SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2001
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-22388
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NEXTGEN COMMUNICATIONS CORPORATION
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(Name of Small Business Issuer in Its charter)
Delaware 99-0273889
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
11850 Jones Road, Houston, Texas 77070
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(Address of Principal Executive Offices) (Zip Code)
(281) 970-9859
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $.001 Per Share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $4,433,000
The aggregate market value of the common stock of the registrant held
by nonaffiliates of the registrant (5,110,135 shares) on March 22, 2002, was
approximately $6,387,669, based upon the closing sale price of the common stock
($1.25 per share) as quoted on the OTC Bulletin Board on March 22, 2002. For
purposes of this response, officers, directors and holders of 5% or more of the
registrant's common stock are considered affiliates of the registrant at that
date.
The number of shares outstanding of the registrant's common stock,
$.001 par value per share, as of March 22, 2002: 9,221,882 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 9 through 12 of Part III of this Form
10-KSB is incorporated by reference from the registrant's definitive proxy
statement, which will be filed with the Securities and Exchange Commission
within 120 days of the close of the registrant's fiscal year ended December 31,
2001.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
NEXTGEN COMMUNICATIONS CORPORATION
FORM 10-KSB
TABLE OF CONTENTS
Page
Item Number
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PART I
1. Description of Business..............................................................1
2. Description of Property..............................................................5
3. Legal Proceedings....................................................................5
4. Submission of Matters to a Vote of Security Holders..................................6
PART II
5. Market For Common Equity and Related Stockholder Matters.............................6
6. Management's Discussion and Analysis or Plan of Operation............................7
7. Financial Statements................................................................10
8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.................................................10
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act ..................................10
10. Executive Compensation..............................................................10
11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters..........................................10
12. Certain Relationships and Related Transactions......................................10
13. Exhibits and Reports on Form 8-K....................................................11
Signatures...................................................................................13
Audited Consolidated Financial Statements...................................................F-i
PRELIMINARY NOTE: This Annual Report on Form 10-KSB contains
forward-looking statements relating to our goals, beliefs, plans or current
expectations and other statements that are not historical facts. For example,
when we use words such as "project," "believe," "anticipate," "plan," "expect,"
"estimate," "intend," "should," "would," "could" or "may," or other words that
convey uncertainty of future events or outcome, we are making forward-looking
statements. We refer you to the caption entitled "Trends, Risks and
Uncertainties" in Item 6 of Part II for important factors that could cause
actual results to differ materially from those indicated by our forward-looking
statements made herein and presented elsewhere by management. Such
forward-looking statements represent management's current expectations and are
inherently uncertain. We do not undertake any obligation to update
forward-looking statements made by us.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
Nextgen Communications Corporation ("we," "us," "Nextgen," or the
"Company") is a Delaware corporation that was incorporated in 1998. Our growth
strategy, developed in 2001, is to acquire communications towers and lease space
on them to wireless carriers such as personal communications services, cellular,
paging, microwave and specialized mobile radio, enhanced specialized mobile
radio, wireless data transmission, radio and television broadcasting. Currently,
we have entered into three non-binding letters of intent to acquire an aggregate
of 229 towers, and are in discussions to acquire additional towers. We plan to
aggressively consolidate ownership of communications sites in purchase
transactions with both wireless carriers and independent owners, and then
increase our tenancy on these towers by allocating dedicated resources to
selling antennae space on these towers. As a result of the recent downturn in
the telecommunications industry, we believe that Nextgen is well positioned to
further consolidate this market at attractive purchase prices based on multiples
of tower cash flow. While we believe that we have the resources and potential
financing sources, and favorable market conditions, to implement our proposed
acquisition strategy, Nextgen has not acquired any towers to date. (See "Trends,
Risks and Uncertainties" in Part II, Item 6 below)
GROWTH STRATEGY
Our growth strategy is to capitalize on the rapid development of the
wireless telecommunications market. The growth factors increasing demand for
wireless communications, and subsequently, increasing the demand for antennae
locations, are:
o Technological advances in wireless communications service
o Decreased cost per minute of wireless communications
o Increased mobility
o Greater awareness of the need for wireless services
o New data applications
o Issuance of new wireless network licenses
As competition in the wireless telecommunications market intensifies,
we believe many wireless carriers will desire to preserve their capital and will
continue the current trend of selling and leasing back their communications
towers. By doing this, wireless carriers can:
o Spend capital on activities that directly increase their subscriber
base
o Co-locate transmission facilities when available versus building
their own infrastructure
o Focus on core business activities
We will cater to these wireless carriers by offering to purchase their
communications towers and lease them back to the carriers for terms of up to ten
years. Also, such an arrangement with the carrier would only require us to
provide access to space on our towers, and would not be dependent upon the type
of technology the carrier uses.
This growth strategy is financially oriented, as opposed to
geographically oriented, as we seek to acquire communications towers at
favorable purchases prices. We gauge the value of communications towers
primarily by considering their current tower cash flow, location, and
opportunities to add new tenants. Tower cash flow is calculated by subtracting
from gross tenant revenues the direct expenses associated with operating a
tower, such as ground lease payment, utilities, real estate taxes, insurance and
maintenance. Ultimately, our focus is to acquire multi-tenant towers, with
underutilized capacity, in markets that we believe will be attractive to
wireless carriers seeking to build out their networks.
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CURRENT LETTERS OF INTENT TO ACQUIRE TOWERS
186-Tower Portfolio: In March 2002, we entered into a letter of intent
to acquire 186 communications towers from a regional wireless carrier. The
purchase price for these towers is $40.0 million, of which $30.0 million is
payable in cash, and $10.0 million through the issuance of our subordinated
promissory note. We intend to finance a substantial portion of the cash required
to close this purchase by issuing senior debt collateralized by the towers and
their tower cash flow. These 186 towers generated approximately $4,000,000 in
tower cash flow in 2001, on a pro forma basis, which yields a purchase price of
approximately ten times annual tower cash flow.
28-Tower Portfolio: In March 2002, we entered into a letter of intent
to acquire 28 communications towers from a regional wireless carrier. The
purchase price for these towers is $5.6 million, of which $4.2 million is
payable in cash, and $1.4 million through the issuance of our subordinated
promissory note. We intend to finance a substantial portion of the cash required
to close this purchase by issuing senior debt collateralized by the towers and
their tower cash flow. These 28 towers generated approximately $840,000 in tower
cash flow in 2001, on a pro forma basis, which yields a purchase price of
approximately seven times annual tower cash flow.
15-Tower Portfolio: In March 2002, we entered into a letter of intent
to acquire 15 communications towers from a regional independent tower owner. The
purchase price for these towers is $5.6 million cash, a substantial portion of
which we intend to finance by issuing senior debt collateralized by the towers
and their tower cash flow. These 15 towers generated approximately $1.2 million
tower cash flow in 2001, on a pro forma basis, which yields a purchase price of
approximately five times annual tower cash flow.
The proposed acquisitions discussed above are subject to the
satisfactory completion of our due diligence review, and the successful
negotiation and execution of definitive purchase and loan agreements, which will
contain numerous conditions to closing. There can be no assurance that we will
be able to consummate these transactions.
We will continue to actively pursue the acquisition of additional
communications towers as we proceed with our growth strategy. Our ability to
acquire towers will be dependent upon, among other factors, our ability to
obtain outside financing and the continuation of the current market conditions
that have created attractive purchase prices for towers.
COMPETITION
We compete for tower and site acquisitions with national independent
tower owners such as American Tower, Crown Castle, and SBA Communications, as
well as local independent tower owners.
We compete in the leasing of antennae space on communications towers
with national independent communications tower owners, local independent tower
owners, and wireless carriers that own their own towers. The competitive factors
that we expect to encounter in the leasing of antennae space are:
o Tower location
o Tower capacity
o Price
o Quality of service
In addition, wireless carriers have the ability to co-locate their
transmission equipment on other existing towers, rooftop locations or other
existing structures.
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REGULATORY MATTERS
General
The communications tower industry is regulated at the federal level by
both the Federal Communications Commission ("FCC") and the Federal Aviation
Administration ("FAA"). The regulations promulgated by these federal agencies
control the siting, marking and lighting of towers, and may also require the
registration of tower facilities. Wireless and broadcast antennas operating on
towers may also be regulated and authorized by the FCC, depending upon the
particular frequency being used. In addition to these regulations, we must
comply with various state and local laws, and certain environmental laws and
regulations.
Federal Regulation
Under the requirements of the Communications Act of 1934, as amended,
the FCC, in conjunction with the FAA, has developed standards to consider
proposals for new or modified antenna structures. These standards mandate that
the FCC and the FAA consider the height of the proposed antenna structure, the
relationship of the structure to existing natural or man-made obstructions and
the proximity of the structure to runways and airports. Proposals to construct
or modify existing structures above certain heights or within certain proximity
to airports are reviewed by the FAA to ensure they will not present a hazard to
aviation. The FAA may condition its issuance of no-hazard determinations upon
compliance with specified lighting and marking requirements. The FCC will not
authorize the operation of communications antennas on towers unless the tower
has been registered with the FCC or a determination has been made that such
registration is not necessary. The FCC will not register a tower unless it has
received all necessary clearances from the FAA. The FCC also enforces special
lighting and painting requirements. Owners of towers on which communications
antennas are located have an obligation to maintain painting and lighting to
conform to FCC standards. Tower owners may also bear the responsibility of
notifying the FAA of any tower lighting failures. Failure to comply with the
applicable requirements may lead to civil penalties and tort liability.
In 1995, the FCC adopted regulations making the owners of towers,
rather than communications licensees, primarily responsible for compliance with
antenna structure painting and lighting requirements. These rule changes are
based on statutory amendments adopted by Congress in 1992 extending regulatory
jurisdiction to tower owners. Communications licensees are now secondarily
responsible for tower maintenance if the tower owners are unwilling or unable to
perform those duties. Currently, these requirements apply to antenna structures
that are more than 200 feet in height or that may interfere with the approach or
departure space of a nearby airport runway.
In December 1998, the FCC announced that an audit of existing antenna
structures revealed that over one quarter of the audited structures had not been
registered as required by the FCC's rules. In light of this finding and several
reported near misses of towers by aircraft, the FCC in January 1999 announced a
no-tolerance policy, requiring all owners of existing unregistered structures to
register them immediately or face monetary forfeitures or civil fines.
The Telecommunications Act of 1996 amended the Communications Act of
1934 by limiting state and local zoning authorities' jurisdiction over the
construction, modification and placement of wireless communications towers. The
new law preserves local zoning authority but prohibits any action that would
discriminate between different providers of wireless services or ban altogether
the construction, modification or placement of communications towers. It also
prohibits state or local restrictions based on the environmental effects of
radio frequency emissions to the extent the facilities comply with the FCC
regulations. The 1996 Telecom Act also requires the federal government to help
licensees of wireless communications services gain access to preferred sites for
their facilities. This may require that federal agencies and departments work
directly with licensees to make federal property available for tower facilities.
State and Local Regulation
Most states regulate certain aspects of real estate acquisition and
leasing activities. Local regulations include city and other local ordinances,
zoning restrictions and restrictive covenants imposed by community developers.
These regulations vary greatly, but typically require tower owners to obtain
approval from local officials
3
or community standards organizations prior to tower construction. Local zoning
authorities generally have been hostile to construction of new transmission
towers in their communities because of the height and visibility of the towers.
Companies owning or seeking to build towers have encountered an array of
obstacles arising from state and local regulation of tower site construction,
including environmental assessments, fall radius assessments, marking/lighting
requirements, and concerns with interference to other electronic devices. The
delays resulting from the administration of such restrictions can last for
several months, and when appeals are involved, can take several years.
Environmental and Other Regulation
Owners and operators of communications towers are also subject to
environmental laws. The FCC's decision to register a proposed tower may be
subject to environmental review under the National Environmental Policy Act of
1969, which requires federal agencies to evaluate the environmental impacts of
their decisions under certain circumstances. The FCC has issued regulations
implementing the National Environmental Policy Act as well as the National
Historic Preservation Act, the Endangered Species Act and the American Indian
Religious Freedom Act. These regulations place responsibility on each applicant
to investigate potential environmental and other effects of operations and to
disclose any significant effects in an environmental assessment prior to
constructing a tower. In the event the FCC determines the proposed tower would
have a significant environmental impact based on the standards the FCC has
developed, the FCC would be required to prepare an environmental impact
statement. This process could significantly delay the registration of a
particular tower. In addition, we are subject to environmental laws that may
require investigation and clean up of any contamination at facilities we own or
operate or at third-party waste disposal sites. These laws could impose
liability even if we did not know of, or were not responsible for, the
contamination. Although we believe that we currently have no material liability
under applicable environmental laws, the costs of complying with existing or
future environmental laws, investigating and remediating any contaminated real
property and resolving any related liability could have a material adverse
effect on our business, financial condition or results of operations.
Our initial strategy involves acquiring existing communications towers,
which will already have obtained the necessary licenses and permits to operate,
as we will verify during our due diligence review.
EMPLOYEES
As of December 2001, we had an aggregate of 40 employees, 39 of whom
were full-time, and 18 of whom were represented by collective bargaining
agreements. The number of full-time employees decreased to four employees
following our sale of Point To Point Network Services, Inc. ("PTP") on February
22, 2002. (See "Business Background--1999 Through 2001" below)
BUSINESS BACKGROUND-1999 THROUGH 2001
The Company was incorporated in Delaware on January 8, 1998, for the
purpose of serving as the successor corporation of EIF Holdings, Inc., a Hawaii
corporation, pursuant to a reincorporation merger that was completed in June
1998. During 1999 and most of 2000, the Company, then named U S Industrial
Services, Inc., operated through its wholly-owned subsidiaries as a multi-state
service company, specializing in industrial cleaning services, including soil
and groundwater remediation and hazardous material management and clean-up.
Prior to July 2000, the Company was a majority-owned subsidiary of American Eco
Corporation ("AEC"), a publicly traded company. In July 2000, Deere Park
Capital, LLC ("Deere Park") acquired AEC's stake in the Company, which consisted
of approximately 81.9% of the Company's outstanding common stock. AEC
subsequently filed for bankruptcy.
On September 29, 2000 the Company sold its holdings in four of its
operating subsidiaries--P.W. Stephens Environmental, Inc., P.W. Stephens
Contractors, Inc., P.W. Stephens Services, Inc., and P.W. Stephens Northwest,
Inc. (collectively, the "Industrial Subsidiaries") to Spruce MacIntyre Holding
Corp. ("Spruce"). The Company currently holds a note receivable from Spruce,
which represents a portion of the purchase price for the sale of the Industrial
Subsidiaries to Spruce. This Note had a principal balance of $1,402,000 on
December 31, 2001. From September 29, 2000 to June 29, 2001, the Company had no
significant operations.
As a result of two Stock Purchase Agreements between Deere Park and
Frank J. Fradella, the President and Chief Executive Officer of the Company,
dated December 21, 2000, and March 23, 2001, respectively, Mr. Fradella
4
purchased, on behalf of himself and as a third-party nominee for other
individuals and entities, approximately 6.9 million shares of the Company's
common stock held by Deere Park, or approximately 79% of the Company's
outstanding common stock at the time. Mr. Fradella currently holds 1,502,651
shares, or approximately 16%, of the Company's outstanding common stock.
On June 29, 2001, the Company entered the communications sector by
acquiring PTP, based in Methuen, Massachusetts. PTP is a provider of fixed
communications networking design and build-out services, such as voice, data,
and video, to the communications industry. The purchase price for PTP consisted
of two million shares of the Company's common stock, and approximately $667,000
cash.
In July 2001, we changed our corporate name to Nextgen Communications
Corporation to reflect our new strategy. Originally, PTP was going to operate as
our service function in coordination with our tower acquisition strategy.
However, due to changing market conditions, we decided to divest PTP and focus
exclusively on acquiring, owning, and leasing communications towers. In February
2002, we settled a dispute with the former owner and president of PTP, and sold
PTP to an investment group led by Richard W. Lancaster, our former director.
(See "Recent Developments" below)
RECENT DEVELOPMENTS
Effective as of December 31, 2001, Richard W. Lancaster resigned from
Nextgen's Board of Directors, in order to focus on operating PTP, which the
investment group that he led acquired from the Company in February 2002. Frank
J. Fradella is currently the sole member of the Company's Board of Directors.
In February 2002, we settled a dispute with the former owner and
president of PTP, in which we reacquired 1.8 million shares of Nextgen's common
stock in exchange for our (i) paying off a promissory note PTP had given the
former owner, which amounted to approximately $357,000, (ii) paying the former
owner severance compensation totaling approximately $107,000 in cash, and (iii)
paying off approximately $42,500 in debt, for which the former owner had
provided a personal guarantee. In February 2002, we sold PTP to an investment
group led by Mr. Lancaster for $1 million, which the buyer paid by issuing us
its promissory note, secured by the outstanding shares of PTP.
In February 2002, we hired R. Andrew White as chief financial officer.
We have entered into a one-year executive employment agreement with Mr. White,
which provides an annual salary of $120,000. We also provided Mr. White with a
loan to acquire 50,000 shares of Nextgen's common stock at $1.25 per share, and
granted Mr. White up to 150,000 options to purchase Nextgen common stock at
$1.25 per share, subject to certain vesting requirements.
In March 2002, we signed three letters of intent to acquire 229
communications towers for an aggregate purchase price of $51.2 million. These
acquisitions are contingent upon the occurrence of various events and
conditions. (See "Current Letters of Intent to Acquire Towers" above)
ITEM 2. DESCRIPTION OF PROPERTY.
We lease our corporate offices, consisting of 4,000 square feet of
office space at 11850 Jones Road Houston, Texas 77070, for $5,000 per month, on
a month-to-month basis. As of December 31, 2001, PTP leased its headquarters in
Methuen, Massachusetts under a lease agreement that expires in May 2003, at
which time the lease may be extended, at the option of PTP, for an additional
five-year term. PTP also occupies a field office in Windham, Maine, which is
currently being leased on a month-to-month basis. We sold PTP in February 2002.
ITEM 3. LEGAL PROCEEDINGS.
The nature and scope of our business operations bring us into regular
contact with the general public, a variety of businesses and government
agencies. These activities inherently subject us to potential litigation, which
we defend in the normal course of business. At December 31, 2001, there were
various claims and disputes incidental to the business. The Company believes
that the disposition of all such claims and disputes, individually or in the
aggregate, should not
5
have a material adverse affect upon our financial position, results of
operations or cash flows. As of December 31, 2001, the Company has not been
named as a responsible party for any environmental issues under the Federal
Superfund Law.
On or about February 9, 2001, AEC commenced an adversary proceeding
against us that, at the time, was a debtor-in-possession under Chapter 11 of the
United States Bankruptcy Code. The proceeding, which is styled Complaint for
Collection of Account Receivable, Turnover of Property of the Estate and
Avoidance Fraudulent Conveyance, seeks the recovery of certain alleged transfers
and recovery of fees against the Company, based on theories of breach of
contract, promissory estoppel, quantum meruit, and pursuant to Sections 542,
544, 548 and 550 of the Bankruptcy Code. The proceeding seeks a recovery in
excess of $1,300,000, and other equitable relief. The Company has filed its
answer that, in part, denies all liability. An Order Scheduling Pre-Trial
Proceedings was signed on October 31, 2001. A trial date has not yet been set.
The Company is vigorously defending this suit. At this time, the Company cannot
predict the likelihood of an unfavorable outcome nor estimate the amount or
range of potential loss; however, certain management fees have been accrued in
the financial statements.
On November 6, 2001, the Company was sued by CIT Group/Equipment
Financing, Inc. ("CIT") in the United States District Court for the Eastern
District of Missouri. CIT alleges that a former subsidiary of the Company
breached an equipment lease, and that the subsidiary owes CIT approximately
$720,000 plus interest, attorney's fees, and costs. CIT alleges that the Company
is liable as a guarantor for the lease. The Company has answered the suit and
intends to vigorously defend itself against the allegations. Moreover, because
the guarantee relates to a subsidiary of the Company that has been sold, the
Company has made demand on Spruce, the purchaser of the subsidiary, to defend
and indemnify the Company in this case. Spruce has agreed to indemnify and
defend the Company, and has hired counsel to answer and defend this case on the
Company's behalf. Because of the early nature of this case, it cannot be
determined with any degree of certainty what the result of this case will be for
the Company.
On November 16, 2001, Acstar Insurance Company ("Acstar") filed a
third-party complaint against the Company and several other third-party
defendants in the United States District Court for the Eastern District of
Missouri. In the primary suit, Spiratas Company is suing Acstar for
approximately $650,000, which is allegedly due under a construction contract,
plus attorney's fees, interest, and costs. Acstar has sued the Company as a
third-party defendant, alleging that the Company agreed to indemnify Acstar in
the event of any claim. While the Company has not yet answered the complaint,
the Company intends to defend the suit vigorously. Moreover, because the
indemnification agreement relates to a subsidiary of the Company that has been
sold, the Company has made a claim on Spruce, the purchaser of the subsidiary,
to defend and indemnify the Company in this case. Spruce has agreed to indemnify
and defend the Company, and has hired counsel to answer and defend this case on
the Company's behalf. Because of the early nature of this case, it cannot be
determined with any degree of certainty what the result of this case will be for
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's stockholders during
the fourth quarter of 2001.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICES
The Common Stock of the Company is traded in the over-the-counter
market. Quotations are published in the National Quotation Bureau "Pink Sheets"
and the OTC Bulletin Board under the symbol "NXGC.OB." The following table sets
forth, for the fiscal quarters indicated, the range of the high and low sales
prices for the Company's Common Stock as reported by the National Quotation
Bureau, Inc.
Fiscal Year ended December 31, 2001: High Low
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Quarter ended December 31, 2001 1.95 1.25
Quarter ended September 30, 2001 2.25 0.95
Quarter ended June 30, 2001 2.20 1.13
Quarter ended March 31, 2001 2.25 0.91
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Fiscal Year ended December 31, 2000: High Low
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Quarter ended December 31, 2000 2.00 0.88
Quarter ended September 30, 2000 2.63 0.63
Quarter ended June 30, 2000 2.13 0.53
Quarter ended March 20, 2000 4.75 0.31
STOCKHOLDERS
As of March 2002, the Company had approximately 102 record holders of
its Common Stock, as reflected on the books of the Company's transfer agent. A
significant number of shares are held in street names and, as such, the Company
believes the actual number of beneficial owners is significantly higher.
DIVIDENDS
The Company has not established a policy concerning payment of regular
dividends nor has it paid any dividends on its Common Stock to date. Any payment
of dividends in the future will be determined by the Board of Directors in light
of conditions then existing, including the Company's earnings, financial
condition, capital requirements and debt covenants.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
On September 29, 2000, the Company sold its holdings in the Industrial
Subsidiaries to Spruce. The assets sold comprised substantially all of the
Company's operating assets and liabilities and operations for the year ended
September 30, 2000. The Company had no operations from the date of its sale of
the Industrial Subsidiaries until it acquired PTP on June 29, 2001. Therefore,
comparisons between the periods presented are not informative. In addition, PTP
was sold in February 2002. (See "Business Background--1999 Through 2001" in Item
1 of Part I above.)
Revenue
Based on the diverse nature of the Industrial Subsidiaries' operations
and the operations conducted by PTP, and the partial periods that the Company
owned and operated these subsidiaries during 2000 and 2001, a comparison of 2001
to 2000 would not be informative.
Gross Profit
Based on the diverse nature of the Industrial Subsidiaries' operations
and the operations conducted by PTP, and the partial periods that the Company
owned and operated these subsidiaries during 2000 and 2001, a comparison of 2001
to 2000 would not be informative.
Selling, General and Administrative Expenses:
Based on the diverse nature of the Industrial Subsidiaries' operations
and the operations conducted by PTP, and the partial periods that the Company
owned and operated these subsidiaries during 2000 and 2001, a comparison of 2001
to 2000 would not be informative.
7
Other Income (Expenses):
Based on the diverse nature of the Industrial Subsidiaries' operations
and the operations conducted by PTP, and the partial periods that the Company
owned and operated these subsidiaries during 2000 and 2001, a comparison of 2001
to 2000 would not be informative.
LIQUIDITY AND CAPITAL RESOURCES
The Company's existing capital resources as of December 31, 2001,
consisted of cash and notes totaling $3,612,000, compared to $6,084,000 for the
year ended December 31, 2000. The Company believes that the proceeds from the
sale of assets and the financing arrangements the Company currently has in place
would be sufficient throughout the next twelve months to finance its working
capital needs and any remaining obligations from the Company's divested
operations. Implementation of the Company's strategic plan of acquiring
communications towers will require additional capital, however.
During fiscal year 2001 the Company utilized net cash in operating
activities of $1,983,000, including a net loss of $2,447,000.
The Company's investing activities provided net cash of $5,209,000,
primarily due to collections from notes receivable and cash received in
acquisition.
The Company's financing activities utilized net cash of $1,049,000,
primarily due to payments on long-term debt.
TRENDS, RISKS AND UNCERTAINTIES
We have sought to identify what we believe to be the most significant
risks to our business, but we cannot predict whether or to what extent any of
such risks may be realized, nor can there be any assurances that the Company has
identified all possible risks that might arise. Current and potential investors
should carefully consider all of the following risk factors before making an
investment decision with respect to our stock.
WE HAVE NO PRIOR EXPERIENCE ACQUIRING, OWNING, OR LEASING WIRELESS
COMMUNICATIONS TOWERS.
Although the Company has a history of operations in the industrial
services and voice/data and cabling services sectors, we have no history of
acquiring, owning or leasing wireless communications towers. The current
strategy is a new direction for the Company, and we may encounter unanticipated,
unusual, or unexpected risks and problems in developing this new area of
business, which could adversely affect us, as well as our operations, revenue,
and ability to obtain a profit.
WE REQUIRE SIGNIFICANT CAPITAL TO ACQUIRE TOWERS.
We will require substantial capital to purchase towers. If we are
unable to raise capital when our needs arise, we will be unable to pursue our
current business strategy and may not be able to fund our operations.
IF WE OBTAIN ADDITIONAL FINANCING, IT COULD DILUTE PRESENT STOCKHOLDER
HOLDINGS.
Although we intend to finance a large portion of our tower acquisitions
with debt, we may also need to raise money through the sale of additional equity
within the next twelve months, in one or more private placements and/or public
offerings. If we do so, all of the then current existing stockholders and their
stock holdings will be proportionately diluted.
8
WE MAY NOT BE ABLE TO RETAIN TENANTS ON OUR TOWERS.
If tenants on the towers that we acquire default on their leases, or
fail to renew their leases upon the expiration thereof, we may have difficulty
finding replacement tenants, which could adversely affect our financial results
and our ability to obtain additional financing. Our growth strategy depends in
part on our ability to retain tenants on the towers that we acquire.
OUR BUSINESS DEPENDS ON THE DEMAND FOR WIRELESS COMMUNICATIONS.
Upon acquiring our wireless communications towers, we would be
adversely affected by any slowdown in the growth of, or reduction in demand for,
wireless communications. Demand for our site rentals depends on demand for
communication sites from wireless carriers, which, in turn, depends on the
demand for wireless services. The demand for our sites depends on many factors
that we cannot control, including:
o the level of demand for wireless services generally;
o the financial condition and access to capital of wireless carriers;
o the strategy of carriers relating to owning or leasing
communication sites;
o changes in telecommunications regulations; and
o general economic conditions.
A slowdown in the growth of, or reduction in, demand in a particular
wireless segment could adversely affect the demand for communication sites.
Moreover, wireless carriers often operate with substantial indebtedness, and
financial problems for such carriers that are our tenants could result in
accounts receivable going uncollected, the loss of a tenant (and associated
lease revenue), or a reduced ability of these carriers to finance expansion
activities and lease space on additional towers that we build or acquire.
Finally, advances in technology, such as the development of new satellite and
antenna systems, could reduce the need for land-based, or terrestrial,
transmission networks. The occurrence of any of these factors could have a
material adverse effect on our financial condition and results of operations.
OUR AGGRESSIVE BUSINESS PLANS WILL PLACE A SIGNIFICANT STRAIN ON OUR
ASSETS.
Implementation of our aggressive acquisition strategy will impose
significant strains on our management, operating systems and financial
resources. The acquisitions that we are currently contemplating would involve
substantial expenditures of our time and resources to close. If we fail to
manage our growth or encounter unexpected difficulties during expansion, it
could have a material adverse effect on our financial condition and results of
operations. The pursuit and integration of acquisitions will require substantial
attention from our senior management, which will limit the amount of time they
are able to devote to our existing operations.
WE ARE HEAVILY DEPENDENT ON OUR SENIOR MANAGEMENT.
If we lose members of our senior management, we may not be able to find
appropriate replacements on a timely basis, and our business could be adversely
affected. Our existing operations and continued future development depend to a
significant extent upon the performance and active participation of certain key
individuals as employees, including our chief executive officer and our chief
financial officer. We cannot guarantee that we will be successful in retaining
the services of these or other key personnel. If we were to lose any of these
individuals, we may not be able to find appropriate replacements on a timely
basis and our financial condition and results of operations could be materially
adversely affected.
9
WE HAVE A HISTORY OF LOSSES.
We incurred consolidated net losses of $2,447,000, $67,000, and
$6,225,000 during the year ended December 31, 2001, the three months ended
December 31, 2000 (we changed our fiscal year to a calendar year at the
beginning of 2001), and the year ended September 30, 2000, respectively. Our
management believes that our revised business plan will be successful and we
will become profitable; however, there can be no assurance that we will be
successful in implementing our business plan or that we will be profitable now
or in the future.
BECAUSE OUR COMPETITION HAS GREATER EXPERIENCE AND RESOURCES THAN WE
DO, WE MAY BE AT A COMPETITIVE DISADVANTAGE.
Many of our competitors have significantly greater experience and
financial resources than us, which could place us at a competitive disadvantage.
We will compete with a number of competitors that have a similar strategy of
acquiring and leasing wireless communications towers.
EMISSIONS FROM OUR ANTENNAS MAY CREATE HEALTH RISKS.
We could suffer from future claims if the radio frequency emissions from
equipment on our towers is demonstrated to cause negative health effects. The
government imposes requirements and other guidelines on our towers relating to
radio frequency emissions. The potential connection between radio frequency
emissions and certain negative health effects, including some forms of cancer,
has been the subject of substantial study by the scientific community in recent
years. To date, the results of these studies have been inconclusive. We cannot
guarantee that claims relating to radio frequency emissions will not arise in
the future.
ITEM 7. FINANCIAL STATEMENTS.
The audited financial statements are annexed to this report, commencing
on page F-i.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information relating to directors, executive officers, and
compliance with Section 16(a) of the Exchange Act contained in the Company's
definitive proxy statement to be delivered to stockholders in connection with
the 2002 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information relating to executive compensation contained in the
Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information relating to security ownership of certain beneficial
owners and management contained in the Proxy Statement is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to related party transactions contained in the
Company's Proxy Statement is incorporated herein by reference.
10
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2.1 Stock Purchase Agreement, dated as of December 2000, between Deere Park
Capital, L.L.C. and Frank J. Fradella (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on January 5, 2001, 2001,
and incorporated herein by reference).
2.2 Stock Purchase and Note Assignment Agreement, dated as of September 29,
2000, between Spruce MacIntyre Holding Corp., P.W. Stephens
Environmental, Inc., P.W. Stephens Contractors, Inc., P.W. Stephens
Services, Inc., P.W. Stephens Northwest, Inc. and U.S. Industrial
Services, Inc. (filed as Exhibit 2.1 to the Company's Current Report on
Form 8-K filed on February 20, 2001, and incorporated herein by
reference).
2.3 Stock Purchase Agreement, dated as of March 23, 2001, between Deere
Park Capital, L.L.C. and Frank J. Fradella (filed as Exhibit 2 to
Amendment No. 3 to Schedule 13D of Deere Park Capital, L.L.C. and
Douglas Gerrard filed on April 23, 2001, and incorporated herein by
reference).
2.4 Secured Promissory Note, dated as of March 23, 2001, issued by Frank J.
Fradella to Deere Park Capital, L.L.C. (filed as Exhibit 3 to Amendment
No. 3 to Schedule 13D of Deere Park Capital, L.L.C. and Douglas Gerrard
filed on April 23, 2001, and incorporated herein by reference).
2.5 Hypothecation Agreement, dated as of March 23, 2001, among Deere Park
Capital, L.L.C., Frank J. Fradella and U S Industrial Services, Inc.
(filed as Exhibit 4 to Amendment No. 3 to Schedule 13D of Deere Park
Capital, L.L.C. and Douglas Gerrard filed on April 23, 2001, and
incorporated herein by reference).
2.6 Reorganization Agreement and Plan of Merger, effective as of June 29,
2001, by and among U S Industrial Services, Inc., a Delaware
corporation, Point To Point Network Services, Inc., a Massachusetts
corporation, and W. Michael Sullivan (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on July 19, 2001, and
incorporated herein by reference).
2.7 Note Purchase Agreement, dated as of November 30, 2001, by and among
Capital Resource Partners IV, L.P., a Delaware limited partnership, CRP
Investment Partners IV, LLC, a Delaware limited liability company,
ATNAM Enterprises, Inc., an Illinois corporation, and Kenny Industrial
Services, L.L.C., a Delaware limited liability company (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K filed on
December 18, 2001, and incorporated herein by reference).
2.8 Settlement Agreement, dated as of November 30, 2001, by and among ATNAM
Enterprises, Inc., an Illinois corporation, Nextgen Communications
Corporation, a Delaware corporation, and Kenny Industrial Services,
L.L.C., a Delaware limited liability company (filed as Exhibit 2.2 to
the Company's Current Report on Form 8-K filed on December 18, 2001,
and incorporated herein by reference).
2.9 Agreement dated November 30, 2001, by and among Deere Park Capital,
L.L.C., an Illinois limited liability company, Frank J. Fradella, and
Nextgen Communications Corporation, a Delaware corporation (filed as
Exhibit 1 to Amendment No. 3 to Schedule 13D of Frank J. Fradella filed
on January 3, 2002, and incorporated herein by reference).
3.1 Certificate of Incorporation of the Company, as restated on July 31,
2001 (filed as Exhibit A to the Company's Information Statement on
Schedule 14C filed on July 9, 2001, and incorporated herein by
reference).
3.2 Bylaws of the Company, as amended on April 2, 2001 (filed as Exhibit
3.2 to the Company's Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2001, and incorporated herein by reference).
10.1* 1998 Stock Option Plan (filed as Exhibit 4.1 to the Company's Annual
Report on Form 10-KSB for the year ended September 30, 1998, and
incorporated herein by reference).
10.2 Promissory Notes in principal amounts of $3,490,000 and $1,000,000,
respectively, issued to ATNAM Enterprises, Inc. by Kenny Industrial
Services, L.L.C. (filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 2001, and
incorporated herein by reference).
11
10.3* 2001 Stock Plan (filed as Exhibit B to the Company's Information
Statement on Schedule 14C filed on July 9, 2001, and incorporated
herein by reference).
10.4 Voting Agreement by and between Frank J. Fradella and W. Michael
Sullivan, dated June 29, 2001 (filed as Exhibit 99.1 to Frank J.
Fradella's Schedule 13D/A filed on July 19, 2001, and incorporated
herein by reference).
10.5 Note Modification Agreement dated April 30, 2001, by and between Spruce
MacIntyre Holding Corp. and U S Industrial Services, Inc. (filed as
Exhibit 10.6 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2001, and incorporated herein by reference).
10.6* Employment Agreement by and between Frank J. Fradella and U S
Industrial Services, Inc., dated April 2, 2001. (filed as Exhibit 10.7
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2001, and incorporated herein by reference).
10.7* Registration Rights Agreement by and between Frank J. Fradella and U S
Industrial Services, Inc., dated April 2, 2001. (filed as Exhibit 10.8
to the Company's Quarterly Report on Form 10-QSB for the quarter ended
June 30, 2001, and incorporated herein by reference).
10.8* Stock Option Agreement executed December 27, 2001, to be effective as
of October 3, 2000, by and between Frank J. Fradella and Nextgen
Communications Corporation (filed as Exhibit 2 to Amendment No. 3 to
Schedule 13D of Frank J. Fradella filed on January 3, 2002, and
incorporated herein by reference).
----------
* Denotes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on December 18,
2001, for an event as of November 30, 2001, to report the Company's
sale of two promissory notes that had been issued by Kenny Industrial
Services, L.L.C. to a subsidiary of the Company.
12
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NEXTGEN COMMUNICATIONS CORPORATION
Dated: April 1, 2002 By: /s/ FRANK J. FRADELLA
----------------------------------------
Frank J. Fradella
President and Chief Executive Officer
NEXTGEN COMMUNICATIONS CORPORATION
Dated: April 1, 2002 By: /s/ R. ANDREW WHITE
----------------------------------------
R. Andrew White
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Dated: April 1, 2002 By: /s/ FRANK J. FRADELLA
----------------------------------------
Frank J. Fradella, Sole Director
13
NEXTGEN COMMUNICATIONS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
F-i
NEXTGEN COMMUNICATIONS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
PAGE
----
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED BALANCE SHEET F-2
CONSOLIDATED STATEMENTS OF OPERATIONS F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 - F-23
F-ii
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
NEXTGEN COMMUNICATIONS CORPORATION:
We have audited the accompanying consolidated balance sheet of NEXTGEN
COMMUNICATIONS CORPORATION as of December 31, 2001, and the consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 2001, the three-month period ended December 31, 2000, and the year
ended September 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of NEXTGEN
COMMUNICATIONS CORPORATION as of December 31, 2001, and the consolidated results
of its operations and its cash flows for the year ended December 31, 2001, the
three-month period ended December 31, 2000, and the year ended September 30,
2000, in conformity with accounting principles generally accepted in the United
States of America.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
March 1, 2002
F-1
NEXTGEN COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
(In Thousands)
ASSETS
Current assets
Cash $ 2,210
Accounts receivable, net of allowance
for doubtful accounts of $30 639
Costs and earnings in excess of billings 226
Note receivable - current portion 353
Inventory 50
Other current assets 41
--------
Total current assets 3,519
Restricted cash 167
Note receivable, long-term portion 1,049
Property and equipment, net of accumulated depreciation of $73 470
Goodwill, net of accumulated amortization of $44 3,465
Other assets 2
--------
TOTAL ASSETS $ 8,672
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,851
Billings in excess of costs 220
Due to affiliate 1,370
Deferred revenue 63
Notes payable - current portion 5
Note payable - stockholder - current portion 208
Other current liabilities 6
--------
Total current liabilities 3,723
Long-term debt - stockholder 133
Long-term debt - others 11
--------
Total liabilities 3,867
--------
Stockholders' equity
Common stock, $.001 par value, 50,000 shares
authorized 10,972 shares issued and outstanding 11
Additional paid-in capital 26,393
Accumulated deficit (21,599)
--------
Total stockholders' equity 4,805
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,672
========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
NEXTGEN COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except for per share amounts)
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
2001 2000 2000
------------ ------------ ------------
Revenue $ 4,433 $ -- $ 13,511
------------ ------------ ------------
Costs and expenses
Direct costs of revenue 2,943 -- 10,805
Selling, general and administrative expenses 2,605 155 5,796
------------ ------------ ------------
5,548 155 16,601
------------ ------------ ------------
Operating loss (1,115) (155) (3,090)
------------ ------------ ------------
Other income (expense)
Loss on sale of note receivable (1,591) -- --
Gain on sale of subsidiary -- -- 379
Interest income (expense), net 259 88 23
------------ ------------ ------------
Total other income (expense) (1,332) 88 402
------------ ------------ ------------
Loss from operations before income taxes (2,447) (67) (2,688)
Income tax provision -- -- 3,537
------------ ------------ ------------
Net loss $ (2,447) $ (67) $ (6,225)
============ ============ ============
Basic and diluted loss per common share $ (0.25) $ (0.01) $ (0.71)
============ ============ ============
Weighted average shares outstanding
- Basic and diluted 9,868 8,764 8,764
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
NEXTGEN COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DECEMBER 31, 2001
(In Thousands)
Common Shares
------------------------ Additional Total
Shares Dollar Paid-in Accumulated Shareholders'
Outstanding Amount Capital Deficit Equity
----------- ---------- ---------- ----------- -------------
Balance, September 30, 1999 8,764 $ 88 $ 22,684 $ (12,860) $ 9,912
Issuance of warrants -- -- 493 -- 493
Net loss -- -- -- (6,225) (6,225)
---------- ---------- ---------- ---------- ----------
Balance, September 30, 2000 8,764 23,177 (19,085) 4,180
88
Net loss -- -- -- (67) (67)
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2000 8,764 88 23,177 (19,152) 4,113
Exercise of options 83 1 33 -- 34
Issuance of shares for services 125 1 190 -- 191
Issuance of shares for acquisition 2,000 20 2,894 -- 2,914
Net loss -- -- -- (2,447) (2,447)
Adjustment for change in par value -- (99) 99 -- --
---------- ---------- ---------- ---------- ----------
Balance, December 31, 2001 $ 10,972 $ 11 $ 26,393 $ (21,599) $ 4,805
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
NEXTGEN COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
2001 2000 2000
------------ ------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,447) $ (67) $ (6,225)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 117 -- 680
Allowance for doubtful accounts 67 -- (81)
Gain on sale of subsidiary -- -- (379)
Change in deferred income tax -- -- 3,537
Loss on sale of notes receivable 1,591 -- 336
Stock-based compensation 60 -- 493
Change in accounts receivable (706) -- (87)
Change in costs and estimated earnings in excess of
billings on jobs in progress (91) -- 321
Change in prepaid expenses and other current assets 168 (88) (419)
Change in other assets 9 -- 34
Change in accounts payable and accrued liabilities (519) 51 1,515
Change in other payables and due to affiliates (132) -- (534)
Change in billings in excess of costs and estimated earnings
on jobs in progress (100) -- 680
-------- -------- --------
Net cash (used in) provided by operating activities (1,983) (104) (129)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments of notes receivable 2,500 -- --
Payments on notes receivable 897 100 1,000
Cash received in acquisition, net 1,812 -- (421)
Capital expenditures -- -- (136)
-------- -------- --------
Net cash provided by investing activities 5,209 100 443
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (882) -- (582)
Proceeds from notes payable -- 25 --
Restricted cash (167) -- --
-------- -------- --------
Net cash (used in) provided by financing activities (1,049) 25 (582)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 2,177 21 (268)
CASH AT BEGINNING OF YEAR 33 12 280
-------- -------- --------
CASH AT END OF YEAR $ 2,210 $ 33 $ 12
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 23 $ -- $ 217
======== ======== ========
Income Taxes $ -- $ -- $ --
======== ======== ========
Supplemental schedule of non-cash investing and financing activities:
Machinery and equipment acquired through capital lease obligations $ -- $ -- $ 2,190
======== ======== ========
Stock issued for services $ 60 $ -- $ --
======== ======== ========
Stock issued in payment of accounts payable $ 131 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Company Description and Nature of Operations
Nextgen Communications Corporation (formerly U S Industrial
Services, Inc.) and its wholly owned subsidiaries (the "Company"
or "Nextgen"), provide comprehensive network development services
and components for the communications industry. The Company's
corporate operations are based in Houston, Texas.
On July 31, 2001, the Company filed a restated certificate of
incorporation, thereby changing its name from U S Industrial
Services, Inc. to Nextgen Communications Corporation. The restated
certificate of incorporation also increased the authorized shares
of the Company's common stock from 25,000 to 50,000, and decreased
the par value of the Company's common and preferred stock from
$0.01 to $0.001. Stockholders holding a majority of the Company's
common stock outstanding approved the restated certificate of
incorporation by their written consent in lieu of a special
meeting dated June 14, 2001.
On June 29, 2001, the Company completed the acquisition of Point
To Point Network Services, Inc. ("Point to Point"), based in
Methuen, Massachusetts. Point to Point is a provider of fixed
communications networking design and build-out services, such as
voice, data, and video, to the communications industry. The
acquisition was structured as a forward triangular merger (the
"Merger"), with Point to Point merging with and into a subsidiary
of the Company, pursuant to a Reorganization Agreement and Plan of
Merger (the "Merger Agreement").
The individual who was the sole shareholder of Point to Point
prior to the Merger received the following consideration in the
Merger: (a) 2,000 shares of the Company's common stock (the
"Merger Shares") valued at $2,914; (b) $667 in cash; and (c) an
earn-out calculated as five times the amount by which Point to
Point's earnings before interest, taxes, depreciation and
amortization exceed $771 during 2001, payable 20% in cash and the
remainder in shares of common stock, based on a value per share
equal to the closing trading price of the common stock on the last
trading day of 2001. The earn-out portion of the purchase price,
if any, will be recorded as compensation expense. No earn-out
payment is due to the former stockholder since Point to Point's
earnings for the year did not exceed $771. The Merger Agreement
requires 200 shares of the Merger Shares to be held in escrow for
one year in order to satisfy certain indemnification obligations
that could arise under the Merger Agreement, and piggy-back
registration rights were granted in connection with the Merger
Shares. The Company had 10,889 shares of Common Stock outstanding
immediately following the Merger.
From September 29, 2000 to June 29, 2001, the Company had no
significant operations. Prior to September 29, 2000, the Company
operated as a multi-state service company, specializing in
industrial cleaning services, including soil and groundwater
remediation, hazardous material management and clean-up, asbestos
abatement and lead hazard removal services.
F-6
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Company Description and Nature of Operations (continued)
On September 29, 2000 the Company sold its holdings in P.W.
Stephens Environmental, Inc., P.W. Stephens Contractors, Inc.,
P.W. Stephens Services, Inc. and P.W. Stephens Northwest, Inc. to
Spruce MacIntyre Holding Corp. ("Spruce"). The Company also
assigned to Spruce its interest in a note receivable from American
Temporary Sanitation Inc., with a face value of $1,220. Total
consideration for the sale and assignment was $1,650. The assets
sold comprised substantially all of the Company's operating assets
and liabilities and operations for the year ended September 30,
2000.
The Company was a majority-owned subsidiary of American Eco
Corporation (AEC) through July 21, 2000, at which time Deere Park
Capital, LLC ("Deere Park") acquired AEC's stake in the Company,
which consisted of approximately 81.9% of the Company's
outstanding common stock. As a result of two Stock Purchase
Agreements between Deere Park and Frank J. Fradella, the President
and Chief Executive Officer of the Company ("Fradella"), dated
December 21, 2000, and March 23, 2001, respectively, Fradella
purchased, on behalf of himself and a third-party nominee for
other individuals, 6,926 shares of the Company's common stock held
by Deere Park. The purchase price for such shares was paid by
Fradella in cash and a promissory note secured by 500 shares of
common stock of the Company, which Fradella subsequently
transferred back to Deere Park in full satisfaction of the
promissory note. As a result of these transactions, Fradella
currently owns 1,503 shares, or approximately 16%, of the
Company's outstanding common stock as of March 22, 2002.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated in consolidation.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in
accordance with generally accepted accounting principles. For
certain of the Company's financial instruments, including cash,
receivables, notes receivable, accounts payable and due to
affiliate, the carrying amounts approximate fair value due to
their short maturities.
Use of Estimates
The 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 these estimates.
F-7
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Concentration of Credit Risk
Financial instruments, which potentially subject the company to
concentrations of credit risk, consist of cash and notes and other
receivables. The Company places its cash with high quality
financial institutions and at times may exceed the FDIC $100
insurance limit. The Company offers its services predominately in
the states of Massachusetts, Maine and New York, and it extends
credit based on an evaluation of a customer's financial condition,
generally without collateral. Exposure to losses on accounts
receivable is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses, if required.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash
equivalents.
Inventory
Inventory consists of supplies and is valued at lower of cost or
market on a first-in, first-out basis.
Property Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of
plant and equipment is provided over the estimated useful lives of
the respective assets using the straight-line method. Leasehold
improvements are amortized over the shorter of life of the lease
or the estimated life of the improvements.
Goodwill
Goodwill represents the excess of acquisition cost over the net
assets acquired in a business combination and is amortized on the
straight-line method over 40 years. Management reviews, on an
annual basis, the carrying value of goodwill in order to determine
whether an impairment has occurred. Impairment is based on several
factors including the Company's projection of future undiscounted
operating cash flows. If an impairment of the carrying value were
to be indicated by this review, the Company would adjust the
carrying value of goodwill to its estimated fair value.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the related carrying amount
may not be recoverable. Recovery of assets to be held and used is
measured by a comparison of the carrying amount of the assets to
the future net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less the cost to sell.
F-8
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Revenue Recognition
The Company reports revenues from fixed priced contracts using the
percentage of completion method for financial reporting purposes.
Under the percentage of completion method, revenues with respect
to individual contracts are recognized in the proportion that
costs incurred to date bear to total estimated costs. Revenue and
cost estimates are subject to revision during the terms of the
contracts, and any required adjustments are made in the periods in
which the revisions become known. Provision is made, where
applicable, for the entire amount of future estimated losses on
contracts in progress when such losses are determined. General and
administrative costs are not allocated to contract costs and are
charged to expense as incurred.
The Company recognizes revenues from time and materials contracts
and consulting services as those services are performed. Advance
payments made under these contracts are recorded as deferred
revenue and recognized when the related services are performed.
Stock-Based Compensation
The Company uses the intrinsic value method of accounting for
stock-based compensation in accordance with Accounting Principles
Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. See Note 9 for pro forma
disclosure of net income and earnings per share under the fair
value method of accounting for stock-based compensation as
proscribed by Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation."
Income Taxes
Income taxes are provided for based on the liability method of
accounting pursuant to SFAS No. 109, "Accounting for Income
Taxes". Deferred income taxes, if any, are recorded to reflect the
tax consequences on future years of differences between the tax
bases of assets and liabilities and their financial reporting
amounts at each year-end.
Per Share Data
The Company calculates earnings per share in accordance with SFAS
No. 128, "Earnings Per Share", which requires presentation of
basic earnings per share ("BEPS") and diluted earnings per share
("DEPS"). The computation of BEPS is computed by dividing income
available to common stockholders by the weighted average number of
outstanding common shares during the period. DEPS gives effect to
all dilutive potential common shares outstanding during the
period. The computation of DEPS does not assume conversion,
exercise or contingent exercise of securities that would have an
antidilutive effect on earnings. As of December 31, 2001, the
Company had the following securities that would effect loss per
share if they were to be dilutive:
F-9
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Per Share Data (continued)
Options 909
Warrants 392
-----
1,301
=====
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", establishes
standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial
statements. During the periods presented, the Company had no items
of other comprehensive income and, therefore, has not presented a
statement of comprehensive income.
NOTE 2 - NOTE RECEIVABLE
The Company held notes receivable from Kenny Industrial Services,
LLC ("Kenny") in the original principal amount of $4,000. On March
31, 2001, the notes were amended and restated; this resulted in a
new principal amount of $4,490, which included accrued and unpaid
interest. On November 30, 2001, the Company and Kenny entered into
the second amended and restated notes with a principal amount of
$4,091. These notes were then sold for cash proceeds of $2,500.
This sale resulted in a loss of $1,591.
The Company holds a note receivable from Spruce McIntyre Holding
Corp. resulting from the sale of assets in September 2000.
Principal payments were due in three installments beginning June
15, 2001. The note was modified on April 30, 2001 in a new
principal amount of $1,420, representing the outstanding principal
balance of the original note on that date. The modified note bears
an interest rate of 7.75% and matures on July 1, 2005. Terms
provide for payments of interest only through November 1, 2001 and
44 equal payments of principal and interest of $37 commencing
December 1, 2001. Outstanding principal at December 31, 2001 is
$1,402. The note is secured by the assets sold and by certain
assets of the purchaser.
F-10
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows at December
31, 2001:
Furniture and equipment $ 251
Software 42
Autos 30
Leasehold improvements 220
-----
543
Less: accumulated depreciation and amortization (73)
-----
Property and equipment, net $ 470
=====
Depreciation expense for the year ended December 31, 2001 was $73.
All of the above assets were acquired in the Point to Point
acquisition and this expense represents depreciation from June 29
to December 31. There was no depreciation expense for the period
prior to the acquisition.
The estimated service lives used in determining depreciation are
one to six years for furniture and equipment, one to two years for
software, one to four years for automobiles and seven years for
leasehold improvements.
For the three months ended December 31, 2000 and the year ended
September 30, 2000, depreciation expense was $-0- and $633,
respectively. The Company sold the assets and operations that had
resulted in this expense.
NOTE 4 - BUSINESS COMBINATIONS AND DISPOSITIONS
Point to Point Network Services, Inc.
As described in Note 1, the Company acquired all of the issued and
outstanding stock of Point to Point Network Services, Inc. on June
29, 2001. This acquisition has been recorded as a purchase.
Consideration paid was 2,000 shares of the Company's common stock,
valued at $2,914 and cash of $678, for a total consideration of
$3,592. The Company has also incurred direct costs related to the
acquisition of $189, for a total purchase price of $3,781. The
purchase price has been allocated as follows:
F-11
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 4 - BUSINESS COMBINATIONS AND DISPOSITIONS (Continued)
Point to Point Network Services, Inc. (continued)
Cash $ 2,679
Inventory 171
Note receivable 350
Property and equipment 543
Other assets 186
Accounts payable and accruals (1,830)
Notes payable (1,215)
Billings in excess of earnings (320)
Deferred revenue (153)
Other liabilities (139)
Goodwill 3,509
--------
Total $ 3,781
========
The results of operations of Point to Point have been included
since June 29, 2001. The following unaudited pro forma information
presents the results of operations for the periods as though the
acquisition had occurred on October 1, 1999:
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30
2001 2000 2000
------------ ------------ ------------
Revenue $ 10,989 $ 4,630 $ 29,354
Net loss (3,728) (704) (5,965)
Loss per share (0.32) (0.07) (0.55)
P.W. Stephens Environmental, Inc. (PWSE"), P.W. Stephens
Contractors, Inc. ("PWSC"), P.W. Stephens Service, Inc., ("PWSS"),
P.W. Stephens Northwest, Inc. ("PWSN")
On September 29, 2000, the Company sold its holdings in PWSE,
PWSC, PWSS and PWSN to Spruce MacIntyre Holding Corp. Also, the
Company assigned its interest in a note receivable with a face
amount of $1,220. The consideration for the sale and assignment is
$1,650, consisting of a cash payment of $100 and a note receivable
in the aggregate amount of $1,550 (see Note 2). The Company has
recorded a gain on the sale of $310.
The assets sold comprised substantially all of the Company's
operating assets and all of its revenue generating activity at the
time of sale.
F-12
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 5 - LEASES
For the year ended December 31, 2001, the three months ended
December 31, 2000, and the year ended September 30, 2000, rent
expense was approximately $143, $-0- and $51, respectively. The
Company has sold the operations that resulted in rent expense for
September 30, 2000.
The Company's Houston facilities are leased on a month-to-month
basis, with a monthly rent of $5.
Point to Point entered into a lease agreement for its headquarters
in Methuen, Massachusetts, under an operating lease, expiring May
2003, at which time the lease may be extended, at the option of
the Company, for an additional five year term. The Company also
occupies a field office in Windham, Maine. This lease expires on
February 28, 2002; thereafter, this space will be leased on a
month-to-month basis.
The Company is leasing a vehicle under an operating lease that
expires November 2004.
Future minimum annual lease commitments under these operating
leases are as follows:
Year Ending December 31, AMOUNT
------------------------ ------
2002 $ 179
2003 79
2004 8
For the period ended December 31, 2000, the Company's principal
corporate office was located in Northbrook, Illinois, which
consisted of office space shared with a principal stockholder at
no incremental cost to the Company. The fair value of the rental
was approximately $0.5 per month.
F-13
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 6 - FEDERAL INCOME TAX
The components of the provisions (benefit) for income taxes are as
follows:
December 31,
------------------------ September 30,
2001 2000 2000
---------- ---------- -------------
Current tax expense:
U.S. Federal $ -- $ -- $ --
State and local -- -- --
---------- ---------- ----------
Total current -- -- --
---------- ---------- ----------
Deferred tax expense --
U.S. Federal -- 3,537
State and local -- -- --
---------- ---------- ----------
Total deferred -- -- 3,537
---------- ---------- ----------
Total tax provision from
continuing operations $ -- $ -- $ 3,537
========== ========== ==========
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
December 31,
----------------------- September 30,
2001 2000 2000
---------- ---------- -------------
Federal income tax rate (34.0)% (34.0)% (34.0)%
State and local income tax rate -- -- --
Effect of reversal of deferred
tax valuation allowance -- -- 236.8
Effect of deferred tax
valuation allowance 34.0 34.0 --
---------- ---------- ----------
Effective income tax rate -- -- 202.8%
========== ========== ==========
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of asset and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's
deferred tax assets are as follows as of December 31, 2001:
F-14
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 6 - FEDERAL INCOME TAX (Continued)
Deferred tax assets
Loss carryforwards $ 4,871
Less: valuation allowance (4,871)
--------
Net deferred tax assets $ 0
========
At December 31, 2001, the Company had net carryforward losses of
approximately $14,325. Net operating loss carryforwards expire
starting in 2016 through 2020. Per year availability may be
subject to change of ownership limitation under Internal Revenue
Code Section 382.
NOTE 7 - LITIGATION, COMMITMENTS AND CONTINGENCIES
The nature and scope of the Company's business operations bring it
into regular contact with the general public, a variety of
businesses and government agencies. These activities inherently
subject the Company to potential litigation, which are defended in
the normal course of business. At December 31, 2001, there were
various claims and disputes incidental to the business. The
Company believes that the disposition of all such claims and
disputes, individually or in the aggregate, should not have a
material adverse affect upon the Company's financial position,
results of operations or cash flows. As of December 31, 2001, the
Company has not been named as a responsible party for any
environmental issues under the Federal Superfund Law.
An adversary proceeding was commenced on or about February 9, 2001
by American Eco Corporation ("Plaintiff"), which, at the time, was
a debtor-in-possession under Chapter 11 of the United States
Bankruptcy Code. The proceeding, which is styled Complaint for
Collection of Account Receivable, Turnover of Property of the
Estate and Avoidance Fraudulent Conveyance, seeks the recovery of
certain alleged transfers and recovery of fees against the Company
based on theories of breach of contract, promissory estoppel,
quantum meruit and pursuant to Sections 542, 544, 548 and 550 of
the Bankruptcy Code. The proceeding seeks a recovery in excess of
$1,300 and other equitable relief. The Company has filed its
answer, which, in part, denies all liability. An Order Scheduling
Pre-Trial Proceedings was signed on October 31, 2001. A trial date
has not yet been set. The Company is vigorously defending this
suit. At this time, the Company cannot predict the likelihood of
an unfavorable outcome nor estimate the amount or range of
potential loss; however, certain management fees have been accrued
in the financial statements (see Note 8).
F-15
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 7 - LITIGATION, COMMITMENTS AND CONTINGENCIES (Continued)
On November 6, 2001, the Company was sued by CIT Group/Equipment
Financing, Inc. in the United States District Court for the
Eastern District of Missouri. CIT alleges that a former subsidiary
of the Company breached an equipment lease and that the subsidiary
owes CIT approximately $720 plus interest, attorney's fees, and
costs. CIT alleges that the Company is liable as a guarantor for
the lease. The Company has answered the suit and intends to
vigorously defend against the allegations. Moreover, because the
guarantee relates to a subsidiary of the Company that has been
sold, the Company has made a claim on the purchaser of the
subsidiary - Spruce MacIntyre Holding Corp. ("Spruce") - to defend
and indemnify the Company in this case. Spruce has agreed to
indemnify and defend this case on the Company's behalf. Because of
the early nature of this case, it cannot be determined with any
degree of certainty what the result of this case will be for the
Company.
On November 16, 2001, Acstar Insurance Company ("Acstar") filed a
third party complaint against the Company and several other
third-party defendants in the United States District Court for the
Eastern District of Missouri. In the primary suit, Acstar is being
sued by Spiratas Company for approximately $650 that is allegedly
due under a construction contract plus attorney's fees, interest,
and costs. Acstar has sued the Company as a third party defendant
alleging that the Company agreed to indemnify Acstar in the event
of any claim. While the Company has not yet answered the
complaint, the Company intends to defend the suit vigorously.
Moreover, because the indemnification agreement relates to a
subsidiary of the Company that has been sold, the Company has made
a claim on the purchaser of the subsidiary - Spruce - to defend
and indemnify the Company in this case. Spruce has agreed to
indemnify and defend the Company and has hired counsel to answer
and defend this case on the Company's behalf. Because of the early
nature of this case, it cannot be determined with any degree of
certainty what the result of this case will be for the Company.
The Company has entered into employment contracts with two
executive officers. Each contract provides for an annual salary of
$200; one contract has been terminated (see Note 14) and the other
expires during 2004.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company is involved in various related party transactions.
These transactions are summarized as follows:
F-16
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 8 - RELATED PARTY TRANSACTIONS (Continued)
Pursuant to a Management Services Agreement effective May 1, 1999,
between AEC and the Company, AEC had agreed to provide certain
services to the Company in exchange for a management fee to be
paid on a monthly basis. The services include providing the
Company with management guidance in addition to guaranteeing
certain of the Company's obligations with its creditors, in order
to allow the Company to receive favorable terms with its
creditors. The agreement provided for a monthly payment of $40.
For the year ended September 30, 2000, total management fees
recorded were $280, which are included in other payables in the
consolidated balance sheet, as further described below. The
Company believes that AEC did not perform its responsibilities
under the management agreement and, although the Company has
recorded the management fees in the financial statements, it is
contesting the validity of the agreement. At December 31, 2001,
the Company was indebted to AEC in the amount of $1,370, including
the disputed management fees. The amounts are due on demand and
included in other payables.
The Company is obligated to Point to Point's former shareholder
pursuant to a note in the amount of $340, which represented
advances made to Point to Point prior to its acquisition by the
Company. The note is described in Note 11 - Long-Term Debt.
NOTE 9 - EQUITY
Warrants
During the year ended September 30, 2000, the Company issued
warrants to purchase an aggregate of 296 shares of the Company's
common stock. The warrants are exercisable at $1.50 per share for
five years. The warrants have been valued at $493 using the
Black-Scholes option pricing model with the following weighted
average assumptions: risk free interest rate of 5%; dividend yield
of 0%; volatility of 238%; and an expected life of 5 years.
During the year ended September 30, 1999, the Company issued
warrants, related to financing fees, for the purchase of 96 shares
of the Company's common stock at $1.50 price per share, for 5
years. The warrants had an aggregate fair value at date of grant
of $48. The fair value for the warrants was estimated at the date
of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of
6.1%; dividend yield of 9%; volatility of 183%; expected life of
2.5 years.
Stock Options
The Company's board of directors approved the 2001 Stock Plan (the
"2001 Plan") on April 2, 2001. The 2001 Plan provides for awards
of incentive stock options, non-qualified stock options, and
restricted stock purchase rights. The Company has reserved 2,000
shares of common stock under the 2001 Plan. The exercise price of
the awards shall be determined by the Plan administrator at the
date of grant, but shall not be less than the fair market value of
the stock at the date of grant for employees, or 85% of the fair
market value for non-employees. The exercise period shall be no
more than 10 years and the awards will vest over a period of time
determinable by the board of directors.
F-17
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 9 - EQUITY (Continued)
Stock Options (continued)
The Company's board of directors approved the 1998 Stock Option
Plan (the "Plan"). The Plan covers two types of options: incentive
stock options and non-qualified stock options. The aggregate
number of shares that may be issued pursuant to the Plan may not
exceed 1,000 shares. The exercise price for the options shall be
determined by the Plan administrator at the date of grant, but
shall not be less than the fair market value of the stock at the
date of grant. The option period can be no more than 10 years and
the options will vest over a period of time determinable by the
board.
Pro forma information regarding net income and earnings per share
is required by SFAS No. 123, "Accounting for Stock-Based
Compensation", and has been determined as if the Company had
accounted for its employee stock awards under the fair value
method of that Statement. The weighted average fair values at date
of grant for options granted during 2001 and 2000 were $1.14 and
$0.73, and were estimated at the date of grant using the
Black-Scholes option pricing model with the following respective
weighted average assumptions for 2001 and 2000: interest rates of
5.5% and 5%; dividend yields of 0%; volatility of 160% and 238%;
and a weighted average expected life of the option of 5 years.
This option valuation model requires input of highly subjective
assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a
reliable single measure of the fair value of its employee stock
options.
The Company has adopted only the disclosure provisions of SFAS No.
123. It applies Accounting Principles Bulletin ("APB") Options No.
25, "Accounting for Stock Issued to Employees", and related
interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other
than for stock and other equity instruments issued to outside
third parties. If the Company had elected to recognize
compensation expense based on the fair value at the grant date for
awards under these plans consistent with the methodology
prescribed by SFAS 123, the Company's net loss would be increased
by approximately $274, $8 and 359 for the periods ended December
31, 2001, December 31, 2000 and September 30, 2000, respectively,
to the pro forma amounts indicted below.
December 31, September 30,
--------------------- -------------
2001 2000 1999
-------- -------- -------------
As reported $ (2,447) $ (67) $ (6,225)
Pro forma $ (2,721) $ (75) $ (6,584)
Loss per share - Pro forma $ (0.28) $ (0.01) $ (0.75)
F-18
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 9 - EQUITY (Continued)
The following summarizes the Company's stock option transactions
under the stock option plan:
Weighted
Share Options Average
Outstanding Exercise Price
------------- --------------
Outstanding, September 30, 1999 895 $ 1.52
Granted at an exercise of price $4.74 10 4.74
Granted at exercise price of $0.75 125 0.75
--------
Outstanding, September 30, 2000 1,030 1.46
Options expired (325) 0.87
--------
Outstanding, December 31, 2000 705 1.73
Granted at an exercise price of $1.25 375 1.25
Granted at an exercise price of $1.55 102 1.55
Options exercised (83) 0.41
Options expired (190) 4.74
--------
Outstanding, December 31, 2001 909 1.00
========
The following table summarizes the outstanding and exercisable
options grouped by range of exercise prices as of December 31,
2001:
Weighted Weighted
Average Range of Average
Remaining Exercise Exercise
Number of Shares Life Prices Price
---------------- --------- -------------- --------
422 2.5 years $0.41 to $1.10 $0.50
10 2.9 years 4.74 $4.74
477 4.3 years $1.25 to $1.55 1.31
NOTE 10 - RETIREMENT PLANS
As of December 31, 2001, a majority of the Company's current and
former employees are covered by union sponsored, collectively
bargained multi-employer pension plans. The Company contributed
and charged to expense approximately $109 and $160 in fiscal years
ended December 31, 2001 and September 30, 2000, respectively, for
such plans. The plans' administrators do not provide sufficient
information to enable the Company to determine its share, if any,
of unfunded vested benefits.
F-19
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 10 - RETIREMENT PLANS (Continued)
Point to Point also maintains a 401K Plan for its non-union
employees. The Company matched a portion of the employee
contributions. The matching amount charged to expense for the year
ended December 31, 2001 was $6.
NOTE 11 - LONG-TERM DEBT
Point to Point is obligated to its former shareholder pursuant to
a note dated June 29, 2001, in the amount of $340. The note bears
interest at 8.25%. Interest only is payable monthly in arrears
until January 1, 2002. Starting February 1, 2002, the note is to
be repaid in 18 equal monthly installments of principal and
interest.
In the event of a default, interest is payable at 18% per annum.
Default events include the following:
a) Borrower fails to pay principal and interest when due.
b) Borrower fails to meet its obligations or violates terms of the
Reorganization Agreement and Plan of merger between Lender,
Borrower and certain other parties, dated June 29, 2001.
c) Borrower makes an assignment for the benefit of creditors or
files for bankruptcy.
The Company is also obligated on two notes in connection with the
purchase of two automobiles in 2000. The notes bear interest at
rates of 5.9% and 7.9%; principal balances at December 31, 2001
are $10 and $7, respectively. The loans are secured by liens on
the vehicles.
Scheduled annual maturities of long-term debt as of December 2001
are as follows:
2002 $ 213
2003 140
2004 4
-------
$ 357
=======
NOTE 12 - RESTRICTED CASH
The Company has issued, through its bank, an irrevocable letter of
credit in the amount of $167 for the benefit of its landlord in
Methuen, Massachusetts, as security for its rent. The amount
approximates the Company's annual lease liability.
The letter of credit must be effective until 30 days after May 31,
2003, the expiration of the Company's initial 5 year lease term. The
Company's bank has restricted its cash account to secure the letter
of credit.
F-20
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 13 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, SFAS No. 141, "Business Combinations", and SFAS No.
142, "Goodwill and Other Intangible Assets," were issued. SFAS 141
requires that all business combinations initiated after June 30,
2001 be accounted for using the purchase method of accounting, and
that identifiable intangible assets acquired in a business
combination be recognized as an asset apart from goodwill, if they
meet certain criteria. The impact of the adoption of SFAS 141 on
reported operating results, financial position and existing
financial statement disclosure is not expected to be material.
SFAS 142 applies to all goodwill and identified intangible assets
acquired in a business combination. Under the new standard, all
goodwill and indefinite-lived intangible assets, including that
acquired before initial application of the standard, will not be
amortized but will be tested for impairment at least annually. The
new standard is effective for fiscal years beginning after
December 15, 2001. Adoption of SFAS 142 effective January 1, 2002,
will result in the elimination of approximately $88 of annual
amortization ($44 of amortization expense was recorded during the
year ended December 31, 2001). The Company does not expect to
recognize any impaired goodwill as of January 1, 2002.
In July 2001, SFAS No. 143, "Accounting for Asset Retirement
Obligations" was issued, which requires the recognition of a
liability for an asset retirement obligation in the period in
which it is incurred. When the liability is initially recorded,
the carrying amount of the related long-lived asset is
correspondingly increased. Over time, the liability is accreted to
its present value and the related capitalized charge is
depreciated over the useful life of the asset. SFAS 143 is
effective for fiscal years beginning after June 15, 2002. The
impact of the adoption of SFAS 143 on the Company's reported
operating results, financial position and existing financial
statement disclosure is not expected to be material.
In August 2001, SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," was issued. This statement
addresses the financial accounting and reporting for the
impairment or disposal of long-lived assets and broadens the
definition of what constitutes a discontinued operation and how
results of a discontinued operation are to be measured and
presented. The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15,
2001. The impact of the adoption of SFAS 144 on our reported
operating results, financial position and existing financial
statement disclosure is not expected to be material.
F-21
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 14 - SUBSEQUENT EVENTS
Disposition of Point To Point Network Services, Inc.
On February 22, 2002, the Company completed the sale of Point to
Point Network Services, a Delaware corporation and wholly-owned
subsidiary of the Company ("Point to Point"), to Point to Point of
Louisiana, Inc., a Louisiana corporation (the "Buyer"). The
purchase price for the 1 share of outstanding common stock of
Point to Point (the "Shares") that the Buyer acquired from the
Company was $1,000, which the Buyer paid by issuing a Secured
Promissory Note (the "Note") to the Company. The Note bears
interest at 6.5% per annum, and requires a payment of accrued
interest on February 22, 2003, and a payment of accrued interest
and $100 of principal on February 22, 2004, and all remaining
principal and interest accrued thereon on February 22, 2005. The
Note is secured by the Shares, pursuant to a Stock Pledge
Agreement dated February 22, 2002. Richard W. Lancaster, a former
director of the Company, serves as the President of the Buyer.
The assets of Point to Point included in the Company's
consolidated balance sheet at December 31, 2001 are summarized as
follows:
Cash $ 162
Accounts receivable 639
Costs and earnings in excess of billings 226
Other current assets 71
Fixed assets 470
Other assets 169
Goodwill 3,465
Intercompany accounts 751
---------
5,953
---------
Accounts payable 1,369
Billings in excess of costs 220
Other current liabilities 159
Notes payable 357
---------
2,105
---------
Net assets $ 3,848
=========
The results of operations of Point to Point included in the
statement of operations for the year ended December 31, 2001, are
summarized as follows:
Revenue $ 4,403
Costs and expenses 4,336
---------
$ 67
=========
F-22
NEXTGEN COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
NOTE 14 - SUBSEQUENT EVENTS (Continued)
Settlement Agreement
A Settlement Agreement and Mutual Release of Claims (the
"Release") was entered effective as of February 20, 2002, by and
among Point to Point, the Company, and W. Michael Sullivan
("Sullivan"), a stockholder of the Company and former employee and
stockholder of Point to Point. The Release settled certain
disputes among the parties related to the Company's acquisition of
Point to Point from Sullivan on June 29, 2001, and the termination
of Sullivan's employment with Point to Point on November 1, 2001.
Pursuant to the Release, Sullivan received approximately $464
cash, comprised of approximately $107 as severance for the
termination of his employment with Point to Point, and
approximately $357 as payment in full of a promissory note issued
by Point to Point to Sullivan on June 29, 2001. Also,
approximately $42 of liabilities of Point to Point that Sullivan
had personally guaranteed were paid off in full. The Release
required Sullivan to transfer 1,800 of his 2,000 shares of the
Company's common stock back to the Company, and gave the Company
the right to repurchase the 200 shares retained by Sullivan, at a
purchase price of $5.00 per share, until June 29, 2002. The
Company has returned the 1,800 shares of common stock repurchased
form Sullivan to its authorized, but unissued, shares.
Employment Agreement
In February 2002, the Company hired R. Andrew White as chief
financial officer. The parties entered into a one-year executive
employment agreement which provides an annual salary of $120,000.
The Company also provided Mr. White with a loan to acquire 50,000
shares of Nextgen's common stock at $1.25 per share, and granted
Mr. White up to 150,000 options to purchase Nextgen common stock
at $1.25 per share, subject to certain vesting requirements.
Letters of Intent
In March 2002, the Company entered into three letters of intent to
acquire 229 communications towers for an aggregate purchase price
of $51.2 million. These acquisitions are contingent upon the
occurrence of various events and conditions.
F-23