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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
For the Year Ended December 31, 2001 Commission File Number 000-21091
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FIRST AVENUE NETWORKS, INC.
(formerly known as Advanced Radio Telecom Corp.)
(Exact name of registrant as specified in its charter)
Delaware 52-1869023
(State or other (I.R.S.
jurisdictionof EmployerIdentification
incorporation or No.)
organization)
230 Court Square, Suite 202, Charlottesville, VA 22902
(Address of principal executive offices )
(434) 220-4988
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchangeon
Title of Each Class Which Registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class: Common Stock ($0.001 Par
Value)
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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 [_] No [X].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_].
The aggregate market value of the registrant's voting stock held by
non-affiliates was approximately $11.1 million on February 22, 2002, based
solely on the registrant's estimated reorganization value (determined
as described in Item 7 hereto) net of liabilities as of such date. As of
February 22, 2002, non-affiliates held 6.8 million shares of common stock.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date: Pursuant to its plan
of reorganization, the registrant has 20,000,000 shares of its common stock
outstanding as of February 22, 2002. As of such date, 18,512,064 shares have
been distributed pursuant to the plan of reorganization.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference: Part III:
Portions of the Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Registrant's 2002
Annual Meeting of Stockholders.
Exhibit Index is on page 50
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PART I
ITEM 1. BUSINESS
Overview
We hold over 750 39 GHz licenses granted by the Federal Communications
Commission ("FCC") and provide wireless, high-speed, point-to-point
telecommunications services. Our licenses cover nearly 100% of the area and
population of the contiguous United States. Over 170 of our licenses cover the
top 50 Basic Economic Areas ("BEA") by population and result in our holding
nearly 350 MHz of spectrum on average in these most populous areas. In total,
our spectrum portfolio represents over 980 million channel pops, calculated as
number of channels in a given area multiplied by the population covered by
these channels.
Our strategy is to utilize our FCC licenses to provide telecommunications
services in a capital efficient manner. In the short-term, we will seek to
identify, contact and serve existing telecommunications carriers in a manner
that does not require significant sales and marketing, operating and capital
expenditures. Our long-term objective is to develop our business plan in
response to carrier, business and other customer demands for wireless,
high-speed services.
We are a Delaware corporation organized in 1993 under the name Advanced
Radio Technologies Corporation. In October 1996, one of our subsidiaries merged
with Advanced Radio Telecom Corp., a corporation organized by us in 1995 to
acquire spectrum licenses and to jointly operate our businesses. Upon the
merger, Advanced Radio Telecom Corp. became our subsidiary and changed its name
to ART Licensing Corp., and we changed our name to Advanced Radio Telecom Corp.
In February 2002, our shareholders approved an amendment to the Certificate of
Incorporation to change our name to First Avenue Networks, Inc.
Pre-Reorganization Activities
From our inception in 1993 through the first quarter of 2001, we acquired
spectrum rights through FCC auctions and purchase transactions, raised capital
through public and private offerings of securities, acquired equipment and roof
rights, and developed operating and support systems and networks. In 1998, we
began to sell a variety of Internet services to end-users in Seattle, WA,
Portland, OR, and Phoenix, AZ. In late 1999, our strategy evolved to providing
high-speed transmission services, including Internet access, to businesses.
During 2000, we launched these services in ten markets. In the first quarter of
2001, we were unable to secure additional funding sources to continue to
finance our operations and service our debt.
Reorganization
In April 2001, we sought to reorganize our business under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware ("Court"). We terminated nearly all of our employees, terminated
operation of our networks and eliminated customer support. We developed a Joint
Plan of Reorganization ("Plan") that was approved by the Court on October 31,
2001. On December 20, 2001 ("Effective Date"), the Plan was effective and we
emerged from the proceedings under Chapter 11 of the United States Bankruptcy
Code pursuant to the terms of the Plan.
Under the Plan, we issued 20 million shares of new post-Chapter 11 common
stock ("New Common Stock") to our unsecured creditors and holders of our Series
A Preferred Stock ("Old Preferred Stock"). Each holder of an unsecured claim
received its pro rata share of 19 million shares of New Common Stock. Each
holder of our Old Preferred Stock received its pro rata share of 1 million
shares of New Common Stock. Holders of our pre-Chapter 11 common stock ("Old
Common Stock") and holders of any other equity interest received no
distribution under the Plan. All Old Common Stock, Old Preferred Stock and all
other equity interests such as employee stock options and warrants were
cancelled on the Effective Date.
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On or shortly after the Effective Date of the Plan, we consummated several
transactions. We:
. filed an Amended and Restated Certificate of Incorporation;
. cancelled Old Common Stock, Old Preferred Stock and all other existing
securities and agreements to issue or purchase any equity interests;
. issued 20 million shares of New Common Stock in satisfaction of all
unsecured claims;
. issued $11 million of five-year New Senior Secured Notes which bear paid
in-kind interest at 9% and are secured by substantially all of our assets;
. issued 4 million warrants with a five year life and a $0.01 per share
exercise price to holders of New Senior Secured Notes on a pro rata basis
with their investment; and,
. paid the holder of an $11.3 million secured financing $6.0 million in cash
in complete satisfaction of the debt.
In February 2002, we had verified approximately 90% of the holders of
unsecured claims and 100% of the holders of Old Preferred Stock and distributed
stock certificates of New Common Stock. We estimate that we will complete the
verification of the remaining holders of unsecured claims by June 30, 2002 and
make another distribution of stock certificates of New Common Stock. We will
not make any additional distributions to holders of Old Preferred Stock.
We distributed 17,512,064 and 1,000,000 shares of New Common Stock to
holders of unsecured claims and holders of Old Preferred Stock, respectively,
in February 2002. Once we complete the verification process we will distribute
1,487,936 New Common Shares to settle the remaining unsecured claims. If the
verification process results in fewer than 1,487,936 New Common Shares being
allocated to settle these claims, the difference between 1,487,936 and the
number of shares required to settle the claims will be allocated to the current
holders of New Common Stock on a prorata basis relative to their current
holdings.
These transaction and related transactions are more fully described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity" under Item 7 of this report.
Industry Discussion
Telecommunication users continue to demand reliable, fast and inexpensive
carriage services. However, the climate for the implementation of new wireless,
high-speed, point-to-point telecommunications services of the type we provide
has not been attractive. Market acceptance of these types of services has not
yet been strong. Further, there has been inadequate access to capital for
providers of these services. The recent bankruptcies of Teligent, Inc. and
Winstar Communications, Inc. illustrate the difficulties being faced by service
providers in the wireless, high-speed telecommunications industry and the
telecommunications industry in general. Teligent is the largest holder of LMDS
(24 GHz) licenses in the United States and Winstar is the largest holders of 39
GHz licenses in the United States. These frequencies are virtually identical in
regulatory and transmission characteristics to our 39 GHz licenses.
Notwithstanding the recent difficulties of emerging telecommunications
businesses like ours, management believes that there are certain business
environment conditions that broadly frame out future opportunities. According
to equity reports and research analysts, the metro access last-mile segment of
the transport market is expected to enjoy the highest gross margins (45% to
50%) and the highest annual growth rates (20% to 30%) through 2005, as compared
with long haul and metro transport segments. As new technology, applications
and services evolve in response to demands for rapid, reliable and less
expensive carriage, we believe opportunities for high-speed, wireless
transmission services will increase.
Our Business Strategy
Our strategy is to utilize our FCC licenses and to provide
telecommunications services in a capital efficient manner. Our long-term
objective is to develop our business plan in response to carrier, business and
other customer demands for wireless, high-speed telecommunications services.
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Current. In the short-term, we will seek to identify, contact and serve
existing telecommunication carriers in a manner that does not require
significant sales and marketing, operating and capital expenditures. We believe
that the greatest near-term opportunity for our portfolio of spectrum is to
provide point-to-point microwave links serving the wireless telecommunications,
metropolitan fiber optic, and redundancy/disaster recovery markets. We are
pursuing opportunities to (i) connect remote cellular tower sites to the
telephone network, (ii) provide short-range OC-3 links to fiber optic data and
telephony carriers, and (iii) provide supplemental or complementary wireless
links for telecommunications traffic. To minimize capital requirements and
operational risks, we may enter into joint ventures with established
telecommunication industry participants. We may also alter our strategy from
acting as a pure service provider to a strategy that involves closer working
arrangements with telecommunications customers. Such arrangements may include
capital cost sharing through equipment sharing, joint ventures and other
similar arrangements.
Future. Our long-term objective is to develop our business plan in response
to carrier demands for wireless, high-speed telecommunications services. We
will continue to evaluate larger scale business opportunities as they develop.
We expect that our ability to pursue other opportunities will be subject to the
development of applicable technology and our ability to secure the necessary
financing. In addition to high-speed transmission services, we may provide
related communications services. We are unable to predict what business
opportunities will be available to us or which we may seek to pursue.
Advantages of our 39 GHz Transmission Services
Advantages of our fixed wireless transmission services include:
High-Capacity. Current technology allows transmission with high-capacity
local access with quality and reliability superior to copper and comparable to
fiber. For example, current radio technology is capable of two-way data
transfer at rates up to 622 megabits per second (Mbps) (OC-12).
Lower Cost. We believe that wireless networks cost less than comparable
fiber networks. Our fixed wireless links do not require the same magnitude of
installation and maintenance costs as required by fiber networks. Furthermore,
we expect this cost differential to increase over time because the cost of
deploying fiber involves substantial labor and right-of-way costs that we
believe will increase in the future. The cost of our links involves substantial
electronic equipment which costs we expect will continue to decline.
Rapid deployment. Because wireless links using our own spectrum licenses do
not require rights of way, substantial construction infrastructure, or
additional FCC licensing, they can be established quickly between two points as
long as line of sight and the appropriate level of reliability are assured.
Current Business
We currently have 23 customers, for whom we engineered telecommunication
links, purchased and installed radios and tested the links for proper operation
and reliability. Our customers incorporate our fixed transmission links into
their telecommunication networks and utilize our wireless links to provide a
primary telecommunication link or, in other cases, redundancy, back up or
diversity to other telecommunication services. The data transmission capacity
of these links ranges from T-1 (1.5 Mbps, or 24 simultaneous phone calls) to
OC-3 (155 Mbps). We own all of the equipment serving our customers and contract
for whatever property rights (such as roof rights) are required to provide our
service.
Our 39 GHz Wireless Broadband Licenses
The FCC has allocated the use of the 37.0-40.0 GHz airwave band consisting
of fourteen 100 MHz channels by issuing licenses for the provision of wireless
telecommunications services within a specified geographic territory. The
licenses issued in the 37.0-40.0 GHz band are generally referred to as 39 GHz
licenses.
Our spectrum licenses were acquired through application with the FCC and
purchase contracts with other spectrum holders. Additionally, in 2000, we were
the winning bidder for 253 licenses covering substantially all
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of the contiguous United States in an auction conducted by the FCC. In total,
we hold over 750 licenses that represent over 980 million channel pops. Our
licenses were granted for initial ten-year terms with expirations ranging from
2006 through 2011. We have an anticipation of renewal upon a showing of
"substantial service" as determined by the FCC. Over 170 of our licenses cover
the top 50 BEAs and result in our holding nearly 350 MHz of spectrum on average
in these most populous areas. The following chart presents our BEA license
holdings and total channel pops in each of our top 50 BEAs.
Total
BEA Channel
BEA Licenses(1) Pops
--- ----------- ----------
(millions)
New York, NY................ 4 97.0
Los Angeles, CA............. 4 71.3
San Francisco, CA........... 4 40.3
Detroit, MI................. 5 33.3
Philadelphia, PA............ 4 31.6
Washington, DC/Baltimore, MD 3 31.2
Chicago, IL................. 3 29.6
Boston, MA.................. 3 28.4
Dallas, TX.................. 3 26.5
Houston, TX................. 3 22.1
Atlanta, GA................. 3 20.8
Cleveland, OH............... 4 18.8
Miami, FL................... 3 18.0
Seattle, WA................. 3 15.8
Pittsburgh, PA.............. 5 14.3
Puerto Rico................. 1 14.3
Minneapolis, MN............. 2 13.9
Orlando, FL................. 4 13.7
Denver, CO.................. 3 13.3
Indianapolis, IN............ 4 12.7
Portland, OR................ 4 12.2
San Diego, CA............... 2 11.5
Salt Lake City, UT.......... 3 10.6
Nashville, TN............... 4 10.2
San Antonio, TX............. 4 10.2
Phoenix, AZ................. 2 10.1
Kansas City, MO............. 4 9.8
Raleigh, NC................. 6 9.8
New Orleans, LA............. 5 8.6
St. Louis, MO............... 3 8.1
Columbus, OH................ 4 8.1
Syracuse, NY................ 4 7.7
Jacksonville, FL............ 4 7.5
Oklahoma City, OK........... 5 7.4
Greenville, SC.............. 3 7.4
Cincinnati, OH.............. 3 7.3
Tampa, FL................... 2 7.1
Milwaukee, WI............... 3 7.1
Sacramento, CA.............. 2 6.8
Charlotte, NC............... 4 6.7
Austin, TX.................. 5 6.7
Rochester, NY............... 5 6.4
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Total
BEA Channel
BEA Licenses(1) Pops
--- ----------- ----------
(millions)
Albany, NY.......................... 5 6.4
Birmingham, AL...................... 3 6.3
Las Vegas, NV....................... 2 6.2
Greensboro, NC...................... 3 5.7
Louisville, KY...................... 2 5.6
Tulsa, OK........................... 1 5.5
Buffalo, NY......................... 3 5.5
Des Moines, IA...................... 3 5.4
Total top 50 markets............... 171 800.8
Grand total BEA and legacy licenses 753 985.8
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(1) BEA licenses represent only those licenses granted by the FCC that
encompass Basic Economic Areas. First Avenue Networks holds additional
licenses that represent areas that overlap BEAs and have different
regulatory characteristics. These licenses are referred to as "legacy"
licenses.
Our Foreign Licenses
We have certain foreign subsidiaries that have been granted broadband
wireless authorizations covering Finland, Norway and the United Kingdom. To
date, we have generated no revenues from foreign operations and our operating
costs have not been material. We are evaluating strategic alternatives for
these assets, including disposal.
Our Competition
We face significant competition from entities that currently deliver or
could in the future deliver telecommunications services over copper wire, fiber
and wireless networks. As we pursue our current strategy of seeking
economically viable opportunities to provide services without significant
capital outlay, we expect to face competition from other high capacity
point-to-point telecommunications, broadband, fiber and wireless companies. As
our business develops in the longer term, we may face competition from such
providers, as well as from satellite communications companies, internet service
providers, cable television operators and others seeking to profit from the
demand for wireless, high-speed services. In addition, we may encounter new
competition due to the consolidation of telecommunications companies and the
formation of strategic alliances and cooperative relationships in the
telecommunications and related industries, as well as the development of new
technologies.
We expect to compete primarily on the basis of responsiveness to customer
needs, time required to deploy, quality of service, price, transmission speed
and reliability. We cannot give any assurance that we will be able to compete
effectively in any of our markets with any of our existing or potential
competitors. Many of our competitors have long-standing relationships with
customers and suppliers, greater name recognition and greater financial,
technical and marketing resources than we do. Additionally, market perceptions
as to reliability and security for the relatively earlier-stage wireless
networks as compared to copper or fiber networks provide us with additional
marketing challenges. We may not be able to exploit new or emerging
technologies or adapt to changes in customer requirements more quickly than
these competitors, or devote greater resources to the marketing and sale of our
services.
Following are types of providers with which we now compete or with which we
may compete in the future:
Fiber Networks. We face competition from expanding fiber-optic networks
owned by various telecommunications carriers, electric utilities and other
companies. Many of these companies have greater name recognition and greater
financial, technical and marketing resources than we do. Fiber-optic service
generally
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offers transmission speeds which are superior to ours. In addition, fiber
technology may enjoy a greater degree of market acceptance than our wireless
broadband technology.
Copper Networks of the Local Exchange Carriers. We face significant
competition from the traditional local telephone companies that typically
deliver telecommunication services over copper networks. These companies have
long-standing relationships with their customers and substantial name
recognition.
Coaxial Cable Networks. We are likely to face competition from cable
television operators, which provide high-speed data transmission capability
over installed coaxial cable television networks. We believe that in order to
provide broadband capacity to a significant number of businesses, cable
operators will be required to spend significant time and capital in order to
upgrade their existing networks to a more advanced network architecture and to
extend these. However, we can give no assurance that competition from cable
television operators will not be significant.
Other Fixed Wireless Networks. We also face competition from other service
providers that utilize fixed wireless technology including Teligent, Inc.,
Winstar Communications, Inc. and XO Communications, Inc. In many cases, these
service providers hold FCC licenses to operate in the same markets we do.
Winstar and Teligent have positioned themselves as fixed wireless
telecommunications service providers, and therefore will compete with us in
offering broadband telecommunication services to off-fiber businesses and
buildings. XO also has the ability to provide wireless broadband services.
These companies potentially have access to greater financial resources than we
do.
Various other entities also have 39 GHz and other wireless broadband
licenses. Due to the relative ease and speed of deployment of fixed wireless
technology, we could face price competition and competition for customers from
other wireless service providers.
Multichannel Multipoint Distribution service providers, also known as MMDS
or wireless cable, operating in the 2.4 GHz spectrum band, also provide
metropolitan wireless high-speed transmission services. Worldcom and Sprint are
the principal holders of such licenses and use them primarily for wireless
broadband telecommunications services in residential areas. We can give no
assurances that these companies will not also market high-speed
telecommunications services elsewhere.
In January 1997, the FCC allocated 300 MHz of spectrum in the 5 GHz band for
unlicensed devices to provide short-range, high-speed wireless digital
communications. These frequencies must be shared with incumbent users without
causing interference. The allocation was designed to facilitate the creation of
new wireless local area networks, and thus may compete with our strategy of
providing wireless telecommunication services. It is too early for us to
predict, however, how and to what extent this particular frequency may be used
in competition with our services.
Mobile Wireless Networks. Cellular, personal communications services and
other mobile service providers may also offer high-speed telecommunications
services over their licensed frequencies. The FCC has allocated a number of
spectrum blocks for use by wireless devices that do not require site or network
licensing. A number of vendors have developed such devices, which may provide
competition to us.
Government Regulation
Our wireless broadband services are subject to regulation by federal, state
and local governmental agencies. At the federal level, the FCC has jurisdiction
over the use of the electromagnetic spectrum (i.e., wireless services) and has
exclusive jurisdiction over all interstate telecommunications services, that
is, those that originate in one state and terminate in another state. State
regulatory commissions have jurisdiction over intrastate communications, that
is, those that originate and terminate in the same state. Municipalities may
regulate limited aspects of our business by, for example, imposing zoning
requirements and requiring installation
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permits. The regulations of these agencies are continually evolving through
rulemakings and other administrative and judicial proceedings, and there is no
guarantee that in the future regulatory changes will not have an adverse effect
on our business.
Federal Regulation
FCC Licensing. As an FCC licensee and regulatee, we are subject to
comprehensive regulatory oversight, including regulations constraining
ownership of us, rules governing the services we can provide and the prices we
charge, and rules related to construction and operation of our services. Under
certain circumstances, including certain violations of FCC rules, our licenses
may be revoked, canceled or conditioned, or we may be fined. Among other
things, the Communications Act of 1934, as amended, and the FCC Rules and
Regulations impose requirements on radio licensees and carriers, that include
regulations on the ownership, operation, acquisition and sale of the broadband
operating radio systems that are needed to provide the services we offer. The
operational rules generally provide significant flexibility to licensees
operating in the 37.0-40.0 GHz band. For example, licensees are permitted to
offer point-to-multipoint and point-to-point services, and will be permitted to
provide mobile services upon adoption of inter-licensee coordination policies.
Our 39 GHz licenses, like other FCC licenses, are generally granted for an
initial ten-year term, subject to renewal. In order to obtain renewal of a 39
GHz license, the licensee must demonstrate that it has provided "substantial
service" during its license term. What level of service is considered
"substantial" will vary depending upon the type of offering by the licensee,
and the FCC has provided specific guidance only for point-to-point offerings,
where it has indicated the licensee should have constructed four links per
channel per million persons in the licensed market area. Licensees are
required, prior to the expiration date of their licenses, to file renewal
applications with an exhibit demonstrating compliance with the substantial
service criteria. If an entity is deemed not to have provided substantial
service with respect to a license for which renewal is sought, the renewal will
not be granted and the license cancelled.
Licenses in this band are subject to an arrangement between the FCC and the
Department of Industry of Canada regarding sharing between broadband wireless
systems along the U.S.-Canada border. Additionally, this band is subject to
satellite power flux density limits that are subject to change. We cannot
assure you that the ultimate resolution of these issues will not adversely
affect the Company's operations.
Competition. Over the last several years, the FCC has issued a series of
decisions and Congress has enacted legislation making the interstate access
services market more competitive by requiring reasonable and fair
interconnection by local exchange carriers. The Telecommunications Act of 1996
substantially departed from prior legislation in the telecommunications
industry by establishing local exchange competition as a national policy
through the removal of state regulatory barriers to competition and the
preemption of laws restricting competition in the local exchange market. The
provisions of the Telecommunications Act are designed to ensure that regional
Bell Operating Companies take affirmative steps to level the playing field for
their competitors so that emerging telecommunications service providers can
compete effectively. The FCC, with advice from the United States Department of
Justice, and the states are given jurisdiction to enforce these requirements.
We can give no assurance, however, that the states and the FCC will implement
the Telecommunications Act in a manner favorable to us.
State Regulation
Many of our services, either now or in the future, may be classified as
intrastate and therefore may be subject to state regulation. Under current
state regulations services that can be provided are:
. Local access services;
. Dedicated access services;
. Private network services, for businesses and other entities; and,
. Long distance toll services.
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Employees
As of February 22, 2002, we had six employees, none of which is represented
by a collective bargaining agreement. We plan to reduce our number of employees
to three by April 30, 2002.
Risk Factors
The following risk factors should be reviewed and considered. Any of the
following risks could materially adversely affect our business, financial
conditions or results of operation. Additional risks and uncertainties not
known to us or that we currently deem immaterial may also impair our business
operations.
Our FCC licenses may be canceled or revoked for violations of the FCC's
rules, which could limit our operations and growth.
Our FCC radio licenses comprise 86% of the book value of our assets. As an
FCC licensee and regulatee, we are subject to comprehensive regulatory
oversight, including regulations constraining ownership of us, rules governing
the services we can provide and the prices we charge, and rules related to
construction and operation of our services. Under certain circumstances, our
licenses may be revoked, canceled, or conditioned. For example, the licenses
may be revoked for violations of the FCC's rules or we may be fined. The loss
of some of our licenses could limit the expansion of our business. Even the
initiation of a proceeding that may result in the loss of our licenses could
adversely affect our business.
Our FCC licenses may not be renewed upon expiration.
Our 39 GHz licenses are granted for initial ten-year terms with renewal
dates ranging from 2006 to 2011. For renewal, we must demonstrate that we have
provided "substantial service" during the license term. The level of service
that will be considered "substantial" may vary depending upon our type of
product offering. The FCC has provided specific guidance only for
point-to-point offerings, where it has indicated the licensee should have
constructed four links per channel per million persons in the market area. We
may not be able to meet the substantial service requirement before the
expiration date of our licenses or the FCC may modify its definition of
substantial service. In the future, we may offer products for which the FCC
establishes more stringent substantial service requirements. We may be unable
to meet the FCC's renewal requirements and could lose our licenses. The loss of
some of our licenses could limit the expansion of our business.
An investment in us or sale of our assets may trigger a repayment of FCC
small business bidding credit.
The Company acquired 39 GHz licenses for BEAs in a FCC auction in 2000. For
this auction, the FCC found that the Company qualified under its regulations as
a "very small business" and consequently awarded the Company a 35 percent
bidding credit, reducing the Company's gross winning bids by approximately
$41.5 million. Under the FCC's rules, if control of the licenses acquired in
this auction is transferred or assigned to an entity that does not meet the
financial requirements for "very small businesses", the amount of the bidding
credit may be required to be repaid to the FCC. If a change in control of the
licenses occurs before October 31, 2002, the entire bidding credit of $41.5
million must be repaid. For each year thereafter the bidding credit required to
be repaid decreases by 25%. After October 31, 2005, no repayment of the bidding
credit would be required if control of the licenses were transferred. To
qualify as a "very small business", an entity, its controlling investors, the
entity's affiliates, and the affiliates of the entity's controlling investors
must collectively have average gross revenues for the prior three years of $15
million or less. The Company may find it more difficult to obtain investors or
purchasers since potential investors in the Company or potential purchasers of
its assets may trigger a significant repayment obligation to the FCC.
We are subject to comprehensive and continually evolving regulation that
could increase our costs and adversely affect our ability to successfully
implement our business plan.
We and some of our communications services and installations are regulated
by the FCC, the states, local zoning authorities, and other governmental
entities. These regulators regularly conduct rulemaking proceedings
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and issue interpretations of existing rules. For example, the FCC has a number
of proceedings still pending to implement the Telecommunications Act of 1996,
which Act sought to increase competition in local telephone services. These
regulatory proceedings could impose additional obligations on us, give rights
to competitors, increase our costs, and otherwise adversely affect our ability
to implement our business plan.
The value of our licenses could decline.
Our wireless licenses are integral assets of our business. The value of any
or all of our licenses could decrease as a result of:
. increases in supply of spectrum that provides similar functionality;
. a decrease in the demand for services offered with these licenses;
. values placed on similar licenses in future FCC auctions;
. regulatory limitations on transfers of these licenses;
. recent bankruptcies of Teligent, Inc. and Winstar Communications, Inc. and
subsequent sale of their assets and operations; and,
. bankruptcy or liquidation of any other comparable companies.
We expect to incur negative cash flows and operating losses during the next
few years.
We have generated only nominal revenues from operations to date. We have
generated operating and net losses since our inception and we expect to
generate operating and net losses and negative cash flows for at least the next
few years. We may not develop a successful business or achieve or sustain
profitability in the future. Our ability to achieve profitability will depend,
in part, on our ability to:
. raise adequate additional capital when required;
. attract and retain an adequate customer base;
. deploy and commercialize our services;
. attract and retain experienced and talented personnel as needed; and,
. establish strategic business relationships.
We may not be able to do any of these successfully, and our failure to do so
is likely to harm our operating results.
We may be unsuccessful in executing our short-term strategy of serving
existing telecommunications carriers in a manner that does not require
significant sales and marketing costs, other operating costs or capital
expenditures.
In the short-term we will be operating with limited resources. By the end of
April 2002, we expect to have only three employees. Our ability to find and
respond to opportunities to deliver our services in a cost-effective manner is
limited by the number of personnel we employ and our lack of capital and other
operational resources. Even if we are able to find customers to whom we can
provide services, we may have to hire additional personnel without whom we may
only be able to provide limited support for those services, which could result
in customer dissatisfaction. Additionally, our competitors may be better able
to seek out opportunities to provide services and may be better able to respond
to such opportunities than we are.
In the long-term, we may be unable to successfully discover and respond to
business opportunities to utilize our 39 GHz licenses.
Our long-term strategy requires that we both identify uses for our 39 GHz
licenses and be able to effectively implement a business plan with respect to
such uses. Opportunities for us to provide services may not arise due to one or
more of the following factors:
. the availability, performance and price of viable alternatives;
11
. our inability to create awareness and acceptance of our services; and,
. our limited resources available to pursue possible opportunities for the
provision of services.
We also will have limited resources available to develop our long-term
business plan. If a longer-term opportunity does arise, we may not have the
capacity to respond in a timely manner. Additionally, we have many competitors
who may be better prepared to respond quickly to increasing demand for the
services we provide. If we are unprepared to implement a solution when the
opportunity arises, we may never achieve profitability.
We may be unable to successfully execute on any longer-term business
opportunities that we determine to pursue.
We currently have few employees and maintain limited capital infrastructure.
We have minimum internal systems and do not operate a service and support
organization. If we identify a longer-term business opportunity for our
services, we will need to build our infrastructure and operational
capabilities. Our ability to do so could be affected by one of more of the
following factors, depending on our business plan:
. our ability to raise substantial additional capital to fund our operations
on acceptable terms, or at all;
. the ability of our equipment, equipment suppliers and service providers to
perform as we expect;
. our ability to execute our strategy, which could be affected by our
limited experience in providing high-speed transmission services;
. our ability to effectively manage our third party relationships;
. our ability to secure suitable locations for our radios and antennas;
. our ability to manage the expansion of our operations, which could result
in increased costs, high employee turnover or damage to customer
relationships;
. our ability to attract and retain qualified personnel, which may be
affected by the significant competition in our industry for persons
experienced in information technology and engineering;
. equipment failure or interruption of service, which could adversely affect
our reputation and our relations with our customers; and,
. our ability to accurately predict and respond to the rapid technological
changes in our industry and the evolving demands of the markets we serve.
Our failure to adequately address the above factors would have a significant
impact on our ability to implement any business plan. The recoverability of our
investment in FCC licenses is dependent on our successful execution of our
business plan.
We have limited financial resources and may be unable to secure additional
capital to operate our business.
We had a cash balance of $5.9 million at December 31, 2001. While we expect
this cash balance to support our operations through 2003, unforeseen expenses
and business opportunities could cause us to spend money more rapidly than
expected. Even if our estimates are correct, we will need additional capital to
operate our business after that time. We may not be able to secure the
necessary financing to continue with our short-term strategy after that time at
all, or on acceptable terms. Any longer-term business opportunities we may
undertake will also likely require us to obtain additional capital. We may be
unable to secure additional financing on acceptable terms, or at all, to pursue
such opportunities. If we are unable to secure capital when needed, we may be
unable to maintain our licenses or continue any level of operations.
12
In light of our brief operating history, change of strategy, and adoption of
"fresh start" accounting, investors may have difficulty evaluating us.
We have a limited operating history under our current business strategy. As
a result of the effectiveness of the Reorganization Plan, we have adopted
"fresh start" reporting as of December 31, 2001. As of December 31, 2001, our
assets are recorded at their estimated fair value, our liabilities are recorded
at the present value of amounts to be paid and our accumulated deficit has been
eliminated. As of the Effective Date, we have a completely new management team.
As a result, limited historical operating and financial information about our
current strategy is available and our financial results will not be comparable
to prior periods.
If our services do not achieve market acceptance we may lose or not obtain
revenue and our ability to achieve profitability would suffer.
Because the provision of wireless high-speed transmission services
represents an emerging sector of the telecommunications industry, the demand
for our services is uncertain. A substantial market for our services may not
develop. The demand for our services may be adversely affected by:
. historical perceptions of the unreliability of previous wireless
technologies;
. our bankruptcy and the bankruptcies of Teligent, Winstar and other
emerging telecommunications companies;
. concerns about the security of transmissions over wireless networks or
links;
. the lack of market history of operational fixed wireless services; and,
. possible desire of customers to acquire telecommunications services from a
single provider.
The telecommunications market is highly competitive and we may be unable to
compete effectively, especially against competitors with greater financial and
other resources, which may affect our ability to attract customers and grow and
maintain our sales.
We operate in a highly competitive environment and may not be able to
successfully compete. In the short-term, we expect to face competition from
other high capacity, point-to-point telecommunications, broadband, fiber and
other wireless companies. As we seek more long-term opportunities to provide
our services, we may face competition from such providers, as well as from
satellite communications companies, internet service providers, cable
television operators and others seeking to profit from the demand for wireless,
high-speed services. We also expect to compete with new providers and
technologies not yet introduced. To date, we do not have a significant market
share in any of the markets in which we are operating. Given the intense
competition, we may be unable to compete effectively with these and other
technologies and service providers in the short- term, and consequently we may
be unable to attract customers and grow and maintain our sales, or we may
experience difficulty in responding to any longer-term opportunities that might
develop.
Many of our competitors are larger, have greater financial and other
resources and have more experience than we have. As a result, these competitors
may be able, among other things, to develop better and exploit new
technologies, adapt to changes in customer requirements more quickly, devote
greater resources to the marketing and sale of their services or more rapidly
deploy telecommunication services than we can.
ITEM 2. PROPERTIES
The following is a summary of our principal facilities leases.
SQUARE FOOTAGE LOCATION EXPIRATION DATE FACILITIES
----------------------------------------------------------------------
1,200 Charlottesville, VA 2003 Corporate office
----------------------------------------------------------------------
17,000 Kent, WA 2002 Distribution center
----------------------------------------------------------------------
13
ITEM 3. LEGAL PROCEEDINGS
As more fully described in ITEM 1--"BUSINESS" and ITEM 7--"MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", the
Company sought protection under Chapter 11 of the Bankruptcy Code on April 20,
2001. The Company developed a Plan that was approved by the Court on October
31, 2001. On December 20, 2001, the Plan was effective and the Company emerged
from the proceedings under Chapter 11 of the United States Bankruptcy Code
pursuant to the terms of the Plan.
On October 31, 2001, the Company filed suit against Commco Partners, LLC
("Commco") and Scott Reardon (together, the "Defendants") in the United States
Bankruptcy Court for the District of Delaware alleging breach of contract under
their guarantees of a Bridge Loan Agreement pursuant to which the Company
advanced over $13.0 million to BroadStream Communications Corporation, which
was later assumed by Commco Technology, LLC, a wholly owned subsidiary of
Commco ("Commco Technology"). The Company can not predict the outcome of this
proceeding, including whether the Company will obtain any monetary recovery. On
February 19, 2002, the Defendants served on the Company their Answer,
Affirmative Defenses and Counterclaim (the "Counterclaim") to the Company's
breach of contract claim. In the Counterclaim, the Defendants have asserted
breach of contract under an Asset Purchase Agreement between the Company, the
Defendants, Commco Technology, BroadStream Communications Corporation and
BroadStream Corporation entered into April 14, 2000 (the "Asset Purchase
Agreement"), breach of implied duty of good faith and fair dealing, breach of
the Company's indemnification obligation under the Asset Purchase Agreement,
and the realization of substantial damages due to the failure of the Company to
register common stock held by the Defendants. Pursuant to a Settlement
Agreement entered into between the Company and the Defendants in connection
with the Company's bankruptcy proceedings which was approved by the United
States Bankruptcy Court for the District of Delaware on December 18, 2001, any
recovery by the Defendants on the counterclaim is restricted to reducing or
eliminating any claim, demand or cause of action of the Company against the
Defendants, and is limited in amount to the total of any recovery by the
Company on its claims, demands or causes of actions against the Defendants. The
pursuit of this litigation may result in a diversion of management and other
resources. The Company does not expect the Counterclaim to have a material
adverse effect on their business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Plan and related disclosure statement were transmitted to all impaired
creditors of the Company along with ballots for the purpose of soliciting
acceptance of the Plan. At a hearing to consider confirmation of the Plan held
on October 31, 2001, the Court found that the Plan was accepted by holders of
approximately 96% in dollar amount, and approximately 93% in number of holders,
of general unsecured claims held by creditors that timely voted to accept or
reject the Plan. Further, the Plan was accepted by 100% in dollar amount, and
100% in number of holders, of the secured vendor financing claim that timely
voted to accept or reject the Plan. Lastly, the Plan was accepted by the
holders of 100% in number of shares held by Old Preferred Stock holders that
timely voted to accept or reject the Plan. The ballots contained no provision
for abstentions. As a result, ballots that were not returned and invalid
ballots had no effect on the outcome of the vote. A summary of the valid
ballots cast is as follows:
Ballots Accepting Plan Ballots Rejecting Plan
---------------------- ----------------------
Holders of general unsecured claims..... 213 15
Secured vendor financing claims......... 1 0
Old Preferred stockholders.............. 489,575 shares 0 shares
14
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers are as follows:
Name Age Position
---- --- --------
Dean M. Johnson 43 Chief Executive Officer, President and Director
Sandra T. Watson 45 Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary
Thomas M. Walker 37 Vice President, General Counsel and Secretary
Evans Mullan 42 Vice President, Business Development
Dean M. Johnson has served as our Chief Executive Officer, President and
Director since December 2001. From February 2001 through December 2001, Mr.
Johnson was President of Cardinal Point Associates, a strategic and financial
consultant to broadband wireless companies. From November 1999 to February
2001, he was founder and President of MuseumCompany.com, Inc., a specialty
retailer of museum-related merchandise. Mr. Johnson served as Executive Vice
President and Chief Financial Officer of Value America, Inc., a discount
retailer, from November 1997 through November 1999. He served as a director of
Value America from November 1997 through April 1999. From April 1996 to
November 1997, Mr. Johnson served as Vice President of Business Development of
Pacific Monolithics, a developer of semiconductors used for broadband wireless
applications. From April 1991 until August 1995, he was General Manager of CFW
Cable, Inc., a broadband wireless company that he co-founded. From September
1986 to April 1991, he was Vice President--Corporate Finance for Lehman
Brothers, an investment bank.
Sandra T. Watson has served as our Vice President, Chief Financial Officer,
Treasurer and Assistant Secretary since December 2001. From February 2001
through December 2001, Ms. Watson was a consultant with Cardinal Point
Associates, a strategic and financial consultant to broadband wireless
companies. From January 2000 to February 2001 she served as Chief Financial
Officer of MuseumCompany.com, Inc., a specialty retailer of museum-related
merchandise. Ms. Watson served as Senior Vice President--Finance of Value
America, Inc., a discount retailer, from March 1998 through November 1999 and
was Controller from November 1997 until February 1999. From August 1993 to
August 1997, Ms. Watson was Financial and Regulatory Manager for CFW Cable,
Inc. a broadband wireless provider, and the Chief Financial Officer of
Charlottesville Quality Cable, a company acquired by the parent-corporation of
CFW Cable, Inc. From July 1979 to August 1993, she was at Coopers & Lybrand,
most recently as Audit Manager.
Thomas M. Walker joined us in April, 1996 and has served as Vice President,
General Counsel and Secretary since January 1, 1997. Mr. Walker managed the
domestic and international legal affairs of the Company and provided guidance
through the Company's IPO, follow-on debt offering and other financings and
business transactions. Prior to joining the company, Mr. Walker advised
telecommunications and other business clients while practicing law with
Buchalter, Nemer, Fields & Younger. Prior to his employment at Buchalter,
Mr. Walker practiced law with Pillsbury Winthrop (formerly Pillsbury Madison &
Sutro). Mr. Walker's employment will terminate no later than April 30, 2002.
Evans Mullan has served as our Vice President, Business Development since
December 2001. From March, 2000 to September, 2001, he served as a Vice
President in Operations at Winstar, a broadband wireless provider, with
executive responsibility for several different areas: Network Management
Center, Operations Support staff, and Customer Provisioning. From January 1999
to March 2000 he was Senior Director of Revenue Assurance for Winstar and
served as Director of Program Management for Winstar from May, 1997 to January,
1999. Mr. Mullan led the start up effort of the Consulting Services Division of
Net2000 from September, 1995 to April, 1997. He also has fifteen years of sales
and sales management experience with Bell Atlantic and Hill Associates
(Burlington, VT), and has sold complex telecom solutions to Federal and top
commercial accounts and technical consulting services to national telecom
carriers.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth for periods indicated high and low sales
price information of the Old Common Stock as reported on the Nasdaq National
Market. Until April 27, 2001, the Old Common Stock was traded in the
over-the-counter market and reported on the Nasdaq National Market under the
symbol "ARTT." Such transactions reflect inter-dealer prices, without retail
markup, markdown or commission and may not necessarily represent actual
transactions.
Old Common Stock
PRICE RANGE
-------------
High Low
------ ------
Fiscal year ended December 31, 2001
First Quarter................... $ 2.53 $ 0.28
Second Quarter.................. $ 0.07 $0.002
Third Quarter................... N/A N/A
Fourth Quarter.................. N/A N/A
Fiscal year ended December 31, 2000
First Quarter................... $47.56 $19.00
Second Quarter.................. $28.12 $ 8.75
Third Quarter................... $15.50 $ 7.62
Fourth Quarter.................. $ 7.75 $ 0.81
Old Common Stock was cancelled on the Effective Date in accordance with the
Court-approved Plan.
We anticipate the New Common Stock to trade on the Over-the-Counter Bulletin
Board sometime after February 22, 2002 under the symbol "FRNS." As of February
22, 2002, there was no market for our New Common Stock and there were
approximately 770 holders of record of our New Common Stock.
We have not paid any cash dividends on Old Common Stock in the past and do
not anticipate paying any cash dividends on New Common Stock in the foreseeable
future. We intend to retain earnings, if any, to finance the expansion of our
business and fund ongoing operations for the foreseeable future. In addition,
terms of our Senior Secured Notes restrict our ability to pay dividends on New
Common Stock and, as of December 31, 2001, prohibit dividends or other
distributions.
Unregistered Securities Sold in 2001
Effective December 20, 2001, pursuant to the Plan, the Company issued 19
million shares of its New Common Stock to holders of general unsecured creditor
claims in satisfaction of such claims. Also on December 20, 2001, the Company
issued 1 million shares of its New Common Stock to holders of Old Preferred
Stock pursuant to the Plan under which the Old Preferred Stock was cancelled.
These issuances were deemed to be exempt from registration in reliance upon
exemptions from registration under the Securities Act of 1933, as amended,
provided by Section 1145 of the Bankruptcy Code.
On December 20, 2001, the Company issued $11.0 million of its New Senior
Secured Notes and 4 million five-year New Class A Warrants to holders of
general unsecured creditor claims and preferred stockholder claims for $11.0
million. These issuances were deemed to be exempt from registration in reliance
upon Section 4(2) of the Securities Act of 1933, as amended, as a transaction
by an issuer not involving any public offering.
16
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data presented below has been derived from and should be
read in conjunction with our audited consolidated financial statements and
management's discussion and analysis of financial condition and results of
operations (in thousands except per share data). As more fully described in
Item 7--"Management's Discussion and Analysis of Financial Condition and
Results of Operations," we have adopted "fresh start" reporting as a result of
the Plan. Fresh start reporting creates a new reporting entity whose assets are
recorded at their estimated fair value and liabilities are recorded at the
present value of the amounts to be paid. Except where noted in the Balance
Sheet Data, all data shown are for the predecessor entity and reflects no
operations of First Avenue Networks. As a result, period to period comparison
may not be meaningful and are not indicative of future results of the successor.
Predecessor
---------------------------------------------------
Year ended December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
(in thousands except per share data)
Statement of Operations Data:
Revenues................................ $ 629 $ 1,241 $ 1,341 $ 841 $ 1,106
Loss from operations (1)................ (79,847) (65,912) (74,820) (36,136) (46,267)
Loss before extraordinary item (2)...... (385,968) (76,772) (96,698) (46,983) (61,729)
Net loss (3)............................ (257,077) (76,772) (96,698) (46,983) (61,729)
Basic and diluted net loss per share (4) (6.52) (3.82) (7.65) (1.89) (3.23)
Successor Predecessor
--------- --------------------------------------
As of December 31,
---------------------------------------------------
2001 2000 1999 1998 1997
--------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents............... $ 5,850 $ 32,314 $108,161 $ 11,864 $ 7,135
Working capital (deficit)............... 4,595 (3,642) 169,754 (2,930) 25,609
FCC licenses, net....................... 46,388 366,652 180,754 186,514 131,210
Total assets............................ 53,694 455,834 398,136 265,721 232,560
Long-term debt.......................... 6,883(5) 110,669 109,427 118,371 108,299
Convertible preferred stock............. -- 243,536 243,536 -- --
Total stockholders' equity (deficit).... 40,812 14,871 (7,935) 82,355 76,257
- --------
(1) Includes expenses of $42.6 million and $20.0 million recorded for equipment
impairment in 2001 and 1999, respectively, and expenses of $3.9 million and
$9.3 million recorded for the impairment of a note receivable in 2001 and
2000, respectively.
(2) Includes $346.7 million in 2001 of reorganization expenses recorded as a
result of the emergence from bankruptcy.
(3) Includes $128.9 million income in 2001 from extraordinary gain on early
extinguishments of debt as a result of the emergence from bankruptcy.
(4) Includes $3.27 income per share relating to an extraordinary gain on early
extinguishment of debt in 2001 and $1.46 and $4.10 loss per share relating
to deemed preferred dividends in 2000 and 1999, respectively.
(5) Total principal of $11.0 million for New Senior Secured Notes was allocated
as $6.9 million to long-term debt and $4.1 million to warrants which is
included in stockholders' equity.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement--This report includes "forward-looking" information, as
that term is defined in the Private Securities Litigation Reform Act of 1995 or
by the Securities and Exchange Commission in its rules, regulations and
releases, regarding, among other things, our financial and business prospects,
the deployment of our services, capital requirements and financing prospects.
The Company cautions investors that any such statements are based on currently
available operational, financial and competitive information, and are subject
to various risks and uncertainties. Actual future results and trends may differ
materially depending on a variety of factors. Those factors include, among
others, those matters disclosed as Risk Factors at the end of the business
section of this Annual Report on Form 10-K.
Overview
The Company holds over 750 licenses granted by the Federal Communications
Commission ("FCC") and provides wireless, high-speed, point-to-point
telecommunications services to 23 customers. The Company engineered these
telecommunication links, purchased and installed radios and tested the links
for proper operation and reliability. Its customers incorporate these fixed
wireless transmission links into their telecommunication networks and utilize
wireless links to provide a primary telecommunication link or, in other cases,
redundancy, back up or diversity to other telecommunication services.
The Company's recoverability of its investment in FCC licenses is dependent
on its successful execution of its business plan.
The Company's strategy is to utilize its FCC licenses to provide
telecommunications services in a capital efficient manner. In the short-term,
the Company will seek to identify, contact and serve existing
telecommunications carriers in a manner that does not require significant sales
and marketing, operating and capital expenditures. Our long-term objective is
to develop our business plan in response to carrier, business and other
end-user customer demands for wireless, high-speed services.
From 1996 to 2000, the Company utilized several strategies to provide
broadband Internet services. It invested heavily in the testing and deployment
of fixed wireless links and networks.
From its inception in 1993 through the first quarter of 2001, the Company
acquired airwave capacity, or spectrum rights, through FCC auctions and
purchase transactions, raised capital through public and private offerings of
securities, acquired equipment and roof rights, and developed operating and
support systems and networks. In 1998, it began to sell a variety of Internet
services to end-users in Seattle, WA, Portland, OR, and Phoenix, AZ. In late
1999, the Company's strategy evolved to providing high-speed transmission
services, including Internet access to businesses. During 2000, it launched
these services in ten markets. In the first quarter of 2001, the Company was
unable to secure additional funding sources to continue to finance operations
and service debt.
Reorganization
The Company sought reorganization under Chapter 11 of the Bankruptcy Code in
the United States Bankruptcy Court for the District of Delaware ("Court") on
April 20, 2001 (the "Petition Date"). It terminated nearly all of its
employees, terminated operation of its networks and eliminated customer
support. A Joint Plan of Reorganization ("Plan") was developed and was approved
by the Court on October 31, 2001. On December 20, 2001 ("Effective Date"), the
Plan was effective and the Company emerged from the proceedings under Chapter
11 of the United States Bankruptcy Code pursuant to the terms of the Plan.
Under the Plan, the Company issued 20 million shares of new-post Chapter 11
common stock ("New Common Stock") to unsecured creditors and holders of Series
A Preferred Stock ("Old Preferred Stock"). Each holder of an unsecured claim
received its pro rata share of 19 million shares of New Common Stock. Each
holder
18
of Old Preferred Stock received its pro rata share of 1 million shares of New
Common Stock. Holders of pre- chapter 11 common stock ("Old Common Stock") and
holders of any other equity interest received no distributions under the Plan.
All Old Common Stock, Old Preferred Stock and all other equity interests such
as employee stock options and warrants were cancelled on the Effective Date.
Prior to the Company's reorganization, it incurred significant operating
costs and interest expense. While pursuing its short-term strategy, the Company
expects significantly less costs in these areas. The Company also expects its
general and administrative and sales and marketing costs to be less than those
incurred by the predecessor.
Fresh Start Reporting
For reporting purposes, the Company has reflected its emergence from
bankruptcy as of December 31, 2001. Effective December 31, 2001, the Company
adopted fresh start reporting in accordance with American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). Pursuant
to fresh start reporting, a new reporting entity is created. The new reporting
entity's assets are recorded at their estimated fair value based on the
confirmed Plan, and liabilities are recorded at the present value of the
amounts to be paid. Results of operations for years ended December 31, 2001 and
2000 are that of the predecessor entity. All other information prior to
December 31, 2001 is that of the predecessor entity. As a result of the
adoption of fresh start accounting and elimination of substantial debt in the
reorganization, results of operations for future periods will not be comparable
to prior periods. The Company's reorganization value was estimated to be
approximately $53.7 million based upon a valuation of the Company's license
portfolio and expected future cash flows that considered an evaluation of the
present state of the economy and telecommunication industry.
In 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141")
and Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires the purchase method
of accounting to be used for all business combinations, and prohibits the
pooling of interest method of accounting. SFAS No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets should be
accounted for in financial statements upon their acquisition. This statement
requires goodwill and indefinite lived intangible asset amortization to cease
and for the assets to be periodically reviewed for impairment. The provisions
of SFAS No. 141 were applied in the Company's allocation of the reorganization
value. The FCC licenses held by the Company are treated as indefinite lived
assets and no amortization will be recorded in future periods.
Results of Operations
Year ended December 31, 2001 compared to year ended December 31, 2000
Revenues for the year ended December 31, 2001, decreased to $0.6 million
from $1.2 million in 2000. In 2000, revenues were primarily derived from Fast
Ethernet metropolitan networks and OC-3 services. The Company also offered
dedicated business links, providing services emphasizing unique links rather
than links combined to form a network. At December 31, 2000, the Company
provided service to 45 customers. The Company continued to market its services
and increased the number of customers to more than 120 at the Petition Date,
resulting in $248,000 revenue in the first quarter of 2001. After the Petition
Date, the Company discontinued services, dismantled its Fast Ethernet networks
and substantially reduced the number of dedicated business links it offered. At
December 31, 2001, the Company provided dedicated wireless links to 23
customers. The decrease in revenue in 2001 is due to the elimination of
services and the decrease in customers.
Technical and network operations costs and expenses are comprised primarily
of compensation, facilities and backhaul rent and maintenance. Technical and
network operations costs and expenses decreased 58% to $8.9 million for the
year ended December 31, 2001, compared to $21.5 million in 2000. This decrease
resulted
19
primarily from the elimination of substantially all technical and network
operations personnel as a result of seeking protection under Chapter 11 of the
Bankruptcy Code and restructuring the Company. During 2000, the Company entered
into lease, maintenance and network circuit agreements as it deployed its
high-speed broadband metropolitan area networks in ten major U.S. markets.
Substantially all of these agreements were terminated in the bankruptcy
proceedings resulting in a further reduction in expenses after the Petition
Date. Percentage of revenue comparisons are not meaningful.
Sales and marketing costs and expenses are comprised primarily of
compensation and related costs as well as consulting and advertising fees and
expenses. These costs decreased 77% to $1.4 million for the year ended December
31, 2001, compared to $6.0 million in 2000. This decrease resulted primarily
from the elimination of all marketing personnel and an elimination of all
marketing efforts as a result of seeking bankruptcy protection and
restructuring the Company. Percentage of revenue comparisons are not meaningful.
General and administrative expenses decreased 49% to $12.1 million for the
year ended December 31, 2001 from $23.8 million for the year ended December 31,
2000. This decrease resulted primarily from the elimination of substantially
all management, accounting, legal and other administrative personnel as a
result of seeking bankruptcy protection and restructuring the Company. Included
in general and administrative expenses for 2001 and 2000 is $3.9 million and
$9.3 million, respectively, of expense for the impairment of a note receivable
from Commco LLC. In 2000, the Company acquired FCC licenses from Commco LLC and
loaned Commco LLC $13.0 million which was due in November 2000. Commco LLC
declared bankruptcy in the fourth quarter of 2000. The Company wrote the
receivable down to the fair value of the underlying collateral during the year
ended December 31, 2000, and wrote off the remainder of the receivable balance
in the first quarter of 2001. Percentage of revenue comparisons are not
meaningful.
As a result of seeking protection under Chapter 11 and developing the plan
of reorganization, the Company approved a plan to sell or abandon substantially
all of the network and other equipment. The Company recorded an impairment
charge of $42.6 million in 2001 to write the carrying amount of these assets
down to fair value less estimated costs to sell.
Depreciation and amortization expense of $15.5 million for the year ended
December 31, 2001 decreased 2% from $15.8 million for 2000. This slight
decrease was due to increased amortization in 2001 resulting from investments
in FCC licenses in 2000 that was offset by a significant decrease in
depreciation in the last two quarters of 2001 as a result of ceasing
depreciation on a majority of the property and equipment when the Company
dismantled its networks and decided to dispose of the equipment.
Interest and other expenses decreased to $7.9 million for the year ended
December 31, 2001 from $13.1 million in 2000. This decrease is comprised of a
61% or $13.5 million decrease in interest expense and 96% or $8.7 million
decrease in interest income. The decrease in interest expense was a result of
the Company ceasing to record interest expense and amortization of deferred
financing costs on its vendor financing facility borrowings and long term debt
in 2001. The decrease in interest income was a result of a reduction in the
average balance of cash and short-term investments of $110.7 million for 2000
to $3.0 million for 2001. The decrease in the average cash balance resulted
from (i) the payment of $80 million primarily in the fourth quarter of 2000 for
the purchase of FCC licenses; (ii) cash used for operating activities of $28.9
million and $47.8 million in 2001 and 2000, respectively; and (iii) capital
expenditures of $4.2 million and $28.2 million for 2001 and 2000, respectively,
without any significant cash inflow from financings.
Reorganization items represent costs resulting from seeking protection and
emerging from bankruptcy. The Company wrote off $30.0 million of financing
costs, including original issue discount, incurred in obtaining the vendor
financing facility borrowings and long-term debt that had been deferred. The
Company conducted a valuation of its FCC licenses and reduced their carrying
value by $310.8 million to a fair value of $46.4 million. Professional fees and
other reorganization costs includes $2.5 million in professional fees incurred
as a result of the bankruptcy proceedings, $1.0 million in severance and $2.4
million of other direct costs.
20
Deferred income tax benefit increase of 2105% to $48.5 million from $2.2
million is the result of a reduction of the deferred tax liability due
primarily to the revaluation of the FCC licenses.
The Company has recognized an extraordinary gain on the early extinguishment
of debt of $128.9 million. This represents the difference between the value of
the claims extinguished on the Effective Date and the value of cash and New
Common Stock distributed under the Plan to satisfy these claims.
Year ended December 31, 2000 compared to year ended December 31, 1999
Revenues for the year ended December 31, 2000, decreased to $1.2 million
from $1.3 million for 1999. Prior to 2000, the Company's revenues related to
networks based on Asynchronous Transfer Mode or, ATM, technology, which the
Company offered in 1998 and 1999, and its prior dedicated links business, that
provide services emphasizing unique links rather than links combined to form a
network. New business revenues in 2000 relate to services utilizing the
Company's Fast Ethernet metropolitan networks and OC-3 services. The increase
in new business revenues in 2000 was more than offset by decreases in prior
business model revenues primarily resulting from the government mandated
divestiture of the Company's ATM network customers in the former US West
territory in connection with the US West/Qwest merger, all of such business
having been divested by the end of 2000. Revenues from the dedicated links
business also declined during 2000 as compared to 1999 due to a decrease in the
number of customers as the Company is not seeking to expand this prior
technology-based business.
Technical and network operations costs and expenses increased 22% to $21.5
million for the year ended December 31, 2000, compared to $17.7 million for
1999. Excluding severance expenses recorded in 1999, technical and network
operations costs increased 24% over 1999 costs. The increase resulted primarily
from the ongoing network market build-out in 2000, during which the Company
deployed its high-speed broadband metropolitan area networks in ten major U.S.
markets and began incurring additional network, technical and support related
costs, including rents, compensation and maintenance. Percentage of revenue
comparisons are not meaningful.
Sales and marketing costs and expenses are comprised primarily of
compensation and related costs as well as consulting and advertising fees and
expenses, and decreased 2% to $6.0 million for the year ended December 31,
2000, compared to $6.2 million for 1999. Excluding severance expenses recorded
in 1999, sales and marketing costs increased 5% during 2000 over 1999 costs as
a result of increased marketing activities relating to new markets entered
during the year. Percentage of revenue comparisons are not meaningful.
General and administrative expenses increased to $23.8 million for the year
ended December 31, 2000, compared to $17.9 million for 1999. Included in
general and administrative expenses for 2000 is $9.3 million of expense for the
impairment of a note receivable from Commco LLC. Included in general and
administrative expenses for 1999, is approximately $3.6 million of severance
expense. Excluding the loan impairment in 2000 and severance in 1999, general
and administrative expenses increased 3% during 2000 as compared to the prior
year as a result of expanded operations and infrastructure build-up in
connection with network deployment, market development and business expansion.
Percentage of revenue comparisons are not meaningful.
Depreciation and amortization expense of $15.8 million for the year ended
December 31, 2000 increased 10% over $14.4 million for 1999 as a result of
increased investments in FCC licenses and property and equipment.
Net interest and other expenses decreased to $13.1 million of net expense
for the year ended December 31, 2000 from $24.1 million of net expense for
1999, primarily due to a decrease in interest expense to $22.1 million in 2000
as compared to $28.8 million in 1999. The higher interest expense in 1999 was
primarily due to amortization of the value ascribed to warrants issued in
equipment financings and borrowings under these facilities, which were repaid
in September 1999. Interest income increased to $9.1 million for the year ended
December 31, 2000 from $4.1 million for 1999 as a result of having increased
balances of cash and short-term investments from the issuance of $251.0 million
of preferred stock in September 1999.
21
Liquidity and Capital Resources
On April 20, 2001, the Company filed a voluntary petition with the
Bankruptcy Court for protection under Chapter 11 of the Bankruptcy Code. As a
result of the Chapter 11 filing, the Company was prohibited from paying, and
creditors were prohibited from attempting to collect, claims or debts arising
prior to the Petition Date. On October 31, 2001, the Bankruptcy Court approved
the Plan. On December 20, 2001, after the Company met all of the Conditions
Precedent to the Effective Date (as defined), the Plan was effective and the
Company emerged from proceedings under Chapter 11 of the Bankruptcy Code. On
the Effective Date of the Plan, the Company:
. Filed an Amended and Restated Certificate of Incorporation;
. Cancelled Old Common Stock, Old Preferred Stock and agreements to issue or
purchase any additional equity interests;
. Issued 19 million shares of New Common Stock to settle all unsecured
creditor claims;
. Issued 1 million shares of New Common Stock to holders of Old Preferred
Stock;
. Issued $11.0 million of five-year New Senior Secured Notes which bear paid
in-kind interest at 9% and are secured by substantially all of the
Company's assets;
. Issued 4 million fully-vested, five-year New Class A Warrants with an
exercise price of $0.01 to holders of the New Senior Secured Notes; and,
. Paid the holder of the $11.3 million secured vendor financing claim $6.0
million in cash in full satisfaction of the debt.
In February 2002, the Company verified approximately 90% of the holders of
unsecured claims and 100% of the holders of Old Preferred Stock and distributed
stock certificates of New Common Stock. The Company estimates that it will
complete the verification of the remaining holders of unsecured claims by June
30, 2002 and make another distribution of stock certificates of New Common
Stock. The Company will not make any additional distributions to holders of Old
Preferred Stock.
We distributed 17,512,064 and 1,000,000 shares of New Common Stock to
holders of unsecured claims and holders of Old Preferred Stock, respectively,
in February 2002. Once we complete the verification process we will distribute
1,487,936 New Common Shares to settle the remaining unsecured claims. If the
verification process results in fewer than 1,487,936 New Common Shares being
allocated to settle these claims, the difference between 1,487,936 and the
number of shares required to settle the claims will be allocated to the current
holders of New Common Stock on a prorata basis relative to their current
holdings.
During the year ended December 31, 2001, operating activities used cash of
approximately $28.9 million as compared to $47.8 million during 2000. Cash used
by operating activities resulted primarily from the Company's net loss reduced
by (i) non-cash provisions for the revaluation of assets and liabilities to
fair value and asset impairment; (ii) write-off of original issue discount and
deferred financing costs; and, (iii) depreciation and amortization offset by an
extraordinary gain on the early extinguishment of debt. The non-cash provision
for revaluation of assets and liabilities to fair value, the write-off of
original issue discount and deferred financing costs and the extraordinary gain
on the early extinguishment of debt were recorded as a result of the Company
emergence from protection under Chapter 11 of the Bankruptcy Code.
Investing activities used cash of $2.6 million primarily to acquire property
and equipment during the year ended December 31, 2001 as compared to $37.1
million during 2000. In 2000, the Company made investments of $80.0 million in
FCC licenses and $28.2 million in property and equipment as well as a $13.0
million loan to an entity from which it acquired licenses. These cash uses were
offset by $75.0 million in proceeds from sales of short-term investments in
2000. The decrease in the cash used in investing activities results from the
Company not making similar investments in 2001 due to the bankruptcy filing and
substantial curtailment of its operations.
Financing activities of the predecessor company used cash of $6.0 million
during the year ended December 31, 2001, primarily to extinguish vendor
financing facility borrowings. Cash provided by financing
22
activities was $9.0 million for the year ended December 31, 2000. Issuance of
New Senior Secured Notes by the successor provided cash of approximately $11.0
million during 2001.
The New Senior Secured Notes are due on December 20, 2006 and are
collateralized by all assets of the Company. They bear interest at the rate of
9% per annum that is payable quarterly through the issuance of additional New
Senior Notes. Only if an event of default has occurred and is continuing is
interest payable in cash. The New Senior Note and Class A Warrant Purchase
Agreement contains covenants which limit the Company's ability to incur
additional debt, pay dividends or make other distributions, incur liens, merge
or sell assets and enter into certain transactions with related parties.
As a result of the Effectiveness of the Plan and the sale of the New Senior
Secured Notes and Warrants, the Company had cash and cash equivalents of $5.9
million at December 31, 2001. Since its inception, the Company has incurred
losses from operations and expects to continue to incur losses in the
foreseeable future. It has altered its business plan to minimize expenditures
and the amount of future capital required. The Company has dismantled its
networks, eliminated customer support and reduced its work force during 2001.
At December 31, 2001, it had only six employees and non-cancelable financial
commitments of less than $100,000 due in 2002. The Company believes that the
cash balance at December 31, 2001 is sufficient to cover its operations and
capital requirements through and including 2003.
Critical Accounting Matters
At December 31, 2001, the Company has $46.4 million of FCC licenses,
$468,000 of property and equipment and $743,000 of assets held for sale. In
connection with fresh-start accounting, the Company has recorded these assets
at their fair values on the effective date. These fair values were determined
based upon management's estimates, third party comparable sales, discounted
cash flow projections and negotiations. The Company is subject to all of the
risks inherent in an early-stage business in the telecommunication industry.
These risks include, but are not limited to: limited operating history;
management of a changing business; reliance on other third parties; competitive
nature of the industry; development and maintenance of efficient technologies
to support the business; employee turnover; and, operating cash requirements.
Management expects operating losses and negative cash flows to continue for the
near term. Failure to generate sufficient revenues could have a material
adverse effect on the Company's results of operations, financial condition and
cash flows. The recoverability of these assets is highly dependent on the
ability of management to execute on its business plan.
Inflation
Management of the Company believes that its business has not been affected
by inflation to a significantly different extent than has the general economy.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's existing long-term debt has a fixed interest rate; however,
future borrowings may bear interest at variable rates and accordingly, the
Company's exposure to market risk for changes in interest rates may change in
the future.
At December 31, 2001, the Company had cash and cash equivalents of $5.9
million that were held in bank accounts and in certificates of deposits with an
average interest rate of 2.2% and original maturity of less than three months.
The Company's investment policy provides that funds in excess of current
operating needs may be invested in cash equivalents, marketable securities
issued by the U.S. Government, its agencies and commercial paper of domestic
corporations. Our policy prohibits investing in instruments with maturities
that exceed 35 days. The Company's investment priorities are to minimize
short-term risk and preserve capital. The Company has had no holdings of
derivative financial or commodity instruments in the past and has no current
plans to do so in the future. The Company has not conducted business in foreign
currencies in the past and has no current plans to do so in the future.
The Company's $11.0 million of long-term debt bears fixed-rate interest at
9% and is due in full in 2006.
23
Report of Independent Accountants
(Post-Emergence)
To the Board of Directors and Stockholders of First Avenue Networks, Inc.:
In our opinion, the accompanying consolidated balance sheet presents fairly,
in all material respects, the financial position of First Avenue Networks, Inc.
and its subsidiaries (the "Company") at December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America. This
financial statement is the responsibility of the Company's management; our
responsibility is to express an opinion on this financial statement based on
our audit. We conducted our audit of this statement in accordance with auditing
standards generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the balance sheet is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the balance sheet, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, on October
31, 2001, the United States Bankruptcy Court for the District of Delaware
confirmed the Company's Plan of Reorganization (the "Plan"). After satisfaction
of certain conditions, the Plan became effective on December 20, 2001 and the
Company emerged from Chapter 11, and subsequently changed its corporate name to
First Avenue Networks, Inc. As discussed in Note 4, the Company adopted fresh
start reporting as of December 31, 2001 in connection with its emergence from
Chapter 11.
/s/ PricewaterhouseCoopers LLP
McLean, VA
January 28, 2002, except for the fourth paragraph of Note 13, as to which the
date is February 19, 2002
24
Report of Independent Accountants
(Pre-Emergence)
To the Board of Directors and Stockholders of Advanced Radio Telecom, Corp.
(now known as First Avenue Networks, Inc.):
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Advanced Radio Telecom, Corp. and its subsidiaries (the "Company") at
December 31, 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 3 to the consolidated financial statements, on October
31, 2001, the United States Bankruptcy Court for the District of Delaware
confirmed the Company's Plan of Reorganization (the "Plan"). After satisfaction
of certain conditions, the Plan became effective on December 20, 2001 and the
Company emerged from Chapter 11 and subsequently changed its corporate name to
First Avenue Networks, Inc. As discussed in Note 4, the Company adopted fresh
start reporting as of December 31, 2001 in connection with its emergence from
Chapter 11.
/s/ PricewaterhouseCoopers LLP
McLean, VA
January 28, 2002, except for the fourth paragraph of Note 13, as to which the
date is February 19, 2002
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FIRST AVENUE NETWORKS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
Successor (Note 1) Predecessor (Note 1)
December 31, 2001 December 31, 2000
------------------ - --------------------
Current assets:
Cash and cash equivalents....................................................... $ 5,850 $ 32,314
Short-term investments.......................................................... -- 1,293
Accounts receivable, net........................................................ 45 216
Prepaid expenses and other current assets....................................... 179 765
Assets held for sale............................................................ 743 --
------- - ---------
Total current assets......................................................... 6,817 34,588
Property and equipment, net of accumulated depreciation (Note 6).................... 468 42,282
FCC licenses, net of accumulated amortization (Note 5).............................. 46,388 366,652
Deferred financing costs, net of accumulated amortization........................... -- 7,918
Other assets........................................................................ 21 4,394
------- - ---------
Total assets................................................................. $53,694 $ 455,834
======= = =========
Current liabilities:
Accounts payable................................................................ $ 457 $ 4,753
Accrued compensation and benefits............................................... 238 2,876
Accounts payable to related parties (Note 12)................................... -- 4,394
Accrued taxes other than income................................................. 350 3,827
Accrued interest payable........................................................ -- 7,342
Other accrued liabilities....................................................... 1,177 4,470
Vendor financing facility borrowings (Note 9)................................... -- 10,568
------- - ---------
Total current liabilities.................................................... 2,222 38,230
New senior secured notes, net of unamortized discount (Note 9)...................... 6,883 --
Old senior notes, net of unamortized discount (Note 9).............................. -- 110,669
Other non-current liabilities (Note 7).............................................. 3,777 --
Deferred income tax liabilities (Note 8)............................................ -- 48,528
------- - ---------
Total liabilities............................................................ 12,882 197,427
------- - ---------
Commitments and contingencies (Note 13).............................................
Predecessor convertible redeemable preferred stock, $0.001 par value;
no shares authorized, issued or outstanding at December 31, 2001,
3,250,000 shares authorized, 3,137,500 shares issued and outstanding at
December 31, 2000.................................................................. -- 243,536
------- - ---------
Stockholders' equity:
Successor common stock, $0.001 par value; 50,000,000 shares authorized,
20,000,000 shares issued and outstanding at December 31, 2001.................. 20 --
Successor additional paid-in capital............................................ 40,792 --
Predecessor common stock, $0.001 par value, no shares issued or
outstanding at December 31, 2001, 100,000,000 shares authorized,
39,341,181 shares issued and outstanding at December 31, 2000.................. -- 39
Predecessor additional paid-in capital.......................................... -- 331,054
Accumulated deficit (Note 4).................................................... -- (316,222)
------- - ---------
Total stockholders' equity................................................... 40,812 14,871
------- - ---------
Total liabilities, convertible preferred stock and stockholders' equity...... $53,694 $ 455,834
======= = =========
The accompanying notes are an integral part of these consolidated financial
statements.
26
FIRST AVENUE NETWORKS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
Predecessor (Note 1)
-------------------------------
Years ended December 31,
-------------------------------
2001 2000 1999
--------- --------- ---------
Revenues.................................................................... $ 629 $ 1,241 $ 1,341
--------- --------- ---------
Costs and expenses:
Technical and network operations........................................ 8,942 21,521 17,703
Sales and marketing..................................................... 1,382 6,006 6,154
General and administrative (Note 5)..................................... 12,121 23,803 17,853
Provision for equipment impairment (Note 6)............................. 42,565 -- 20,043
Depreciation and amortization........................................... 15,466 15,823 14,408
--------- --------- ---------
Total costs and expenses............................................. 80,476 67,153 76,161
--------- --------- ---------
Loss from operations........................................................ (79,847) (65,912) (74,820)
--------- --------- ---------
Interest and other:
Interest expense........................................................ (8,587) (22,117) (28,806)
Interest income......................................................... 345 9,057 4,057
Other................................................................... 311 -- 696
--------- --------- ---------
Total interest and other............................................. (7,931) (13,060) (24,053)
--------- --------- ---------
Loss before reorganization items, income taxes and extraordinary item....... (87,778) (78,972) (98,873)
--------- --------- ---------
Reorganization items (Notes 3 and 4):
Write-off of original issue discount and deferred financing costs....... (30,025) -- --
Revaluation of assets and liabilites to estimated fair value............ (310,835) -- --
Professional fees and other reorganization costs........................ (5,858) -- --
--------- --------- ---------
Total reorganization items........................................... (346,718) -- --
--------- --------- ---------
Loss before income taxes and extraordinary item............................. (434,496) (78,972) (98,873)
Deferred income tax benefit................................................. 48,528 2,200 2,175
--------- --------- ---------
Loss before extraordinary item.............................................. (385,968) (76,772) (96,698)
Extraordinary item--gain on early extinguishment of debt (Notes 3 and 4).... 128,891 -- --
--------- --------- ---------
Net loss.................................................................... $(257,077) $ (76,772) $ (96,698)
========= ========= =========
Net loss.................................................................... $(257,077) $ (76,772) $ (96,698)
Deemed preferred dividend................................................... -- (47,740) (111,880)
--------- --------- ---------
Net loss applicable to common stockholders.................................. $(257,077) $(124,512) $(208,578)
========= ========= =========
Basic and diluted net loss per common share, including $1.46 and
$4.10 loss per share relating to deemed preferred dividend in 2000 and 1999
Loss before extraordinary item....................................... $ (9.79) $ (3.82) $ (7.65)
Extraordinary item................................................... 3.27 -- --
--------- --------- ---------
Net loss............................................................. $ (6.52) $ (3.82) $ (7.65)
========= ========= =========
Weighted average common shares.............................................. 39,429 32,604 27,272
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
27
FIRST AVENUE NETWORKS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (Deficit)
(in thousands)
Note Accumulated
Common stock Receivable Other
-------------- Additional from Comprehensive Accumulated
Shares Amount Paid-In Capital Stockholder Income Deficit Total
------- ------ --------------- ----------- ------------- ----------- ---------
Predecessor (prior to emergence from Bankruptcy--Note 1)
Balances at January 1, 1999.................... 26,707 $ 27 $ 225,967 $(887) $ -- $(142,752) $ 82,355
Comprehensive loss.............................
Net loss...................................... -- -- -- -- -- (96,698) (96,698)
Increase in unrealized appreciation on
investments available for sale............... -- -- -- -- 889 -- 889
------- ---- --------- ----- ----- --------- ---------
Total comprehensive loss...................... -- -- -- -- 889 (96,698) (95,809)
Common stock issued in connection with
acquisition of FCC licenses................... 154 -- 848 -- -- -- 848
Value ascribed to warrants issued in connection
with working capital facility................. -- -- 1,242 -- -- -- 1,242
Warrants exercised............................. 610 1 3 -- -- -- 4
Stock options exercised........................ 255 -- 1,724 -- -- -- 1,724
Stock compensation expense..................... -- -- 1,195 -- -- -- 1,195
Common stock issuable under employment
agreements.................................... 242 -- 506 -- -- -- 506
Value ascribed to beneficial conversion feature
of Predecessor convertible preferred stock.... -- -- 111,880 -- -- -- 111,880
Deemed dividend of beneficial conversion
feature of Predecessor convertible preferred
stock......................................... -- -- (111,880) -- -- -- (111,880)
------- ---- --------- ----- ----- --------- ---------
Balances at December 31, 1999.................. 27,968 28 231,485 (887) 889 (239,450) (7,935)
Comprehensive loss.............................
Net loss...................................... -- -- -- -- -- (76,772) (76,772)
Decrease in unrealized appreciation on
investments available for sale............... -- -- -- -- (889) -- (889)
------- ---- --------- ----- ----- --------- ---------
Total comprehensive loss...................... -- -- -- -- (889) (76,772) (77,661)
Repayment of note receivable................... -- -- -- 887 -- -- 887
Stock options exercised........................ 1,194 1 8,116 -- -- -- 8,117
Warrants exercised............................. 439 -- 4 -- -- -- 4
Stock issued pursuant to
employee benefit plan......................... 33 -- 229 -- -- -- 229
Stock compensation expense..................... 9 -- (239) -- -- -- (239)
Common stock issued in connection with
acquisition of FCC licenses................... 9,698 10 91,459 -- -- -- 91,469
Value ascribed to beneficial conversion feature
of Predecessor convertible preferred stock.... -- -- 47,740 -- -- -- 47,740
Deemed dividend of beneficial conversion
feature of Predecessor convertible preferred
stock......................................... -- -- (47,740) -- -- -- (47,740)
------- ---- --------- ----- ----- --------- ---------
Balances at December 31, 2000.................. 39,341 39 331,054 -- -- (316,222) 14,871
Net loss....................................... -- -- -- -- -- (257,077) (257,077)
Stock issued pursuant to employee benefit plan. 126 -- 215 -- -- -- 215
Stock compensation expense..................... 4 -- 8 -- -- -- 8
Decrease in accrued stock issuance costs....... -- -- 337 -- -- -- 337
Adoption of fresh start accounting............. (39,471) (39) (331,614) -- -- 573,299 241,646
------- ---- --------- ----- ----- --------- ---------
-- $ -- $ -- $ -- $ -- $ -- $ --
======= ==== ========= ===== ===== ========= =========
- ---------------------------------------------------------------------------------------------------------------------------------
Successor (subsequent to emergence from Bankruptcy--Note 1)
Issuance of Successor common stock pursuant
to terms of reorganization plan upon
ermergence from bankruptcy (Note 3 and 4)..... 20,000 $ 20 $ 36,700 $ -- $ 36,720
Value ascribed to warrants issued in connection
with new senior secured notes................. -- -- 4,092 -- 4,092
------- ---- --------- --------- ---------
Balances at December 31, 2001.................. 20,000 $ 20 $ 40,792 $ -- $ 40,812
======= ==== ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
28
FIRST AVENUE NETWORKS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Predecessor (Note 1)
-----------------------------
Years ended December 31,
-----------------------------
2001 2000 1999
--------- -------- --------
Cash flows from operating activities for Predecessor:
Net loss.............................................................................. $(257,077) $(76,772) $(96,698)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary item--gain on early extinguishment of debt........................... (128,891) -- --
Write off of original issue discount and deferred financing costs.................. 30,025 -- --
Revaluation of assets and liabilities to fair value................................ 310,835 -- --
Provision for equipment impairment................................................. 42,565 -- 20,043
Provision for note impairment...................................................... 3,896 9,311 --
Non-cash stock-based compensation expense.......................................... 8 (10) 1,701
Depreciation and amortization...................................................... 15,466 15,823 14,408
Non-cash interest expense.......................................................... 2,224 2,295 5,660
Deferred income tax benefit........................................................ (48,528) (2,200) (2,175)
Changes in operating assets and liabilities:.......................................
Accounts payable and other current liabilities.................................. 2,041 3,540 6,432
Interest payable................................................................ (3,215) 222 (34)
Other........................................................................... 1,739 38 (1,342)
--------- -------- --------
Net cash used by operating activities........................................... (28,912) (47,753) (52,005)
--------- -------- --------
Cash flows from investing activities for Predecessor:
Purchases of property and equipment................................................... (4,206) (28,234) (13,037)
Additions to FCC licenses............................................................. -- (80,036) (4,311)
Proceeds from sale of FCC licenses.................................................... -- -- 6,872
Purchases of short-term investments................................................... -- (1,250) (74,998)
Proceeds from sales of short-term investments......................................... 1,293 74,998 --
Loan to third party in connection with acquisition of FCC licenses.................... -- (13,006) --
Proceeds from maturities of pledged securities........................................ -- 9,450 18,900
Proceeds from repayment of notes receivable........................................... -- 887 --
Proceeds from disposition of property and equipment................................... 361 120 2,045
--------- -------- --------
Net cash used by investing activities........................................... (2,552) (37,071) (64,529)
--------- -------- --------
Cash flows from financing activities for Predecessor:
Proceeds from issuance of preferred stock............................................. -- -- 243,536
Proceeds from (repayment of) vendor financing facility borrowings..................... (5,975) 1,365 (27,500)
Proceeds from issuance of common stock................................................ -- 8,121 1,728
Principal payments of long-term debt.................................................. -- (360) (430)
Additions to deferred financing costs................................................. -- (149) (4,503)
--------- -------- --------
Net cash provided (used) by financing activities................................ (5,975) 8,977 212,831
--------- -------- --------
Net (decrease) increase in cash and cash equivalents...................................... (37,439) (75,847) 96,297
Cash provided by financing activities for Successor:
Proceeds from issuance of new senior secured notes.................................... 10,975 -- --
Cash and cash equivalents, beginning of period............................................ 32,314 108,161 11,864
--------- -------- --------
Cash and cash equivalents, end of period.................................................. $ 5,850 $ 32,314 $108,161
========= ======== ========
Supplemental Disclosure of Cash Flow Information:
Non-cash financing and investing activities:
Predecessor
Value ascribed and deemed dividend of beneficial conversion feature of Series
B preferred stock................................................................. $ -- $ 47,740 $111,880
Additions to property and equipment................................................ 3,478 9,203 --
Value ascribed to warrants......................................................... -- 58 1,242
Issuance of shares for FCC licenses................................................ -- 91,469 848
Interest paid...................................................................... 9,709 19,110 23,146
Successor
Value ascribed to warrants......................................................... 4,092 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
29
First Avenue Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1--The Company
First Avenue Networks, Inc. (collectively with its subsidiaries, the
"Company") owns over 750 wireless telecommunications licenses granted by the
Federal Communications Commission ("FCC") that provide coverage of
substantially all of the continental United States with 39 GHz spectrum. This
license portfolio represents over 980 million channel pops, calculated as
number of channels in a given area multiplied by the population covered by
these channels.
The Company was previously known as Advanced Radio Telecom Corp. ("ART"). In
February 2002, the shareholders approved amendments to the Certificate of
Incorporation to change the Company's name to First Avenue Networks, Inc. ART
with its subsidiaries filed a voluntary petition with the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") for
protection under Chapter 11 of Title 11 of the United States Code (the
"Bankruptcy Code") on April 20, 2001 (the "Petition Date").
On October 31, 2001, the Bankruptcy Court approved the Company's Plan of
Reorganization filed with the Bankruptcy Court on September 27, 2001 (the
"Plan"). On December 20, 2001 (the "Effective Date"), the Company met all of
the Conditions Precedent to the Effective Date (as defined), the Plan was
effective and the Company emerged from proceedings under Chapter 11 of the
Bankruptcy Code. For financial reporting purposes, the Company has reflected
its emergence from bankruptcy as of the close of business on December 31, 2001.
As used herein, the term "Predecessor" refers to the Company and its
operations for periods through December 31, 2001, while the term "Successor" is
used to describe the Company and its operations for periods thereafter.
The Company is subject to all of the risks inherent in an early-stage
business in the telecommunication industry. These risks include, but are not
limited to: limited operating history; management of a changing business;
reliance on other third parties; competitive nature of the industry;
development and maintenance of efficient technologies to support the business;
employee turnover; and, operating cash requirements. Management expects
operating losses and negative cash flows to continue for the near term. Failure
to generate sufficient revenues could have a material adverse effect on the
Company's results of operations, financial condition and cash flows. The
recoverability of assets is highly dependent on the ability of management to
execute its business plan.
Note 2--Summary of Significant Accounting Policies
Consolidation - The accompanying consolidated financial statements include
the accounts of the Company and its subsidiaries. Significant intercompany
balances have been eliminated in consolidation.
Use of estimates - Preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported in the financial statements. Actual results could differ from those
estimates. Among the more significant estimates made by management include
estimated useful lives of long-lived assets, including FCC licenses, fair
values of assets and liabilities, and realization of deferred tax assets.
Segment reporting - Statement of Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information"
establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas, and major customers. The Company has determined that it
operates in one segment.
Cash and cash equivalents - Cash and cash equivalents represent funds on
deposit with banks or investments with remaining maturities of three months or
less when purchased that are readily convertible into
30
Note 2--Summary of Significant Accounting Policies, continued
Cash and cash equivalents, continued - cash and not subject to significant risk
from fluctuation in interest rates. The Company places its temporary cash
investments with major financial institutions in amounts which, at times,
exceed Federally insured limits.
Short-term investments - Short-term investments are comprised primarily of
certificates of deposit or commercial paper with remaining maturities in excess
of three months when purchased and are stated at fair value, with unrealized
appreciation reported as other comprehensive income in stockholders' equity.
The Company classifies all short-term investments as available-for-sale and it
is the Company's intent to maintain a liquid portfolio not subject to
significant risk from fluctuation in interest rates.
Assets held for sale - Assets held for sale are stated at fair value less
cost to sell and are comprised primarily of telecommunications equipment,
consisting of radios, routers, switches, indoor and outdoor device units and
other parts and accessories, which were initially purchased by the Company to
deploy in its telecommunications networks.
Property and equipment - Property and equipment for the Successor is stated
at estimated fair value and is comprised primarily of telecommunications
radios, office equipment, including computer equipment and related software and
peripherals. Depreciation is computed utilizing straight-line methods over
estimated useful lives, generally two to five years. Property and equipment for
the Predecessor is stated at cost. Network assets are comprised of (i)
equipment and related direct costs of placing assets into service, (ii) network
monitoring equipment and related computer (hardware and software) systems, and
(iii) simulation and lab equipment utilized in network design, testing,
development and support. Major renewals and improvements are capitalized, while
maintenance and repairs were expensed as incurred. Depreciation and
amortization are computed utilizing straight-line methods over estimated useful
lives, generally two to five years. Cost and accumulated depreciation for
assets sold, retired, or otherwise disposed of are removed from the accounts,
and resulting gains or losses recorded.
FCC licenses - FCC licenses are granted for initial ten-year terms with
renewal dates ranging from 2006 to 2011. The Successor has adopted the
provisions of Statement of Financial Accounting Standards No. 142 "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). FCC licenses are deemed to have an
indefinite useful life and are not amortized. The Predecessor capitalized
direct costs of obtaining licenses and amortized such costs on a straight-line
basis over 40 years in accordance with Accounting Principles Board Opinion No.
17 "Intangible Assets". Accumulated amortization at December 31, 2000
approximated $17.8 million. Amortization expense was $9.6 million, $6.2 million
and $4.9 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
Impairment of long-lived assets - The Company evaluates its long-lived
assets for impairment and continues to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully
recoverable. In cases where undiscounted expected cash flows associated with
such assets are less than their carrying value, an impairment provision is
recognized in an amount by which the carrying value exceeds the estimated fair
value of such assets. Recoverability of the carrying value of FCC licenses is
dependent on successful deployment of networks and radio links or sales of such
assets to a third party. The Successor considers the FCC licenses to have an
indefinite useful life under the provisions of SFAS No. 142. The Company will
perform an annual impairment test on this asset. If events and circumstances
indicate the assets might be impaired, the Company will perform such a test on
an interim basis. The impairment test compares the fair value of the FCC
licenses with the carrying value of the asset. If the fair value is less than
the carrying value an impairment loss will be recorded.
Financing costs - Direct costs associated with obtaining debt financing are
deferred and charged to interest expense using the effective interest rate
method over the debt term. Direct costs associated with the sale of capital
stock are recorded as a reduction of proceeds. Direct costs of obtaining
commitments for financing are
31
Note 2--Summary of Significant Accounting Policies, continued
Financing costs, continued - deferred and charged to expense over the
commitment term; cost and accumulated amortization are removed from the
accounts upon borrowing repayments. Accumulated amortization of deferred
financing costs approximated $1.2 million at December 31, 2000. In connection
with seeking protection under Chapter 11 of the Bankruptcy Code, $30.0 million
of remaining deferred financing costs were written off in 2001.
Revenue recognition - Revenue from services provided to customers is
recognized ratably over the period such services are provided. Fees from
installation, connection and other similar non-recurring fees are deferred and
recognized ratably as revenue over the estimated term of customer relationship.
Income taxes - The Company accounts for income taxes utilizing the liability
method of accounting. Under the liability method, deferred taxes are determined
based on differences between financial statement and tax bases of assets and
liabilities at enacted tax rates in effect in years in which differences are
expected to reverse. Valuation allowances are established, when necessary, to
reduce deferred tax assets to amounts expected to be realized.
Stock options - The Company applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations,
including Financial Accounting Standards Board Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation", for its
stock-based compensation plan. Accordingly, compensation costs for stock
options granted to employees and directors is measured as the excess, if any,
of fair value of company stock over exercise price at the measurement date,
except when the plan is determined to be variable in nature. The Company
accounts for equity stock options granted to non-employees at fair value.
Net loss per share - Calculations of loss per share exclude the effect of
convertible preferred stock, stock options and warrants to purchase common
stock since inclusion in such calculations would have been antidilutive. Shares
excluded in per share calculations for the Predecessor approximated 40.0
million, 40.0 million and 37.3 million for fiscal 2001, 2000 and 1999,
respectively.
Newly issued accounting standards - In accordance with American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the
Company has adopted all changes in accounting principles that will be required
in the financial statements of the emerging entity within 12 months following
the adoption of fresh start reporting. The following is a summary of those new
standards adopted by the Company upon the emergence from bankruptcy.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 "Business Combinations" ("SFAS No. 141")
and Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 141 addresses financial
accounting and reporting for business combinations. This statement requires the
purchase method of accounting to be used for all business combinations, and
prohibits the pooling of interest method of accounting. This statement
supercedes APB Opinion No. 16, "Business Combinations" as well as Statement of
Financial Accounting Standards No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." SFAS No. 142 addresses how intangible
assets that are acquired individually or with a group of other assets should be
accounted for in financial statements upon their acquisition. This statement
requires goodwill and indefinite lived intangible asset amortization to cease
and for the assets to be periodically reviewed for impairment. SFAS No. 142
supercedes APB Opinion No. 17, "Intangible Assets." The provisions of SFAS No.
141 were applied in the Company's allocation of the reorganization value. The
FCC licenses held by the Company are treated as indefinite lived assets and no
amortization will be recorded in future periods.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 required companies to record a
liability for asset retirement obligations in the period in which they are
incurred, which
32
Note 2--Summary of Significant Accounting Policies, continued
Newly issued accounting standards, continued - typically could be upon
completion or shortly thereafter. The adoption of this standard had no impact
on the Company.
In October 2001, 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"). SFAS No. 144 provides a single
accounting model for long-lived assets to be disposed of and supercedes SFAS
No. 121 " Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to Be Disposed Of." The adoption of this standard had no impact on the
Company.
Note 3--Reorganization under Chapter 11 of the Bankruptcy Code
On April 20, 2001, the Company filed a voluntary petition with the
Bankruptcy Court for protection under Chapter 11 of the Bankruptcy Code. On
October 31, 2001, the Bankruptcy Court approved the Plan of Reorganization. On
December 20, 2001, the Company met all of the Conditions Precedent to the
Effective Date (as defined), the Plan was effective and the Company emerged
from proceedings under Chapter 11 of the Bankruptcy Code.
Plan of Reorganization - The Plan represents a consensual arrangement among
the Predecessor, the Official Committee of Unsecured Creditors, holders of the
Predecessor's $135 million 14% Senior Notes due 2007 (the "Old Notes"), and the
holders of the Predecessor's Series A Preferred Stock (the "Old Preferred
Stock"). Following is a summary of certain material provisions of the Plan.
Cancellation of existing securities and agreements - On the Effective Date,
the Old Notes, Old Preferred Stock, Predecessor Common Stock ("Old Common
Stock") and commitments, contractual or otherwise, obligating the Predecessor
to issue, transfer or sell preferred or common stock interests or any other
capital stock of the Predecessor were cancelled and have no effect other than
the right to participate in the distributions, if any, provided under the Plan
in respect to claims.
Distributions under the Plan - The Plan provides for the following
distributions in settlement of claims, preferred interests and equity interests:
. Secured Vendor Financing Claim - The holder of a $11.3 million secured
vendor financing claim received cash of $6.0 million.
. General Unsecured Creditor Claims - Each of the general unsecured
creditors, including the Old Notes, received its ratable portion of 19
million shares of post-Chapter 11 successor common stock ("New Common
Stock").
. Preferred Stockholder Claims - Each of the holders of Old Preferred
Stock received its ratable portion of 1 million shares of New Common
Stock.
. Common Stockholder Claims - The holders of Old Common Stock and options
and warrants to acquire Old Common Stock received no distributions.
New securities issued under the Plan - The following securities were issued
on the Effective Date under terms of the Plan:
. New Common Stock -The Successor issued 20 million shares of New Common
Stock.
. New Senior Secured Notes and New Class A Warrants - The Successor issued
$10,975,000 of its New Senior Secured Notes ("New Senior Notes")
together with 4 million New Class A Warrants to holders of general
unsecured creditor claims and preferred stockholder claims that
purchased the New Senior Notes. Each warrant entitles the holder to
purchase one share of New Common Stock at a price of $0.01 per share for
a period of five years from the Effective Date.
33
Note 3--Reorganization under Chapter 11 of the Bankruptcy Code, continued
Stock option plan - The Successor adopted a stock option plan, under which
it may grant incentive and non-qualified options to purchase up to 1.2 million
shares of New Common Stock to directors, officers and employees. At December
31, 2001, there were no options granted under the stock option plan. In January
2002, the Successor's Board of Directors granted options to acquire 940,000
shares of New Common Stock.
Registration rights - The New Common Stock is exempt from registration under
the Securities Act of 1933, as amended, in reliance upon exemptions from
registration provided by section 1145 of the Bankruptcy Code. Pursuant to a
Registration Rights Agreement, the Successor has agreed to register under the
Securities Act 1933, shares of New Common Stock to be issued upon exercise of
the New Class A Warrants and New Common Stock held by affiliates. On the date
on which the Company is entitled to register securities using a registration
statement on Form S-3, any holder or holders holding, in the aggregate, not
less than 30% of the New Class A Warrants and New Common Stock may from time to
time request that the Company effect the registration under the Securities Act
of 1933 of that number of shares of New Common Stock and New Common Stock to be
issued upon exercise of the New Class A Warrants requested and owned by the
requesting holder(s), provided, however, that the Company is not required to
effect more than one such registration in any 12-month period and no more than
three in total. The Registration Rights Agreement also provides affiliates
holding New Common Stock and New Class A Warrant holders with rights to include
shares of New Common Stock and New Common Stock to be issued upon exercise of
New Class A Warrants in a registration statement, subject to certain
limitations, any time the Company files a registration statement.
Note 4--Fresh Start Accounting
In connection with its emergence from bankruptcy, the Company reflected
terms of the Plan in its consolidated financial statements by adopting the
fresh start accounting provisions of SOP 90-7. Fresh start accounting creates a
new reporting entity and the recorded amounts of assets and liabilities are
adjusted to reflect their estimated fair values. For accounting purposes, the
fresh start adjustments have been recorded in the Company's consolidated
balance sheet as of December 31, 2001. As a result of fresh start adjustments,
financial statements for the Successor are not comparable to financial
statements of the Predecessor.
In adopting fresh start accounting, the Company utilized the reorganization
value or fair value of the entity. The reorganization value of a company is the
amount of value available and to become available for the satisfaction of
post-petition liabilities and allowed claims, as negotiated between the
debtor-in-possession and the creditors and holders of equity interests. The
Committee of Unsecured Creditors together with the Company determined a
reorganization value of approximately $53.7 million that is the deemed fair
value of the assets of the reorganized business. FCC licenses comprise 86% of
the reorganization value. The Company's recoverability of its investment in FCC
licenses is dependent on its successful execution of its business plan.
The reorganization value was determined in consideration of several factors
and by reliance on various valuation methods. Valuation methods include
replacement cost, comparability or market, and income or discounted cash flow
approaches, and are generally made utilizing one or more of these approaches.
The Company used both the discounted cash flow method and the comparability or
market approach in the determination of the Company's reorganization value. The
Successor's principal assets consist of FCC licenses, which are estimated to
have an aggregate fair value of approximately $46.4 million at the Effective
Date.
Pursuant to the fresh start reporting, the reorganization value was
estimated by management and allocated to the identified assets based upon their
relative fair values. Liabilities were valued at the present value of amounts
to be paid. The Company has pre-petition and post-petition priority claims
totaling approximately $925,000 that are being disputed and remain unresolved
as of the Effective Date. The Company estimates that its maximum cash exposure
to settle these claims is $557,000 which represents the Company's best estimate
of the amounts which will be paid for the claims. The Company has recorded
$447,000 as accounts payable and $100,000 as a component of accrued
liabilities. The Company has not reflected the $368,000 remainder as a
liability as it
34
Note 4--Fresh Start Accounting, continued
believes that it will be successful at negotiating favorable settlements on
these disputed claims. Any adjustments to the estimated value of such claims
subsequent to the Effective Date will be recorded in income or loss from
continuing operations in the period in which the claim is settled. The
Company's allocation of reorganization value inherent in fresh start accounting
as presented in these consolidated financial statements has been made in
accordance with the provisions of SFAS No. 141.
The effect of the Plan and fresh start accounting on the Company's December
31, 2001 balance sheet is as follows (in thousands):
Reorganization
and Fresh Start
Predecessor Adjustments Successor
----------- --------------- ---------
Current assets:
Cash and cash equivalents......................................... $ 852 $ 4,998(a,c) $ 5,850
Accounts receivable, net.......................................... 45 -- 45
Prepaid expenses.................................................. 179 -- 179
Assets held for sale.............................................. 743 -- 743
--------- --------- -------
Total current assets.................................................. 1,819 4,998 6,817
Property and equipment, net........................................... 468 -- 468
FCC licenses.......................................................... 357,223 (310,835)(e) 46,388
Other assets.......................................................... 21 -- 21
--------- --------- -------
Total assets........................................................ $ 359,531 $(305,837) $53,694
========= ========= =======
Current liabilities:
Accounts payable.................................................. $ 20,512 $ (20,055)(a) $ 457
Accrued compensation and benefits................................. 238 -- 238
Accrued taxes other than income................................... 350 -- 350
Other accrued liabilities......................................... 1,177 -- 1,177
Vendor financing facility borrowings.............................. 11,274 (11,274)(a) --
Old senior notes and accrued interest............................. 138,423 (138,423)(a) --
--------- --------- -------
Total current liabilities............................................. 171,974 (169,752) 2,222
New senior secured notes, net of discount............................. -- 6,883(c) 6,883
Other non-current liabilities......................................... 3,777 -- 3,777
Deferred income tax liabilities....................................... 48,528 (48,528)(e) --
--------- --------- -------
Total liabilities .................................................... 224,279 (211,397) 12,882
--------- --------- -------
Old redeemable preferred stock........................................ 243,536 (243,536)(a) --
--------- --------- -------
Stockholders' equity (deficit):
Old common stock.................................................. 331,653 (331,653)(d) --
New common stock.................................................. -- 40,812(a,c) 40,812
Accumulated deficit............................................... (439,937) 128,891(b) --
573,299(d)
(262,253)(e)
--------- --------- -------
Total stockholders' equity (deficit).................................. (108,284) 149,096 40,812
--------- --------- -------
Total liabilities, redeemable preferred stock and stockholders' equity $ 359,531 $(305,837) $53,694
========= ========= =======
The following summarizes adjustments required to record the reorganization
and the issuance of various securities in connection with implementation of the
Plan:
(a) To record the discharge of Predecessor claims and preferred interest and
issuance of New Common Stock in accordance with the Plan:
. $11,274,000 of Secured Vendor Financing Claims received cash of
$5,975,000.
. Unsecured claims, including Old Notes, received 19 million shares of New
Common Stock.
35
Note 4--Fresh Start Accounting, continued
. 3,137,500 shares of Old Preferred Stock received 1 million shares of New
Common Stock.
(b) To record the extraordinary gain on early extinguishment of debt of
$128,891,000. This represents the difference between the claims
extinguished on the Effective Date and the fair value of cash and New
Common Stock distributed under the Plan to satisfy these claims.
(c) To record the receipt of $10,975,000 cash and the issuance of New Senior
Notes and New Class A Warrants.
(d) To eliminate the Predecessor stockholders' equity and accumulated deficit.
(e) To record revaluation of assets and liabilities to fair value.
Note 5--FCC Licenses
The Company acquired its spectrum portfolio from 1996 to 2000 through
purchase transactions and participation in the FCC auction process.
Bachow - In August 2000, the Predecessor acquired 39 GHz licenses from
Bachow Communications Incorporated in exchange for 2.1 million shares of Old
Common Stock and payment of certain seller transaction costs of $2.0 million.
The total acquisition cost recorded for these licenses was approximately $26.5
million, comprised of the fair value of Old Common Stock issued of
approximately $19.5 million, direct costs of $2.1 million and related net
deferred tax liabilities of $4.9 million (such deferred tax liabilities being
recorded as a result of the carry-over of the relatively low tax basis in
assets acquired in this non-taxable transaction).
BroadStream - In August 2000, the Predecessor acquired certain 39 GHz
licenses from BroadStream Communications Corporation and its affiliates (the
"Seller") in exchange for 7.6 million shares of Old Common Stock. The total
acquisition cost recorded for these licenses was $89.2 million, comprised of
the fair value of Old Common Stock issued of approximately $72.0 million,
direct costs of $800,000 and related net deferred tax liabilities of $16.4
million (such deferred tax liabilities being recorded as a result of the
carry-over of the relatively low tax basis in assets acquired in this
non-taxable transaction). The Company believes that the remaining licenses
owned by the Seller were renewed by the FCC in 2001. Pursuant to a purchase
agreement between the Predecessor and the Seller, the Company obtained a right
to acquire, and the Seller obtained a right to require the Company to acquire
such additional licenses for Old Common Stock (the "Purchase Agreement"). The
Company also entered into an agreement to make available to the Seller, bridge
loans of up to $30 million, pursuant to which the Company loaned $13.0 million
in 2000. The notes receivable bear interest at 10% per annum, are
collateralized by a pledge of 3.9 million shares of Old Common Stock acquired
by Seller in the license acquisition transaction and by the personal guarantee
of an affiliate of the Seller. The notes were due in November 2000 and the
Seller defaulted on repayment. Upon the Seller's default on repayment of the
notes receivable, the Company was no longer obligated to issue an additional
416,667 shares of its Old Common Stock as the final payment for licenses
acquired in August 2000. In December 2000, the Seller made a voluntary filing
for relief under Chapter 11 of the Bankruptcy Code. During the year ended
December 31, 2000, the Company recorded a provision for loan loss of $9.3
million that is included in general and administrative expense. An additional
provision for loan loss of $3.9 million was recorded in 2001 as a result in the
decrease in value of the collateral securing this note. The Company cannot
predict what effect the Company's reorganization and the Seller's Chapter 11
filing, in which it has rejected the Purchase Agreement, will have on each
party's respective rights under the Purchase Agreement.
Auction - In 2000 the Company acquired certain 39 GHz licenses from the FCC
for $77.0 million cash.
Other - In 1999, the Company consummated acquisitions of certain 39 GHz
licenses for $4.3 million in cash and certain other licenses for 154,114 shares
of Old Common Stock, valued at $848,000.
Fresh Start Accounting - As a result of its emergence from bankruptcy and
its application of fresh start accounting, the Company reduced the carrying
value of its FCC licenses by $310.8 million to a fair value of $46.4 million.
36
Note 6--Property and Equipment
Components of property and equipment at December 31 were as follows (in
thousands):
Successor Predecessor
2001 2000
--------- -----------
Network assets in service...................... $100 $ 34,206
Network components and construction in progress 284 13,445
Computer systems............................... 25 13,125
Furniture and equipment........................ 59 3,851
---- --------
Total property and equipment.................. 468 64,627
Accumulated depreciation....................... (--) (22,345)
---- --------
Property and equipment, net................... $468 $ 42,282
==== ========
Depreciation expense approximated $5.9 million, $9.7 million and $9.5
million during fiscal 2001, 2000 and 1999, respectively.
During 2001, the Company recorded a non-cash charge for equipment impairment
of $42.6 million related to the write-down to estimated fair value less costs
to sell of substantially all of its property and equipment since the
Predecessor's operations had been substantially closed down and networks
dismantled. These assets were transferred from property and equipment to assets
held for sale. During 2001, certain of these assets were sold. As of December
31, 2001, none of the assets reported as assets held for sale are in service
and the Company is in the process of actively marketing these assets for sale.
During 1999, the Company recorded non-cash charges for asset impairment of
$6.4 million related to the write-down to estimated fair value less costs to
sell of certain radio equipment, which was of a technology no longer included
as part of the Company's then current or future network technology, and such
assets were sold or otherwise disposed. Proceeds from the sale of such
equipment approximated $2.0 million during 1999. Additionally, in 1999, the
Company recorded a provision for equipment impairment of $13.6 million related
to the write-down of assets pertaining to the Company's Asynchronous Transfer
Mode ("ATM") technology networks, which the Company deployed in 1998 and 1999
in Seattle, Portland and Phoenix. In 1999, as a result of a change in the
Company's business model, the Company determined that it would no longer sell
or support ATM networks. Removal of equipment is typically routine and does not
require significant time or expense. Costs and expenses of removing equipment
were estimated to not exceed amounts recoverable upon disposition. Accordingly,
an impairment loss was recorded for the remaining net book value of these ATM
networks. At December 31, 2000, these ATM networks were no longer in service.
Note 7--Other Non-current Liabilities
Other non-current liabilities represent pre-petition amounts due to various
state and local governments for sales and use and personal property taxes.
These amounts are expected to be paid in periods from 2003 to 2006.
37
Note 8--Income Taxes
A reconciliation of the Company's effective tax rate as a percentage of loss
before income tax benefit and federal statutory rate for the years ended
December 31, is summarized as follows:
Predecessor
---------------------
2001 2000 1999
----- ----- -----
Federal statutory rate.................. 35.0% 35.0% 35.0%
Non-deductible interest................. (2.6%) (0.8%) (0.5%)
State income tax, net of federal benefit 2.0% 2.0% 2.0%
Other................................... (0.4%) (0.2%) (0.4%)
Valuation allowance..................... (18.0%) (33.0%) (33.9%)
----- ----- -----
Effective income tax rate............... 16.0% 3.0% 2.2%
===== ===== =====
Deferred tax assets and liabilities at December 31 were as follows (in
thousands):
Successor Predecessor
2001 2000
Deferred tax assets:
Net operating loss carryforwards................. $ 69,746 $ 89,374
FCC license amortization......................... 14,701 --
Equipment depreciation and impairment............ 13,665 927
Accrued liabilities.............................. 7,076 2,654
--------- ---------
Total deferred tax assets........................ 105,188 92,955
Valuation allowance.............................. (105,188) (40,697)
--------- ---------
Net deferred tax assets.......................... -- 52,258
Deferred tax liabilities relating to FCC licenses -- (100,786)
--------- ---------
Net deferred tax liabilities..................... $ -- $ (48,528)
========= =========
Deferred tax assets have been reduced by a valuation allowance based on
management's determination that the recognition criteria for realization has
not been met. In 2001, the Company increased its deferred tax asset valuation
allowance by approximately $64.5 million.
In connection with the reorganization, the Predecessor realized a gain from
the extinguishment of certain indebtedness. This gain will not be taxable since
the gain resulted from the reorganization under the Bankruptcy Code. However,
the Successor will be required, as of the beginning of its 2002 taxable year,
to reduce certain of its tax attributes including (a) net operating loss
carryforwards ("NOLs"), (b) certain tax credits and (c) tax bases in assets in
an amount equal to such gain on extinguishment. The reorganization of the
Company on the Effective Date constituted an ownership change under Section 382
of the Internal Revenue Code and the use of any of the Company's NOLs and tax
credits generated prior to the ownership change, that are not reduced pursuant
to the provisions discussed above, may be subject to an overall annual
limitation.
At December 31, 2001, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $189 million (after reductions
discussed above), which expire in various amounts between 2008 and 2021. The
Company's tax basis in its assets is approximately $130.0 million at December
31, 2001.
Note 9--New Senior Notes, Old Senior Notes and Vendor Financing Facility
Borrowings
New Senior Notes - On the Effective Date the Successor issued $11.0 million
of New Senior Notes, with 4 million New Class A Warrants pursuant to terms of
the New Senior Notes and Class A Warrant Purchase Agreement. The New Senior
Notes are due December 20, 2006, or earlier upon change of control, and bear
interest at the rate of 9% per annum. Interest on the New Senior Notes is
payable quarterly through the issuance
38
Note 9--New Senior Notes, Old Senior Notes and Vendor Financing Facility
Borrowings, continued
New Senior Notes, continued - of additional New Senior Notes. If an event of
default has occurred and is continuing, interest is payable in cash. The New
Senior Notes are collateralized by all of the assets of the Company and its
subsidiaries.
The Company recorded the issuance of New Senior Notes and New Class A
Warrants by allocating proceeds of $11.0 million to New Senior Notes and New
Class A Warrants based on their estimated relative fair values at the issuance
date, resulting in $4.1 million assigned to New Class A Warrants and $6.9
million to New Senior Notes. The value ascribed to the New Class A Warrants was
recorded as debt discount and an increase in additional paid-in capital of the
Successor. Amortization of debt discount will be determined utilizing the
effective interest rate method and included as a component of interest expense
in future periods.
The New Senior Notes are subject to terms and conditions of the New Senior
Secured Note and Class A Warrant Purchase Agreement which, among other things,
contains covenants limiting the Successor's ability to incur additional debt,
pay dividends or make other distributions, incur liens, merge or sell assets,
or enter into certain transactions with related parties. At December 31, 2001,
no amounts are available for payment of dividends and these restrictive
covenants prohibit dividends and distributions.
Old Notes - In 1997, the Predecessor received $135.0 million of gross
proceeds from a public offering of 14% Senior Notes (the "Old Notes") and
warrants to purchase an aggregate of 2.7 million shares of Old Common Stock at
an exercise price of $0.01 per share. Approximately $51.0 million of such
proceeds were used to purchase a portfolio of U.S. Treasury securities that
provided for interest payments on the Old Notes through February 2000. The
aggregate value ascribed to the warrants of approximately $29.7 million, was
recorded as debt discount and an increase in additional paid-in capital. Debt
discount amortization was determined utilizing the effective interest rate
method and included as a component of interest expense. In 1999, the Company,
with the consent of holders of Old Notes, amended certain covenants of the Old
Senior Notes indenture to provide the Company with greater flexibility to
implement its business plan. Consent fees paid to holders of Old Senior Notes
of approximately $4 million and other financing costs associated with obtaining
consents of $453,000 were deferred and charged to interest expense using the
effective interest rate method over the debt term.
Old Notes, due February 2007, were unsecured senior obligations of the
Predecessor with interest payable on February 15 and August 15 of each year and
were redeemable at the Company's option beginning in February 2002 at
redemption prices declining to par. Old Notes were issued under an indenture
which, among other things, contained covenants limiting the Company's ability
to incur additional debt, pay dividends or make other distributions, incur
liens, merge or sell assets, or enter into certain transactions with related
parties. At December 31, 2000, no amounts were available for payment of
dividends and these restrictive covenants prohibit dividends and distributions.
The Company was in compliance with all Old Notes covenants at December 31, 2000.
As described in Note 3, on the Effective Date of emerging from bankruptcy,
holders of Old Notes received shares of New Common Stock in full satisfaction
of claims, and the Old Notes were cancelled.
Purchase and Financing Agreement with Cisco - In November 1999, the
Predecessor entered into a purchase agreement, with no minimum purchase
obligation, with Cisco Systems Inc. ("Cisco"). During 2000, the Predecessor
entered into a credit agreement with Cisco Systems Capital Corporation, an
affiliate of Cisco, for multi-year vendor financing to be used to fund the
Company's purchases of Cisco networking hardware and other costs associated
with the network installation and integration of such hardware. Funding under
the facility was available in tranches, $14 million being immediately
available, $36.0 million available upon build-out of certain markets and the
remaining $125.0 million becoming available upon completion of additional
market build-outs or closing of additional financing facilities, as defined.
Borrowings under the facility bore interest at LIBOR plus 4.25% per annum
(10.9% at December 31, 2000), payable quarterly, and were collateralized by the
Predecessor's pledge of substantially all of its assets. The Predecessor
commenced borrowing under the facility
39
Note 9--New Senior Notes, Old Senior Notes and Vendor Financing Facility
Borrowings, continued
Purchase and Financing Agreement with Cisco, continued - in June 2000, and
during that year average borrowings and weighted average interest rate were
$7.2 million and 11%, respectively. Principal payments on facility borrowings
were due in installments beginning in 2002. Terms of the credit agreement,
among other things, included requirements for the Predecessor to meet certain
operational and financial targets, maintain certain levels of financial ratios,
to limit distributions, dividends, redemptions or other acquisitions of the
Company's capital stock, to limit the amount of additional indebtedness and
provided for mandatory principal prepayments under certain circumstances. The
Predecessor was not in compliance with certain of the financial covenants in
the Cisco credit agreement at December 31, 2000 and subsequent thereto, and no
additional draws on the credit facility were available.
Borrowings outstanding at December 31, 2000 totaled $10.6 million. As a
result of the Predecessor's non-compliance with financial covenants at December
31, 2000, the borrowings have been presented as a current liability in the
accompanying December 31, 2000 consolidated balance sheet.
Purchase Money and Working Capital Facilities with Lucent - In 1998, the
Predecessor and Lucent Technologies Inc. ("Lucent") entered into a purchase
money credit facility (the "Purchase Money Facility") setting forth terms and
conditions under which Lucent would provide financing in an aggregate amount of
up to $200 million, to be used to finance the purchase of the Company's data
network from Lucent. Additionally, the Company and Lucent entered into a credit
facility (the "Working Capital Facility") for Lucent to provide the Predecessor
with up to $25.0 million of unsecured revolving loans for working capital
purposes. Interest initially accrued on facility borrowings at an annual rate
of LIBOR plus 5% and increased 0.5% each month beginning January 1999. During
1998, the Company borrowed $10.0 million under the Purchase Money Facility and
$17.5 million under the Working Capital Facility, and during 1999 borrowed the
remaining Working Capital Facility funds available. Principal payments on the
Purchase Money Facility borrowings were due in installments beginning in 2003.
In September 1999, the Company repaid all of the borrowings under both
facilities and the facilities terminated.
Under terms of the Working Capital Facility, the Predecessor issued warrants
to purchase its common stock, at an exercise price of $3.33 per share, each
time a borrowing was made. In connection with 1999 borrowings, the Company
issued warrants to purchase 192,000 shares, and the value ascribed to these
warrants approximated $1.2 million was recorded as debt discount and an
increase in additional paid-in capital.
Interest - In accordance with SOP 90-7, as of the Petition Date, the
Predecessor discontinued the accrual of interest related to liabilities subject
to compromise. If such interest had continued to be accrued, based on
contractual terms without increase for default provisions, interest expense for
the year ended December 31, 2001 would have increased $13.7 million.
Note 10--Capital Stock
New Common Stock - The Successor issued 20 million shares of New Common
Stock to unsecured creditors and holders of Old Preferred Stock.
New Class A Warrants - In connection with issuance of New Senior Notes, the
Successor issued 4 million New Class A Warrants. Each warrant entitles the
holder to purchase one share of New Common stock at a price of $0.01 per share
for a period of five years from the Effective Date.
Successor Stock Option Plan -The Successor's Stock Option Plan provides for
the grant of incentive and non-qualified options to purchase up to 1.2 million
shares of New Common Stock to directors, officers and employees. At December
31, 2001, there were no options granted under the Stock Option Plan. In January
2002, the Successor's Board of Directors granted options to acquire 940,000
shares of New Common Stock. The options granted vest ratably over five years,
are exercisable for a ten-year term, and have an exercise price of $3.96 per
share.
40
Note 10--Capital Stock, continued
Old Preferred Stock - The Predecessor was authorized to issue 10.0 million
shares of $0.001 par value serial preferred stock. Each series of preferred
stock issued was a separate class and, as a class, had a liquidation preference
equal to the aggregate purchase price paid for such class. As described in Note
3, on the Effective Date, holders of Old Preferred Stock received shares of New
Common Stock in full satisfaction of claims, and the Old Preferred Stock was
cancelled.
In September 1999, pursuant to terms of a stock purchase agreement entered
into with a group of investors, the Predecessor sold 2,234,607 shares of Series
A convertible preferred stock and 902,893 shares of Series B convertible
preferred stock, each at $80 per share, to the investors in exchange for an
aggregate of $251.0 million (the "Investment"). At the closing of the
investment, the Company designated 3,250,000 shares of Series A Preferred Stock
and 902,893 shares of Series B Preferred Stock. The Series B Preferred Stock
did not vote. In 2000, all of the Series B Preferred Stock converted into
Series A Preferred Stock in accordance with its terms. Except for voting,
shares of Series A Preferred Stock and Series B Preferred Stock were identical
and entitled holders thereof to the same rights and privileges.
Series A Preferred Stock shares voted on an as-converted basis with Old
Common Stock and represented approximately 45% of the Predecessor's outstanding
common stock. Holders of the Series A Preferred Stock could convert Series A
shares at any time into ten shares of Old Common Stock. The conversion ratio
would have increased or decreased as a result of stock splits, dividends and
similar events. Series A Preferred Stock automatically converted into Old
Common Stock under certain circumstances. The holders of Series A Preferred
Stock were entitled to an initial liquidation preference of $80 per share,
subject to adjustments, plus any declared and unpaid dividends. Upon
liquidation, after payment of the initial $80 preference amount, the Series A
Preferred Stock was also to have participated on a pro rata basis with Old
Common Stock until each share of Series A Preferred Stock had received a total
liquidation amount of $160. The Predecessor could not pay any cash dividend on
Old Common Stock unless in that year a cash dividend of $80 per share on the
Series A Preferred Stock had been paid. The total preference in liquidation for
Series A Preferred Stock was $251 million.
Shares of Series A Preferred Stock were subject to mandatory redemption
requirements under certain limited circumstances as defined in the certificate
of designation, preferences and rights of preferred stock. Those circumstances
included a consolidation, merger, or sale of all or substantially all of the
assets of the Predecessor in which the stockholders of the Predecessor
immediately prior to such consolidation, merger, or sale did not own, directly,
or indirectly, a majority of the outstanding voting power of the surviving
corporation or acquiring entity, as the case may be, immediately after such
merger or sale, and the holders of a majority of the then-outstanding shares of
Series A Preferred Stock elect not to treat any of the foregoing events as a
liquidation, dissolution or winding up by giving written notice thereof to the
Company. If such holders did not exercise their right to treat a consolidation,
merger or sale as a non-liquidating event, the holders of preferred stock would
have been entitled to receive out of the consideration paid in such conveyance
the amount payable to such holders in a manner similar to that for a
liquidation. Due to the mandatory redemption feature, Predecessor preferred
stock was classified outside of stockholders' equity on the accompanying
consolidated balance sheet.
The investors included U.S. Telesource, Inc., a subsidiary of Qwest
Communications International Inc. ("Qwest"), investment funds led by Oak
Investment Partners ("Oak"), and investment funds of two of the Predecessor's
then existing major stockholders. The investors entered into a stockholders
agreement to which the Predecessor was not a party. In the event the
Predecessor raised capital through the issuance of equity securities (other
than public and certain other offerings), the Predecessor agreed to let
investors participate in the purchase of such securities in proportion to their
stock holdings. The Predecessor also entered into registration rights and
standstill agreements with the investors.
Costs incurred in connection with the investment, including investment
advisory, legal, regulatory filing and other fees, approximated $7.5 million
and were recorded as a reduction of amounts assigned to preferred stock. The
Predecessor recorded the issuance of Series A and B preferred stock by
allocating net proceeds of
41
Note 10--Capital Stock, continued
Old Preferred Stock, continued - approximately $243.5 million to Series A and B
shares based on their estimated relative fair values at the date of the Stock
Purchase Agreement, resulting in $192.7 million assigned to Series A shares and
$50.8 million assigned to Series B shares. Based on the closing price of
Predecessor Old Common Stock on the date of stockholder approval of the
Investment, the estimated fair value of Series A Preferred Stock on an
as-converted to common stock basis exceeded the amount assigned to the Series A
shares by approximately $108.9 million. The Predecessor recorded the $108.9
million excess, representing the estimated fair value of the beneficial
conversion feature, as an increase in additional paid-in-capital and a decrease
in Series A Preferred Stock. The beneficial conversion feature is recognized as
a deemed dividend to the preferred stock over the minimum period in which
preferred stockholders realize their return. Because Series A shares are
immediately convertible, the estimated fair value of the Series A beneficial
conversion feature was realizable upon closing of the Investment. Accordingly,
a $108.9 million deemed dividend as of the closing of the Investment was
recognized as a charge to additional paid-in capital and, for loss per share
computations, net loss applicable to common stockholders, and an increase in
the carrying value of Series A Preferred Stock.
The remaining balance of the beneficial conversion feature of approximately
$50.8 million, which was not realizable until and unless Series B shares were
converted, was not recognized at closing and was recognized upon conversion.
Series B Preferred Stock automatically converted on a 1-for-1 basis into Series
A Preferred Stock whenever the total voting shares of the investors would
otherwise have been less than 45% (as defined) of the Predecessor's outstanding
voting stock. As a result of the automatic conversion of approximately 849,000
shares and 54,000 shares of Series B into Series A, during the years ended
December 31, 2000 and 1999, respectively, the Predecessor recognized an
additional $47.7 million and $3.0 million of deemed dividends. During the year
ended December 31, 2000, all remaining Series B shares were converted into
shares of Series A and, accordingly, no additional deemed dividends relating to
such stock would be recorded in future periods.
Warrants to Purchase Old Common Stock - In connection with financing
activities, the Predecessor issued warrants to purchase shares of Old Common
Stock. Certain of such warrants contained anti-dilution provisions. As
described in Note 3, on the Effective Date, the holders of warrants to purchase
Old Common Stock did not receive any distributions under the Plan and the
warrants were cancelled. A summary of Old Common Stock shares issuable pursuant
to such warrants follows (shares in thousands):
Exercise Price Warrant
Shares per Share Expiration
------ -------------- ----------
Balance at January 1, 1999.. 2,263 $0.01-$17.19 2001-2008
Warrants issued............. 192 $3.33 2008
Warrants exercised.......... (610) $0.01
------
Balance at December 31, 1999 1,845 $0.01-$17.19 2001-2008
Warrants issued............. 20 $3.50 2004
Warrants exercised.......... (439) $0.01
------
Balance at December 31, 2000 1,426 $0.01-$17.19 2001-2008
Warrants cancelled.......... (1,426) $0.01-$17.19
------
Balance at December 31, 2001 --
======
Predecessor Stock Compensation - Pursuant to the Predecessor's Restated
Equity Incentive Plan (the "Predecessor Plan"), the Predecessor could grant
incentive and non-qualified options and other equity incentives with respect to
up to 8.0 million shares of Old Common Stock to employees and certain other
persons or entities. Pursuant to the 1997 Equity Incentive Plan for
Non-Employee Directors, non-employee directors were provided annual stock
option grants and could annually elect to take fees in Old Common Stock to be
issued covering options and fees up to an aggregate of 500,000 shares. In
addition, the Predecessor's Board of Directors also authorized the Predecessor
to grant non-qualified options outside the Predecessor Plan. At December 31,
2000, there had been 750,000 non-plan options authorized and granted.
42
Note 10--Capital Stock, continued
Predecessor Stock Compensation, continued - During 1997, the Company
cancelled and reissued certain stock options previously granted to employees
under the Predecessor Plan to have exercise prices equal to the then current
fair market value of $7.88 per share of Old Common Stock. During 1998, the
Predecessor authorized the cancellation and reissuance, at the election of the
recipients, of certain other stock options previously granted to employees
under the Predecessor Plan. Approximately 2.1 million stock options were
cancelled and reissued, of which, 50% were issued with an exercise price equal
to the then current market value of $2.19 per share of Old Common Stock. The
exercise price of the remaining stock options was to be established upon
occurrence of certain future events at the then current market value. During
1999, exercise prices of the remaining options were established at the then
current fair market value of $8.50 per share of Old Common Stock. These
remaining stock options with an $8.50 exercise price are accounted for as
variable options prospectively from July 1, 2000, the effective date of FASB
Interpretation No. 44.
As described in Note 3, on the Effective Date, the holders of options to
purchase Old Common Stock did not receive any distributions under the Plan and
the options were cancelled. A summary of Predecessor stock option activity
follows (shares in thousands):
Weighted Average
Shares Exercise Price
------ ----------------
Options outstanding, January 1, 1999.. 3,006 $ 6.15
Options granted.................... 1,508 8.93
Options exercised.................. (255) 5.42
Options cancelled.................. (209) 7.20
------
Options outstanding, December 31, 1999 4,050 7.16
Options granted.................... 4,588 12.89
Options exercised.................. (1,194) 6.80
Options cancelled.................. (272) 23.55
------
Options outstanding, December 31, 2000 7,172 11.04
Options cancelled.................. (7,172)
------
Options outstanding, December 31, 2001 --
======
The Predecessor adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). Assumptions utilized in estimating fair values for such disclosures
were (i) use of the Black-Scholes option pricing model, (ii) risk-free interest
rates ranging from 4.6% to 6.2%, (iii) expected volatility rates ranging from
60% to 118%, (iv) assumed expected lives of 3 to 5 years, and (v) no expected
dividends. The weighted average fair value of options granted during the years
ended December 31, 2000 and 1999 were $9.88 and $6.23, respectively. Had the
Company elected to recognize compensation costs as provided for by SFAS No.
123, the net loss and per share amounts available for common stockholders on a
pro forma basis would have been as follows for fiscal years 2001, 2000 and 1999
(in thousands, except per share data):
2001 2000 1999
--------- --------- ---------
Pro forma net loss available for common
stockholders................................... $(260,722) $(135,358) $(220,086)
Pro forma basic and diluted net loss per share... $ (6.61) $ (4.15) $ (8.07)
During 1997, the Predecessor entered into an employment agreement with its
then chief executive officer providing for, among other things, issuance of
100,000 shares of Old Common Stock deliverable in 2001, resulting in a non-cash
compensation charge of $887,500 in 1997 in exchange for a recourse note
receivable of $887,500 due 2001, with interest at the minimum applicable
federal rate. The note receivable was repaid in full in January 2000. During
1998, the Predecessor entered into agreements with two of its officers to issue
an
43
Note 10--Capital Stock, continued
Predecessor Stock Compensation, continued - aggregate of 85,000 shares of Old
Common Stock deliverable in 2001. Pursuant to terms of employment and change of
control agreements and in connection with the resignations of these three
executive officers, shares deliverable in 2001 were issued and delivered in
1999.
Note 11--401(k) Plan
In 1999, the Company established a 401(k) Plan administered by a third
party. In 2001 and 2000, the Company matched employee contributions with
126,180 and 33,000 shares, respectively, of Old Common Stock. Substantially all
of the 401(k) Plan assets were distributed to participants in 2001.
Note 12--Related Party Transactions
Holders of approximately 57% of the New Common Stock own approximately 93%
of the outstanding New Senior Notes and New Class A Warrants. Representatives
from two entities holding approximately 43% of the New Common Stock serve on
the Company's Board of Directors.
During 1999, the Predecessor entered into a private line agreement, a
co-location agreement, a broadband services agreement and a coordinated
marketing agreement with Qwest, which beneficially owned greater than five
percent of the Predecessor's outstanding voting stock. These agreements
provided the basic framework around how Qwest and the Company could purchase
each other's services, co-locate equipment and jointly market products, where
desirable. These agreements were cancelled when the Company sought protection
under Chapter 11 of the Bankruptcy Code. There were no significant transactions
pursuant to these agreements between the Predecessor and Qwest. The Predecessor
purchased telecommunications services from Qwest of $168,000 and $713,000
during 2001 and 2000, respectively.
The Predecessor purchased certain equipment and services from two companies,
both of which were beneficially owned more than 10% by Oak, which beneficially
owned greater than five percent of the Predecessor's outstanding voting stock.
The Predecessor purchased network equipment from one of the companies of $0.5
million, $9.0 million and $2.0 million during fiscal 2001, 2000 and 1999,
respectively, and purchased network deployment services from the other company
of $4.0 million, $3.2 million and $2.5 million during 2001, 2000 and 1999,
respectively. Amounts due these related parties at December 31, 2000 are
separately presented on the accompanying consolidated balance sheet.
Note 13--Commitments and Contingencies
Leases - The Successor has entered into operating leases, expiring between
2002 and 2005, for office and warehouse space and antenna sites. Future minimum
payments under non-cancelable operating leases are as follows (in thousands):
Amount due
Year ending 12/31 ----------
2002....... $64
2003....... 7
2004....... 4
2005....... 3
---
Total...... $78
===
Prior to the Effective date, the Predecessor had entered into operating
leases for office space and antenna sites which were rejected in the bankruptcy
proceedings. Rent expense approximated $3.0 million, $6.4 million and $4.2
million for fiscal 2001, 2000 and 1999, respectively.
44
Note 13--Commitments and Contingencies, continued
Contingencies - The Company is subject to certain claims and assessments and
makes routine filings with the FCC and state regulatory authorities. Management
believes that resolution of any such claims or matters arising from such
filings, if any, will not have a material adverse impact on the Company's
consolidated financial position.
In the normal course of business, the Company has various legal claims and
other contingent matters outstanding. On October 31, 2001, the Company filed
suit against Commco Partners, LLC ("Commco") and Scott Reardon (together, the
"Defendants") in the United States Bankruptcy Court for the District of
Delaware alleging breach of contract for non-payment of a $13.0 million bridge
loan entered into in connection with the Company's acquisition of 39 GHz
licenses from BroadStream Communications Corporation as described in Note 5. On
February 19, 2002, the Defendants served the Company with a counterclaim that
asserts breach of contract under the contract for the purchase of the licenses
and the realization of substantial damages due to the Company's failure to
register Old Common Stock held by the Defendants. As a result of a settlement
agreement between the Company and the Defendants reached in connection with the
Company's bankruptcy proceedings, any recovery by the Defendants on their
counterclaim is restricted to reducing or eliminating any claim, demand or
cause of action of the Company against the Defendants, and is limited in amount
to the total of any recovery by the Company on its claims, demands or causes of
actions against the Defendants. The pursuit of this litigation may result in a
diversion of management and other resources. Management believes that any
ultimate liability arising from these actions would not have a material adverse
effect on the company's financial condition or liquidity.
Employment Agreements - The Predecessor entered into various employment
agreements, as amended, with certain executives that provided for, among other
things, annual base salaries and bonuses based on achievement of specific
performance goals. Additionally, the Predecessor had entered into change of
control agreements, as amended, with certain executives that under certain
circumstances provided for cash payments and immediate vesting of any stock,
stock option or other awards granted to such executive. The September 1999
preferred stock investment qualified as a change of control event under the
change of control agreements, then in effect, entitling certain executives to
various benefits if they were terminated or resign with good reason within 24
months of the event. During 1999, pursuant to terms of these employment
agreements, change of control agreements and equity incentive plans, the
Company recorded severance expense of approximately $4.5 million relating to
resignations of several senior executive officers, including the retirement of
its then chairman and chief executive officer, and approximately 1.9 million
stock options or stock awards of Old Common Stock were immediately vested.
Note 14--Fair Values of Financial Instruments
Carrying amounts and estimated fair values of financial instruments were as
follows at December 31 (in thousands):
Successor Predecessor
2001 2000
------------------------ ------------------------
Carrying Amt. Fair Value Carrying Amt. Fair Value
------------- ---------- ------------- ----------
Cash and cash equivalents $5,850 $ 5,850 $ 32,314 $32,314
Short-term investments... -- -- 1,293 1,293
Vendor financing facility
borrowings............. -- -- 10,568 10,568
Old Senior Notes......... -- -- 110,669 56,025
New Senior Notes......... 6,883 10,975 -- --
Carrying amounts reported in the consolidated balance sheets for cash, cash
equivalents and short-term investments approximate fair values. Fair values of
Old Senior Notes are based on published market values. Fair values of vendor
financing and New Senior Notes are based on interest rates available for
issuance of similar debt with similar terms and maturities.
45
Note 15--Quarterly Financial Data (unaudited)
Predecessor selected unaudited quarterly financial information is summarized
as follows (in thousands, except per share data):
Predecessor
----------------------------------------------------
Quarter Ended
----------------------------------------- Year Ended
3/31/01(1) 6/30/01(2) 9/30/01 12/31/01(3) 12/31/01
---------- ---------- ------- ----------- ----------
Revenues................................... $ 248 $ 184 $ 119 $ 78 $ 629
Loss from operations....................... (22,343) (48,824) (4,942) (3,738) (79,847)
Loss before extraordinary item............. (27,637) (54,124) (6,855) (297,352) (385,968)
Net loss................................... (27,637) (54,124) (6,855) (168,461) (257,077)
Basic and diluted net loss per common share (0.70) (1.37) (0.17) (4.28) (6.52)
Predecessor
---------------------------------------------------
Quarter Ended
---------------------------------------- Year Ended
3/31/00 6/30/00 9/30/00 12/31/00(4) 12/31/00
-------- -------- -------- ----------- ----------
Revenues....................................... $ 398 $ 363 $ 243 $ 237 $ 1,241
Loss from operations........................... (13,373) (14,729) (14,199) (23,611) (65,912)
Net loss....................................... (14,825) (17,183) (16,332) (28,432) (76,772)
Basic and diluted net loss per common share (5) (0.68) (0.67) (1.71) (0.75) (3.82)
(1) Net loss for the quarter includes a $3.9 million expense for writing a note
receivable down to the value of the underlying collateral.
(2) Net loss for the quarter includes $41.3 million expense to write network
and other equipment down to fair value less estimated costs to sell.
Additional equipment impairments of $1.2 million and $150,000 are included
in the quarters ended 9/30/01 and 12/31/01, respectively.
(3) Net loss for the quarter reflects the following:
. Extraordinary gain of $128.9 million from the early extinguishments of
debt;
. Expense of $310.8 million for the revaluation of assets and liabilities
to fair value as a result of the reorganization; and,
. Expense of $30.0 million for write-off of original issue discount and
deferred financing costs related to long-tem debt as a result of the
reorganization.
(4) Net loss for the quarter includes a $9.3 million expense for writing a note
receivable down to the value of the underlying collateral.
(5) Includes $0.16, $0.08 and $1.22 loss per share during the quarters ended
March 31, June 30 and September 30, 2000, respectively, relating to deemed
preferred dividends.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to our directors is incorporated herein by reference to
the information included under "Election of Directors" and "Certain
Transactions" in our definitive Proxy Statement to be filed with the Commission
in connection with our 2002 Annual Meeting of Stockholders (the "Proxy
Statement").
46
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under "Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under "Common Stock Ownership" in the Proxy
Statement is incorporated herein by reference.
For the sole purpose of calculating the aggregate market value of voting
stock held by our non-affiliates as set forth on the cover page, we assumed
that only directors, executive officers and greater than five percent
stockholders as of the calculation date constituted affiliates; no
acknowledgment by such persons of affiliate status is implied.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Report of Independent Accountants (Post - Emergence)
Report of Independent Accountants (Pre - Emergence)
Consolidated Balance Sheets as of December 31, 2001 and 2000.
Consolidated Statements of Operations for the years ended December 31, 2001,
2000 and 1999.
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the
years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999.
(2) Financial Statement Schedules:
The Company's management has determined that the presentation of schedules
related to reserves is not required since such reserves and activity therein
is immaterial.
47
(3) Exhibits
The following Exhibits are, as indicated on the Exhibit Index, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission and are referred to and incorporated herein by reference to such
filings.
Exhibit
No. Title
- ------- -----
2.1.* Findings of Fact and Conclusions of Law Relating to, and Order under 11 U.S.C. Sections 1129(a)
and (b) Confirming, the Debtors' and Official Committee of Unsecured Creditors' Joint Plan of
Reorganization of Advanced Radio Telecom Corp., et al. under Chapter 11 of the Bankruptcy
Code dated October 31, 2001.
2.2.* Debtors' and Official Committee of Unsecured Creditors' Joint Plan of Reorganization under
Chapter 11 of the Bankruptcy Code dated September 20, 2001
2.3.* Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code in Respect of the Debtors'
and Official Committee of Unsecured Creditors' Joint Plan of Reorganization under Chapter 11 of
the Bankruptcy Code dated September 20, 2001.
3.1. Restated Certificate of Incorporation of the Registrant.
3.2. Amendment to Certificate of Incorporation of the Registrant.
3.3. Amended and Restated By-Laws of the Registrant.
4.1. Specimen of Common Stock Certificate.
4.2.** New Senior Secured Note and Class A Warrant Agreement.
4.3.** Form of Class A Warrant.
4.4.** Form of New Senior Secured Note.
4.5.** Registration Rights Agreement.
4.6.** Advanced Radio Telecom Corp. Stock Option Plan.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney
99.1 Letter to Shareholders.
-----
* Previously filed with the Company's Periodic Report on Form 8-K, dated
January 4, 2002 and incorporated by reference herein.
** Previously filed as an exhibit to Exhibit 2.2 of the Company's Periodic
Report on Form 8-K, dated January 4, 2002 and incorporated by reference
herein.
(b) Reports on Form 8-K.
The Company did not file any Report on Form 8-K during the last quarter of
the year ended December 31, 2001.
48
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) 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 on this 27th day of
February 2002.
FIRST AVENUE NETWORKS, INC.
By: /S/ DEAN M. JOHNSON
-----------------------------
Dean M. Johnson
President, Chief Executive
Officer
FIRST AVENUE NETWORKS, INC.
By: /S/ SANDRA T. WATSON
-----------------------------
Sandra T. Watson
Chief Financial Officer
Principal Financial and
Accounting Officer
Pursuant to the requirements of the securities and exchange act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
/S/ DEAN M. JOHNSON Director February 27, 2002
- -----------------------------
Dean M. Johnson
WHARTON B. RIVERS, JR.* Director February 27, 2002
- -----------------------------
Wharton B. Rivers, Jr
RICHARD L. SHORTEN, JR.* Director February 27, 2002
- -----------------------------
Richard L. Shorten, Jr.
NEIL SUBIN* Director February 27, 2002
- -----------------------------
Neil Subin
MATTHEW TEPLITZ* Director February 27, 2002
- -----------------------------
Matthew Teplitz
R. TED WESCHLER* Director February 27, 2002
- -----------------------------
R. Ted Weschler
*/S/ SANDRA T. WATSON February 27, 2002
- -----------------------------
Sandra T. Watson
Attorney-in-fact
49
EXHIBIT INDEX
Exhibit
No. Title
- ------- -----
2.1.* Findings of Fact and Conclusions of Law Relating to, and Order under 11 U.S.C. Sections 1129(a)
and (b) Confirming, the Debtors' and Official Committee of Unsecured Creditors' Joint Plan of
Reorganization of Advanced Radio Telecom Corp., et al. under Chapter 11 of the Bankruptcy
Code dated October 31, 2001.
2.2.* Debtors' and Official Committee of Unsecured Creditors' Joint Plan of Reorganization under
Chapter 11 of the Bankruptcy Code dated September 20, 2001
2.3.* Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code in Respect of the Debtors'
and Official Committee of Unsecured Creditors' Joint Plan of Reorganization under Chapter 11 of
the Bankruptcy Code dated September 20, 2001.
3.1. Restated Certificate of Incorporation of the Registrant.
3.2. Amendment to Certificate of Incorporation of the Registrant.
3.3. Amended and Restated By-Laws of the Registrant.
4.1. Specimen of Common Stock Certificate.
4.2.** New Senior Secured Note and Class A Warrant Agreement.
4.3.** Form of Class A Warrant.
4.4.** Form of New Senior Secured Note.
4.5.** Registration Rights Agreement.
4.6.** Advanced Radio Telecom Corp. Stock Option Plan.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney
99.1 Letter to Shareholders.
-----
* Previously filed with the Company's Periodic Report on Form 8-K, dated
January 4, 2002 and incorporated by reference herein.
** Previously filed as an exhibit to Exhibit 2.2 of the Company's Periodic
Report on Form 8-K, dated January 4, 2002 and incorporated by reference
herein.
50