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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 33339884-01
MPOWER HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 52-2232143
(State of incorporation) (I.R.S. Employer Identification No.)
175 SULLY'S TRAIL, SUITE 300
PITTSFORD, NY 14534
(Address of principal executive offices)
(585) 218-6550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
YES[ x ] NO [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court.
YES[ x ] NO [ ]
The number of shares outstanding of the issuer's common stock,
as of November 8, 2002:
Common stock (par value $0.001 per share) .... 64,999,025 shares outstanding
MPOWER HOLDING CORPORATION
INDEX
PAGE NO.
PART I-- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets
Reorganized Mpower Holding - as of September 30, 2002....................................... 4
Predecessor Mpower Holding - as of December 31, 2001........................................ 4
Consolidated Statements of Operations
Reorganized Mpower Holding - for the period July 31, 2002 to September 30, 2002............. 6
Predecessor Mpower Holding - for the period July 1, 2002 to July 30, 2002................... 6
Predecessor Mpower Holding - for the three months ended September 30, 2001.................. 6
Reorganized Mpower Holding - for the period July 31, 2002 to September 30, 2002............. 7
Predecessor Mpower Holding - for the period January 1, 2002 to July 30, 2002................ 7
Predecessor Mpower Holding - for the nine months ended September 30, 2001.. ................ 7
Consolidated Statements of Redeemable Preferred Stock and Stockholders' Equity (Deficit) for
the period from December 31, 2000 to September 30, 2002....................................... 8
Consolidated Statements of Cash Flows
Reorganized Mpower Holding - for the period July 31, 2002 to September 30, 2002............. 9
Predecessor Mpower Holding - for the period January 1, 2002 to July 30, 2002................ 9
Predecessor Mpower Holding - for the nine months ended September 30, 2001. ................. 9
Condensed Notes to Unaudited Interim Consolidated Financial Statements........................ 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................... 41
Item 4. Controls and Procedures ...................................................................... 41
PART II-- OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 42
Item 2. Changes in Securities and Use of Proceeds..................................................... 42
Item 5. Other Information............................................................................. 43
Item 6. Exhibits and Reports on Form 8-K.............................................................. 43
SIGNATURES............................................................................................... 45
CERTIFICATIONS........................................................................................... 46
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
MPOWER HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
REORGANIZED PREDECESSOR
MPOWER HOLDING MPOWER HOLDING
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................................................... $ 14,185 $ 9,136
Investments available-for-sale .......................................................... 42,566 161,144
Restricted investments .................................................................. 10,769 12,640
Accounts receivable, less allowance for doubtful accounts of $5,652 and $4,330 at
September 30, 2002 and December 31, 2001, respectively................................ 23,760 24,825
Prepaid expenses and other current assets................................................ 8,212 5,587
--------- ---------
Total current assets............................................................... 99,492 213,332
Property and equipment, net ................................................................ 74,764 385,872
Deferred financing costs, net of accumulated amortization of $736 and $2,095 at
September 30, 2002 and December 31, 2001, respectively................................... 470 8,400
Intangibles, net of accumulated amortization of $1,157 at
September 30, 2002....................................................................... 21,355 --
Other assets ............................................................................... 10,773 6,043
--------- ---------
Total assets ......................................................................... $ 206,854 $ 613,647
========= =========
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt and capital lease obligations ...................... $ 1,202 $ 7,729
Accounts payable:
Trade................................................................................. 28,759 24,336
Property and equipment ............................................................... 1,458 4,493
Accrued interest ........................................................................ -- 14,023
Accrued sales tax payable ............................................................... 6,224 7,077
Accrued network optimization costs ...................................................... 3,833 13,593
Accrued other expenses .................................................................. 20,938 24,087
--------- ---------
Total current liabilities not subject to compromise................................... 62,414 95,338
Current liabilities subject to compromise ............................................... 22,903 --
--------- ---------
Total current liabilities............................................................. 85,317 95,338
Senior Notes, net of unamortized discount of $370 and $10,686 at September 30, 2002 and
December 31, 2001, respectively.......................................................... 50,576 420,803
Other long-term debt and capital lease obligations.......................................... 539 2,154
--------- ---------
Total liabilities ................................................................. 136,432 518,295
--------- ---------
Commitments and contingencies
Redeemable preferred stock:
Predecessor Mpower Holding 10% Series C convertible preferred stock, 1,250,000 shares
authorized, issued and outstanding at December 31, 2001............................... -- 46,610
Predecessor Mpower Holding 7.25% Series D convertible preferred stock, 3,013,388 shares
authorized, issued and outstanding at December 31, 2001............................... -- 156,220
Stockholders' equity (deficit):
Predecessor Mpower Holding preferred stock, 45,636,612 shares authorized but unissued
at December 31, 2001.................................................................. -- --
Predecessor Mpower Holding Series E preferred stock, 100,000 shares authorized but
unissued at December 31, 2001......................................................... -- --
Predecessor Mpower Holding common stock, $0.001 par value, 300,000,000 shares
authorized, 59,488,843 shares issued and outstanding at December 31, 2001............. -- 59
Reorganized Mpower Holding preferred stock, 50,000,000 shares authorized but unissued
at September 30, 2002 ................................................................ -- --
Reorganized Mpower Holding common stock, $0.001 par value, 1,000,000,000 shares
authorized, 64,999,025 shares issued and outstanding at September 30, 2002............ 65 --
Additional paid-in capital ................................................................. 87,454 712,334
Accumulated deficit ........................................................................ (16,821) (826,615)
Less: Predecessor Mpower Holding treasury stock, 13,710 shares, at cost .................... -- (76)
Predecessor Mpower Holding Notes receivable from stockholders for issuance of common stock.. -- (973)
Accumulated other comprehensive (loss) income............................................... (276) 7,793
-------- ---------
Total stockholders' equity (deficit) .............................................. 70,422 (107,478)
-------- ---------
Total liabilities, redeemable preferred stock and stockholders' equity (deficit)... $ 206,854 $ 613,647
========= =========
See accompanying condensed notes to unaudited interim consolidated
financial statements.
MPOWER HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
REORGANIZED PREDECESSOR PREDECESSOR
MPOWER HOLDING MPOWER HOLDING MPOWER HOLDING
JULY 31, 2002 TO JULY 1, 2002 TO THREE MONTHS ENDED
SEPTEMBER 30, 2002 JULY 30, 2002 SEPTEMBER 30, 2001
------------------ --------------- ------------------
Operating revenues:
Telecommunication services......................... $ 38,485 $ 18,843 $ 49,477
Operating expenses:
Cost of operating revenues
(excluding depreciation and amortization)... 22,799 11,847 38,282
Selling, general and administrative
(excluding depreciation and amortization)... 27,830 12,555 45,396
Reorganization expense............................. -- 245,681 --
Stock-based compensation expense................... 219 100 639
Depreciation and amortization...................... 3,850 6,038 15,151
-------------- -------------- -------------
54,698 276,221 99,468
-------------- -------------- -------------
Loss from operations............................ (16,213) (257,378) (49,991)
Other income (expense):
Gain (loss) on sale of assets, net................. 24 (4) 1,955
Interest income.................................... 593 304 4,433
Interest expense, net of amount capitalized
(contractual interest was $4,681 from July 1,
2002 to July 30, 2002).......................... (1,225) (559) (14,370)
-------------- -------------- -------------
Net loss before extraordinary item.............. (16,821) (257,637) (57,973)
Extraordinary item:
Gain on discharge of debt.......................... -- 315,310 --
-------------- -------------- -------------
Net (loss) income............................... (16,821) 57,673 (57,973)
Accrued preferred stock dividend (contractual
dividend was $1,319 from July 1, 2002 to
July 30, 2002)..................................... -- -- (3,600)
-------------- -------------- -------------
Net (loss) income applicable to common
stockholders....................................... $ (16,821) $ 57,673 $ (61,573)
============== ============== =============
Basic and diluted loss per share of common stock
before extraordinary item......................... $ (0.26) $ (4.33) $ (1.04)
============== ============== =============
Basic and diluted income per share of common
stock applicable to extraordinary item............. $ -- $ 5.30 $ --
============== ============== =============
Basic and diluted (loss) income per share of
common stock....................................... $ (0.26) $ 0.97 $ (1.04)
============== ============== =============
Basic and diluted weighted average
shares outstanding................................. 64,999,025 59,465,233 59,468,984
============== ============== =============
See accompanying condensed notes to unaudited interim consolidated
financial statements.
MPOWER HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
REORGANIZED PREDECESSOR PREDECESSOR
MPOWER HOLDING MPOWER HOLDING MPOWER HOLDING
JULY 31, 2002 TO JANUARY 1, 2002 TO NINE MONTHS ENDED
SEPTEMBER 30, 2002 JULY 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------ ------------------
Operating revenues:
Telecommunication services......................... $ 38,485 $ 128,571 $ 144,908
Operating expenses:
Cost of operating revenues
(excluding depreciation and amortization)... 22,799 88,225 121,045
Selling, general and administrative
(excluding depreciation and amortization)... 27,830 96,045 148,750
Reorganization expense............................. -- 266,383 --
Stock-based compensation expense................... 219 442 2,506
Network optimization cost.......................... -- 19,000 233,083
Depreciation and amortization...................... 3,850 41,344 59,196
-------------- -------------- -------------
54,698 511,439 564,580
-------------- -------------- -------------
Loss from operations............................ (16,213) (382,868) (419,672)
Other income (expense):
Gain on sale of assets, net........................ 24 4,417 4,730
Interest income.................................... 593 3,237 17,805
Interest expense, net of amount capitalized
(contractual interest was $33,470 from
January 1, 2002 to July 30, 2002)............... (1,225) (18,065) (44,029)
-------------- -------------- -------------
Net loss before extraordinary item.............. (16,821) (393,279) (441,166)
Extraordinary item:
Gain on discharge of debt.......................... -- 315,310 32,322
-------------- -------------- -------------
Net loss........................................ (16,821) (77,969) (408,844)
Accrued preferred stock dividend (contractual
dividend was $8,782 from January 1, 2002
to July 30, 2002).................................. -- (3,974) (18,020)
-------------- -------------- -------------
Net loss applicable to common
stockholders....................................... $ (16,821) $ (81,943) $ (426,864)
============== ============== =============
Basic and diluted loss per share of common stock
before extraordinary item.......................... $ (0.26) $ (6.68) $ (7.77)
============== ============== =============
Basic and diluted income per share of common
stock applicable to extraordinary item............. $ -- $ 5.30 $ 0.55
============== ============== =============
Basic and diluted loss per share of common
stock ............................................. $ (0.26) $ (1.38) $ (7.22)
============== ============== =============
Basic and diluted weighted average
shares outstanding................................. 64,999,025 59,461,374 59,142,249
============== ============== =============
See accompanying condensed notes to unaudited interim consolidated
financial statements.
MPOWER HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
REDEEMABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
COMPREHENSIVE --------------- ------------ PAID-IN ACCUMULATED
LOSS SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
---- ------ ------ ------ ------ ------- -------
BALANCE AT DECEMBER 31, 2000 5,390,000 $ 244,886 56,875,870 $ 57 $ 672,031 $ (358,875)
Unrealized loss on investments
available-for-sale ................. $ (1,231) -- -- -- -- -- --
Warrants and options exercised for
common stock ....................... -- -- -- 211,072 -- 72 --
Cancellation of stockholder's
note for common stock .............. -- -- -- (225,000) -- (4,904) --
Stock-based compensation ............ -- -- -- -- -- 3,081 --
Accrued preferred stock dividend .... -- -- 15,157 -- -- (15,157) --
Preferred dividends paid in
common stock ....................... -- -- (2,995) 427,070 -- 2,995 --
7.25% Series D convertible preferred
stock converted to common stock .... (1,126,612) (54,218) 2,199,831 2 54,216 --
Net loss ............................ (467,740) -- -- -- -- -- (467,740)
----------- --------- --------- ----------- ----- ---------- -----------
COMPREHENSIVE LOSS .................. $ (468,971)
===========
BALANCE AT DECEMBER 31, 2001 ........ 4,263,388 202,830 59,488,843 59 712,334 (826,615)
Unrealized loss on investments
available-for-sale ................. $ (5,754) -- -- -- -- -- --
Cancellation of stockholders'
notes for common stock ............. -- -- -- (81,000) -- (435) --
Principal stockholder's short
swing profit ....................... -- -- -- -- -- 588 --
Stock-based compensation ............ -- -- -- -- -- 342 --
Accrued preferred stock dividend .... -- -- 3,974 -- -- (3,974) --
7.25% Series D convertible
preferred stock converted to
common stock ....................... -- (50,000) (2,425) 57,390 -- 2,425 --
New Common issued for exchange
of 2010 Notes ...................... -- -- -- 55,250,000 55 74,150 --
Cancellation of preferred
and common stock ................... -- (4,213,388) (204,379) (59,465,233) (59) 191,267 --
New Common issued for exchange
of Stock ........................... -- -- -- 9,749,025 10 13,085 --
Fresh Start Accounting -- -- -- -- -- (902,547) 904,584
Net loss ............................ (77,969) -- -- -- -- -- (77,969)
----------- --------- --------- ----------- ----- ---------- -----------
COMPREHENSIVE LOSS .................. $ (83,723)
===========
BALANCE AT JULY 30, 2002 ............ -- -- 64,999,025 65 87,235 --
Unrealized loss on investments
available-for-sale ................. $ (276) -- -- -- -- -- --
Stock-based compensation ............ -- -- -- -- -- 219 --
Net loss ............................ (16,821) -- -- -- -- -- (16,821)
----------- --------- --------- ---------- ----- ---------- -----------
COMPREHENSIVE LOSS .................. $ (17,097)
===========
BALANCE AT SEPTEMBER 30, 2002 ....... -- $ -- 64,999,025 $ 65 $ 87,454 $ (16,821)
========= ========= ========== ===== ========== ==========
NOTES ACCUMULATED
RECEIVABLE FROM OTHER TOTAL
TREASURY STOCK STOCKHOLDERS FOR COMPREHENSIVE STOCKHOLDERS'
-------------- ISSUANCE OF INCOME EQUITY
SHARES AMOUNT COMMON STOCK (LOSS) (DEFICIT)
------ ------ ------------ ------ --------
BALANCE AT DECEMBER 31, 2000 13,710 $ (76) $ (5,294) $ 9,024 $ 316,867
Unrealized loss on investments
available-for-sale ................. -- -- -- (1,231) (1,231)
Warrants and options exercised for
common stock ....................... -- -- -- -- 72
Cancellation of stockholder's
note for common stock .............. -- -- 4,321 -- (583)
Stock-based compensation ............ -- -- -- -- 3,081
Accrued preferred stock dividend .... -- -- -- -- (15,157)
Preferred dividends paid in
common stock ....................... -- -- -- -- 2,995
7.25% Series D convertible preferred
stock converted to common stock .... -- -- -- -- 54,218
Net loss ............................ -- -- -- -- (467,740)
------ ------ --------- -------- ----------
COMPREHENSIVE LOSS ..................
BALANCE AT DECEMBER 31, 2001 ........ 13,710 (76) (973) 7,793 (107,478)
Unrealized loss on investments
available-for-sale ................. -- -- -- (5,754) (5,754)
Cancellation of stockholders'
notes for common stock ............. -- -- 435 -- --
Principal stockholder's short
swing profit ....................... -- -- -- -- 588
Stock-based compensation ............ -- -- 100 -- 442
Accrued preferred stock dividend .... -- -- -- -- (3,974)
7.25% Series D convertible
preferred stock converted to
common stock ....................... -- -- -- -- 2,425
New Common issued for exchange
of 2010 Notes ...................... -- -- -- -- 74,205
Cancellation of preferred
and common stock ................... (13,710) 76 -- -- 191,284
New Common issued for exchange
of Stock ........................... -- -- -- -- 13,095
Fresh Start Accounting -- -- 438 (2,039) 436
Net loss ............................ -- -- -- -- (77,969)
------ ------ --------- -------- ----------
COMPREHENSIVE LOSS ..................
BALANCE AT JULY 30, 2002 ............ -- -- -- -- 87,300
Unrealized loss on investments
available-for-sale ................. -- -- -- (276) (276)
Stock-based compensation ............ -- -- -- -- 219
Net loss ............................ -- -- -- -- (16,821)
------ ------ --------- -------- ----------
Comprehensive Loss ..................
BALANCE AT SEPTEMBER 30, 2002 ....... -- $ -- $ -- $ (276) $ 70,422
====== ====== ========= ======== ==========
See accompanying condensed notes to unaudited
interim consolidated financial statements.
MPOWER HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
REORGANIZED PREDECESSOR PREDECESSOR
MPOWER HOLDING MPOWER HOLDING MPOWER HOLDING
JULY 31, 2002 TO JANUARY 1, 2002 NINE MONTHS ENDED
SEPTEMBER 30, 2002 TO JULY 30, 2002 SEPTEMBER 30, 2001
------------------- ---------------- ------------------
Cash flows from operating activities:
Net loss........................................................... $(16,821) $ (77,969) $(408,844)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 3,850 41,344 59,196
Gain on early retirement of debt ................................ -- -- (32,322)
Gain on discharge of debt ....................................... -- (315,310) --
Non-cash reorganization expense ................................. -- 244,669 --
Network optimization cost ....................................... -- 19,000 233,083
Gain on sale of assets, net ..................................... (24) (4,417) (4,730)
Bad debt expense................................................. 1,573 5,454 5,389
Amortization of debt discount ................................... 31 718 1,127
Amortization of deferred debt financing costs ................... 41 608 1,007
Stock-based compensation expense................................. 219 442 2,506
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... (2,530) (2,334) 5,357
Decrease (increase) in prepaid expenses and other
current assets........................................... 646 (3,271) (3,136)
Decrease (increase) in other assets.......................... 171 (5,724) 786
Increase (decrease) in accounts payable - trade ............. 1,448 9,767 (9,577)
Decrease in sales tax payable ............................... (5) (848) (1,338)
Increase (decrease) in accrued network optimization costs ... 151 (3,707) (9,033)
(Decrease) increase in accrued interest and other expenses .. (2,850) 10,544 13,290
-------- --------- ---------
Net cash used in operating activities ..................... (14,100) (81,034) (147,239)
-------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net of payables................ (1,976) (11,298) (78,953)
Proceeds from sale of customer base ............................... -- -- 1,601
Sale of investments available-for-sale, net ....................... 10,615 105,550 286,607
Sale of restricted investments, net................................ 159 1,712 460
-------- --------- ---------
Net cash provided by investing activities ................. 8,798 95,964 209,715
-------- --------- ---------
Cash flows from financing activities:
Proceeds from principal stockholder's short swing profit .......... -- 588 --
Repurchase of Senior Notes......................................... -- -- (14,134)
Proceeds from issuance of common stock............................. -- -- 74
Payments on other long-term debt and capital lease obligations..... (1,051) (4,116) (6,765)
-------- --------- ---------
Net cash used in financing activities ..................... (1,051) (3,528) (20,825)
-------- --------- ---------
Net (decrease) increase in cash ........................... (6,353) 11,402 41,651
Cash and cash equivalents at beginning of period ...................... 20,538 9,136 10,437
-------- --------- ---------
Cash and cash equivalents at the end of period......................... $ 14,185 $ 20,538 $ 52,088
======== ========= =========
Supplemental schedule of non-cash investing and financing activities:
Preferred stock converted to common stock.......................... $ -- $ 2,425 $ 54,170
======== ========= =========
Preferred dividends paid in common stock........................... $ -- $ -- $ 2,995
======== ========= =========
Preferred stock dividends accrued ................................. $ -- $ 3,974 $ 11,395
======== ========= =========
Other disclosures:
Cash paid for interest, net of amounts capitalized ................ $ 3,125 $ 2,150 $ 28,025
======== ========= =========
See accompanying condensed notes to unaudited interim
consolidated financial statements.
MPOWER HOLDING CORPORATION
CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Mpower
Holding Corporation (the "Company"), a Delaware corporation, include the
accounts of the Company and its wholly owned subsidiary, Mpower Communications
Corp. ("Communications") and other subsidiaries of Communications. All
significant inter-company balances and transactions have been eliminated.
These consolidated financial statements reflect all normal recurring
adjustments, which management believes are necessary to present fairly the
financial position, results of operations, and cash flows for the Company for
the respective periods presented. Certain information and footnote disclosures
normally included in the annual consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission for Form 10-Q. These unaudited interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's annual report on Form
10-K filed with the Securities and Exchange Commission.
On April 8, 2002, the Company, Communications and Mpower Lease
Corporation ("Mpower LeaseCorp"), a wholly owned subsidiary of Communications
(collectively, the "Debtors"), each filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy
Court for the District of Delaware. On July 30, 2002, the Company emerged from
the Bankruptcy Court proceedings pursuant to the terms of its First Amended
Joint Plan of Reorganization (the "Plan"). The Plan was filed with the
Bankruptcy Court on May 20, 2002 and was confirmed on July 17, 2002. The
Bankruptcy Court also dismissed the Mpower LeaseCorp Chapter 11 case on July 17,
2002, effective as of July 30, 2002.
During the period from April 8, 2002 to July 30, 2002, the Company
operated as "debtors-in-possession." The unaudited consolidated financial
statements during the period from April 8, 2002 to July 30, 2002, the effective
date of the Plan, have been prepared in accordance with the provisions of
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code." The Debtors adopted the provisions of
SOP 90-7 upon commencement of the Bankruptcy Court proceedings. The consolidated
statements of operations for the periods January 1, 2002 to July 30, 2002 and
July 1, 2002 to July 30, 2002 separately disclose expenses related to the
Chapter 11 proceedings as reorganization expenses. Interest expense on the
Company's 13% Senior Notes due 2010 (the "2010 Notes") and the preferred stock
dividends on the 10% Series C Convertible Redeemable Preferred Stock (the
"Series C Preferred Stock") and 7.25% Series D Convertible Redeemable Preferred
Stock (the "Series D Preferred Stock") ceased to accrue after filing by the
Debtors on April 8, 2002. Interest and dividends ceased by operation of law. See
Note 6 for further discussion on the Chapter 11 proceedings.
Upon emergence from bankruptcy, the Company implemented Fresh Start
Accounting under the provisions of SOP 90-7. Under SOP 90-7, the reorganization
fair value of the Company was allocated to its assets and liabilities, its
accumulated deficit was eliminated, and its new equity was issued according to
the Plan as if it were a new reporting entity. The Company recorded a $244.7
million reorganization charge to adjust the historical carrying value of its
assets and liabilities to fair market value reflecting the allocation of the
Company's $87.3 million estimated reorganized equity value as of July 30, 2002.
The Company also recorded a $315.3 million gain on the cancellation of debt on
July 30, 2002, pursuant to the Plan.
As a result of the reorganization occurring as of July 30, 2002, the
third quarter financial results have been separately presented under the label
"Predecessor Mpower Holding" for periods prior to July 30, 2002 and "Reorganized
Mpower Holding" for the period July 31 to September 30, 2002.
As a result of the reorganization, the financial statements published
for periods following the effectiveness of the Plan will not be comparable to
those published before the effectiveness of the Plan.
The consolidated balance sheet at December 31, 2001 was derived from
the audited consolidated financial statements of the Company, but does not
include all disclosures required under generally accepted accounting principles.
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made in the prior period financial
statements to conform to the current presentation.
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
Buildings and property ........................................................ $ 2,222 $ 5,715
Telecommunication and switching equipment ..................................... 34,368 335,475
Leasehold improvements ........................................................ 14,424 41,213
Computer hardware and software ................................................ 6,938 28,436
Office equipment and other .................................................... 4,806 14,756
Assets held for future use..................................................... 6,529 42,134
--------- ----------
69,287 467,729
Less accumulated depreciation and amortization................................. (2,693) (121,837)
--------- ----------
66,594 345,892
Assets held for sale........................................................... 6,187 9,888
Construction in progress....................................................... 1,983 30,092
--------- ----------
Net property and equipment..................................................... $ 74,764 $ 385,872
========= ==========
The historical carrying value of Property and Equipment at September
30, 2002 reflects adjustments from implementation of Fresh Start Accounting as
described in Note 1. Independent financial advisors were engaged to assist in
the determination of the fair value of Property and Equipment. The independent
financial advisors determined the estimated fair value of Property and Equipment
based upon the Cost Approach appraisal methodology. The Cost Approach method
measures the value of a tangible asset by determining the current cost of an
asset and deducting for various elements of depreciation, physical
deterioration, and technical, functional, and economic obsolescence.
As further discussed in Note 5 "Network Optimization Cost", the assets
held for future use are primarily related to the recovery of switch and
collocation equipment from markets cancelled or exited during 2001 and 2002
which will be redeployed in future periods throughout the Company's remaining
operating markets.
As of September 30, 2002, the corporate aircraft has been classified
as an asset held for sale, with a carrying value of $6.2 million. The aircraft
was subsequently sold in October 2002 to an unrelated third party for net
proceeds of $6.2 million.
(3) REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
In January 2002, holders of the Series D Preferred Stock converted
50,000 preferred shares into 57,390 shares of the Company's common stock.
In January 2002, the Company entered into certain agreements with
former employees, whereby in consideration for the payment of $0.1 million and
return of 81,000 shares of the Company's common stock, the former employees were
released from $0.4 million of obligations related to the notes receivable from
stockholders for issuance of common stock. In addition, during July 2002, the
Company established a $0.1 million reserve against the remaining employee
related note receivable from stockholder.
In January 2002, the Company announced a deferral of the quarterly
dividend on the Company's Series D Preferred Stock. As discussed in Note 1,
dividends on the Series C Preferred Stock and the Series D Preferred Stock
ceased to accrue after filing of a bankruptcy petition by the Debtors on April
8, 2002.
A principal stockholder purchased and sold shares of the Company's
common stock, resulting in a short-swing profit under Section 16(b) of the
Securities Exchange Act of 1934. The settlement agreement between the Company
and the principal stockholder required that the Company be reimbursed for the
short-swing profit in the amount of $0.6 million. In March 2002 the Company
received $0.1 million of the settlement, and received the remaining $0.5 million
in April 2002.
Refer to Note 6, "Emergence from Chapter 11 Proceedings" for discussion
of changes in the Company's common and preferred stock as of July 30, 2002,
resulting from implementation of the Company's Plan of Reorganization.
(4) COMMITMENTS AND CONTINGENT LIABILITIES
In the ordinary course of business, the Company enters into purchase
agreements with its equipment vendors and collocation site providers. As of
September 30, 2002, the Company had total unfulfilled commitments with equipment
vendors and collocation site providers of $2.7 million. The Company also has
various agreements with certain carriers for transport, long distance and other
network services. At September 30, 2002, the Company's commitment under these
agreements is $28.2 million, which expire through July 2005.
The Company is party to various legal proceedings, most of which relate
to routine matters incidental to its business. In addition, on September 20,
2000, a class action lawsuit was commenced against the Company and its chief
executive officer (the "CEO"), in federal court for the Western District of New
York. On March 6, 2001, an amended consolidated class action complaint was
served in that action, seeking to recover damages for alleged violations by the
Company of the Securities Exchange Act of 1934 and Rule 10(b)-5 thereunder (the
"Exchange Act") and Section 11 of the Securities Act of 1933. The amended
consolidated complaint also seeks to recover damages against several of the
Company's officers and former members of its board of directors in addition to
the CEO. The amended consolidated complaint also named various underwriters as
defendants in the action. However, by agreement of the parties and order of the
court, the action against the underwriters has been discontinued, subject to the
plaintiff's right to rename the underwriters as defendants prior to completion
of discovery. On February 11, 2002, the Court issued its Decision and Order
dismissing the class action lawsuit. The decision of the Court has been appealed
to the Court of Appeals in the Second Circuit. The final outcome of this lawsuit
is uncertain.
The Company and the individual defendant officers and former board
members have denied any wrongdoing and will vigorously contest the class action
lawsuit. Any judgment that is significantly greater than the Company's
available insurance coverage could have a material adverse effect on the
Company's results of operations and/or financial condition.
Except as set forth above, management does not believe that the outcome
of any legal proceedings will have a material adverse effect on the Company's
financial position or results of operations.
(5) NETWORK OPTIMIZATION COST
The Company has recognized several charges related to the cancellation
of certain markets.
In September 2000, the Company recognized a $12.0 million network
optimization charge associated with commitments made for collocation sites. As
of September 30, 2002, the Company had incurred $8.9 million of these charges
and had $3.1 million of remaining reserves.
In February 2001, the Company recognized a network optimization charge
of $24.0 million associated with the closing of certain markets and related
commitments made for switch sites and collocations. During the fourth quarter of
2001, as a result of unfavorable lease negotiations, the Company revised its
original estimate and recorded an additional network optimization charge of $2.1
million to cover lease commitments through July 2002. As of September 30, 2002,
the Company had incurred all $26.1 million of these charges and does not
anticipate any additional charges associated with this network optimization.
In May 2001, the Company recognized a network optimization charge of
$209.1 million. Included in the charge was $126.8
million for the goodwill and customer base associated with the Primary Network
business, $65.1 million for property and equipment including collocations and
switch sites and $17.2 million for other costs associated with exiting the
Primary Network markets. During the fourth quarter of 2001, as a result of
favorable negotiations with various carriers, the Company reduced its original
network optimization charge by $2.1 million. As of September 30, 2002, the
Company had incurred $65.1 million and $7.9 million of charges related to
property and equipment and other costs, respectively, and had $7.2 million of
remaining reserves.
In February 2002, the Company closed its operations in Charlotte, North
Carolina and eliminated certain other non-performing sales offices. The Company
also cancelled the implementation of the new billing system in February 2002.
The Company recognized a network optimization charge of $19.0 million in the
first quarter of 2002. Included in the charge was $12.5 million for the write
down of its investment in software and assets for a new billing system, $3.7
million for property and equipment including collocations and switch sites and
$2.8 million for other costs associated with exiting these markets. As of
September 30, 2002, the Company had incurred $12.5 million, $3.7 million and
$1.5 million of charges related to the billing system, property and equipment
and other costs, respectively, and had $1.3 million of remaining reserves.
The remaining $11.6 million of Accrued Network Optimization costs as of
September 30, 2002 represent amounts estimated to be paid, $7.8 million of which
has been classified as current liabilities subject to compromise in the
Consolidated Balance Sheet. Actual payments will be based on ultimate
settlements with various carriers and vendors, net of any costs that may be
recoverable through sales of the related assets, and the Company's ability to
enter into sublease or termination agreements for its switch site and sales
office leases.
(6) EMERGENCE FROM CHAPTER 11 PROCEEDINGS
Confirmation of the Plan: On July 17, 2002, the Bankruptcy Court
confirmed the Plan, as modified by the Findings of Fact, Conclusions of Law, and
Order Under Section 1129 of the Bankruptcy Code and Rule 3020 of the Bankruptcy
Rules Confirming Debtors' First Amended Joint Plan of Reorganization entered by
the Bankruptcy Court on the same date (the "Confirmation Order," the Plan as
modified by the Confirmation Order is referred to herein as the "Final Plan").
Also, on July 17, 2002, the Bankruptcy Court dismissed the Chapter 11 case of
Mpower LeaseCorp, effective as of July 30, 2002. The general unsecured creditors
of the Company, except for the holders of the Company's 2010 Notes and lessors
of certain Company real estate leases, were unaffected by the Chapter 11
proceedings and the Plan. The Plan became effective on July 30, 2002 and
resulted in the following:
- - The 2010 Notes were cancelled and the indenture governing the 2010 Notes
(the "2010 Note Indenture") was terminated. Pursuant to the Final Plan,
holders of the 2010 Notes prior to the emergence (the "2010 Noteholders")
received their pro rata share of 55,250,000 shares of the Reorganized
Company's common stock (the "New Common Stock") representing 85% of the
issued and outstanding common stock of the Reorganized Company, which
included 150,000 shares of New Common Stock withheld by the Trustee under
the 2010 Note Indenture to satisfy certain fees owed to the Trustee.
- - The authorized, issued and outstanding Series C Preferred Stock and Series
D Preferred Stock were cancelled. Pursuant to the Final Plan, holders of
the Series C Preferred Stock and Series D Preferred Stock prior to the
emergence (collectively, the "Preferred Stockholders") received, on a pro
rata basis, 1,862,214 and 6,912,786 shares of New Common Stock,
respectively, which represent a total of 13.5% of the issued and
outstanding common stock of the Reorganized Company.
- - The authorized, issued and outstanding common stock, par value of $0.001
per share, (the "Old Common Stock") was cancelled. Pursuant to the Final
Plan, holders of the Old Common Stock prior to the emergence (the "Old
Common Stockholders") received their pro rata share of 975,000 shares of
New Common Stock representing 1.5% of the issued and outstanding common
stock of the Reorganized Company.
- - Pursuant to the Final Plan, the Rights Agreement, dated as of June 28, 2001
between the Company and Continental Stock Transfer & Trust Company, as
rights agent, was cancelled, along with all rights granted to holders of
the Old Common Stock thereunder. In addition, the authorized Series E
Preferred Stock was also cancelled.
- - Pursuant to the Final Plan, no fractional shares of New Common Stock will
be issued. All distributions of New Common Stock pursuant to the Final Plan
will reflect rounding, to avoid the issuance of fractional shares. As a
result, the actual shares of New Common Stock issued to holders of each
class of the old securities may differ from the share numbers specifically
enumerated in the preceding paragraphs.
- - The Reorganized Company has entered into a new stock option plan for
certain selected key employees (the "New Key Employee Option Plan") that is
substantially identical to the existing Amended and Restated Mpower Holding
Corporation Stock Option Plan (the "Old Option Plan"). Under the New Key
Employee Option Plan, a total of 7,222,222 shares of New Common Stock have
been reserved for issuance to employees of the Reorganized Company.
- - Upon the written request of a holder who individually received in excess of
ten percent (10%) of the New Common Stock under the Final Plan (the
"Eligible Holders") the Reorganized Company will enter into a registration
rights agreement (the "Registration Rights Agreement") with the holders of
the New Common Stock.
- - The board of directors of the Reorganized Company (the "Board of
Directors") initially consisted of six members. Among them, Rolla P. Huff
is the Chief Executive Officer of the Reorganized Company; Joseph M. Wetzel
is the President and Chief Operating Officer and is the designee of the
Company; Robert M. Pomeroy, Michael E. Cahr, Richard L. Shorten, Jr. and
Michael M. Earley are the designees of the 2010 Noteholders (the "2010
Noteholder Designees"). The Final Plan further provides that the 2010
Noteholder Designees will serve for a term of two years during which they
cannot be removed without cause. Thereafter, the Board of Directors will be
elected in accordance with the Reorganized Company's certificate of
incorporation and by-laws, as amended and restated, and applicable law.
Effective September 2002, S. Gregory Clevenger, the Executive Vice
President and Chief Financial Officer, was added as a seventh member of our
board of directors, filling a vacancy on the Board.
- - As of the Effective Date, the Reorganized Company's certificate of
incorporation, as amended and restated pursuant to the Final Plan,
authorized 1,000,000,000 shares of common stock, $0.001 par value and
50,000,000 shares of preferred stock, $0.001 par value. Pursuant to the
terms of the Final Plan, on the Effective Date, the Reorganized Company
issued 64,999,025 shares of the New Common Stock, which constitutes 100% of
the issued and outstanding common stock of the Reorganized Company as of
the Effective Date.
- - The New Common Stock began trading on July 31, 2002 on the NASD
Over-the-Counter Bulletin Board under the symbol MPOW.
- - As of the Effective Date, 1,000 shares of Communications' common stock
remain issued and outstanding, and are held by the Reorganized Company.
- - The Company is still reviewing the overall tax impact of the implementation
of the Plan. However the Company's net operating loss carryforwards,
which were subject to annual use limitations before the reorganization,
may be significantly reduced. Furthermore, other tax attributes,
including the tax basis of certain assets, could also be reduced as a
result of the cancellation of indebtedness as part of the Plan. In
addition, Section 382 of the Internal Revenue Code of 1986, which
generally applies after a more than 50 percentage point ownership change
has occurred, may impose more limitations on the annual utilization of any
remaining net operating losses. The Company believes that it has
experienced such an ownership change as a result of the implementation of
the Final Plan. However, since the Company was under jurisdiction of a
court in a Chapter 11 case at the time of the ownership change, various
alternatives pertaining to the application of Section 382 are available.
At this time, the Reorganized Company has not yet determined which of the
alternatives to elect. A valuation allowance has been recorded to offset
the entire net deferred tax asset due to the uncertainty of the
Reorganized Company realizing any benefit related to the net operating
loss carryforwards or the other future tax deductible amounts.
The condensed financial information for the Company and Communications
(the "Reorganized Companies"), for the periods July 1, 2002 to July 30, 2002 and
January 1, 2002 to July 30, 2002 is as follows (in thousands):
CONDENSED STATEMENT OF OPERATIONS
(in thousands)
REORGANIZED REORGANIZED
COMPANIES COMPANIES
JULY 1, 2002 TO JANUARY 1, 2002 TO
JULY 30, 2002 JULY 30, 2002
------------- -------------
Operating revenues $ 18,843 $ 128,571
Cost of operating revenues (excluding
depreciation and amortization) 11,847 88,225
Selling, general and administrative (excluding
depreciation and amortization) 11,966 109,817
Reorganization expense 530,489 551,191
Stock-based compensation expense 100 100
Network optimization cost (1,576) 6,213
Depreciation and amortization 3,455 23,872
----------- -----------
Loss from operations (537,438) (650,847)
Gain on sale of assets, net 376 377
Interest income 4,524 34,361
Interest expense, net of amounts capitalized (533) (17,651)
Equity earnings in subsidiary (16,123) (147,598)
----------- -----------
Net loss before extraordinary item (549,194) (781,358)
Gain on discharge of debt 315,310 315,310
----------- -----------
Net loss $ (233,884) $ (466,048)
=========== ===========
CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
REORGANIZED REORGANIZED
COMPANIES COMPANIES
JULY 1, 2002 TO JANUARY 1, 2002 TO
JULY 30, 2002 JULY 30, 2002
------------- -------------
Net cash used in operating activities $ (17,377) $ (81,771)
Cash flows from investing activities:
Purchases of property and equipment, net
of payables (116) (1,695)
Transfer of investments available-for-sale - 85,124
Sale of investments available-for-sale, net 10,615 10,615
Sale of restricted investments, net 146 1,712
---------- ----------
Net cash provided by investing activities 10,645 95,756
---------- ----------
Cash flows from financing activities:
Proceeds from principal stockholders' short
swing profit - 588
Payments on other long-term debt and capital
lease obligations (77) (363)
Transfer of other long-term debt and capital
lease obligations (2,312) (2,312)
---------- ----------
Net cash used in financing activities (2,389) (2,087)
---------- ----------
Net increase in cash (9,121) 11,898
Cash and cash equivalents, beginning of year 28,011 6,992
---------- ----------
Cash and cash equivalents, end of year $ 18,890 $ 18,890
========== ==========
Liabilities for which payment was subject to the Chapter 11
proceedings have been classified as liabilities subject to compromise in the
consolidated balance sheet. As of September 30, 2002, liabilities of the
Company subject to compromise consisted of other liabilities of $22.9 million.
Reorganization expense: Reorganization expense is comprised of charges
that were realized or incurred by the Company as a result of reorganization
under Chapter 11 of the Bankruptcy Code. Reorganization expense for the period
January 1, 2002 to July 30, 2002 consisted of the following (in thousands):
Consent fee $ 19,025
Fresh start fair market value adjustments 244,669
Professional fees 2,689
---------
$ 266,383
=========
During the periods January 1, 2002 to April 7, 2002 and July 31, 2002
to September 30, 2002, selling, general and administrative expenses included
$2.5 million and $3.7 million, respectively, of professional fees associated
with our recapitalization plan which have been excluded from reorganization
expense in accordance with SOP 90-7.
(7) DEBT
As further discussed in Note 6, as a result of the implementation of
the Company's Plan of Reorganization, on July 30, 2002, the Company eliminated
$371.0 million of debt related to the 2010 Notes.
As of September 30, 2002, long-term borrowings consist of $50.6 million
of 13% Senior Notes due October 1, 2004, net of unamortized discount of $0.4
million, and $4.4 million of other long-term debt and capital lease obligations,
of which $2.7 million has been classified as current liabilities subject to
compromise on the Consolidated Balance Sheet, maturing through 2003.
(8) FRESH START ACCOUNTING
As discussed in Note 1, the Company adopted the provisions of Fresh
Start Accounting as of July 30, 2002. Independent financial advisors were
engaged to assist in the determination of the reorganization equity value or
fair value of the Reorganized Company. The independent financial advisors
determined the estimated reorganization equity value of the Company to be $87.3
million. This entity value was determined by an independent valuation and
financial specialist based on several factors including using projections by
management and various valuation methods including appraisals, discounted cash
flow analysis and other relevant industry information.
SOP 90-7 requires an allocation of the reorganization equity value in
conformity with procedures specified by APB 16, "Business Combinations," as
amended by SFAS 141, "Business Combinations," for transactions reported on the
basis of the purchase method. In applying SOP 90-7, the Company had the value
of its non-current and intangible assets appraised. The Fresh Start Accounting
adjustments are based on the allocation of the reorganization equity value to
the non-current and intangible assets in accordance with SOP 90-7. A
reconciliation of the adjustments recorded in connection with the debt
restructuring and the adoption of Fresh Start Accounting at July 30, 2002 is
presented below (in thousands):
Predecessor Fresh Start Reorganized
Mpower Holding Debt Exchange of Accounting Mpower Holding
July 30, 2002 Restructuring Stock Adjustments(d) July 30, 2002
-------------- ------------- ----------- -------------- --------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 20,538 $ - $ - $ - $ 20,538
Investments available-for-sale 52,964 - - - 52,964
Restricted investments 10,928 - - - 10,928
Accounts receivable, net 22,908 - - 438 23,346
Prepaid expenses and other
current assets 8,859 - - - 8,859
--------- --------- ---------- ---------- -----------
Total current assets 116,197 - - 438 116,635
Property and equipment, net 342,287 - - (267,493) 74,794
Deferred financing costs, net 7,792 (7,281)(a) - - 511
Intangibles - - - 22,512 22,512
Other assets 10,943 - - - 10,943
--------- --------- ---------- ---------- -----------
Total assets $ 477,219 $ (7,281) $ - $ (244,543) $ 225,395
========= ========= ========== ========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ 1,681 $ - $ - $ - $ 1,681
Accounts payable:
Trade 21,778 - - - 21,778
Property and equipment 1,349 - - - 1,349
Accrued interest 1,932 - - - 1,932
Accrued sales tax payable 6,229 - - - 6,229
Accrued network optimization costs 3,726 - - - 3,726
Accrued other expenses 18,627 - - - 18,627
--------- --------- ---------- ---------- -----------
Total current liabilities not
subject to compromise 55,322 - - - 55,322
Current liabilities subject to compromise 429,100 (396,796)(a) - (310) 31,994
--------- --------- ---------- ---------- -----------
Total current liabilities 484,422 (396,796) (310) 87,316
Senior notes, net of unamortized discount 50,545 - - - 50,545
Other long-term debt and capital lease
obligations 234 - - - 234
--------- --------- ---------- ---------- -----------
Total Liabilities 535,201 (396,796) - (310) 138,095
--------- --------- ---------- ---------- -----------
Commitments and contingencies
Redeemable preferred stock:
10% Series C convertible preferred stock 47,763 - (47,763)(b) - -
7.25% Series D convertible preferred stock 156,616 - (156,616)(b) - -
Stockholders' equity (deficit):
Reorganized Mpower Holding common stock - 55(a) 10(b)(c) - 65
Reorganized Mpower Holding additional paid
in capital - 74,150(a) 13,085(b) - 87,235
Predecessor Mpower Holding common stock 59 - (59)(c) - -
Predecessor Mpower Holding additional paid
in capital 711,280 - 191,267(b)(c) (902,547) -
Predecessor Mpower Holding treasury stock (76) - 76(c) - -
Predecessor Mpower Holding note receivable
for issuance of stock (438) - - 438 -
Predecessor Mpower Holding unrealized other
income/(loss) 2,039 - - (2,039) -
Accumulated (deficit) earnings (975,225) 315,310(a) - 659,915 -
--------- --------- ---------- ---------- -----------
Total stockholders' equity (deficit) (262,361) 389,515 204,379 (244,233) 87,300
--------- --------- ---------- ---------- -----------
Total liabilities, redeemable
preferred stock and
stockholders' equity (deficit) $ 477,219 $ (7,281) $ - $ (244,543) $ 225,395
========= ========= ========== ========== ===========
(a) To record the discharge of the carrying value ($370,977) and accrued
interest ($25,819), deferred financing costs ($7,281) related to the 2010
Notes and the Reorganized Mpower Holding Common Stock issued ($55) the 2010
Noteholders.
(b) To record the conversion of the Predecessor Mpower Holding Convertible
Series C and D Preferred Stock, and the accrued dividends thereon
($21,540) to Reorganized Mpower Holding Common Stock.
(c) To eliminate the Predecessor Mpower Holding Common Stock and
Treasury Stock and record the issuance of Reorganized Mpower Holding
Common Stock.
(d) To adjust the carrying value of assets and liabilities to fair market
value.
(9) INTANGIBLE ASSETS
On January 1 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142). SFAS No. 142 provides that goodwill and other separately
recognized intangible assets with indefinite lives will no longer be amortized,
but will be subject to at least an annual assessment for impairment through the
application of a fair-value-based test. Intangible assets that do have finite
lives will continue to be amortized over their estimated useful lives.
In connection with the Company's adoption of fresh start reporting,
independent appraisers assigned a value to the Company's customer relationships
and trademark of $20.8 million and $1.7 million, respectively. The customer
relationships are amortized using the straight-line method over 3 years.
Amortization expense for the period July 31, 2002 to September 30, 2002 was
$1.2 million. The trademark was determined to have an indefinite life and is
not being amortized.
Had the Company adopted the provisions of SFAS No. 142 for all periods
presented the effect would have been as follows:
REORGANIZED THREE MONTHS REORGANIZED JULY PREDECESSOR NINE MONTHS
JULY 31, 2002 TO PREDECESSOR ENDED 31, 2002 TO JANUARY 1, ENDED
SEPTEMBER 30, JULY 1, 2002 TO SEPTEMBER 30, SEPTEMBER 30, 2002 TO JULY SEPTEMBER 30,
2002 JULY 30, 2002 2001 2002 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
Net (loss) income applicable
to common stockholders, as
reported $ (16,821) $ 57,673 $ (61,573) $ (16,821) $ (81,943) $ (426,864)
- ------------------------------------------------------------------------------------------------------------------------------------
Goodwill amortization - - 3,220 - - 6,440
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted net (loss) income
applicable to
common stockholders $ (16,821) $ 57,673 $ (58,353) $ (16,821) $ (81,943) $ (420,424)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic and diluted (loss)
income per share, as
reported $ (0.26) $ 0.97 $ (1.04) $ (0.26) $ (1.38) $ (7.22)
- ------------------------------------------------------------------------------------------------------------------------------------
Goodwill amortization
per share - - 0.06 - - 0.11
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted basic and diluted
(loss) income per share $ (0.26) $ 0.97 $ (0.98) $ (0.26) $ (1.38) $ (7.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Adjusted basic and diluted loss per share of common stock before
extraordinary item for the three and nine months ended September 31, 2001 would
have been $(0.98) and $(7.66), respectively.
(10) STOCK OPTION PLAN
As filed in the Company's Final Plan with the Bankruptcy Court,
7,222,222 shares of New Common Stock have been reserved for issuance pursuant
to the terms of a new stock option plan (the "New Key Employee Option Plan")
adopted by the Company for the benefit of certain selected key employees that
is substantially identical to the Amended and Restated Mpower Holding
Corporation Stock Option Plan (the "Old Option Plan") canceled as of the
Effective Date. Employees of Reorganized Mpower have received an initial grant
of options under the New Key Employee Option Plan (the "New Options") to
replace their canceled options, on a one-for-one basis. The New Options granted
under the New Key Employee Option Plan will be subject to the same terms and
conditions as the corresponding canceled outstanding Employee Options,
including such provisions as option period, exercise price, termination of
employment and vesting. Generally the Outstanding Employee Options vest over a
three year period, with one third of the options vesting on September 29, 2002,
2003, and 2004. All outstanding Employee Options expire on September 29, 2010.
All of the New Options are considered to be a new grant of options from a new
reporting entity, and will be accounted for as a fixed award.
On August 2, 2002 the Company issued 3,764,236 new options which held a
strike price of $0.22 per share, and at the time of the issuance the fair market
value of the stock was $0.38 per share. The compensation expense of $0.2 million
was primarily the result of these new options and is included in the statement
of operations for Reorganized Mpower Holding for the quarter ending September
30, 2002.
(11) RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143). Upon adoption of SFAS No. 143, the fair
value of a liability for an asset retirement obligation will be recognized in
the period in which it is incurred. The associated retirement costs will be
capitalized as part of the carrying amount of the long-lived asset and
subsequently allocated to expense over the asset's useful life. This statement
is effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. Mpower Holding, as required by SOP 90-7, has
implemented this statement as part of Fresh Start Accounting. The adoption of
SFAS No. 143 has not had a material effect on the financial results of the
Company.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). The Company
adopted the provisions of this standard on January 1, 2002. This standard
addresses financial accounting and reporting for the impairment and disposal of
long-lived assets. The adoption of SFAS No. 144 has not had a material effect
on the financial results of the Company.
In April 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (SFAS No. 145). This standard rescinds FASB No. 4 and an
amendment to that Statement, FASB No. 64, which relates to extinguishment of
debt. It rescinds FASB No. 44, which relates to certain sale-leaseback
transactions. The Company adopted this standard on July 30, 2002, in
connection with the implementation of Fresh Start Accounting. The adoption of
SFAS No. 145 has not had a material effect on the financial results of the
Company.
In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" (SFAS No. 146). This standard
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". This Statement requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred, as
opposed to when the entity commits to an exit plan under EITF No. 94-3. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
Company adopted this standard on July 30, 2002, in connection with the
implementation of Fresh Start Accounting. The adoption of SFAS No. 146 has not
had a material effect on the financial results of the Company.
(12) GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business.
The Company incurred losses applicable to common stockholders of $98.8
million during the first nine months of 2002 and $426.9 million during the first
nine months of 2001. The Company continues to incur negative cash flows from
operating activities and based on current operations estimates that it has the
resources to fund the Company's operations through the first quarter of
2003, but that additional resources most likely will be required thereafter. The
funding necessary for the Company's ongoing operations could be materially
affected by our completion of one or more of the initiatives described below.
These factors, among others, indicate that the Company could be unable to
continue as a going concern.
The Company's operations require substantial capital investment for
the purchase of equipment and the development and maintenance of its network.
Management expects to continue to require substantial amounts of capital to
acquire customers, fund operating losses, augment the network in existing
markets and develop new products and services.
The Company has completed, and is pursuing, several initiatives
intended to increase liquidity and better position the Company to compete under
current conditions and anticipated changes in the telecommunications sector.
These include:
- Implementation of the recapitalization of its balance sheet as
described in Note 6
- Aggressively seeking additional equity or debt financing
- Discussions with companies who may be interested in acquiring the
Company or its assets, in whole or in part, and discussions with
companies who may be interested in selling their assets or
business, in whole or in part
- Potential repurchase of all or a portion of the Company's
outstanding 13% Senior Secured Notes due 2004
- Continuing to update its prospective business plans and forecasts
to assist in monitoring current and future liquidity
- Closing or selling unprofitable or under performing markets
- Reducing general and administrative expenses through various cost
cutting measures
- Introducing new products and services with greater profit margins
- Analyzing the pricing of its current products and services to
ensure they are competitive and meet Company objectives
- Redeploying assets held for future use to reduce the requirement
for capital expenditures
The Company's continuation as a going concern is dependent on its
ability to meet the above initiatives, among others. However, there can be no
assurance that the Company will be successful in obtaining additional debt or
equity financing, or in obtaining a bank facility on terms acceptable to the
Company, or at all, or that management's estimate of additional funds required
is accurate. The financial statements do not include any adjustments relating
to the recoverability and classification of assets and the satisfaction and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
(13) SUBSEQUENT EVENTS
In October 2002, the Company established and funded a trust with $2.0
million, an amount sufficient to pay all severance benefit obligations pursuant
to employment agreements for several executives and any other severance or
retention agreements in effect that were not funded by the trust adopted by the
Company in November 2001.
(14) CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following information sets forth the condensed consolidating
balance sheets of the Company as of September 30, 2002 and December 31, 2001
and the condensed consolidating statements of operations and cash flows for the
nine months ended September 30, 2002 and 2001, for the Company (the "Parent
Company"), the subsidiary of the Company, Communications, which guarantees the
2004 Notes ("Subsidiary Guarantor") and the combined subsidiaries of the
Company which are not Subsidiary Guarantors ("Subsidiary Nonguarantors.") The
Subsidiary Guarantor is wholly owned and the guarantee is the full,
unconditional, joint and several obligation of the Subsidiary Guarantor. The
accounting policies of the subsidiaries are the same as those of the Company
which are described in Note 1 of the Company's annual report on Form 10-K filed
with the Securities and Exchange Commission. There are no restrictions on the
ability of the Subsidiary Guarantor to transfer funds to the Company in the
form of cash dividends, loans or advances.
CONDENSED CONSOLIDATING BALANCE SHEET
AT SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 100 $ 13,851 $ 234 $ - $ 14,185
Investments available-for-sale - 42,552 14 - 42,566
Restricted investments - 10,769 - - 10,769
Accounts receivable, net - 23,761 (1) - 23,760
Prepaid expenses and other
current assets 1,030 7,004 178 - 8,212
Intercompany receivable (payable) (1,910) 2,629 (719) - -
-------- -------- ------- --------- --------
Total current assets (780) 100,566 (294) - 99,492
Property and equipment, net - 43,566 31,198 - 74,764
Investments in subsidiaries 73,945 10,673 - (84,618) -
Intangibles, net 1,694 19,661 - - 21,355
Other assets 1,108 10,135 - - 11,243
-------- -------- ------- --------- --------
Total assets $ 75,967 $184,601 $30,904 $ (84,618) $206,854
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt
and capital lease obligations $ - $ - $ 1,202 $ - $ 1,202
Accounts payable 3,923 23,051 3,243 - 30,217
Other current liabilities 1,326 14,422 15,247 - 30,995
-------- -------- ------- --------- --------
Total current liabilities
not subject to compromise 5,249 37,473 19,692 - 62,414
Current liabilities subject
to compromise 20 22,883 - - 22,903
-------- -------- ------- --------- --------
Total current liabilities 5,269 60,356 19,692 - 85,317
Senior notes, net - 50,576 - - 50,576
Other long-term debt and capital lease
obligations - - 539 - 539
-------- -------- ------- --------- --------
Total liabilities 5,269 110,932 20,231 - 136,432
Commitments and contingencies
Stockholders' equity:
Common stock 65 - - - 65
Additional paid-in capital 87,454 86,001 14,462 (100,463) 87,454
Accumulated deficit (16,821) (12,056) (3,789) 15,845 (16,821)
Accumulated other comprehensive loss - (276) - - (276)
-------- -------- ------- --------- --------
Total stockholders'
equity 70,698 73,669 10,673 (84,618) 70,422
-------- -------- ------- --------- --------
Total liabilities, redeemable
preferred stock
and stockholders'
equity $ 75,967 $184,601 $30,904 $(84,618) $206,854
======== ======== ======= ======== ========
CONDENSED CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 2001
(IN THOUSANDS)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
------- ---------- ------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 100 $ 6,892 $ 2,144 $ - $ 9,136
Investments available-for-sale - 10,671 150,473 - 161,144
Restricted investments - 12,050 590 - 12,640
Accounts receivable, net - 24,001 824 - 24,825
Prepaid expenses and other
current assets - 5,315 272 - 5,587
Intercompany receivable (payable) (24,839) 588,507 (563,668) - -
--------- ---------- -------- ---------- ---------
Total current assets (24,739) 647,436 (409,365) - 213,332
Property and equipment, net - 182,419 203,453 - 385,872
Investments in subsidiaries 488,258 (239,148) - (249,110) -
Goodwill and other intangibles, net - - - - -
Other assets 7,746 6,697 - - 14,443
--------- ---------- --------- ---------- ---------
Total assets $ 471,265 $ 597,404 $(205,912) $ (249,110) $ 613,647
========= ========== ========= ========== =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt and
capital lease obligations $ - $ 697 $ 7,032 $ - $ 7,729
Accounts payable - 28,877 (48) - 28,829
Accrued interest 12,367 1,656 - - 14,023
Other current liabilities - 27,200 17,557 - 44,757
--------- ---------- --------- ----------- ---------
Total current liabilities 12,367 58,430 24,541 - 95,338
Senior notes, net 370,366 50,437 - - 420,803
Other long-term debt and capital
lease obligations - 811 1,343 - 2,154
--------- ---------- --------- ----------- ---------
Total liabilities 382,733 109,678 25,884 - 518,295
Commitments and contingencies
Redeemable preferred stock:
10% Series C convertible
preferred stock 46,610 - - - 46,610
7.25% Series D convertible
preferred stock 156,220 - - - 156,220
Stockholders' equity (deficit):
Common stock 59 - - - 59
Additional paid-in capital 712,334 1,289,012 75,556 $(1,364,568) 712,334
Accumulated deficit (826,615) (800,754) (314,704) 1,115,458 (826,615)
Treasury stock and other (76) (532) 7,352 - 6,744
--------- ---------- --------- ----------- ---------
Total stockholders'
equity (deficit) (114,298) 487,726 (231,796) (249,110) (107,478)
--------- ---------- --------- ----------- ---------
Total liabilities, redeemable
preferred stock
and stockholders'
equity (deficit) $ 471,265 $ 597,404 $(205,912) $ (249,110) $ 613,647
========= ========== ========= =========== =========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------- -------------
Operating revenues $ - $ 167,056 $ 24,295 $ (24,295) $ 167,056
Cost of operating revenues
(excluding depreciation and amortization) - 111,049 (25) - 111,024
Selling, general and administrative
(excluding depreciation and amortization) 5,839 130,747 11,584 (24,295) 123,875
Reorganization expenses (40,675) 591,866 (298,266) 13,458 266,383
Stock-based compensation
expense 219 100 342 - 661
Network optimization cost - 6,213 12,787 - 19,000
Depreciation and amortization - 25,028 20,166 - 45,194
----------- ----------- ------------- ------------ ------------
Loss from operations 34,617 (697,947) 277,707 (13,458) (399,081)
Gain on sale of assets, net - 401 4,040 - 4,441
Interest income - 38,112 1,760 (36,042) 3,830
Interest expense, net 17,668 4,305 33,359 (36,042) 19,290
Loss on investments in subsidiary (413,591) 250,148 - 163,443 -
----------- ----------- ------------- ------------ ------------
Net Loss before extraordinary item (396,642) (413,591) 250,148 149,985 (410,100)
Gain on discharge of debt 315,310 - - - 315,310
----------- ----------- ------------- ------------ ------------
Net Loss $ (81,332) $ (413,591) $ 250,148 $ 149,985 $ (94,790)
=========== =========== ============= ============ ============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------ ------------- ------------- ------------
Operating revenues $ - $ 135,200 $ 48,145 $ (38,437) $ 144,908
Cost of operating revenues
(excluding depreciation and amortization) - 108,644 12,401 - 121,045
Selling, general and administrative
(excluding depreciation and amortization) - 163,726 23,461 (38,437) 148,750
Stock-based compensation
expense - 2,506 - - 2,506
Network optimization cost - 50,090 182,993 - 233,083
Depreciation and amortization - 26,192 33,004 - 59,196
----------- ----------- ------------- ------------ ------------
Loss from operations - (215,958) (203,714) - (419,672)
Gain on sale of assets, net - 2,716 2,014 - 4,730
Interest income - 63,428 14,237 (59,860) 17,805
Interest expense, net 12,955 29,757 61,177 (59,860) 44,029
Loss on investments in subsidiary (395,888) (248,639) - 644,527 -
----------- ----------- ------------- ------------ ------------
Net Loss before extraordinary item (408,843) (428,210) (248,640) 644,527 (441,166)
Gain on discharge of debt - 32,322 - - 32,322
----------- ----------- ------------- ------------ ------------
Net loss $ (408,843) $ (395,888) $ (248,640) $ 644,527 $ (408,844)
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2002
(in thousands)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ --------------
Net cash (used in) provided by operating
activities $ - $ (96,761) $ 1,627 $ - $ (95,134)
Cash flows from investing activities:
Purchases of property and
equipment, net - (1,867) (11,407) - (13,274)
Transfers of investments
available for sale - 85,124 (85,124) - -
Sale of investments
available-for-sale, net - 21,143 95,022 - 116,165
Sale of restricted
investments, net - 1,871 - - 1,871
----------- ----------- ------------ ------------ -------------
Net cash (used in) provided by
investing activities - 106,271 (1,509) - 104,762
----------- ----------- ------------ ------------ -------------
Cash flows from financing activities:
Payments on other long-term
debt and capital lease
obligations - (827) (4,340) - (5,167)
Transfer of other long-term
debt and capital lease
obligations, net - (2,312) 2,312 - -
Proceeds from principal stockholders'
short swing profit - 588 - - 588
----------- ----------- ------------ ------------ -------------
Net cash used in financing
activities - (2,551) (2,028) - (4,579)
----------- ----------- ------------ ------------ -------------
Net increase (decrease) in cash - 6,959 (1,910) - 5,049
Cash and cash equivalents, beginning
of year 100 6,892 2,144 - 9,136
----------- ----------- ------------ ------------ -------------
Cash and cash equivalents, end
of year $ 100 $ 13,851 $ 234 $ - $ 14,185
=========== =========== ============ ============ =============
Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2001
(in thousands)
PARENT SUBSIDIARY SUBSIDIARY
COMPANY GUARANTOR NONGUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ --------------
Net cash (used in) provided by
operating activities $ 100 $ (76,923) $ (70,416) $ - $ (147,239)
Cash flows from investing activities:
Purchases of property and
equipment, net - (59,215) (19,738) - (78,953)
Sale of investments
available-for-sale, net - 182,273 104,334 - 286,607
Proceeds from sale of customer base - - 1,601 - 1,601
Sale of restricted investments, net - 460 - - 460
----------- ----------- ------------- ------------ -------------
Net cash provided by investing
activities - 123,518 86,197 - 209,715
----------- ----------- ------------- ------------ -------------
Cash flows from financing activities:
Payments on other long-term
debt and capital lease
obligations - (442) (6,323) - (6,765)
Repurchase of senior notes - (14,134) - - (14,134)
Proceeds from issuance of
common stock - 74 - - 74
----------- ----------- ------------- ------------ -------------
Net cash used in financing
activities - (14,502) (6,323) - (20,825)
----------- ------------ ------------- ------------ -------------
Net increase in cash 100 32,093 9,458 - 41,651
Cash and cash equivalents, beginning
of year - 4,359 6,078 - 10,437
----------- ----------- ------------- ------------ -------------
Cash and cash equivalents, end
of year $ 100 $ 36,452 $ 15,536 $ - $ 52,088