 2,222 $ 5,715
Telecommunication and switching equipment ..................................... 34,368 335,475
Leasehold improvements ........................................................ 14,424 41,213
Computer hardware and software ................................................ 6,938 28,436
Office equipment and other .................................................... 4,806 14,756
Assets held for future use..................................................... 6,529 42,134
--------- ----------
69,287 467,729
Less accumulated depreciation and amortization................................. (2,693) (121,837)
--------- ----------
66,594 345,892
Assets held for sale........................................................... 6,187 9,888
Construction in progress....................................................... 1,983 30,092
--------- ----------
Net property and equipment..................................................... $ 74,764 $ 385,872
========= ==========
The historical carrying value of Property and Equipment at September
30, 2002 reflects adjustments from implementation of Fresh Start Accounting as
described in Note 1. Independent financial advisors were engaged to assist in
the determination of the fair value of Property and Equipment. The independent
financial advisors determined the estimated fair value of Property and Equipment
based upon the Cost Approach appraisal methodology. The Cost Approach method
measures the value of a tangible asset by determining the current cost of an
asset and deducting for various elements of depreciation, physical
deterioration, and technical, functional, and economic obsolescence.
As further discussed in Note 5 "Network Optimization Cost", the assets
held for future use are primarily related to the recovery of switch and
collocation equipment from markets cancelled or exited during 2001 and 2002
which will be redeployed in future periods throughout the Company's remaining
operating markets.
As of September 30, 2002, the corporate aircraft has been classified
as an asset held for sale, with a carrying value of $6.2 million. The aircraft
was subsequently sold in October 2002 to an unrelated third party for net
proceeds of $6.2 million.
(3) REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
In January 2002, holders of the Series D Preferred Stock converted
50,000 preferred shares into 57,390 shares of the Company's common stock.
In January 2002, the Company entered into certain agreements with
former employees, whereby in consideration for the payment of $0.1 million and
return of 81,000 shares of the Company's common stock, the former employees were
released from $0.4 million of obligations related to the notes receivable from
stockholders for issuance of common stock. In addition, during July 2002, the
Company established a $0.1 million reserve against the remaining employee
related note receivable from stockholder.
In January 2002, the Company announced a deferral of the quarterly
dividend on the Company's Series D Preferred Stock. As discussed in Note 1,
dividends on the Series C Preferred Stock and the Series D Preferred Stock
ceased to accrue after filing of a bankruptcy petition by the Debtors on April
8, 2002.
A principal stockholder purchased and sold shares of the Company's
common stock, resulting in a short-swing profit under Section 16(b) of the
Securities Exchange Act of 1934. The settlement agreement between the Company
and the principal stockholder required that the Company be reimbursed for the
short-swing profit in the amount of $0.6 million. In March 2002 the Company
received $0.1 million of the settlement, and received the remaining $0.5 million
in April 2002.
Refer to Note 6, "Emergence from Chapter 11 Proceedings" for discussion
of changes in the Company's common and preferred stock as of July 30, 2002,
resulting from implementation of the Company's Plan of Reorganization.
(4) COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, the Company enters into purchase
agreements with its equipment vendors and collocation site providers. As of
September 30, 2002, the Company had total unfulfilled commitments with equipment
vendors and collocation site providers of $2.7 million. The Company also has
various agreements with certain carriers for transport, long distance and other
network services. At September 30, 2002, the Company's commitment under these
agreements is $28.2 million, which expire through July 2005.
The Company is party to various legal proceedings, most of which relate
to routine matters incidental to its business. In addition, on September 20,
2000, a class action lawsuit was commenced against the Company and its chief
executive officer (the "CEO"), in federal court for the Western District of New
York. On March 6, 2001, an amended consolidated class action complaint was
served in that action, seeking to recover damages for alleged violations by the
Company of the Securities Exchange Act of 1934 and Rule 10(b)-5 thereunder (the
"Exchange Act") and Section 11 of the Securities Act of 1933. The amended
consolidated complaint also seeks to recover damages against several of the
Company's officers and former members of its board of directors in addition to
the CEO. The amended consolidated complaint also named various underwriters as
defendants in the action. However, by agreement of the parties and order of the
court, the action against the underwriters has been discontinued, subject to the
plaintiff's right to rename the underwriters as defendants prior to completion
of discovery. On February 11, 2002, the Court issued its Decision and Order
dismissing the class action lawsuit. The decision of the Court has been appealed
to the Court of Appeals in the Second Circuit. The final outcome of this lawsuit
is uncertain.
The Company and the individual defendant officers and former board
members have denied any wrongdoing and will vigorously contest the class action
lawsuit. Any judgment that is significantly greater than the Company's
available insurance coverage could have a material adverse effect on the
Company's results of operations and/or financial condition.
Except as set forth above, management does not believe that the outcome
of any legal proceedings will have a material adverse effect on the Company's
financial position or results of operations.
(5) NETWORK OPTIMIZATION COST
The Company has recognized several charges related to the cancellation
of certain markets.
In September 2000, the Company recognized a $12.0 million network
optimization charge associated with commitments made for collocation sites. As
of September 30, 2002, the Company had incurred $8.9 million of these charges
and had $3.1 million of remaining reserves.
In February 2001, the Company recognized a network optimization charge
of $24.0 million associated with the closing of certain markets and related
commitments made for switch sites and collocations. During the fourth quarter of
2001, as a result of unfavorable lease negotiations, the Company revised its
original estimate and recorded an additional network optimization charge of $2.1
million to cover lease commitments through July 2002. As of September 30, 2002,
the Company had incurred all $26.1 million of these charges and does not
anticipate any additional charges associated with this network optimization.
In May 2001, the Company recognized a network optimization charge of
$209.1 million. Included in the charge was $126.8
million for the goodwill and customer base associated with the Primary Network
business, $65.1 million for property and equipment including collocations and
switch sites and $17.2 million for other costs associated with exiting the
Primary Network markets. During the fourth quarter of 2001, as a result of
favorable negotiations with various carriers, the Company reduced its original
network optimization charge by $2.1 million. As of September 30, 2002, the
Company had incurred $65.1 million and $7.9 million of charges related to
property and equipment and other costs, respectively, and had $7.2 million of
remaining reserves.
In February 2002, the Company closed its operations in Charlotte, North
Carolina and eliminated certain other non-performing sales offices. The Company
also cancelled the implementation of the new billing system in February 2002.
The Company recognized a network optimization charge of $19.0 million in the
first quarter of 2002. Included in the charge was $12.5 million for the write
down of its investment in software and assets for a new billing system, $3.7
million for property and equipment including collocations and switch sites and
$2.8 million for other costs associated with exiting these markets. As of
September 30, 2002, the Company had incurred $12.5 million, $3.7 million and
$1.5 million of charges related to the billing system, property and equipment
and other costs, respectively, and had $1.3 million of remaining reserves.
The remaining $11.6 million of Accrued Network Optimization costs as of
September 30, 2002 represent amounts estimated to be paid, $7.8 million of which
has been classified as current liabilities subject to compromise in the
Consolidated Balance Sheet. Actual payments will be based on ultimate
settlements with various carriers and vendors, net of any costs that may be
recoverable through sales of the related assets, and the Company's ability to
enter into sublease or termination agreements for its switch site and sales
office leases.
(6) EMERGENCE FROM CHAPTER 11 PROCEEDINGS
Confirmation of the Plan: On July 17, 2002, the Bankruptcy Court
confirmed the Plan, as modified by the Findings of Fact, Conclusions of Law, and
Order Under Section 1129 of the Bankruptcy Code and Rule 3020 of the Bankruptcy
Rules Confirming Debtors' First Amended Joint Plan of Reorganization entered by
the Bankruptcy Court on the same date (the "Confirmation Order," the Plan as
modified by the Confirmation Order is referred to herein as the "Final Plan").
Also, on July 17, 2002, the Bankruptcy Court dismissed the Chapter 11 case of
Mpower LeaseCorp, effective as of July 30, 2002. The general unsecured creditors
of the Company, except for the holders of the Company's 2010 Notes and lessors
of certain Company real estate leases, were unaffected by the Chapter 11
proceedings and the Plan. The Plan became effective on July 30, 2002 and
resulted in the following:
- - The 2010 Notes were cancelled and the indenture governing the 2010 Notes
(the "2010 Note Indenture") was terminated. Pursuant to the Final Plan,
holders of the 2010 Notes prior to the emergence (the "2010 Noteholders")
received their pro rata share of 55,250,000 shares of the Reorganized
Company's common stock (the "New Common Stock") representing 85% of the
issued and outstanding common stock of the Reorganized Company, which
included 150,000 shares of New Common Stock withheld by the Trustee under
the 2010 Note Indenture to satisfy certain fees owed to the Trustee.
- - The authorized, issued and outstanding Series C Preferred Stock and Series
D Preferred Stock were cancelled. Pursuant to the Final Plan, holders of
the Series C Preferred Stock and Series D Preferred Stock prior to the
emergence (collectively, the "Preferred Stockholders") received, on a pro
rata basis, 1,862,214 and 6,912,786 shares of New Common Stock,
respectively, which represent a total of 13.5% of the issued and
outstanding common stock of the Reorganized Company.
- - The authorized, issued and outstanding common stock, par value of $0.001
per share, (the "Old Common Stock") was cancelled. Pursuant to the Final
Plan, holders of the Old Common Stock prior to the emergence (the "Old
Common Stockholders") received their pro rata share of 975,000 shares of
New Common Stock representing 1.5% of the issued and outstanding common
stock of the Reorganized Company.
- - Pursuant to the Final Plan, the Rights Agreement, dated as of June 28, 2001
between the Company and Continental Stock Transfer & Trust Company, as
rights agent, was cancelled, along with all rights granted to holders of
the Old Common Stock thereunder. In addition, the authorized Series E
Preferred Stock was also cancelled.
- - Pursuant to the Final Plan, no fractional shares of New Common Stock will
be issued. All distributions of New Common Stock pursuant to the Final Plan
will reflect rounding, to avoid the issuance of fractional shares. As a
result, the actual shares of New Common Stock issued to holders of each
class of the old securities may differ from the share numbers specifically
enumerated in the preceding paragraphs.
- - The Reorganized Company has entered into a new stock option plan for
certain selected key employees (the "New Key Employee Option Plan") that is
substantially identical to the existing Amended and Restated Mpower Holding
Corporation Stock Option Plan (the "Old Option Plan"). Under the New Key
Employee Option Plan, a total of 7,222,222 shares of New Common Stock have
been reserved for issuance to employees of the Reorganized Company.
- - Upon the written request of a holder who individually received in excess of
ten percent (10%) of the New Common Stock under the Final Plan (the
"Eligible Holders") the Reorganized Company will enter into a registration
rights agreement (the "Registration Rights Agreement") with the holders of
the New Common Stock.
- - The board of directors of the Reorganized Company (the "Board of
Directors") initially consisted of six members. Among them, Rolla P. Huff
is the Chief Executive Officer of the Reorganized Company; Joseph M. Wetzel
is the President and Chief Operating Officer and is the designee of the
Company; Robert M. Pomeroy, Michael E. Cahr, Richard L. Shorten, Jr. and
Michael M. Earley are the designees of the 2010 Noteholders (the "2010
Noteholder Designees"). The Final Plan further provides that the 2010
Noteholder Designees will serve for a term of two years during which they
cannot be removed without cause. Thereafter, the Board of Directors will be
elected in accordance with the Reorganized Company's certificate of
incorporation and by-laws, as amended and restated, and applicable law.
Effective September 2002, S. Gregory Clevenger, the Executive Vice
President and Chief Financial Officer, was added as a seventh member of our
board of directors, filling a vacancy on the Board.
- - As of the Effective Date, the Reorganized Company's certificate of
incorporation, as amended and restated pursuant to the Final Plan,
authorized 1,000,000,000 shares of common stock, $0.001 par value and
50,000,000 shares of preferred stock, $0.001 par value. Pursuant to the
terms of the Final Plan, on the Effective Date, the Reorganized Company
issued 64,999,025 shares of the New Common Stock, which constitutes 100% of
the issued and outstanding common stock of the Reorganized Company as of
the Effective Date.
- - The New Common Stock began trading on July 31, 2002 on the NASD
Over-the-Counter Bulletin Board under the symbol MPOW.
- - As of the Effective Date, 1,000 shares of Communications' common stock
remain issued and outstanding, and are held by the Reorganized Company.
- - The Company is still reviewing the overall tax impact of the implementation
of the Plan. However the Company's net operating loss carryforwards,
which were subject to annual use limitations before the reorganization,
may be significantly reduced. Furthermore, other tax attributes,
including the tax basis of certain assets, could also be reduced as a
result of the cancellation of indebtedness as part of the Plan. In
addition, Section 382 of the Internal Revenue Code of 1986, which
generally applies after a more than 50 percentage point ownership change
has occurred, may impose more limitations on the annual utilization of any
remaining net operating losses. The Company believes that it has
experienced such an ownership change as a result of the implementation of
the Final Plan. However, since the Company was under jurisdiction of a
court in a Chapter 11 case at the time of the ownership change, various
alternatives pertaining to the application of Section 382 are available.
At this time, the Reorganized Company has not yet determined which of the
alternatives to elect. A valuation allowance has been recorded to offset
the entire net deferred tax asset due to the uncertainty of the
Reorganized Company realizing any benefit related to the net operating
loss carryforwards or the other future tax deductible amounts.
The condensed financial information for the Company and Communications
(the "Reorganized Companies"), for the periods July 1, 2002 to July 30, 2002 and
January 1, 2002 to July 30, 2002 is as follows (in thousands):
CONDENSED STATEMENT OF OPERATIONS
(in thousands)
REORGANIZED REORGANIZED
COMPANIES COMPANIES
JULY 1, 2002 TO JANUARY 1, 2002 TO
JULY 30, 2002 JULY 30, 2002
------------- -------------
Operating revenues $ 18,843 $ 128,571
Cost of operating revenues (excluding
depreciation and amortization) 11,847 88,225
Selling, general and administrative (excluding
depreciation and amortization) 11,966 109,817
Reorganization expense 530,489 551,191
Stock-based compensation expense 100 100
Network optimization cost (1,576) 6,213
Depreciation and amortization 3,455 23,872
----------- -----------
Loss from operations (537,438) (650,847)
Gain on sale of assets, net 376 377
Interest income 4,524 34,361
Interest expense, net of amounts capitalized (533) (17,651)
Equity earnings in subsidiary (16,123) (147,598)
----------- -----------
Net loss before extraordinary item (549,194) (781,358)
Gain on discharge of debt 315,310 315,310
----------- -----------
Net loss $ (233,884) $ (466,048)
=========== ===========
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
REORGANIZED REORGANIZED
COMPANIES COMPANIES
JULY 1, 2002 TO JANUARY 1, 2002 TO
JULY 30, 2002 JULY 30, 2002
------------- -------------
Net cash used in operating activities $ (17,377) $ (81,771)
Cash flows from investing activities:
Purchases of property and equipment, net
of payables (116) (1,695)
Transfer of investments available-for-sale - 85,124
Sale of investments available-for-sale, net 10,615 10,615
Sale of restricted investments, net 146 1,712
---------- ----------
Net cash provided by investing activities 10,645 95,756
---------- ----------
Cash flows from financing activities:
Proceeds from principal stockholders' short
swing profit - 588
Payments on other long-term debt and capital
lease obligations (77) (363)
Transfer of other long-term debt and capital
lease obligations (2,312) (2,312)
---------- ----------
Net cash used in financing activities (2,389) (2,087)
---------- ----------
Net increase in cash (9,121) 11,898
Cash and cash equivalents, beginning of year 28,011 6,992
---------- ----------
Cash and cash equivalents, end of year $ 18,890 $ 18,890
========== ==========
Liabilities for which payment was subject to the Chapter 11
proceedings have been classified as liabilities subject to compromise in the
consolidated balance sheet. As of September 30, 2002, liabilities of the
Company subject to compromise consisted of other liabilities of $22.9 million.
Reorganization expense: Reorganization expense is comprised of charges
that were realized or incurred by the Company as a result of reorganization
under Chapter 11 of the Bankruptcy Code. Reorganization expense for the period
January 1, 2002 to July 30, 2002 consisted of the following (in thousands):
Consent fee $ 19,025
Fresh start fair market value adjustments 244,669
Professional fees 2,689
---------
$ 266,383
=========
During the periods January 1, 2002 to April 7, 2002 and July 31, 2002
to September 30, 2002, selling, general and administrative expenses included
$2.5 million and $3.7 million, respectively, of professional fees associated
with our recapitalization plan which have been excluded from reorganization
expense in accordance with SOP 90-7.
(7) DEBT
As further discussed in Note 6, as a result of the implementation of
the Company's Plan of Reorganization, on July 30, 2002, the Company eliminated
$371.0 million of debt related to the 2010 Notes.
As of September 30, 2002, long-term borrowings consist of $50.6 million
of 13% Senior Notes due October 1, 2004, net of unamortized discount of $0.4
million, and $4.4 million of other long-term debt and capital lease obligations,
of which $2.7 million has been classified as current liabilities subject to
compromise on the Consolidated Balance Sheet, maturing through 2003.
(8) FRESH START ACCOUNTING
As discussed in Note 1, the Company adopted the provisions of Fresh
Start Accounting as of July 30, 2002. Independent financial advisors were
engaged to assist in the determination of the reorganization equity value or
fair value of the Reorganized Company. The independent financial advisors
determined the estimated reorganization equity value of the Company to be $87.3
million. This entity value was determined by an independent valuation and
financial specialist based on several factors including using projections by
management and various valuation methods including appraisals, discounted cash
flow analysis and other relevant industry information.
SOP 90-7 requires an allocation of the reorganization equity value in
conformity with procedures specified by APB 16, "Business Combinations," as
amended by SFAS 141, "Business Combinations," for transactions reported on the
basis of the purchase method. In applying SOP 90-7, the Company had the value
of its non-current and intangible assets appraised. The Fresh Start Accounting
adjustments are based on the allocation of the reorganization equity value to
the non-current and intangible assets in accordance with SOP 90-7. A
reconciliation of the adjustments recorded in connection with the debt
restructuring and the adoption of Fresh Start Accounting at July 30, 2002 is
presented below (in thousands):
Predecessor Fresh Start Reorganized
Mpower Holding Debt Exchange of Accounting Mpower Holding
July 30, 2002 Restructuring Stock Adjustments(d) July 30, 2002
-------------- ------------- ----------- -------------- --------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 20,538 $ - $ - $ - $ 20,538
Investments available-for-sale 52,964 - - - 52,964
Restricted investments 10,928 - - - 10,928
Accounts receivable, net 22,908 - - 438 23,346
Prepaid expenses and other
current assets 8,859 - - - 8,859
--------- --------- ---------- ---------- -----------
Total current assets 116,197 - - 438 116,635
Property and equipment, net 342,287 - - (267,493) 74,794
Deferred financing costs, net 7,792 (7,281)(a) - - 511
Intangibles - - - 22,512 22,512
Other assets 10,943 - - - 10,943
--------- --------- ---------- ---------- -----------
Total assets $ 477,219 $ (7,281) $ - $ (244,543) $ 225,395
========= ========= ========== ========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 1,681 $ - $ - $ - $ 1,681
Accounts payable:
Trade 21,778 - - - 21,778
Property and equipment 1,349 - - - 1,349
Accrued interest 1,932 - - - 1,932
Accrued sales tax payable 6,229 - - - 6,229
Accrued network optimization costs 3,726 - - - 3,726
Accrued other expenses 18,627 - - - 18,627
--------- --------- ---------- ---------- -----------
Total current liabilities not
subject to compromise 55,322 - - - 55,322
Current liabilities subject to compromise 429,100 (396,796)(a) - (310) 31,994
--------- --------- ---------- ---------- -----------
Total current liabilities 484,422 (396,796) (310) 87,316
Senior notes, net of unamortized discount 50,545 - - - 50,545
Other long-term debt and capital lease
obligations 234 - - - 234
--------- --------- ---------- ---------- -----------
Total Liabilities 535,201 (396,796) - (310) 138,095
--------- --------- ---------- ---------- -----------
Commitments and contingencies
Redeemable preferred stock:
10% Series C convertible preferred stock 47,763 - (47,763)(b) - -
7.25% Series D convertible preferred stock 156,616 - (156,616)(b) - -
Stockholders' equity (deficit):
Reorganized Mpower Holding common stock - 55(a) 10(b)(c) - 65
Reorganized Mpower Holding additional paid
in capital - 74,150(a) 13,085(b) - 87,235
Predecessor Mpower Holding common stock 59 - (59)(c) - -
Predecessor Mpower Holding additional paid
in capital 711,280 - 191,267(b)(c) (902,547) -
Predecessor Mpower Holding treasury stock (76) - 76(c) - -
Predecessor Mpower Holding note receivable
for issuance of stock (438) - - 438 -
Predecessor Mpower Holding unrealized other
income/(loss) 2,039 - - (2,039) -
Accumulated (deficit) earnings (975,225) 315,310(a) - 659,915 -
--------- --------- ---------- ---------- -----------
Total stockholders' equity (deficit) (262,361) 389,515 204,379 (244,233) 87,300
--------- --------- ---------- ---------- -----------
Total liabilities, redeemable
preferred stock and
stockholders' equity (deficit) $ 477,219 $ (7,281) $ - $ (244,543) $ 225,395
========= ========= ========== ========== ===========
(a) To record the discharge of the carrying value ($370,977) and accrued
interest ($25,819), deferred financing costs ($7,281) related to the 2010
Notes and the Reorganized Mpower Holding Common Stock issued ($55) the 2010
Noteholders.
(b) To record the conversion of the Predecessor Mpower Holding Convertible
Series C and D Preferred Stock, and the accrued dividends thereon
($21,540) to Reorganized Mpower Holding Common Stock.
(c) To eliminate the Predecessor Mpower Holding Common Stock and
Treasury Stock and record the issuance of Reorganized Mpower Holding
Common Stock.
(d) To adjust the carrying value of assets and liabilities to fair market
value.
(9) INTANGIBLE ASSETS
On January 1 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142). SFAS No. 142 provides that goodwill and other separately
recognized intangible assets with indefinite lives will no longer be amortized,
but will be subject to at least an annual assessment for impairment through the
application of a fair-value-based test. Intangible assets that do have finite
lives will continue to be amortized over their estimated useful lives.
In connection with the Company's adoption of fresh start reporting,
independent appraisers assigned a value to the Company's customer relationships
and trademark of $20.8 million and $1.7 million, respectively. The customer
relationships are amortized using the straight-line method over 3 years.
Amortization expense for the period July 31, 2002 to September 30, 2002 was
$1.2 million. The trademark was determined to have an indefinite life and is
not being amortized.
Had the Company adopted the provisions of SFAS No. 142 for all periods
presented the effect would have been as follows:
REORGANIZED THREE MONTHS REORGANIZED JULY PREDECESSOR NINE MONTHS
JULY 31, 2002 TO PREDECESSOR ENDED 31, 2002 TO JANUARY 1, ENDED
SEPTEMBER 30, JULY 1, 2002 TO SEPTEMBER 30, SEPTEMBER 30, 2002 TO JULY SEPTEMBER 30,
2002 JULY 30, 2002 2001 2002 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income applicable
to common stockholders, as
reported $ (16,821) $ 57,673 $ (61,573) $ (16,821) $ (81,943) $ (426,864)
- ------------------------------------------------------------------------------------------------------------------------------------
Goodwill amortization - - 3,220 - - 6,440
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted net (loss) income
applicable to
common stockholders $ (16,821) $ 57,673 $ (58,353) $ (16,821) $ (81,943) $ (420,424)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted (loss)
income per share, as
reported $ (0.26) $ 0.97 $ (1.04) $ (0.26) $ (1.38) $ (7.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Goodwill amortization
per share - - 0.06 - - 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted basic and diluted
(loss) income per share $ (0.26) $ 0.97 $ (0.98) $ (0.26) $ (1.38) $ (7.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted basic and diluted loss per share of common stock before
extraordinary item for the three and nine months ended September 31, 2001 would
have been $(0.98) and $(7.66), respectively.
(10) STOCK OPTION PLAN
As filed in the Company's Final Plan with the Bankruptcy Court,
7,222,222 shares of New Common Stock have been reserved for issuance pursuant
to the terms of a new stock option plan (the "New Key Employee Option Plan")
adopted by the Company for the benefit of certain selected key employees that
is substantially identical to the Amended and Restated Mpower Holding
Corporation Stock Option Plan (the "Old Option Plan") canceled as of the
Effective Date. Employees of Reorganized Mpower have received an initial grant
of options under the New Key Employee Option Plan (the "New Options") to
replace their canceled options, on a one-for-one basis. The New Options granted
under the New Key Employee Option Plan will be subject to the same terms and
conditions as the corresponding canceled outstanding Employee Options,
including such provisions as option period, exercise price, termination of
employment and vesting. Generally the Outstanding Employee Options vest over a
three year period, with one third of the options vesting on September 29, 2002,
2003, and 2004. All outstanding Employee Options expire on September 29, 2010.
All of the New Options are considered to be a new grant of options from a new
reporting entity, and will be accounted for as a fixed award.
On August 2, 2002 the Company issued 3,764,236 new options which held a
strike price of $0.22 per share, and at the time of the issuance the fair market
value of the stock was $0.38 per share. The compensation expense of $0.2 million
was primarily the result of these new options and is included in the statement
of operations for Reorganized Mpower Holding for the quarter ending September
30, 2002.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). Upon adoption of SFAS No. 143, the fair
value of a liability for an asset retirement obligation will be recognized in
the period in which it is incurred. The associated retirement costs will be
capitalized as part of the carrying amount of the long-lived asset and
subsequently allocated to expense over the asset's useful life. This statement
is effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. Mpower Holding, as required by SOP 90-7, has
implemented this statement as part of Fresh Start Accounting. The adoption of
SFAS No. 143 has not had a material effect on the financial results of the
Company.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). The Company
adopted the provisions of this standard on January 1, 2002. This standard
addresses financial accounting and reporting for the impairment and disposal of
long-lived assets. The adoption of SFAS No. 144 has not had a material effect
on the financial results of the Company.
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). This standard rescinds FASB No. 4 and an
amendment to that Statement, FASB No. 64, which relates to extinguishment of
debt. It rescinds FASB No. 44, which relates to certain sale-leaseback
transactions. The Company adopted this standard on July 30, 2002, in
connection with the implementation of Fresh Start Accounting. The adoption of
SFAS No. 145 has not had a material effect on the financial results of the
Company.
In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). This standard
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". This Statement requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred, as
opposed to when the entity commits to an exit plan under EITF No. 94-3. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
Company adopted this standard on July 30, 2002, in connection with the
implementation of Fresh Start Accounting. The adoption of SFAS No. 146 has not
had a material effect on the financial results of the Company.
(12) GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company incurred losses applicable to common stockholders of $98.8
million during the first nine months of 2002 and $426.9 million during the first
nine months of 2001. The Company continues to incur negative cash flows from
operating activities and based on current operations estimates that it has the
resources to fund the Company's operations through the first quarter of
2003, but that additional resources most likely will be required thereafter. The
funding necessary for the Company's ongoing operations could be materially
affected by our completion of one or more of the initiatives described below.
These factors, among others, indicate that the Company could be unable to
continue as a going concern.
The Company's operations require substantial capital investment for
the purchase of equipment and the development and maintenance of its network.
Management expects to continue to require substantial amounts of capital to
acquire customers, fund operating losses, augment the network in existing
markets and develop new products and services.
The Company has completed, and is pursuing, several initiatives
intended to increase liquidity and better position the Company to compete under
current conditions and anticipated changes in the telecommunications sector.
These include:
- Implementation of the recapitalization of its balance sheet as
described in Note 6
- Aggressively seeking additional equity or debt financing
- Discussions with companies who may be interested in acquiring the
Company or its assets, in whole or in part, and discussions with
companies who may be interested in selling their assets or
business, in whole or in part
- Potential repurchase of all or a portion of the Company's
outstanding 13% Senior Secured Notes due 2004
- Continuing to update its prospective business plans and forecasts
to assist in monitoring current and future liquidity
- Closing or selling unprofitable or under performing markets
- Reducing general and administrative expenses through various cost
cutting measures
- Introducing new products and services with greater profit margins
- Analyzing the pricing of its current products and services to
ensure they are competitive and meet Company objectives
- Redeploying assets held for future use to reduce the requirement
for capital expenditures
The Company's continuation as a going concern is dependent on its
ability to meet the above initiatives, among others. However, there can be no
assurance that the Company will be successful in obtaining additional debt or
equity financing, or in obtaining a bank facility on terms acceptable to the
Company, or at all, or that management's estimate of additional funds required
is accurate. The financial statements do not include any adjustments relating
to the recoverability and classification of assets and the satisfaction and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
(13) SUBSEQUENT EVENTS
In October 2002, the Company established and funded a trust with $2.0
million, an amount sufficient to pay all severance benefit obligations pursuant
to employment agreements for several executives and any other severance or
retention agreements in effect that were not funded by the trust adopted by the
Company in November 2001.
(14) CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following information sets forth the condensed consolidating
balance sheets of the Company as of September 30, 2002 and December 31, 2001
and the condensed consolidating statements of operations and cash flows for the
nine months ended September 30, 2002 and 2001, for the Company (the "Parent
Company"), the subsidiary of the Company, Communications, which guarantees the
2004 Notes ("Subsidiary Guarantor") and the combined subsidiaries of the
Company which are not Subsidiary Guarantors ("Subsidiary Nonguarantors.") The
Subsidiary Guarantor is wholly owned and the guarantee is the full,
unconditional, joint and several obligation of the Subsidiary Guarantor. The
accounting policies of the subsidiaries are the same as those of the Company
which are described in Note 1 of the Company's annual report on Form 10-K filed
with the Securities and Exchange Commission. There are no restrictions on the
ability of the Subsidiary Guarantor to transfer funds to the Company in the
form of cash dividends, loans or advances.
CONDENSED CONSOLIDATING BALANCE SHEET
AT SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 100 $ 13,851 $ 234 $ - $ 14,185
Investments available-for-sale - 42,552 14 - 42,566
Restricted investments - 10,769 - - 10,769
Accounts receivable, net - 23,761 (1) - 23,760
Prepaid expenses and other
current assets 1,030 7,004 178 - 8,212
Intercompany receivable (payable) (1,910) 2,629 (719) - -
-------- -------- ------- --------- --------
Total current assets (780) 100,566 (294) - 99,492
Property and equipment, net - 43,566 31,198 - 74,764
Investments in subsidiaries 73,945 10,673 - (84,618) -
Intangibles, net 1,694 19,661 - - 21,355
Other assets 1,108 10,135 - - 11,243
-------- -------- ------- --------- --------
Total assets $ 75,967 $184,601 $30,904 $ (84,618) $206,854
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ - $ - $ 1,202 $ - $ 1,202
Accounts payable 3,923 23,051 3,243 - 30,217
Other current liabilities 1,326 14,422 15,247 - 30,995
-------- -------- ------- --------- --------
Total current liabilities
not subject to compromise 5,249 37,473 19,692 - 62,414
Current liabilities subject
to compromise 20 22,883 - - 22,903
-------- -------- ------- --------- --------
Total current liabilities 5,269 60,356 19,692 - 85,317
Senior notes, net - 50,576 - - 50,576
Other long-term debt and capital lease
obligations - - 539 - 539
-------- -------- ------- --------- --------
Total liabilities 5,269 110,932 20,231 - 136,432
Commitments and contingencies
Stockholders' equity:
Common stock 65 - - - 65
Additional paid-in capital 87,454 86,001 14,462 (100,463) 87,454
Accumulated deficit (16,821) (12,056) (3,789) 15,845 (16,821)
Accumulated other comprehensive loss - (276) - - (276)
-------- -------- ------- --------- --------
Total stockholders'
equity 70,698 73,669 10,673 (84,618) 70,422
-------- -------- ------- --------- --------
Total liabilities, redeemable
preferred stock
and stockholders'
equity $ 75,967 $184,601 $30,904 $(84,618) $206,854
======== ======== ======= ======== ========
CONDENSED CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 2001
(IN THOUSANDS)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 100 $ 6,892 $ 2,144 $ - $ 9,136
Investments available-for-sale - 10,671 150,473 - 161,144
Restricted investments - 12,050 590 - 12,640
Accounts receivable, net - 24,001 824 - 24,825
Prepaid expenses and other
current assets - 5,315 272 - 5,587
Intercompany receivable (payable) (24,839) 588,507 (563,668) - -
--------- ---------- -------- ---------- ---------
Total current assets (24,739) 647,436 (409,365) - 213,332
Property and equipment, net - 182,419 203,453 - 385,872
Investments in subsidiaries 488,258 (239,148) - (249,110) -
Goodwill and other intangibles, net - - - - -
Other assets 7,746 6,697 - - 14,443
--------- ---------- --------- ---------- ---------
Total assets $ 471,265 $ 597,404 $(205,912) $ (249,110) $ 613,647
========= ========== ========= ========== =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ - $ 697 $ 7,032 $ - $ 7,729
Accounts payable - 28,877 (48) - 28,829
Accrued interest 12,367 1,656 - - 14,023
Other current liabilities - 27,200 17,557 - 44,757
--------- ---------- --------- ----------- ---------
Total current liabilities 12,367 58,430 24,541 - 95,338
Senior notes, net 370,366 50,437 - - 420,803
Other long-term debt and capital
lease obligations - 811 1,343 - 2,154
--------- ---------- --------- ----------- ---------
Total liabilities 382,733 109,678 25,884 - 518,295
Commitments and contingencies
Redeemable preferred stock:
10% Series C convertible
preferred stock 46,610 - - - 46,610
7.25% Series D convertible
preferred stock 156,220 - - - 156,220
Stockholders' equity (deficit):
Common stock 59 - - - 59
Additional paid-in capital 712,334 1,289,012 75,556 $(1,364,568) 712,334
Accumulated deficit (826,615) (800,754) (314,704) 1,115,458 (826,615)
Treasury stock and other (76) (532) 7,352 - 6,744
--------- ---------- --------- ----------- ---------
Total stockholders'
equity (deficit) (114,298) 487,726 (231,796) (249,110) (107,478)
--------- ---------- --------- ----------- ---------
Total liabilities, redeemable
preferred stock
and stockholders'
equity (deficit) $ 471,265 $ 597,404 $(205,912) $ (249,110) $ 613,647
========= ========== ========= =========== =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------- -------------
Operating revenues $ - $ 167,056 $ 24,295 $ (24,295) $ 167,056
Cost of operating revenues
(excluding depreciation and amortization) - 111,049 (25) - 111,024
Selling, general and administrative
(excluding depreciation and amortization) 5,839 130,747 11,584 (24,295) 123,875
Reorganization expenses (40,675) 591,866 (298,266) 13,458 266,383
Stock-based compensation
expense 219 100 342 - 661
Network optimization cost - 6,213 12,787 - 19,000
Depreciation and amortization - 25,028 20,166 - 45,194
----------- ----------- ------------- ------------ ------------
Loss from operations 34,617 (697,947) 277,707 (13,458) (399,081)
Gain on sale of assets, net - 401 4,040 - 4,441
Interest income - 38,112 1,760 (36,042) 3,830
Interest expense, net 17,668 4,305 33,359 (36,042) 19,290
Loss on investments in subsidiary (413,591) 250,148 - 163,443 -
----------- ----------- ------------- ------------ ------------
Net Loss before extraordinary item (396,642) (413,591) 250,148 149,985 (410,100)
Gain on discharge of debt 315,310 - - - 315,310
----------- ----------- ------------- ------------ ------------
Net Loss $ (81,332) $ (413,591) $ 250,148 $ 149,985 $ (94,790)
=========== =========== ============= ============ ============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------- ------------
Operating revenues $ - $ 135,200 $ 48,145 $ (38,437) $ 144,908
Cost of operating revenues
(excluding depreciation and amortization) - 108,644 12,401 - 121,045
Selling, general and administrative
(excluding depreciation and amortization) - 163,726 23,461 (38,437) 148,750
Stock-based compensation
expense - 2,506 - - 2,506
Network optimization cost - 50,090 182,993 - 233,083
Depreciation and amortization - 26,192 33,004 - 59,196
----------- ----------- ------------- ------------ ------------
Loss from operations - (215,958) (203,714) - (419,672)
Gain on sale of assets, net - 2,716 2,014 - 4,730
Interest income - 63,428 14,237 (59,860) 17,805
Interest expense, net 12,955 29,757 61,177 (59,860) 44,029
Loss on investments in subsidiary (395,888) (248,639) - 644,527 -
----------- ----------- ------------- ------------ ------------
Net Loss before extraordinary item (408,843) (428,210) (248,640) 644,527 (441,166)
Gain on discharge of debt - 32,322 - - 32,322
----------- ----------- ------------- ------------ ------------
Net loss $ (408,843) $ (395,888) $ (248,640) $ 644,527 $ (408,844)
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2002
(in thousands)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ --------------
Net cash (used in) provided by operating
activities $ - $ (96,761) $ 1,627 $ - $ (95,134)
Cash flows from investing activities:
Purchases of property and
equipment, net - (1,867) (11,407) - (13,274)
Transfers of investments
available for sale - 85,124 (85,124) - -
Sale of investments
available-for-sale, net - 21,143 95,022 - 116,165
Sale of restricted
investments, net - 1,871 - - 1,871
----------- ----------- ------------ ------------ -------------
Net cash (used in) provided by
investing activities - 106,271 (1,509) - 104,762
----------- ----------- ------------ ------------ -------------
Cash flows from financing activities:
Payments on other long-term
debt and capital lease
obligations - (827) (4,340) - (5,167)
Transfer of other long-term
debt and capital lease
obligations, net - (2,312) 2,312 - -
Proceeds from principal stockholders'
short swing profit - 588 - - 588
----------- ----------- ------------ ------------ -------------
Net cash used in financing
activities - (2,551) (2,028) - (4,579)
----------- ----------- ------------ ------------ -------------
Net increase (decrease) in cash - 6,959 (1,910) - 5,049
Cash and cash equivalents, beginning
of year 100 6,892 2,144 - 9,136
----------- ----------- ------------ ------------ -------------
Cash and cash equivalents, end
of year $ 100 $ 13,851 $ 234 $ - $ 14,185
=========== =========== ============ ============ =============
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2001
(in thousands)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ --------------
Net cash (used in) provided by
operating activities $ 100 $ (76,923) $ (70,416) $ - $ (147,239)
Cash flows from investing activities:
Purchases of property and
equipment, net - (59,215) (19,738) - (78,953)
Sale of investments
available-for-sale, net - 182,273 104,334 - 286,607
Proceeds from sale of customer base - - 1,601 - 1,601
Sale of restricted investments, net - 460 - - 460
----------- ----------- ------------- ------------ -------------
Net cash provided by investing
activities - 123,518 86,197 - 209,715
----------- ----------- ------------- ------------ -------------
Cash flows from financing activities:
Payments on other long-term
debt and capital lease
obligations - (442) (6,323) - (6,765)
Repurchase of senior notes - (14,134) - - (14,134)
Proceeds from issuance of
common stock - 74 - - 74
----------- ----------- ------------- ------------ -------------
Net cash used in financing
activities - (14,502) (6,323) - (20,825)
----------- ------------ ------------- ------------ -------------
Net increase in cash 100 32,093 9,458 - 41,651
Cash and cash equivalents, beginning
of year - 4,359 6,078 - 10,437
----------- ----------- ------------- ------------ -------------
Cash and cash equivalents, end
of year $ 100 $ 36,452 $ 15,536 $ - $ 52,088
=========== =========== ============= ============ =============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Under the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, we caution investors that certain statements contained in
this Report regarding our or management's intentions, hopes, beliefs,
expectations or predictions of the future are forward-looking statements. We
wish to caution the reader these forward-looking statements are not historical
facts and are only estimates or predictions. Actual results may differ
materially from those projected as a result of risks and uncertainties
including, but not limited to, market makers' independent decisions to create a
market in the common stock of our recapitalized company, future sales growth,
market acceptance of our product offerings, our ability to secure adequate
financing or equity capital to fund our operations and network augmentation, our
ability to manage rapid growth and maintain a high level of customer service,
the performance of our network and equipment, our ability to enter into
strategic alliances, the cooperation of incumbent local exchange carriers in
provisioning lines and interconnecting our equipment, regulatory decisions,
regulatory approval processes, changes in technology, price competition and
other market conditions and risks detailed from time to time in our Securities
and Exchange Commission filings.
EMERGENCE FROM CHAPTER 11 PROCEEDINGS
On July 30, 2002, Mpower Holding Corporation and our subsidiary Mpower
Communications Corp., formally emerged from Chapter 11 as our recapitalization
plan (the "Plan") became effective. Also on July 30, 2002, the Bankruptcy Court
dismissed the Chapter 11 case of Mpower Leasecorp. We are now operating our
businesses and properties as reorganized entities pursuant to the Final Plan.
See Note 6 in the Condensed Notes to the Unaudited Interim Consolidated
Financial Statements for a summary of the material features of the Plan.
As a consequence of the reorganization occurring as of July 30, 2002,
the third quarter financial results have been separately presented under the
label "Predecessor Mpower Holding" for the period July 1 to July 30, 2002 and
"Reorganized Mpower Holding" for the period July 31 to September 30, 2002. For
discussion purposes, the operating results for the periods July 1, 2002 to July
30, 2002 and July 31, 2002 to September 30, 2002 have been added together to
compare to the three months ended September 30, 2001 and the operating results
for the periods January 1, 2002 to July 30, 2002 and July 31, 2002 to September
30, 2002 have been added together to compare to the nine months ended September
30, 2001.
As of July 30, 2002, we implemented Fresh Start Accounting under the
provisions of SOP 90-7. Under SOP 90-7, our reorganization fair value was
allocated to our assets and liabilities, our accumulated deficit was eliminated,
and our new equity was issued according to the Plan as if we were a new
reporting entity. In conformity with Fresh Start Accounting principles,
Predecessor Mpower Holding recorded a $244.7 million reorganization charge to
adjust the historical carrying value of our assets and liabilities to fair
market value reflecting the allocation of our $87.3 million estimated
reorganized equity value as of July 30, 2002. We also recorded a $315.3 million
gain on the cancellation of debt on July 30, 2002 pursuant to the Plan.
As a result of reorganization, the financial statements published for
the periods following the effectiveness of the Plan will not be comparable to
those published before the effectiveness of the Plan.
We are still reviewing the overall tax impact of the implementation of
the Plan. However our net operating loss carryforwards, which were subject to
annual use limitations before the reorganization, may be significantly reduced.
Furthermore, other tax attributes, including the tax basis of certain assets,
could also be reduced as a result of the cancellation of indebtedness as part
of the Plan. In addition, Section 382 of the Internal Revenue Code of 1986,
which generally applies after a more than 50 percentage point ownership change
has occurred, may impose more limitations on the annual utilization of any
remaining net operating losses. We believe that we have experienced such an
ownership change as a result of the implementation of the Final Plan. However,
since we were under jurisdiction of a court in a Chapter 11 case at the time of
the ownership change, various alternatives pertaining to the application of
Section 382 are available. At this time, we have not yet determined which of the
alternatives to elect. A valuation allowance has been recorded to offset the
entire net deferred tax asset due to the uncertainty of our realizing any
benefit related to the net operating loss carryforwards or the other future tax
deductible amounts.
THE BUSINESS
We operate through our wholly owned subsidiary, Mpower Communications
Corp. ("MCC"), which offers voice and high-speed data services using both SDSL
and T1 technology in all of our markets. As of September 30, 2002, we provided
services in 27 metropolitan areas in 8 states. Our network consists of 568
incumbent carrier central office collocation sites providing us access to more
than 11 million addressable business lines. All of our 568 central office
collocation sites are SDSL capable and 383 are T1 capable. We have established
working relationships with the following incumbent local exchange carriers
(ILEC's): BellSouth, Sprint, Verizon, and Southwestern Bell Corporation
(including its operating subsidiaries PacBell and Ameritech, collectively
referred to as "SBC"). We have over 407,000 lines in service. At September 30,
2002, we have 1,673 employees.
We were one of the first competitive communications carriers to
implement a facilities-based network strategy. As a result, we own the network
equipment that controls how voice and data transmissions originate and
terminate, which we refer to as switches, and lease the telephone lines over
which the voice and data traffic are transmitted, which we refer to as
transport.
We install our network equipment at the site of the incumbent carrier
from whom we rent standard telephone lines. These sites are referred to as
collocation sites within the telecommunications industry. As we have already
invested and built our network, we believe our strategy allows us to serve a
broad geographic area at a comparatively low cost while maintaining control of
the access to our customers.
Our business is to deliver packaged voice and broadband data solutions
to small and mid-sized businesses. Specifically, our business plan is based on
serving the small and medium enterprise customers that find business value in
high-speed broadband Internet access integrated with local dial-tone service. We
have more than 83,000 business customers, providing them broadband Internet via
SDSL and T1, integrated services over VoDSL, T1 and local voice telephone
service.
In the fourth quarter of 2001, we began to upgrade our network with T1
technology to increase our revenue potential, gross margin and addressable
customer base. By leveraging our existing equipment, interconnection agreements
with incumbent carriers and network capabilities, we are able to offer fully
integrated and channelized voice and data products over a T1 connection,
overcoming the DSL loop length limitations. This platform utilizes central
office equipment provisioned with T1 line cards that leverage low-cost T1
unbundled network elements leased from incumbent carriers. Our collocation DSL
equipment then aggregates Internet traffic to the central office Internet
gateway. This delivery mechanism provides guaranteed bandwidth and a data
service that is positioned to be a superior offering when compared to the
incumbent carriers' DSL service offering.
By using a T1 service delivery platform, we expect to increase the
amount of revenue per customer. In order to serve the largest portion of our
target market, our combined voice and data network allows us to deliver services
in several combinations over the most favorable technology: basic phone service
on the traditional phone network, SDSL service, integrated T1 voice and data
service, or data-only T1 connectivity.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to revenue
recognition, allowance for doubtful accounts, network optimization accruals and
disputes with carriers. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
Revenue Recognition: Revenue from monthly recurring charges, enhanced
features and usage is recognized in the period in which service is provided.
Deferred revenue represents advance billings for services not yet provided. Such
revenue is deferred and recognized in the period in which service is provided.
We recognize revenue from switched access in the period in which
service is provided, when the price is fixed, the earnings process is complete
and the collectability is reasonably assured. Approximately 79% of the switched
access minutes carried on our network in the quarter ended September 30, 2002
were from our largest carriers with whom we have existing contracts governing
the amount of our switched access charges. If the amount we collect in the
future from our switched access carriers varies significantly from our
estimates, our revenue may be negatively affected. These certain judgments in
measuring revenue may affect our results. Revenue results may be difficult to
predict, and any shortfall in revenue or delay in recognizing revenue could
cause our operating results to vary significantly and could result in or
increase future operating losses.
Allowance For Doubtful Accounts: We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
pay for our services. In order to estimate the appropriate level of this
allowance, we analyze historical bad debts, current economic trends and changes
in our customer payment patterns. If the financial condition of our customers
were to deteriorate and impact their ability to make payments, additional
allowances may be required. Several of the carriers that terminate or originate
traffic for our customers are currently in Chapter 11 proceedings. The largest
of these vendors include Global Crossing and Worldcom. In establishing the
allowance for doubtful accounts we have taken into consideration the aggregate
risk of our receivables, including the potential exposure from Global Crossing
and Worldcom Chapter 11 proceedings. If actual results differ from our
estimates, we may need to adjust our reserves in the future.
Network Optimization Accruals: In establishing the accrual for the
network optimization costs, we made certain assumptions related to the wind down
and closure of certain markets and related future severance costs and other exit
costs. While we feel the assumptions were appropriate, there can be no assurance
that actual costs will not differ from estimates used to establish the network
optimization accrual. If actual results differ significantly from the estimates,
we may need to adjust our network optimization accrual in the future.
Billing From Network Carriers: Various long distance carriers and
incumbent carriers lease loop, transport and network facilities to us. The
pricing of such facilities are governed by either a tariff or an interconnection
agreement. These carriers bill us for our use of such facilities. From time to
time, the carriers present inaccurate bills to us, which we dispute. As a result
of such billing inaccuracies, we record an estimate of our liability based on
our measurement of services received. As of September 30, 2002 we had $7.7
million of disputes with carriers. We have reserved $4.6 million against those
disputed balances. Based on the nature and history of disputes with the
carriers, we believe this amount to be adequate. Any significant victories or
losses when these disputes are resolved may require us to adjust our reserves in
the future.
Fresh Start Accounting: In accordance with the American Institute of
Certified Public Accountants' Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code", we adopted fresh-start
accounting as of July 30, 2002, on the effective date of the Plan. Since July
31, 2002, our financial statements have been prepared as if we were a new
reporting entity. Under fresh-start accounting, all assets and liabilities were
restated to reflect our reorganization value, which approximated fair value at
the date of reorganization. The reorganization value of our common equity was
determined to be $87.3 million at July 30, 2002, by an independent valuation and
financial specialist based on several factors including using projections by
management and various valuation methods including appraisals, discounted cash
flow analysis and other relevant industry information. Our reorganization value
was allocated to various asset categories pursuant to fresh-start accounting
principles. We recorded a $244.7 million reorganization charge to adjust the
historical carrying value of our assets and liabilities to fair market value
reflecting the allocation of our $87.3 million estimated reorganized equity
value as of July 30, 2002. We also recorded a $315.3 million gain on the
cancellation of debt on July 30, 2002, pursuant to the Plan.
RESULTS OF OPERATIONS
Our revenues are generated from sales of communications services
consisting primarily of local phone services, data services, long-distance
services, switched access billings and non-recurring charges, principally
installation charges. Local, long distance and data services are generally
provided and billed as a bundled offering under which customers pay a fixed
amount for a package of combined services. As a result, the portion of our
revenues attributable to each service is not identifiable and, therefore, we do
not record or report these amounts separately.
The measures we took during the second quarter of 2002 to improve the
quality of new revenue added, included more stringent credit checks, minimum
customer line thresholds, term contracts, and higher prices in many markets
began to show positive effects on our gross margin. In spite of our expectation
of positive results, we cannot assure the investor that our revenues will
continue to
grow as a result of softness in the economy, difficulties in the competitive
telecom sector, and current and potential customer response to our emergence
from our Chapter 11 restructuring.
Growth in revenue during the remainder of 2002 and into 2003 will
primarily be dependent on our ability to continue to add new customers in a
competitive market, manage our churn (defined as the percentage of installed
lines that disconnect service each month), and sell additional services to our
existing customers.
Our revenues consist of:
- the monthly recurring charge for basic local voice and data
services;
- usage-based charges for local, toll and long distance calls in
certain markets;
- charges for services and features such as call waiting and
call forwarding;
- certain non-recurring charges, such as set-up charges for new
customers or for additional lines for existing customers; and
- interconnection revenues from switched access charges to long
distance carriers.
Our switched access revenues historically have been subject to
uncertainties such as various federal and state regulations and disputes with
our long distance carriers. As of September 30, 2002, we have agreements with
those carriers that provide approximately 79% of our switched access traffic. In
addition, the Federal Communications Commission (the "FCC") in April 2001
adopted new rules that limit the rates we can charge carriers for use of our
facilities. Under these rules, which took effect on June 20, 2001, competitive
carriers are required to reduce their tariffed interstate access charges to
agreed upon contractual rates or rates no higher than 2.5 cents per minute.
After one year, the rate ceiling will be reduced to 1.8 cents and after two
years to 1.2 cents per minute. After three years, all competitive carriers will
be required to charge rates no higher than the incumbent telephone company. As a
result of our agreements and the reductions in rates dictated by the FCC, we
anticipate a continued decrease of switched access revenues as a percentage of
total revenue. Switched access revenue, as a percentage of total revenue was 14%
for the third quarter of 2002 compared to 29% in the third quarter of 2001. As a
result, other revenue from core trade customers was 86% of total third quarter
2002 revenues as compared to 71% of total third quarter 2001 revenues.
Our principal recurring operating expenses consist of cost of operating
revenues, selling, general and administrative expenses, and depreciation and
amortization expense. Cost of operating revenues consists primarily of access
charges, line installation expenses, transport expenses, long distance expenses
and lease expenses for our switch sites and our collocation sites. While we
cannot be certain that we will be successful controlling cost and achieving
operating efficiencies in our network, we expect these costs to remain flat or
slightly decrease as a percentage of total revenue during the remainder of 2002
and into 2003.
Selling, general and administrative expenses consist primarily of
salaries, commissions and related personnel costs, marketing costs, the cost of
maintaining the hardware in our network and back office systems, provision for
bad debts, professional fees and facilities expenses.
In accordance with SOP 90-7, expenses resulting from the reorganization
of the business in a bankruptcy proceeding are reported separately as
reorganization expenses. In accordance with SOP 90-7 charges resulting from
the reorganization of the business in a bankruptcy proceeding are reported
separately as reorganization expenses.
As filed in our Final Plan with the Bankruptcy Court, 7,222,222 shares
of New Common Stock have been reserved for issuance pursuant to the terms of a
new stock option plan (the "New Key Employee Option Plan") adopted by us for the
benefit of certain selected key employees that is substantially identical to the
Amended and Restated Mpower Holding Corporation Stock Option Plan (the "Old
Option Plan") canceled as of the Effective Date. Employees of Reorganized Mpower
have received an initial grant of options under the New Key Employee Option Plan
(the "New Options") to replace their canceled options, on a one-for-one basis.
The New Options granted under the New Key Employee Option Plan will be subject
to the same terms and conditions as the corresponding canceled. Outstanding
Employee Options, including such provisions as option period, exercise price,
termination of employment and vesting. Generally the outstanding Employee
Options vest over a three year period, with one third of the options vesting on
September 29, 2002, 2003 and 2004. All outstanding Employee Options expire on
September 29, 2010. All of the New Options are considered to be a new grant of
options from a new reporting entity, and will be accounted for as a fixed award.
On August 2, 2002 we issued 3,764,236 new options which held a strike
price of $0.22 per share, and at the time of the issuance the fair market value
of the stock was $0.38 per share. The compensation expense of $0.2 million was
primarily the result of these new options and is included in the statement of
operations for Reorganized Mpower Holding for the quarter ending September 30,
2002.
Depreciation and amortization expense includes depreciation of
switching and collocation equipment, business application software as well as
general property and equipment and the amortization of leasehold improvements,
goodwill and other intangible assets. Depreciation and amortization expense for
the months of August and September 2002 was significantly impacted by the
implementation of Fresh Start Accounting on July 30, 2002. Likewise,
depreciation and amortization expense in future periods will also be
significantly reduced. Included in the depreciation and amortization expense for
the Reorganized Mpower Holding is the amortization of the asset related to
intangible customer relationships which are amortized over a three-year customer
life.
Gross interest expense is primarily attributable to the 13% Senior
Notes due 2010 (the "2010 Notes") we issued in March 2000 and the 13% Senior
Notes due 2004 (the "2004 Notes") issued in September 1997. Interest was paid on
our 2004 Notes on April 1, 2002 and September 30, 2002. The interest payable on
the 2010 Notes was accrued through April 8, 2002 but not paid and subsequently
eliminated as agreed upon by the holders of the 2010 Notes in connection with
our reorganization plan. With the retirement of the 2010 Notes, interest expense
will be significantly reduced in future periods.
Interest income results from the investment of cash and cash
equivalents, United States Treasury and other federal agency securities.
We have experienced operating losses and generated negative cash flow
from operations since inception and expect to continue to generate negative cash
flow from operations for the foreseeable future while we continue to grow our
existing network and develop our product offerings and customer base. During
this period, we expect to incur significant operating losses as many of the
fixed costs of providing service in newer markets are incurred before
significant revenue can be generated from those markets. In addition, we expect
to incur significant costs to build our base of customers in our newer markets.
We cannot assure investors that our revenue or customer base will grow or that
we will be able to achieve or sustain positive cash flow from operations.
Quarterly Comparison - September 30, 2002 vs. September 30, 2001
Total operating revenues increased to $57.3 million for the quarter
ended September 30, 2002 as compared to $49.5 million for the quarter ended
September 30, 2001. The 16% increase in revenue was primarily the result of the
putting more customers on our voice and data network as well as price increases
we implemented in several of our markets in the second quarter of 2002. These
factors increased our non-switched access revenue from core trade customers from
$34.9 million for the quarter ended September 30, 2001 to $49.0 million for the
quarter ended September 30, 2002. Revenues from core trade customers increased
from 71% to 86% of total revenues quarter over quarter. Total lines in service
increased 13% from September 30, 2001 to over 407,000 at September 30,
2002. Our switched access revenues decreased $6.3 million or 43% from the
quarter ended September 30, 2001 and decreased as a percentage of our revenues
to 14%. This decrease in switched access revenues was primarily a result of the
reduction in rates we negotiated with our major carriers and FCC mandated rate
rules. We expect switched access revenue to continue to decline as a percentage
of total revenue.
Cost of operating revenues for the quarter ended September 30, 2002 was
$34.6 million as compared to $38.3 million for the quarter ended September 30,
2001. The 9% decrease is primarily due to a reduction in installation costs
related to fewer gross new lines added in the third quarter of 2002 versus the
third quarter of 2001 and efforts to improve the cost effectiveness of our
network. These factors offset the increased costs attributable to the increase
of our number of lines in service.
For the quarter ended September 30, 2002, selling, general and
administrative expenses totaled $40.4 million, a 11% decrease from the $45.4
million for the quarter ended September 30, 2001. The decrease is primarily a
result of management initiatives that resulted in a decrease in administrative
personnel and related costs, and initiatives to reduce customer acquisition
costs. We had 1,673 total employees at September 30, 2002 as compared to 2,024
at September 30, 2001. During the period July 31, 2002 to September 30, 2002,
selling, general and administrative expenses included $3.7 million of
professional fees associated with our recapitalization plan which have been
excluded from reorganization expense in accordance with SOP 90-7.
In accordance with SOP 90-7, expenses resulting from the reorganization
of the business in a bankruptcy proceeding are reported separately as
reorganization charges. Reorganization expense, of $245.7 million during the
third quarter 2002 were comprised of professional fees of $1.0 million and
fresh-start fair value adjustments of $244.7 million.
For the quarter ended September 30, 2002, we recorded $0.3 million in
stock-based compensation compared to $0.6 million recorded for the quarter ended
September 30, 2001. $0.1 million of the expense for the quarter ending September
30, 2002 relates to the predecessor Company as we established a $0.1 million
reserve against a remaining employee note receivable from stockholder. $0.2
million of the expense relates to the new stock option plan and the application
of fixed plan accounting. Under fixed plan accounting the compensation expense
is measured as the intrinsic value of the option at date of grant.
The reduction in stock-based compensation expense from the quarter
ending September 30, 2002 as compared to September 30, 2001 was primarily the
result of the rescinded stock agreement with Mr. Huff, our Chief Executive
Officer. Due to the September 2000 and September 2001 re-pricings of stock
options, Predecessor Mpower Holding was subject to variable plan accounting. For
the period ended July 30, 2002 we did not recognize compensation expense for the
options re-priced in September 2000 and 2001 as the market price of the common
stock was below the exercise prices.
For the quarter ended September 30, 2002, depreciation and amortization
was $9.9 million as compared to $15.2 million for the quarter ended September
30, 2001. This decrease is primarily the result of the reduced depreciable value
of our fixed assets in connection with the implementation of Fresh Start
Accounting.
Interest income was $0.9 million for the quarter ended September 30,
2002 compared to $4.4 million for the quarter ended September 30, 2001. The
decrease is a result of decreases in cash and investments during 2001 and 2002.
Cash and investments have been used to purchase capital equipment, pay interest
and fund operating losses.
Gross interest expense for the quarter ended September 30, 2002 totaled
$1.9 million compared to $15.1 million for the quarter ended September 30, 2001.
As required by SOP 90-7, interest expense ceased to accrue on our 2010 Notes
upon filing our petition for relief under Chapter 11 of the Bankruptcy Code on
April 8, 2002. Contractual interest was $4.7 million for the period from July 1,
2002 to July 30, 2002. The decrease in interest expense during the quarter 2002
is primarily due to the cessation of interest expense related to the 2010 Notes
as described above. Gross interest expense is primarily related to interest
expense accrued on our 2004 Senior Secured Notes. Interest capitalized for the
quarter ended September 30, 2002 decreased to $0.1 million as compared to $0.8
million for the quarter ended September 30, 2001. The decrease in interest
capitalized is due to the decrease in switching equipment under construction as
our network expansion has slowed.
We incurred net losses before extraordinary items of $274.5 million and
$58.0 million for the quarters ended September 30, 2002 and 2001, respectively.
In accordance with the terms of the recapitalization, our 2010 Notes
were cancelled and the indenture governing the 2010 Notes was terminated.
Pursuant to the Plan, holders of the 2010 Notes prior to the emergence received
a pro-rata share of our stock as identified in Note 6 of the Condensed Notes to
the Financial Statements. The $389.5 million carrying value of the debt settled,
which includes the face value plus accrued interest less unamortized discount,
and was exchanged for equity with a fair value of $74.2 million. The exchange
resulted in our recording a gain on discharge of debt on July 30, 2002 of $315.3
million.
For the quarter ended September 30, 2001, we accrued preferred stock
dividends of $3.6 million, payable to holders of our Series D convertible
preferred stock. As required by SOP 90-7, accrual of preferred stock dividends
ceased upon filing of our petition for relief under Chapter 11 of the Bankruptcy
Code on April 8, 2002. Contractual dividends were $1.3 million for the period
July 1, 2002 to July 30, 2002.
Nine Month Period Ended - September 30, 2002 vs. September 30, 2001
Total operating revenues increased to $167.1 million for the nine
months ended September 30, 2002 as compared to $144.9 million for the nine
months ended September 30, 2001. This 15% increase was primarily the result of
putting more customers on our network and an increase in the number of lines in
service as well as price increases we implemented in several of our markets in
the second quarter of 2002. These factors increased our revenue from core trade
customers from $101.9 million for the nine months ended September 30, 2001 to
$137.0 million for the nine months ended September 30, 2002. Revenues from core
trade customers increased from 70% to 82% of total revenues year over year.
Switched access revenue decreased year over year by 30%. Switched access
revenues decreased primarily as a result of the reduction in rates we negotiated
with our major carriers and FCC mandated rate rules.
Cost of operating revenues for the nine months ended September 30, 2002
was $111.0 million as compared to $121.0 million for the nine months ended
September 30, 2001. The 9% decrease is primarily due to a reduction in
installation costs related to fewer gross new lines added for the nine months
ending September 30, 2002 versus the nine months ending September 30, 2001,
market reductions during 2001, the closing of our Charlotte, North Carolina
market in the first quarter of 2002 as well as efforts to improve the cost
effectiveness of our network, offset by increased costs attributable to an
increase in the number of lines in service.
For the nine months ended September 30, 2002, selling, general and
administrative expenses totaled $123.9 million, a 17% decrease from the $148.8
million for the comparable 2001 period. The decrease is primarily a result of
the closure of non-performing markets in 2001 that decreased personnel,
facilities and occupancy costs, as well as ongoing management initiatives to
reduce customer acquisition costs. During the periods January 1, 2002 to April
7, 2002 and July 31, 2002 to September 30, 2002, selling, general and
administrative expenses included $2.5 million and $3.7 million, respectively,
of professional fees associated with our recapitalization plan which have been
excluded from reorganization expense in accordance with SOP 90-7.
Reorganization expenses that were realized or incurred by us as a
result of reorganization under Chapter 11 of the Bankruptcy Code for the nine
months ended September 30, 2002 consisted of the following (in millions):
Consent fee $ 19.0
Fresh start accounting adjustment 244.7
Professional fees 2.7
-------
Total $ 266.4
=======
For the nine months ended September 30, 2002, we recorded $0.7 million
in stock-based compensation compared to $2.5 million for the comparable 2001
period. The expense for September 30, 2002 relates to in-the-money stock options
granted in 1999, 2000, and 2001, the establishment of a $0.1 million reserve
against a remaining employee note receivable from stockholder and a $0.2 million
expense relating to the new stock option plan and the application of fixed plan
accounting.
The reduction in compensation expense from the nine months ending
September 30, 2001 was primarily the result of the rescinded stock agreement
with Mr. Huff, our Chief Executive Officer. Due to the September 2000 and
September 2001 re-pricings of stock options, Predecessor Mpower Holding was
subject to variable plan accounting. For the period ending July 30, 2002 we did
not recognize compensation expense for the options re-priced in September 2000
and 2001 as the market price of the common stock was below the exercise price.
In February 2001, we recognized a network optimization charge of $24.0
million associated with the existing markets in the Northeast and Northwest. In
May 2001, we recognized a network optimization charge of $209.1 million.
Included in the charge was $126.8 million for the goodwill and customer base
associated with the Primary Network business, $65.1 million for property and
equipment including collocations and switch sites and $17.2 million for other
costs associated with exiting the Primary Network markets.
In February 2002, we closed down operations in Charlotte, North
Carolina and eliminated certain other non-performing sales offices. We also
cancelled the implementation of a new billing system in February 2002. As a
result of these items, we recognized a network optimization charge of $19.0
million in the first quarter of 2002. Included in the charge was $12.5 million
for the write down of our investment in software and assets for a new billing
system, $3.7 million for property and equipment including collocations and
switch sites and $2.8 million for other costs associated with exiting these
markets.
With respect to the network optimization charges, the total actual
charges will be based on ultimate settlements with the incumbent local exchange
carriers, recovery of costs from any subsequent subleases, our ability to sell
or re-deploy network equipment for growth in our existing network and other
factors.
For the nine months ended September 30, 2002, depreciation and
amortization was $45.2 million as compared to $59.2 million for the nine months
ended September 30, 2001. This 24% decrease is primarily the result of the
retirement of assets in closed markets and write-off of goodwill and other
intangible assets prior to May 2001, which more than offset depreciation from
assets placed in service since June 30 2001.
We recognized a gain on the sale of investments of $4.4 million in the
nine months ending September 30, 2002 compared to $4.7 million in the comparable
period last year.
Interest income was $3.8 million during the nine months ended
September 30, 2002 compared to $17.8 million for the nine months ended September
30, 2001. The decrease is a result of decreases in cash and investments during
2001 and 2002. Cash and investments have been used to purchase capital
equipment, pay interest on our senior secured notes and fund operating losses.
Gross interest expense for the nine months ended September 30, 2002
totaled $20.6 million compared to $48.6 million for the nine months ended
September 30, 2001. Interest capitalized for the nine months ended September 30,
2002 decreased to $1.3 million as compared to $4.6 million for the nine months
ended September 30, 2001. As required by SOP 90-7, interest expense ceased on
our 2010 Notes upon filing our petition for relief under Chapter 11 of the
Bankruptcy Code on April 8, 2002. Contractual interest was $33.5 million for the
period ending July 30, 2002. Gross interest expense on our 2004 Senior Secured
Notes was $5.0 million for the nine months ended September 30, 2002. The
decrease in interest expense is primarily due to the cessation of interest
expense related to the 2010 Notes as described above. The decrease in interest
capitalized is due to the decrease in switching equipment under construction as
our network expansion has slowed.
For the nine months ended September 30, 2002 and 2001, we incurred net
losses before extraordinary items of $410.1 million and $441.2 million,
respectively.
In accordance with the terms of the recapitalization, our 2010 Notes
were cancelled and the indenture governing the 2010 Notes was terminated.
Pursuant to the Plan, holders of the 2010 Notes prior to the emergence received
a pro-rata share of the shares of our new stock as identified in Note 6 of the
Condensed Notes to the Financial Statements. The $389.5 million carrying value
of the debt settled, which includes the face value plus accrued interest less
unamortized discount, and was exchanged for equity with a fair value of $74.2
million. The exchange resulted in our recording a gain on discharge of debt on
July 30, 2002 of $315.3 million.
For the nine months ended September 30, 2002, we accrued dividends of
$4.0 million on our convertible preferred stock, compared to $18.0 million for
the nine months ended September 30, 2001. As required by SOP 90-7, accrual of
preferred stock dividends ceased upon filing of our petition for relief under
Chapter 11 of the Bankruptcy Code on April 8, 2002. Contractual dividends were
$8.8 million for the period January 1, 2002 to July 30, 2002. For the nine
months ended September 30, 2001, we also recognized $6.6 million associated with
the inducement feature included in our conversion of preferred shares into
common stock.
LIQUIDITY AND CAPITAL RESOURCES
We continue to incur negative cash flows from operating activities and
based on our current operations we estimate that we have the resources to fund
our operations through the first quarter of 2003. We will likely require
additional debt or equity financing thereafter. The funding necessary for our
ongoing operations could be materially affected by our completion of one or more
of the initiatives described below. These factors, among others, may indicate
that we may be unable to continue as a going concern.
We expect to continue to require substantial amounts of capital to
acquire customers, fund operating losses, augment and maintain the network in
existing markets and develop new products and services.
We have completed, and are pursuing, several initiatives intended to
increase liquidity and better position us to compete under current conditions
and anticipated changes in the telecommunications sector. These include:
- Implementing our balance sheet recapitalization as described
in Note 6 of the Condensed Notes to the Unaudited Interim
Consolidated Financial Statements
- Aggressively seeking additional equity or debt financing
- Pursuing discussions with companies who may be interested in
acquiring our assets or business, in whole or in part, and
discussions with companies who may be interested in selling
their assets or business, in whole or in part
- Potential repurchase of all or a portion of our outstanding
13% Senior Secured Notes due 2004
- Continuing to update our prospective business plans and
forecasts to assist in monitoring current and future liquidity
- Closing or selling unprofitable or under-performing markets
- Reducing general and administrative expenses through various
cost cutting measures
- Introducing new products and services with greater profit
margins
- Analyzing the pricing of our current products and services to
ensure they are competitive and meet our objectives
- Re-deploying our assets held for future use to reduce the
requirement for capital expenditures
Our continuation as a going concern is dependent on our ability to
successfully meet the above initiatives, among others.
As of September 30, 2002, we had $56.8 million in unrestricted cash and
cash equivalents and investments available for sale and this will be our
near-term source of liquidity. Our revenues have generated only a portion of the
cash necessary to fund our operations. We have incurred a loss in each year
since inception, and we expect to continue to incur substantial losses in the
near future.
We emerged from our Chapter 11 proceeding effective July 30, 2002 and
our liquidity position has improved substantially as a result of the
reorganization as we have eliminated $583.4 million of debt and preferred stock
and $65.3 million of related annual interest and preferred dividend payments. We
cannot assure investors that we will be able to successfully find adequate
funding to operate until we are able to achieve positive cash flow. Without
additional capital, we may have to make further changes to our current business
plan. We cannot assure investors that we will be successful in obtaining
additional debt or equity financing or in obtaining a bank facility on terms
acceptable to us, or at all, or that our estimate of additional funds required
is accurate.
Developing and maintaining our network and business has required and
will continue to require us to incur capital expenditures primarily consisting
of the costs of purchasing switching and associated equipment. Cash outlays for
capital expenditures during 2002 were $13.3 million through the third quarter of
2002. We expect we will continue to require substantial amounts of capital to
acquire customers, fund our operating losses, augment our network in our
existing markets and develop new products and services.
Our capital expenditures for the remainder of 2002 will focus on the
augmentation of our network to add new products and customers and to improve the
cost efficiency of our network, as we have completed the footprint build-out of
our network in the markets in which we operate. To conserve cash we have also
decided to delay any further upgrade and augmentation of our operational support
systems. If we are able to attract new capital into the business, we will
revisit this decision. We will continue to rely on our existing operational
support systems in the interim. We cannot assure investors that these systems
will be adequate to support the continued scaling of our business.
The substantial capital investment required to initiate services and
fund our operations has exceeded our operating cash flow. This negative cash
flow from operations results from the need to establish and maintain our network
and sales and support functions in anticipation of connecting revenue-generating
customers. We expect to continue recording negative cash flow from operations
until we generate adequate revenue to cover the fixed cost of the network. We
cannot assure you we will attain break-even cash flow from operations in
subsequent periods, or that we have the funding to scale the business to
operating cash flow positive.
We continually evaluate our capital requirements plan in light of
developments in the telecommunications industry and market acceptance of our
service offerings. The actual amount and timing of future capital requirements
may differ materially from our estimates as a result of, among other things:
- our ability to obtain any necessary financing
- the cost of the development and support of our networks in
each of our markets
- the extent of price and service competition for
telecommunication services in our markets
- the demand for our services
- regulatory and technological developments
- our ability to develop, acquire and integrate necessary
operating support systems
- our ability to re-deploy assets held for future use
As such, actual costs and revenues may vary from expected amounts,
possibly to a material degree, and such variations are likely to affect our
future capital requirements.
COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, we enter into purchase agreements
with our equipment vendors and collocation site providers. As of September 30,
2002, we had total unfulfilled commitments with equipment vendors and
collocation site providers of $2.7 million. We also have various agreements with
certain carriers for transport, long distance and other network services. At
September 30, 2002, our commitment under these agreements is $28.2 million,
which expire through July 2005.
CASH FLOW DISCUSSION
In summary our cash flows for the first nine months of 2002 were:
NINE
MONTHS
ENDING
SEPTEMBER
30, 2002
---------
(IN THOUSANDS)
Net Cash Used in Operating Activities...... $ (95,134)
Net Cash Provided by Investing Activities.. $ 104,762
Net Cash Used in Financing Activities...... $ (4,579)
The above summary of cash flows includes cash and cash equivalents and
it does not include investments available for sale.
Cash, Cash Equivalents And Investments Available For Sale: We invest
excess cash predominantly in debt instruments that are highly liquid, of
high-quality investment grade, and predominantly have maturities of less than
two years with the intent to make such funds readily available for operating
purposes. At September 30, 2002, cash, cash equivalents and investments
available-for-sale were $56.8 million. Restricted cash amounted to $10.8 million
as of September 30, 2002. The restricted cash primarily represents a commitment
we made in September 2001, to pay up to $4.5 million during the period through
December 31, 2002 for employee retention and incentive compensation bonuses,
subject to the terms of the agreements. In addition, we committed to pay up to
$7.5 million in severance payments to certain employees in the event they are
terminated involuntarily, without cause or voluntarily with good cause. In
November 2001, we established a trust, which was funded at a level sufficient to
cover the maximum commitment for retention, incentive compensation and severance
payments. For the nine months ended September 30, 2002 we paid out $2.9 million
relating to these commitments.
In October 2002, we established and funded an irrevocable grantor trust
with $2.0 million, an amount sufficient to pay all severance benefit obligations
pursuant to employment agreements for several of our executives and any other
severance or retention agreements in effect that were not funded by the trust
adopted by us in November, 2001.
Operating Activities: We used $95.1 million in cash for operations for
the nine months ended September 30, 2002. The use of cash in 2002 was primarily
the result of operating expenses incurred in the on-going operation of our
business, offset by cash revenues.
Investing Activities: For the nine months ended September 30, 2002, we
were provided with $104.8 million in cash from investing activities. The cash
provided in 2002 primarily represents sale of investments available-for-sale to
fund our operating losses and capital requirements.
Financing Activities: For the nine months ended September 30, 2002, we
used $4.6 million of cash for financing activities. The cash used in 2002
represents primarily payments on capital lease obligations.
In October 2002, the corporate aircraft, classified as an asset held
for sale, was sold to an unrelated third party for gross proceeds of $6.2
million.
EFFECTS OF NEW ACCOUNTING STANDARDS
Accounting for Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142). We adopted the provisions of this standard on January 1,
2002. SFAS No. 142 provides that goodwill and other acquired intangible assets
with indefinite lives will no longer be amortized, but will be subject to at
least an annual assessment for impairment through the application of a
fair-value-based test. The adoption of SFAS No. 142 has not had a material
effect on our financial results.
Accounting for Asset Retirement Obligations
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" (SFAS No. 143). We adopted this standard on July 30, 2002 in
connection with our implementation of Fresh Start reporting. Upon adoption of
SFAS No. 143, the fair value of a liability for an asset retirement obligation
will be recognized in the period in which it is incurred. The associated
retirement costs will be capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense over the asset's useful
life. The adoption of SFAS No. 143 has not had a material effect on our
financial results.
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). We adopted the
provisions of this standard on January 1, 2002. This standard addresses
financial accounting and reporting for the impairment and disposal of long-lived
assets. The adoption of SFAS No. 144 has not had a material effect on our
financial results.
Recission of FASB Statements Nos. 4, 44, and 64, an amendment of FASB Statement
No. 13, and Technical Corrections
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). This standard rescinds FASB No. 4 and an
amendment to that Statement, FASB No. 64, which relates to extinguishment of
debt. It rescinds FASB No. 44, which relates to certain sale-leaseback
transactions. We adopted SFAS No. 145 on July 30, 2002 in connection with our
implementation of Fresh Start reporting. The adoption of SFAS No. 145 has not
had a material effect on our financial results.
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" (SFAS No. 146). This standard addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002. We adopted this standard on July 30, 2002, in
connection with the implementation of Fresh Start Accounting. The adoption of
SFAS No. 146 has not had a material effect on our financial results.
TRENDS/UNCERTAINTIES THAT MAY AFFECT OUR BUSINESS
The sector in which our business operates has had many changes over the
past two years. As a result of the downturn of the economy and the dramatic
shrinking of the technology sector, many of our competitors have discontinued
doing business or have restructured in order to be able to continue to operate.
As a result of the downturn, competitive carriers may face over-capacity, large
amounts of debt and uncertain economic and regulatory conditions.
In spite of trends resulting from the further deterioration in the
overall U.S. economy and continuing weakness in the telecom market, there exists
continued growing demand for competitive telecommunications services as well as
high-speed data services. We hope that, with the reduction in the number of
competitors, our position in the marketplace will improve.
We scaled back the markets we serve from early to mid 2001, to focus
our resources on the markets we expect to be the most profitable. Most recently,
on February 25, 2002, we announced we were ceasing operations in Charlotte,
North Carolina, where we were serving approximately 500 customers. We do not
currently have any plans to close any additional markets. We cannot assure you
that additional market closings will not be required in the future or that such
closings, if any, will result in improved operating results.
Various long distance carriers and incumbent carriers lease loop,
transport and network facilities to us. The pricing of such facilities are
governed by either a tariff or an interconnection agreement. These carriers bill
us for our use of such facilities. From time to time, the carriers present bills
to us, which we believe to be inaccurate and which we dispute. As a result of
such billing inaccuracies, we record an estimate of our liability based on our
measurement of services received. We cannot assure you that our estimates will
be upheld, as any disputes are resolved.
From time to time, we have had preliminary discussions with companies
who may be interested in acquiring our assets or business, in whole or in part.
We intend to consider any desirable acquisition proposals that may be made in
the future. However, we cannot assure investors that we will agree, or that we
will not agree, to be acquired by another company.
In connection with our emergence from Chapter 11 proceedings, we have
been in the process of settling our pre-petition liabilities. While most of
these pre-petition obligations have been successfully resolved, there are
several on-going negotiations. If any of the open negotiations are settled at
more than management's estimate, our results may be materially affected.
Several key legal, regulatory and economic factors may affect our
business over the next 12-15 months. On December 12, 2001, the FCC initiated a
review of the current regulatory requirements for incumbent carriers' broadband
telecommunications services. Incumbent carriers are generally treated as
dominant carriers, and hence are subject to certain regulatory requirements,
such as tariff filings and pricing requirements. In this proceeding, the FCC
seeks to determine what regulatory safeguards and carrier obligations, if any,
should apply when a carrier that is dominant in the provision of traditional
local exchange and exchange access services provides broadband service. A
decision by the FCC to exempt the incumbent carriers' broadband services from
traditional regulation could have a significant adverse competitive impact.
Also, on December 12, 2001, the FCC initiated its "triennial review" of which
unbundled network elements (UNEs) the incumbent carriers are required to sell to
competitive carriers such as us at forward looking or TELRIC (total element long
run incremental cost) rates, which reflect efficient costs plus a reasonable
profit. Competitive carriers such as us may depend upon their ability to obtain
access to these UNEs in order to provision services to their customers. A
decision by the FCC to exempt necessary UNEs from the current requirements could
have a significant adverse competitive impact. We cannot reasonably predict the
ultimate outcome of these proceedings.
In several orders adopted in recent years, the FCC has made major
changes in the structure of the access charges incumbent carriers impose for the
use of their facilities to originate or complete interstate and international
calls. Under the FCC's plan, per-minute access charges have been significantly
reduced, and replaced in part with higher monthly fees to end-users and in part
with a new interstate universal service support system. Under this plan, the
largest incumbent carriers are required to reduce their average access charge to
$.0055 per minute over a period of time, and some of these carriers have already
reduced their access charges to the target level.
In August 1999, the FCC adopted an order providing additional pricing
flexibility to incumbent carriers subject to price cap regulation in their
provision of interstate access services, particularly special access and
dedicated transport. The FCC eliminated rate scrutiny for "new services" and
permitted incumbent carriers to establish additional geographic zones within a
market that would have separate rates. Additional and more substantial pricing
flexibility will be given to incumbent carriers as specified levels of
competition in a market are reached through the collocation of competitive
carriers and their use of competitive transport. This flexibility includes,
among other items, customer specific pricing, volume and term discounts for some
services and
streamlined tariffing. As part of the same August 1999 order, the FCC initiated
another proceeding to consider additional pricing flexibility proposals for
incumbent carriers. We cannot predict the outcome of this proceeding, which may
have an unfavorable effect on our business.
Under the Telecommunications Act, competitive local exchange carriers
are entitled to receive reciprocal compensation from other telephone companies
for delivering traffic to their customers. A dispute has existed for several
years on whether this compensation applies to calls bound for Internet service
provider clients of the competitive local exchange carriers. Most states have
required telephone companies to pay this compensation to competitive local
exchange carriers. In April 2001, however, the FCC adopted new rules limiting
the right of competitive local exchange carriers to collect compensation on
calls that terminate to Internet service providers, and preempting inconsistent
state rules. Under the new rules, which took effect on June 14, 2001, the amount
of compensation payable on calls to Internet service providers was limited to
$.0015 per minute for the first six months after the rules took effect, $.0010
per minute for the next eighteen months, and $.0007 per minute thereafter. In
addition, the overall amount of compensation payable in each state is limited
based upon the number of minutes of Internet traffic terminated in the first
quarter of 2001. The FCC rules permit carriers to continue collecting the
existing higher rates on calls that terminate to customers who are not Internet
service providers. Any traffic exchanged between carriers that exceeds a three
to one ratio of terminating to originating minutes is presumed to be Internet
calls, although a carrier may attempt to rebut this presumption and claim a
different level of Internet traffic.
Internet service providers may be among our potential customers and
these new reciprocal compensation rules could limit our ability to service this
group of customers profitably. While some competitive carriers target Internet
service providers in order to generate additional revenues from reciprocal
compensation charges, at the present time we do not focus our marketing efforts
on Internet service providers. Therefore, we expect that these rules will have a
minimal impact on us.
On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy program. This order established new
subsidies for telecommunications and information services provided to qualifying
schools, libraries and rural health providers. The FCC also expanded federal
subsidies for local dial-tone services provided to low-income consumers.
Providers of interstate telecommunications service, including us, must
contribute to these subsidies. In later years, the FCC created additional
subsidies that primarily benefit incumbent telephone companies. On a quarterly
basis, the FCC announces the contribution factor proposed for the next quarter.
For the second quarter of the year 2002, the contribution factor is 0.068086 of
a provider's interstate and international revenue for the third quarter of 2001.
We intend to recover our share of these costs through charges assessed directly
to our customers and participation in federally subsidized programs. The FCC is
considering proposals to change the way contributions are assessed, but we
cannot predict when or whether the FCC will act on these proposals.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Our 13% Senior Notes due 2004 (the "2004 Notes") bear fixed interest
rates. However, the fair market value of this debt is sensitive to changes in
prevailing interest rates. We run the risk that market rates will decline and
the required payments will exceed those based on the current market rate. We do
not use interest rate derivative instruments to manage our exposure to interest
rate changes. Based upon quoted market prices, the fair value of our 2004 Notes
outstanding is approximately $20.4 million at September 30, 2002 as compared to
a carrying value of $50.9 million. A hypothetical 1% decrease in interest rates
would increase the fair value of our long-term debt by $0.6 million.
The remainder of our long-term debt consists primarily of variable rate
debt with carrying amounts that approximate their fair values.
ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our principal
-------------------------------------------------
executive officer and our principal financial officer, after
evaluating the effectiveness of the our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c))
on November 6, 2002, have concluded that, as of such date, the our
disclosure controls and procedures were adequate and effective to
ensure that material information relating to us and our consolidated
subsidiaries would be made known to them by others within those
entities.
(b) Changes in internal controls. There were no significant changes in our
-----------------------------
internal controls or in other factors that could significantly affect
our disclosure controls and procedures subsequent to the date of their
evaluation, nor were there any significant deficiencies or material
weaknesses in our internal controls. As a result, no corrective actions
were required or undertaken.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are party to numerous state and federal administrative proceedings.
In these proceedings, we are seeking to define and/or enforce incumbent carrier
performance requirements related to:
- the nature and availability of network elements;
- the cost and provisioning of those network elements we lease;
- the terms of interconnection agreements;
- the establishment of customer care and provisioning;
- collocation costs and procedures; and
- win back programs based on discriminatory marketing and
predatory pricing.
The outcome of these proceedings will establish the rates and
procedures by which we obtain and provide leased network elements and could have
a material effect on our operating costs.
On September 20, 2000, a class action lawsuit was commenced against us
and our chief executive officer, Rolla P. Huff, in federal court for the Western
District of New York. On March 6, 2001, an amended consolidated class action
complaint was served in that action, seeking to recover damages for alleged
violations by us of the Securities Exchange Act of 1934 and Rule 10(b)-5
thereunder (the "Exchange Act") and Section 11 of the Securities Act of 1933.
The amended consolidated complaint also seeks to recover damages against several
of our officers and former members of our board of directors in addition to Mr.
Huff. The amended consolidated complaint also named various underwriters as
defendants in the action. However, by agreement of the parties and order of the
court, the action against the underwriters has been discontinued, subject to the
plaintiffs' right to rename the underwriters as defendants prior to the
completion of discovery. On February 11, 2002, the Court issued its Decision and
Order dismissing the class action lawsuit. The decision of the Court has been
appealed to the Court of Appeals for the Second Circuit and the final outcome of
this lawsuit is uncertain.
We and the individual defendant officers and former board members have
denied any wrongdoing and will vigorously contest the class action suit. Any
judgment that is significantly greater than our available insurance coverage
could have a material adverse effect on our results of operations and/or
financial condition.
In addition, on April 8, 2002, we commenced a voluntary, pre-negotiated
proceeding under Chapter 11 of the Federal Bankruptcy Code in the U.S.
Bankruptcy Court for the District of Delaware. On July 17, 2002, our Final Plan
was approved and as of July 30, 2002, the Final Plan became effective and we
have emerged from our reorganization in bankruptcy. Please refer to Management's
Discussion and Analysis for a more complete discussion of the bankruptcy
proceedings.
From time to time, we engage in other litigation and governmental
proceedings in the ordinary course of our business. We do not believe any other
pending litigation or governmental proceeding will have a material adverse
effect on our results of operations or financial condition.
ITEM 2. Changes in Securities and Use of Proceeds
As of July 30, 2002, all of our outstanding 2010 Notes, Series C
Preferred Stock, Series D Preferred Stock and old Common Stock were cancelled
and approximately 65,000,000 shares of our New Common Stock were issued in
exchange. See Note 6 to the Consolidated Financial Statements for a more
complete description of the exchange. We did not receive any proceeds from the
issuance. No underwriter was involved in these transactions and no commissions
were paid with respect to the issuance of such securities. These issuances of
securities were made in reliance on the exemption from registration provided by
Section 3(a) (7) of the Securities Act of 1933.
ITEM 5. Other Information
Changes in Board of Directors
Effective as of July 30, 2002, our board of directors consists of six
members. Among them, Rolla P. Huff is our Chief Executive Officer; Joseph M.
Wetzel is our President and Chief Operating Officer and has been designated by
us to serve on our board of directors; and Robert M. Pomeroy, Michael E. Cahr,
Richard L. Shorten, Jr. and Michael M. Earley are the designees of the 2010
Noteholders (the "2010 Noteholder Designees"). The Final Plan provides that the
2010 Noteholder Designees will serve for a term of two years during which they
cannot be removed without cause. Thereafter, our board of directors will be
elected in accordance with our certificate of incorporation and by-laws, as
amended and restated, and applicable law. Effective September 2002, S. Gregory
Clevenger, our Executive Vice President and Chief Financial Officer, was added
as a seventh member of our board of directors, filling a vacancy on the Board.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith or incorporated by
reference as indicated. Exhibit numbers refer to Item 60l of
Regulation S-K.
2.1 Findings of Fact, Conclusions of Law, and Order
Under Section 1129 of the Bankruptcy Code and Rule
3020 of the Bankruptcy Rules Confirming Debtors'
First Amended Joint Plan of Reorganization, dated
July 17, 2002. (1)
2.2 Debtors' First Amended Joint Plan of Reorganization
dated May 20, 2002. (1)
2.3 Debtors' First Amended Disclosure Statement dated
May 20, 2002. (1)
3.1 Second Amended and Restated Certificate of
Incorporation filed with the Secretary of State of
the State of Delaware on July 30, 2002. (2)
3.2 Amended and Restated Articles of Incorporation of
Mpower Communications Corp. filed with the
Secretary of State of the State of Nevada on July
30, 2002. (1)
3.3 Amended and Restated By-laws. (2)
4.1 See the Second Amended and Restated Certificate
of Incorporation filed as Exhibit 3.1 and the
Amended and Restated By-laws filed as Exhibit
3.3.
4.2 Indenture dated as of September 29, 1997, between
the Company and Marine Midland Bank, as
Trustee. (3)
4.3 Form of Note for the Company's registered 13%
Senior Secured Notes due 2004. (3)
4.4 Form of New Key Employee Option Plan adopted by
Mpower Holding Corporation. (2)
4.5 Form of Registration Rights Agreement, to be
entered into by Mpower Holding Corporation pursuant
to the Final Plan. (2)
10.1 Employment Agreement dated September 18, 2002
between Mpower Communications Corp. and Russell I.
Zuckerman.
10.2 Amendment to Employment/Stock Repurchase Agreement
dated September 20, 2002 between Mpower
Communications Corp. and Rolla P. Huff.
10.3 Amendment to Employment Agreement dated September
18, 2002 between Mpower Communications Corp. and
Joseph M. Wetzel.
10.4 Amendment to Employment Agreement dated September
20, 2002 between Mpower Communications Corp. and S.
Gregory Clevenger.
99.1 Certification of Principal Executive Officer
pursuant to 18 U.S.C. Section 1350
99.2 Certification of Principal Financial Officer
pursuant to 18 U.S.C. Section 1350
(1) Incorporated by reference to the Company's Current Report on Form
8-K S-4 (file No. 33339884-01) filed with the Commission on
July 30, 2002.
(2) Incorporated by reference to the Company's Registration Statement on
Form 8-A filed with the Commission of July 30, 2002.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-4 (File No. 333-38875) filed with the Commission on October 28,
1997, and amendments thereto.
(b) The registrant filed the following reports on Form 8-K during
the quarter ended September 30, 2002:
(1) On July 30, 2002, the Company filed Form 8-K to report on certain items
relating to the confirmation of the plan of reorganization and also to
report on changes in certifying accountant.
(2) On August 7, 2002, the Company filed Form 8-K/A, which is Amendment
No. 1 to Form 8-K previously filed on July 30, 2002, to clarify the
ending dates of certain periods stated in Item 4 pertaining to changes
in certifying accountant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MPOWER HOLDING CORPORATION
Date: November 14, 2002 /s/ ROLLA P. HUFF
-------------------------------------------
Rolla P. Huff
Chief Executive Officer and Chairman of the
Board
Date: November 14, 2002 /s/ S. GREGORY CLEVENGER
-------------------------------------------
S. Gregory Clevenger
Executive Vice President, Chief Financial
Officer
CERTIFICATIONS
I, Rolla P. Huff, certify that:
1. I have reviewed this quarterly report of Form 10-Q of Mpower Holding
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation on
internal controls, which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Rolla P. Huff
-----------------
Rolla P. Huff
Principal Executive Officer
CERTIFICATIONS
I, S. Gregory Clevenger, certify that:
1. I have reviewed this quarterly report of Form 10-Q of Mpower Holding
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14)
for the registrant and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation on
internal controls, which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ S. Gregory Clevenger
------------------------
S. Gregory Clevenger
Principal Financial Officer