##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-K/A    þ
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2004  o
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from     to Commission File Number 00021091   FIRST AVENUE NETWORKS, INC. (Exact name of registrant as specified in its charter)
   Delaware
    
    52-1869023(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 230 Court Square, Suite 202, Charlottesville, VA 22902
(Address of principal executive offices) (434) 220-4988
(Registrants telephone number, including area code)   Securities registered pursuant to Section 12(b) of the Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredNone
    
    None
 Securities registered pursuant to Section 12(g) of the Act: Title of Each Class: Common Stock ($0.001 Par Value)   Indicate by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ     No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of the registrants
knowledge, in the definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). Yes o     No þ The aggregate market value of the registrants common stock held by non-affiliates was
approximately $36.9 million on June 30, 2004. For purposes of this disclosure, shares of common
stock held by persons who held more than 10% of the outstanding shares of common stock and shares held by executive officers and directors of the
registrant have been excluded in that such persons may be deemed to be affiliates. This
determination is not necessarily conclusive for other purposes. Indicate the number of shares outstanding of each of the registrants classes of common
stock as of the latest practicable date: The registrant had 59,364,153 shares of its common stock
outstanding as of January 26, 2005. Indicate by check mark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to a distribution of securities under a plan confirmed by a court. Yes þ     No o




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DOCUMENTS INCORPORATED BY REFERENCE The following documents are incorporated herein by reference: Part III: Portions of the Registrants definitive Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the Registrants 2005 Annual Meeting of Stockholders. EXPLANATORY NOTE This Amendment No. 1 on Form 10-K/A to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2004 (the Original Filing), which was filed with the Securities and Exchange
Commission on February 10, 2005, is being filed to revise the following portions of the Original
Filing:  
    Additional disclosure has been added under Industry Discussion of Item 1, Business.
    Additional disclosure has been added under Our Competition of Item 1, Business.
    Additional disclosure has been added to several of the risk factors found under the heading Risk Factors.
    Additional disclosure has been added to the Executive Overview section of Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations.
    Additional disclosure has been added to the Results of
Operations section of Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.
    Additional disclosure has been added to the Liquidity and Capital Resources
section of Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations.
    Additional disclosure has been added to the Critical Accounting Matters and
Significant Estimates section of Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations.
    Item 9A has been corrected. As a result of this amendment, the certifications pursuant to Section 302 and Section 906 of
the Sarbanes-Oxley Act of 2002, filed and furnished as exhibits to the Original Filing, have been
re-executed and re-filed as of the date of this Form 10-K/A. Except
as described above, no other substantive changes have been made to the Original Filing and this
Form 10-K/A does not amend, update or change the financial statements or any other items or
disclosures in the Original Filing. Accordingly, this Form 10-K/A should be read in conjunction
with our filings made with the Securities and Exchange Commission subsequent to the date of filing
of the Original Filing, including any amendments to those filings. 2




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FIRST AVENUE NETWORKS, INC. INDEX PagePART I.Item 1. Business
    
    
    4Item 2. Properties
    
    
    16Item 3. Legal Proceedings
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 4A. Executive Officers of the Registrant
    
    
    18PART II.Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    19Item 6. Selected Financial Data
    
    
    20Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 7A. Quantitative and Qualitative Disclosures about Market Risk
    
    
    28Item 8. Consolidated Financial Statements and Supplementary Data
    
    
    28Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    43Item 9A. Controls and Procedures
    
    
    43Item 9B. Other Information
    
    
    43PART III.Item 10. Directors and Executive Officers of the Registrant
    
    
    43Item 11. Executive Compensation
    
    
    43Item 12. Security Ownership of Certain Beneficial Owners and Management
    
    
    44Item 13. Certain Relationships and Related Transactions
    
    
    44Item 14. Principal Accounting Fees and Services
    
    
    44PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    44Signatures
    
    
    44Exhibit Index
    
    
    45
 3




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CAUTIONARY STATEMENT This report includes forward-looking information, as that term is defined in the
Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in
its rules, regulations and releases, regarding, among other things, our financial and business
prospects, the deployment of our services, capital requirements and financing prospects. The
Company cautions investors that any such statements are based on currently available operational,
financial and competitive information, and are subject to various risks and uncertainties. Actual
future results and trends may differ materially depending on a variety of factors. Those factors
include, among others, those matters disclosed as Risk Factors at the end of Item 1  Business
contained in this Annual Report on Form 10-K. PART I ITEM 1.BUSINESS Overview First Avenue Networks, Inc. (OTCBB: FRNS) has assembled one of the largest and most
comprehensive collections of millimeter wave spectrum in the U.S. We hold over 750 licenses for
spectrum between 38.6 GHz and 40 GHz, commonly referred to as 39 GHz spectrum, granted by the
Federal Communications Commission or FCC. Our licenses extend over virtually the entire United
States, covering over 284 million in population, and represent over 1 billion channel pops,
calculated as number of channels in a given area, as measured in the 2000 census, multiplied by the
population covered by these channels. On January 14, 2005, we purchased substantially all of the
assets of Teligent, Inc. These assets include Teligents portfolio of 24 GHz licenses and its fixed
wireless operations and radio inventories. Our spectrum portfolio now includes, on average, over
740 MHz in the top 20 U.S. metropolitan areas and, in aggregate, approximately 1.5 billion channel
pops. Our fixed wireless activities include services ranging from leasing spectrum to a diverse
mix of fixed wireless service operations. We expect these operations to further our long-term
objectives of participating in and leading the growing fixed wireless markets such as backhauling
mobile phone traffic and providing cost effective extensions to fiber optic networks. We operate a cellular backhaul network in New York City with over 65 links. We plan to
use this network as a foundation for future construction in the New York area and as a reference
account for future nationwide network construction. We anticipate building to order facilities that
can support cellular traffic backhaul, metropolitan transport and fiber extensions to bridge
critical network gaps. These facets of our business are more fully discussed under Target Markets
below. We also lease 39 GHz spectrum to facilitate the construction of high-speed wireless
telecommunications networks. Our leasing products, Express Link and Express Net, offer a way for
telecommunications carriers and enterprise customers to access interference-free, carrier class
licensed spectrum on a capital and cost efficient basis. We are a Delaware corporation incorporated in 1993. We emerged from bankruptcy in
December 2001. In February 2002, our shareholders approved an amendment to the Certificate of
Incorporation to change our name from Advanced Radio Telecom Corp. to First Avenue Networks, Inc. Industry Discussion The demand for high speed data connections between two points or a point and the Internet
continues to grow as telecommunications users demand reliable, fast and capital efficient network
transport services. Network providers, service providers, businesses and government entities are
increasingly seeking cost-effective methods to:  
    establish high-speed data backhaul to accommodate increased mobile phone
penetration as well as new applications such as data, streaming video and mobile
internet;
    extend the fiber optic network footprint by providing communications services at
fiber-equivalent speed to more buildings and businesses;
    provide network alternatives or redundancy for their existing communications
systems; and,
    increase the capacity of their existing communications systems to enhance the
quality of their transmissions, including for such services as voice-over internet
protocol, or VoIP. 4




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We do not believe the existing copper facilities will be able to support all of the
growing demand for such capacity while fiber optic facilities are not sufficiently widespread.
Given the high cost of deploying fiber facilities, we believe it will be difficult to meet the
geographically diverse demand for broadband in a cost effective manner using this medium. In addition, in a March 2004 ruling related to unbundled network elements, or UNE-P, the
District of Columbia Court of Appeals overturned an FCC policy requiring incumbent local exchange
carriers, or ILECs, to lease parts of their network at favorable costs to their competitors.
Instead, the ruling allowed ILECs to begin setting their own rates, and, as a result, prices
charged by ILECs for UNE-P have increased. We expect that the competitive carriers will seek
alternative solutions that are not dependent on the ILEC providing service on their time frame and
on their terms. As carriers seek economically attractive solutions, we expect that fixed wireless will be
a favored alternative. The key advantages of wireless structures as opposed to traditional copper
or fiber facilities include: High-Capacity.Current technology allows transmission with high-capacity local access
with quality and reliability superior to copper and comparable to fiber. For example, current radio
technology is capable of two-way data transfer at rates up to 622 megabits per second (Mbps)
(OC-12), which is competitive with fiber. As a result, carriers are able to transmit similar
volumes of voice and data over our wireless facilities almost as quickly as they could on fiber. Lower Cost.Wireless facilities cost less than comparable fiber facilities, since the
construction and maintenance costs of fixed wireless links are substantially less than those
associated with fiber networks. We expect this cost differential to increase over time because
deploying fiber involves substantial labor and right-of-way expenditures, costs that we believe
will increase in the future, while we expect the main cost component of fixed wireless links 
equipment  to continue to decline as technological advances occur and production volumes increase.
Increasingly, telecommunications networks employ internet protocol, or IP, technology, which serves
to simplify the network architecture, diminish the proprietary nature of facilities and increase
the production volumes of certain equipment elements. Rapid Deployment.Because wireless links using licensed spectrum do not require rights of
way, substantial construction infrastructure, time-consuming third party coordination efforts or
additional FCC licensing, they can be established quickly between two points as long as line of
sight and the appropriate level of reliability are assured. The key disadvantages of wireless structures as opposed to traditional copper or fiber
facilities include: Line of sight.Application of our 24 GHz and 39 GHz spectrum is dependent on a radio in a
wireless link having line of sight to any other radio. As examples, our spectrum can be blocked by
terrain, buildings or foliage. As a result, there may be instances where our spectrum cannot be
used to meet customer needs. General acceptance.Although wireless technology has been emerging over the past several
years, transmitting voice and data by a wireless means is a relatively recent addition to the
communication industry. In order to meet customer and investor demands, at times wireless
companies have attempted to serve customers with unreliable equipment. Because of past customer
dissatisfaction and the much publicized bankruptcy of our predecessor and other fixed wireless
companies, potential customers may be wary of being an early adopter of wireless technology. See Our Competitionbelow where the potential advantages and disadvantages of fixed wireless
services are discussed in more detail. Our Business Strategy In addition to the general advantages of wireless discussed above, we believe that First
Avenue will be well positioned to capitalize on the growing need for broadband connectivity, for
the following reasons:  
    Focus on Premier Spectrum. In terms of breadth of geographic coverage, depth in key
markets and complementary technical and propagation characteristics, our 24 GHz and 39 GHz
licenses represent what we believe to be the premier collection of millimeter wave
spectrum in the United States. The range of transmissions over our 24 GHz spectrum is
approximately twice that of the range of 39 GHz transmissions. As a result for
point-to-point links, 39 GHz spectrum can be used for shorter distances with 24 GHz
providing solutions for longer links. For point-to-multipoint configurations, the area of
the circle covered by 24 GHz spectrum transmissions is four times that of the area for a
39 GHz point-to-multipoint transmission. As a result, we can select the best type of
spectrum to use to meet the customers need. Our strategy is to capitalize on the cost and
speed of deployment advantage inherent in our spectrum assets. Between 1995 and 2001,
several telecommunications companies that owned millimeter wave spectrum sought to provide
a full suite of telecommunications services. However, we believe that those companies 5




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failed to focus on their single unique characteristic  millimeter wave spectrum. As a
result, they essentially replicated facilities already bought and paid for by ILECs in
order to sell directly to service the end user. We believe that this strategy of asset
deployment contributed to the significant losses they experienced. Our strategy is to
provide fixed wireless services directly to or by partnering with other telecommunications
industry participants, including mobile carriers, fiber carriers and alternative facilities
carriers.
    Increased Acceptance. Wireless-based solutions are increasingly accepted in the market.
Whether it be Wi-Fi for laptops, 1xEVDO for internet accessed mobile phones or WiMax for
homes and businesses, wireless communication has become an accepted and fundamental
telecommunications medium. We believe this will lead to a greater acceptance of our
wireless broadband services for portions of the telecommunications network for which we
believe fixed wireless is the leading cost/performance choice.
    Lower Cost Operations. The costs of installing and maintaining a wireless system have
fallen and we believe will continue to decrease. For example, wireless equipment such as a
100 baseT radio that once cost as much as $30,000 now can be purchased for $8,500 or less.
Operationally, we intend to develop our physical facilities in a way that allows them to
be used for a variety of high speed connectivity and communications applications thus
reducing the cost for any single application. Increasing standardization on IP also
contributes to this objective. In general, we intend to invest only in those assets and
business activities that are essential to our business, and expect to obtain functions
such as sales, monitoring, billing and other network operations through outsourcing or
joint ventures. Lastly, we plan to serve carrier customers rather than develop direct to
the consumer, or retail, operations, which would require a greater investment in sales and
administrative personnel.
    Regulatory Environment.In addition to the District of Columbia Circuit Courts UNE-P
ruling discussed above, the FCC ruled in its Secondary Markets Ruling of October 2003 that
companies could lease their spectrum to third parties, enabling us to lease spectrum to
other companies. Since the ruling, we believe that the transaction costs associated with
meeting FCC documentation requirements for any kind of spectrum leasing have decreased
from over $20,000 per lease to practically zero. Target Markets We are focused on delivering value through our expertise in wireless communications.
Given this goal, we have chosen to focus on several carrier markets where we believe we have a
sustainable competitive advantage versus wired telecommunications facilities. Mobile Backhaul Mobile backhaul consists of carrying mobile traffic from a carriers cell site back to
that carriers wireline switching center. Currently, mobile carriers are facing profit margin
pressure and/or erosion. Average revenue per user remains flat, yet customers consume more
bandwidth in the form of voice minutes, data, photography, streaming media and other advanced
applications. At the same time, operating costs are rising because backhaul facilities, typically
leased from the ILEC, are priced according to volume of bandwidth used. To mitigate the decreasing
margins, mobile carriers need to find more cost efficient ways to connect their cell site traffic
to the public service telephone network, or PSTN. We believe that wireless connectivity between the
cell site and the PSTN is an economically attractive alternative to wired facilities. Fiber Extensions By partnering with fiber providers in metropolitan markets, we can provide wireless
connectivity to buildings not served by alternative carriers without relying on existing ILEC
copper facilities or digging up streets to install fiber. We believe that the need for these
facilities will increase further as the ILECs begin to charge more based on the UNE-P rulings. This
is already a large market with AT&T, MCI and Sprint alone having spent approximately a combined $27
billion on access charges in 2003, according to their respective 2003 annual reports. In addition,
we will focus on other opportunities that may arise in the future where we believe that we will
have a similar advantage. Our License Portfolio Our combined 39 GHz and 24 GHz spectrum portfolio includes over 925 licenses
representing, on average, over 740 MHz in the top 20 U.S. metropolitan areas and over 580 MHz in
the top 50 U.S. metropolitan areas. In aggregate, our spectrum portfolio covers approximately 1.5
billion channel pops. These licenses were granted for initial ten-year terms with expirations
ranging from 2006 through 2014. We have an expectation of renewal upon a showing of substantial
service as determined by the FCC. The level of service that will be considered substantial may
vary depending upon our type of product offering. The FCC has provided specific guidance only for
point-to-point offerings, where it has indicated the licensee should have constructed four links
per channel per million persons in the market area. 6




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Our 39 GHz Wireless Broadband Licenses The FCC has allocated the use of the 38.640.0 GHz airwave band consisting of fourteen 50
MHz x 50 MHz channel pairs, for a total of 100 MHz, by issuing licenses for the provision of
wireless telecommunications services within a specified geographic area. The licenses issued in
this band are generally referred to as 39 GHz licenses. Our spectrum licenses were acquired through applications with the FCC and purchase
contracts with other spectrum holders. Additionally, in 2000, we were the winning bidder for 352 39
GHz licenses covering substantially all of the contiguous United States in an auction conducted by
the FCC. In this auction, the FCC sold licenses which represented spectrum covering Basic Economic
Areas (BEAs) which encompassed the entire U. S. BEAs and Economic Areas (EA) are terms developed by
the U.S. Department of Commerce which designate relevant regional markets surrounding metropolitan
statistical areas. In total, we hold over 750 39 GHz licenses that represent over 1 billion channel pops.
Our licenses were granted for initial ten-year terms with expirations ranging from 2006 through
2014. We have an expectation of renewal upon a showing of substantial service as determined by
the FCC. Over 170 of our 39GHz licenses cover the 50 most populous U.S. metropolitan areas and
result in our holding nearly 350 MHz of spectrum, on average, in these most populous areas. Our 24 GHz Wireless Broadband Licenses The FCC has allocated the use of the 24.25-24.45 GHz and the 25.05-25.25 GHz airwave band
consisting of five 40 MHz x 40 MHz channel pairs, for a total of 80 MHz channels, by issuing
licenses for the provision of wireless telecommunications services within a specified geographic
area. The licenses issued in these bands are generally referred to as 24 GHz licenses. On January 14, 2005, we purchased substantially all of the assets of Teligent, Inc. These
assets include a portfolio of 24 GHz licenses and Teligents fixed wireless operations and radio
inventories. Our 24 GHz spectrum portfolio acquired from Teligent includes, on average, over 230
MHz in the top 77 U.S. metropolitan areas and, in aggregate, approximately 504 million channel
pops. Because these licenses were originally granted to Teligent as replacement spectrum resulting
from a reallocation of the 18 GHz band, the 24 GHz licenses that we acquired from Teligent were
granted for geographic areas known as Statistical Metropolitan Service Areas or SMSAs, as defined
by the U.S. Census Bureau. Newer 24 GHz licenses, such as the 24 GHz licenses we purchased in the
July 2004 24 GHz FCC auction, will be granted on an Economic Area or EA. These 24 GHz licenses are
also under ten-year terms and are all due to expire on February 1, 2011. We have an expectation of
renewal upon a showing of substantial service as determined by the FCC. Our Licenses by Market The following chart presents our license holdings and total channel pops in each of our top 50
most populous metropolitan areas based upon 2000 census data. Total24 GHz SMSA
    
    
    39 GHz BEA
    
    
    ChannelBEA
    
    Licenses(1)
    
    
    Licenses(2)
    
    
    Pops(millions)New York, NY
    
    
    5
    
    
    
    4
    
    
    
    115.9Los Angeles, CA
    
    
    5
    
    
    
    4
    
    
    
    115.8Chicago, IL
    
    
    5
    
    
    
    3
    
    
    
    71.1Washington, DC/Baltimore, MD
    
    
    5
    
    
    
    3
    
    
    
    62.1San Francisco, CA
    
    
    5
    
    
    
    4
    
    
    
    55.1Detroit, MI
    
    
    5
    
    
    
    5
    
    
    
    54.5Philadelphia, PA
    
    
    4
    
    
    
    4
    
    
    
    49.5Dallas, TX
    
    
    5
    
    
    
    3
    
    
    
    48.5Houston, TX
    
    
    5
    
    
    
    3
    
    
    
    43.1Atlanta, GA
    
    
    5
    
    
    
    3
    
    
    
    38.8Boston, MA
    
    
    5
    
    
    
    3
    
    
    
    35.4Miami, FL
    
    
    5
    
    
    
    3
    
    
    
    29.2Seattle, WA
    
    
    5
    
    
    
    3
    
    
    
    26.6Minneapolis, MN
    
    
    5
    
    
    
    2
    
    
    
    25.8Phoenix, AZ
    
    
    5
    
    
    
    2
    
    
    
    25.3
 7




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Total24 GHz SMSA
    
    
    39 GHz BEA
    
    
    ChannelBEA
    
    Licenses(1)
    
    
    Licenses(2)
    
    
    Pops(millions)Cleveland, OH
    
    
    5
    
    
    
    4
    
    
    
    25.1Pittsburgh, PA
    
    
    4
    
    
    
    5
    
    
    
    24.5St. Louis, MO
    
    
    5
    
    
    
    3
    
    
    
    23.2San Diego, CA
    
    
    4
    
    
    
    2
    
    
    
    22.9Tampa, FL
    
    
    5
    
    
    
    2
    
    
    
    18.9Portland, OR
    
    
    4
    
    
    
    4
    
    
    
    18.6Indianapolis, IN
    
    
    4
    
    
    
    4
    
    
    
    17.9Denver, CO
    
    
    2
    
    
    
    3
    
    
    
    17.4San Antonio, TX
    
    
    4
    
    
    
    4
    
    
    
    16.4Kansas City, MO
    
    
    4
    
    
    
    4
    
    
    
    15.9Orlando, FL
    
    
    1
    
    
    
    4
    
    
    
    14.6Puerto Rico
    
    
    0
    
    
    
    1
    
    
    
    14.4Sacramento, CA
    
    
    4
    
    
    
    2
    
    
    
    13.0Milwaukee, WI
    
    
    4
    
    
    
    3
    
    
    
    12.8Columbus, OH
    
    
    2
    
    
    
    4
    
    
    
    12.1Cincinnati, OH
    
    
    3
    
    
    
    3
    
    
    
    11.9Salt Lake City, UT
    
    
    1
    
    
    
    3
    
    
    
    11.5Raleigh, NC
    
    
    1
    
    
    
    6
    
    
    
    11.5Nashville, TN
    
    
    1
    
    
    
    4
    
    
    
    10.7New Orleans, LA
    
    
    1
    
    
    
    5
    
    
    
    9.9Oklahoma City, OK
    
    
    1
    
    
    
    5
    
    
    
    9.5Greenville, SC
    
    
    1
    
    
    
    3
    
    
    
    9.1Charlotte, NC
    
    
    1
    
    
    
    4
    
    
    
    9.0Rochester, NY
    
    
    1
    
    
    
    5
    
    
    
    8.5Albany, NY
    
    
    1
    
    
    
    5
    
    
    
    8.4Syracuse, NY
    
    
    1
    
    
    
    4
    
    
    
    8.3Jacksonville, FL
    
    
    1
    
    
    
    4
    
    
    
    8.1Austin, TX
    
    
    1
    
    
    
    5
    
    
    
    7.8Las Vegas, NV
    
    
    1
    
    
    
    2
    
    
    
    7.5Grand Rapids, MI
    
    
    0
    
    
    
    4
    
    
    
    7.5Memphis, TN
    
    
    1
    
    
    
    3
    
    
    
    6.8Louisville, KY
    
    
    1
    
    
    
    4
    
    
    
    6.7Norfolk, VA
    
    
    3
    
    
    
    2
    
    
    
    6.7Buffalo, NY
    
    
    4
    
    
    
    5
    
    
    
    6.6Birmingham, AL
    
    
    1
    
    
    
    3
    
    
    
    6.6Total top 50 markets
    
    
    152
    
    
    
    177
    
    
    
    1,237.0Grand total top 50 market and legacy licenses
    
    
    177
    
    
    
    753
    
    
    
    1,535.0
   (1)
    
    SMSA licenses represent those licenses granted by the FCC that encompass Statistical
Metropolitan Service Area.(2)
    
    BEA licenses represent only those licenses granted by the FCC that encompass Basic Economic
Areas. First Avenue Networks holds additional licenses that represent areas that overlap BEAs
and have different regulatory characteristics. These licenses are referred to as legacy
licenses. Our Competition We face significant competition from entities that currently deliver or could in the
future deliver telecommunications services over copper wire, fiber and wireless networks. As we
pursue our current strategy of seeking economically viable opportunities to provide services
without significant capital outlay, we expect to face competition from other high capacity service
providers utilizing point-to-point telecommunications, broadband, fiber and wireless companies. As
our business develops in the longer term, we may face competition from such providers, as well as
from satellite communications companies, internet service providers, cable television operators and
others seeking to profit from the demand for wireless, high-speed services. In addition, we may
encounter new competition due to the consolidation of telecommunications companies and the formation of strategic alliances and cooperative relationships in the
telecommunications and related industries, as well as the development of new technologies. 8




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We also face competition in our strategy to lease spectrum. Holders of similar spectrum
may elect to lease their spectrum and target the same types of customers. Potential lessees of our
spectrum can obtain spectrum in the Common Carrier frequencies (18 GHz and 23 GHz) on a
link-by-link basis directly by application to the FCC. The FCC recently sought comment on a proposal to allocate, license and auction additional
spectrum in the 37 GHz to 42 GHz range. Specifically, the FCC has proposed to make available an
additional 1.6 GHz of spectrum from 37.0-38.6 GHz under service rules comparable to the existing 39
GHz band. Although the FCC proposal was generally opposed by those that commented on such proposal
and the FCC has not issued any decision in this matter, if such spectrum were available, potential
lessees or users of our spectrum might elect to participate in future auctions rather than lease
spectrum from us or other companies may enter the market. We expect to compete primarily on the basis of responsiveness to customer needs,
deployment speed, service quality, transmission speed, reliability and price. We cannot give any
assurance that we will be able to compete effectively in any of our markets with any of our
existing or potential competitors. Many of our competitors have long-standing relationships with
customers and suppliers, greater name recognition and greater financial, technical and marketing
resources than we do. Additionally, market perceptions as to reliability and security for the
wireless networks as compared to copper or fiber networks provide us with additional marketing
challenges. These perceptions are based upon unfavorable customer experience with earlier-stage
fixed wireless offerings. In the past, certain companies may have used equipment that was still in
developmental stages to provide services. Additionally, the well-publicized bankruptcy of our
predecessor and other fixed wireless companies has contributed to public skepticism regarding our
services. We may not be able to exploit new or emerging technologies or adapt to changes in
customer requirements more quickly than these competitors, or devote the necessary resources to the
marketing and sale of our services. Additionally, we may not be able to overcome these market
perceptions that are based upon unfavorable customer experience with earlier fixed wireless
offerings. Following are types of providers with which we now compete or may compete in the future: Fiber Networks. We face competition from expanding fiber-optic networks owned by various
telecommunications carriers, electric utilities and other companies. Many of these companies have
greater name recognition and greater financial, technical and marketing resources than we do.
Fiber-optic service generally offers transmission speeds which are superior to ours. In addition,
fiber technology may enjoy a greater degree of market acceptance than our wireless broadband
technology. Copper Networks of the Local Exchange Carriers. We face significant competition from the
traditional local telephone companies that typically deliver telecommunication services over copper
networks and can provide broadband services via Digital Subscriber Lines (DSL). These companies
have long-standing relationships with their customers and substantial name recognition. Coaxial Cable Networks.We are likely to face competition from cable television
operators, which provide high-speed data transmission capability over installed coaxial cable
television networks. We believe that in order to provide broadband capacity to a significant number
of businesses, cable operators will be required to spend significant time and capital to upgrade
and extend their existing networks to a more advanced network architecture. However, competition
from cable television operators may be significant. Other Fixed Wireless Networks.We also face competition from other service providers that
utilize fixed wireless technology including IDT Spectrum (formerly Winstar Communications, Inc.)
and XO Communications, Inc. In many cases, these service providers hold FCC licenses to operate in
the same markets we do and could elect to lease their spectrum. IDT Spectrum has positioned itself
as a fixed wireless telecommunications service provider, and therefore will compete with us in
offering broadband telecommunication services to off-fiber businesses and buildings. XO also has
the ability to provide wireless broadband services. These companies may have access to greater
financial resources than we do. Various other entities also have 39 GHz, and other wireless broadband licenses. Due to
the relative ease and speed of deployment of fixed wireless technology, we could face price
competition and competition for customers from other wireless service providers. Multichannel Multipoint Distribution service providers, also known as MMDS or wireless
cable, operating in the 2.4 GHz spectrum band, also provide metropolitan wireless high-speed
transmission services. Nextel and Sprint are the principal holders of such licenses and use them
primarily for wireless broadband telecommunications services in residential areas. However, these
companies may also market high-speed telecommunications services elsewhere. The FCC had allocated 555 MHz of spectrum in the 5 GHz band for unlicensed devices to
provide short-range, high-speed wireless digital communications. These frequencies must be shared
with incumbent users without causing interference. 9




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The allocation was designed to facilitate the
creation of new wireless local area networks, and thus may compete with our strategy of providing
wireless telecommunication services. Mobile Wireless Networks. Cellular, personal communications services and other mobile
service providers may also offer high-speed telecommunications services over their licensed
frequencies. The FCC has allocated a number of spectrum blocks for use by wireless devices that do
not require site or network licensing. A number of vendors have developed such devices, which may
compete with us. Government Regulation Our wireless broadband services are subject to regulation by federal, state and local
governmental agencies. At the federal level, the FCC has jurisdiction over the use of the
electromagnetic spectrum (i.e., wireless transmissions) and has exclusive jurisdiction over all
interstate telecommunications services; that is, those that originate in one state and terminate in
another state. State regulatory commissions have jurisdiction over intrastate communications; that
is, those that originate and terminate in the same state. Municipalities may regulate limited
aspects of our business by, for example, imposing zoning requirements and requiring installation
permits. The regulations of these agencies are continually evolving through rulemakings and other
administrative and judicial proceedings, and there is no guarantee that in the future regulatory
changes will not have an adverse effect on our business. Federal Regulation FCC Licensing. As an FCC licensee and regulatee, we are subject to comprehensive
regulatory oversight, including regulations constraining ownership of us, rules governing the
services we can provide, and rules related to construction and operation of our services. In
addition, we are subject to certain regulatory and other fees levied by the FCC for certain classes
of licenses and services. Under certain circumstances, including certain violations of FCC rules,
our licenses may be revoked, canceled or conditioned, or we may be fined. Among other things, the
Communications Act of 1934, as amended, and the FCC Rules and Regulations impose requirements on
radio licensees and carriers that include regulations on the ownership, operation, acquisition and

sale of the broadband operating radio systems that are needed to provide the services we offer. The
operational rules generally provide significant flexibility to licensees operating in both the 24
and 39 GHz bands. For example, licensees are permitted to offer point-to-multipoint and
point-to-point services, and, at least in the 39 GHz band, will be permitted to provide mobile
services upon adoption of inter-licensee coordination policies. The FCC has also adopted regulations permitting certain classes of licensees, such as 24
GHz and 39 GHz licensees, to lease a portion, or all, of their spectrum to third parties
(Secondary Market Ruling). The FCCs spectrum leasing rules are generally designed to promote a
secondary market for spectrum and provide a number of options for leasing depending upon the degree
of control that the lessee desires to be afforded. While generally beneficial to our business
plans, the FCCs leasing rules may introduce additional competition to the types of services and
products offered by the Company. Moreover, the FCC spectrum leasing rules are also subject to
petitions for reconsideration and may, as a result, be modified in a manner that is not favorable
to our business. Our 24 and 39 GHz licenses, like other FCC licenses, are generally granted for an initial
ten-year term, subject to renewal. In order to obtain renewal of a 24 or 39 GHz license, the
licensee must demonstrate that it has provided substantial service during its license term. What
level of service is considered substantial will vary depending upon the type of offering by the
licensee, and the FCC has provided specific guidance only for point-to-point offerings, where it
has indicated the licensee should have constructed four links per channel per million persons in
the licensed market area. Prior to the expiration date of their licenses, licensees are required to
file renewal applications with an exhibit demonstrating compliance with the substantial service
criteria. If an entity is deemed not to have provided substantial service with respect to a license
for which renewal is sought, the renewal will not be granted and the license canceled. A number of our licenses were also obtained through auctions where the Company qualified
for bidding credits as a designated very small business entity. To avoid repayment of those
bidding credits, the Company is subject to certain limitations on types of investments and overall
control. These requirements may constrain our ability to obtain financing needed for our
operations. Licenses in the 39 GHz band are subject to an arrangement between the FCC and the
Department of Industry of Canada regarding sharing between broadband wireless systems along the
U.S.-Canada border. Additionally, this band is subject to satellite power flux density limits that
are subject to change. We cannot assure you that the ultimate resolution of these issues will not
adversely affect our operations. Auctions.Since 1994, the FCC has conducted auctions of licenses for spectrum to award
licenses to those that will use them most effectively. In July 2004, the FCC auctioned five 80 MHz
licenses for 24 GHz spectrum in 176 Economic Areas 10




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(EA) covering the entire United States. As
discussed below, the purchasers use of the spectrum was subject to Teligents 24 GHz spectrum
holdings. Since Teligent held the most populous areas in many of the EAs, the purchaser would be
barred from operating in the metropolitan sections with arguably the most business potential. In
the auction only seven licenses covering 12.8 million pops were purchased, each for the minimum bid
required by the FCC. The Teligent licenses we have acquired are for geographic areas known as SMSAs, and were
originally awarded to Teligent as replacement spectrum due to rebanding in the 18 GHz band. Because
the SMSA licenses were awarded prior to general licensing of the 24 GHz band by auction, they are
subject to somewhat different regulatory requirements than other 24 GHz auction licenses.
Importantly, new licensees, who may be authorized service areas larger than the SMSAs, must protect
operations conducted under the Teligent authorizations. However, should the Company ever
deconstruct the Teligent facilities, the SMSA territories licensed to the Company would revert to
the holder, if any, of the auction license. The availability of more spectrum in the 24 GHz or 39 GHz band could increase the number
of entities with which we compete. In the future, the FCC could decide to hold another 24 GHz
auction. The FCC still controls a substantial amount of 39 GHz spectrum. The FCC could auction this
spectrum in the future, increasing the number of entities that hold this spectrum. Additionally, as
discussed above, the FCC has pending a proceeding considering the allocation and licensing by
auction of additional spectrum in the 37-38.6 GHz range. Competition. Over the last several years, the FCC and the states have issued a series of
decisions and Congress continues to enact legislation making the interstate access services market
more competitive. These regulatory actions continue to evolve and the Congress, the states and the
FCC implement reforms in a manner unfavorable to us. State Regulation Many of the services we provide, either now or in the future, may be classified as
intrastate and therefore may be subject to state regulation. Under current state regulations
services that can be provided are:  
    local access services;
    dedicated access services;
    private network services, for businesses and other entities; and,
    long distance toll services. Employees As of January 28, 2005 we had eight employees (including officers), none of whom is
represented by a collective bargaining agreement. Risk Factors The following risk factors should be reviewed and considered. Any of the following risks
could materially adversely affect our business, financial conditions or results of operation.
Additional risks and uncertainties not known to us or that we currently deem immaterial may also
impair our business operations. Risks Related to Our Company The Teligent acquisition may result in unanticipated costs, delays and other problems
which could negatively affect our operating results. The acquisition of the Teligent assets inherently carries unavoidable risk regarding the
actual condition of the acquired business, regardless of the investigation we have conducted,
including:  
    the possibility that it would be difficult to maintain or renew the licenses acquired from Teligent;
    the possibility that we have acquired substantial undisclosed liabilities;
    the possibility that we will be unable to effectively consolidate corporate and
administrative infrastructures; and
    the possibility that managements attention would be diverted from ongoing business
concerns. We may not be successful in overcoming these risks, which could negatively affect our
operating results. 11




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Our FCC licenses may be canceled or revoked for violations of the FCCs rules, which
could limit our operations and growth. The book value of our FCC radio licenses comprised approximately 93% of the book value of
our non-cash assets at December 31, 2004. As an FCC licensee and regulatee, we are subject to
comprehensive regulatory oversight, including regulations constraining ownership of us, rules
governing the services we can provide and the prices we charge, as well as rules related to
construction and operation of our services. In addition, we are subject to certain regulatory and
other fees levied by the FCC for certain classes of licenses and services. Under certain
circumstances, our licenses may be revoked, canceled or conditioned. Among other things, the
Communications Act of 1934, as amended, and the FCC Rules and Regulations impose requirements on
radio licensees and carriers that include regulations on the ownership, operation, acquisition and
sale of the broadband operating radio systems that are needed to provide the services we offer. The
FCC also regulates the lease of spectrum, which until the passage of the FCCs First Report and
Order in the Secondary Market Initiative (FCC-03-113) released October 6, 2003, involved a document
intensive and often costly process. Our licenses may be revoked for violations of the FCCs rules or we may be fined. The loss of
some of our licenses could limit the expansion of our business. Even the initiation of a proceeding
with the potential to result in the loss of our licenses could adversely affect our business. In early 2004, we were contacted telephonically regarding eleven of our 24 GHz licenses with
respect to which we had entered into certain leases prior to the effective date of the FCCs
Secondary Market Initiative without fully complying with the FCCs procedures. The matter is still
considered pending at the FCC. However, prior to taking any action against a licensee for rule
violations, the FCC will issue a written Notice of Apparent Liability or a Notice of Violation, and
we have not received any such notice regarding this matter. The potential penalties for such
violations of the FCCs rules include monetary payments or, in rare cases, revocation or
cancellation of the affected license. Our FCC licenses may not be renewed upon expiration which could limit the expansion of
our business and harm our operating results. Our 39 GHz and 24 GHz licenses are granted for initial ten-year terms with renewal dates
ranging from 2006 to 2014. Less than 1% of our licenses, representing less than 1% of our channel
pops, are subject to renewal in 2006, 34.7% of our licenses, representing 17.7% of our channel
pops, are subject to renewal in 2007 and less than 1% of our licenses, representing less than 1% of
our channel pops, are subject to renewal in 2008. Under current FCC guidance, we must demonstrate
that we have provided substantial service during the license term in order for our licenses to be
renewed. Additionally, the FCC has not issued any specific renewal criteria or official definition
of substantial service, but has only issued safe-harbor guidelines for point-to-point
offerings, where it has indicated the licensee should have constructed four individual
point-to-point radio transmission links per channel per million persons in the market area. While
all of our current service offering are on a point-to-point basis, we do not currently meet the
safe-harbor guidance provided by the FCC because we have not constructed four individual
point-to-point links per channel per million persons in a market area. Under FCC rules, licenses are renewed based upon service provided as of the renewal date. The
FCC does not consider service provided during the ten year period for which the licenses are
granted. They evaluate whether substantial service is provided as of the renewal date. We may
not be able to meet the safe-harbor substantial service requirement as of expiration date of our
licenses. Even if we were to meet the safe harbor guidelines today, we may not be able to meet
them as of the renewal date. Additionally, the level of service that will be considered
substantial may vary depending upon our type of product offering. Further, the FCC may modify
its perception of substantial service , and, in the future, we may offer products for which the FCC
establishes more stringent substantial service requirements. The loss of some of our licenses could
limit the expansion of our business and harm our operating results. An investment in us or sale of our assets may trigger a repayment of FCC small business
bidding credit. We acquired 39 GHz licenses in an FCC auction in 2000. For this auction, the FCC found
that we qualified under its regulations as a very small business and consequently awarded us a 35
percent bidding credit, reducing our gross winning bids by approximately $41.5 million. In
addition, we have pending an application for a license in Auction No. 56 in which we are also
claiming eligibility for a 35 percent bidding credit that reduces our gross bid of $96,000 by
$33,600. Under the FCCs rules, if control of the licenses acquired in these auctions is
transferred or assigned to an entity that does not meet the financial requirements for very small businesses, all or a portion of the bidding credit may
be required to be repaid to the FCC with interest. For example, if a change in control of the
licenses acquired in 2000 occurs before October 18, 2005, $10.4 million of the bidding credit must
be repaid with interest. After October 18, 2005, a change in control would require the payment of
only a portion of the $33,600 bidding credit associated with Auction 56 must be repaid, depending
on the date of 12




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the transfer of control. To qualify as a very small business for the licenses
acquired in 2000, an entity, its controlling investors, the entitys affiliates, and the affiliates
of the entitys controlling investors must collectively have average gross revenues for the prior
three years of $15 million or less. For the Auction No. 56 license, the financial limit for a very
small business was reduced to $3 million. We believe that neither the Teligent acquisition nor the
December 2004 sale of common stock triggered a repayment of the bidding credit. In the future, we
may find it more difficult to obtain investors or purchasers since potential investors or potential
purchasers of our assets may trigger a significant repayment obligation to the FCC. We are subject to comprehensive and continually evolving regulation that could increase
our costs and adversely affect our ability to successfully implement our business plan. We and some of our communications services and installations are regulated by the FCC,
the states, local zoning authorities, and other governmental entities. These regulators regularly
conduct rulemaking proceedings and issue interpretations of existing rules. For example, the FCC
has a number of proceedings still pending to implement the Telecommunications Act of 1996, and
these regulatory proceedings could impose additional obligations on us, give rights to competitors,
increase our costs, and otherwise adversely affect our ability to implement our business plan. The value of our licenses could decline. Subsequent to the Teligent acquisitions, our wireless licenses comprise approximately 29%
of our total assets and 97% of our assets, excluding cash, cash equivalents and goodwill. The value
of any or all of our licenses could decrease as a result of:  
    increases in supply of spectrum that provides similar functionality, such as the
FCC proposal to allocate and license additional 37-40 GHz spectrum;
    a decrease in the demand for services offered with these licenses;
    values placed on similar licenses in future FCC auctions;
    greater acceptance of unlicensed spectrum, such as WiMax, for carrier class applications;
    regulatory limitations on transfers of these licenses; and
    bankruptcy or liquidation of any other comparable companies. The foregoing results could adversely affect the market for licenses like ours. The volatility in the value of our licenses could cause volatility in the trading price of our
stock. At December 31, 2001, the market value of our licenses was approximately $50 million. During
the year ended December 31, 2002, we recorded a charge to earnings of $24.8 million to reflect an
impairment in license value. There have been no subsequent declines in license value. During
2004, we performed a valuation of our spectrum and determined that the fair market value of the
spectrum was $89 million at December 31, 2004. In performing this evaluation, we identified a
number of factors that are considered to be indicative of the value of FCC licenses, including (i)
the increase in our public equity value; (ii) private purchases of similar licenses; and, (iii) the
results of a recent FCC Auction for 24 GHz spectrum. Each of the factors was then quantified and
weighted in deriving the estimated fair value. Future declines in the value of our licenses could
result from external market conditions in the wireless communications industry as well as the
telecommunications industry as a whole. Additionally, declines could occur as a result of lack of
acceptance of the types of services that we offer or the development of more cost effective
alternatives for delivering such services. Future declines in our license value and the resulting impairment charge to earnings could
result in a decline in our stock price. We may be unable to secure any needed additional capital to operate our business. We had a cash balance of $80.4 million at December 31, 2004. We may not be able to secure
traditional financing if required to take advantage of future business opportunities. We may be
unable to secure additional financing when needed, on acceptable terms, or at all, to pursue such
opportunities. Any such financing could be on onerous terms and could be very dilutive to our stockholders. If we are unable to secure capital when needed, we may be unable
to maintain our licenses or continue any level of operations. 13




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We expect to incur negative cash flows and operating losses during at least the next few
years. We have generated only nominal revenues from operations to date. We have generated
operating and net losses since our inception and we expect to generate operating and net losses and
negative cash flows for at least the next few years. We may not develop a successful business or
achieve or sustain profitability in the future. Our ability to achieve profitability will depend,
in part, on our ability to:  
    raise adequate additional capital if required;
    attract and retain an adequate customer base;
    deploy and commercialize our services;
    attract and retain experienced and talented personnel as needed; and
    establish strategic business relationships. We may not be able to do any of these successfully, and our failure to do so is likely to
have a negative impact on our operating results. Competition may increase which could impact our growth and negatively affect our
operating results. The FCC still controls a substantial amount of spectrum at and around 39 GHz. The FCC has
proposed to allocate and auction this spectrum in the future, increasing the number of entities
that hold this spectrum and the general availability of spectrum at and around 39 GHz. Companies
that would otherwise lease spectrum from us could instead decide to buy spectrum in these auctions,
which could adversely affect our business or the spectrum could be acquired by companies for the
purpose of competing with us. The FCC still controls a substantial amount of spectrum at 24 GHz. In July 2004, the FCC
auctioned five 80 MHz licenses of 24 GHz spectrum territory in 176 Economic Areas (EA) covering the
entire United States. The purchasers use of the spectrum was subject to Teligents 24 GHz spectrum
holdings. Since Teligent held the most populous areas in many of the EAs, the purchaser would be
barred from operating in the metropolitan sections with arguably the most business potential. As a
result, only seven licenses covering 12.8 million channel pops were purchased, each for the minimum
bid required by the FCC. The FCC could decide to hold another auction for the available 24 GHz
spectrum. We may be unsuccessful in developing a business around our targeted mobile backhaul and
fiber extension strategies. Also, we may be unable to successfully discover and respond to future
business opportunities to utilize our 24 GHz and 39 GHz licenses. Our long-term strategy requires that we effectively implement our current business
strategies and identify additional uses for our 24 GHz and 39 GHz licenses. We may be unsuccessful
in developing our planned or other businesses due to one or more of the following factors:  
    the availability, performance and price of viable alternatives;
    our inability to create awareness and acceptance of our services; and
    our limited resources to develop or pursue possible opportunities for the provision of services. In addition, we anticipate having limited resources available to develop future business
opportunities and, as a result, we may not be able to respond in a timely manner if a longer-term
opportunity does arise. Additionally, we have many competitors who may be better prepared to
respond quickly to increasing demand for the services we provide, which could affect our ability to
capitalize on such opportunities. We may be unable to successfully execute on any of our identified business opportunities
or other business opportunities that we determine to pursue. We currently have only eight employees (including officers) and maintain limited
corporate infrastructure. We have minimum internal systems and do not operate a service and support
organization. In order to pursue our identified opportunities, as well as any other opportunities
for our services we identify, we will need to build our infrastructure and operational
capabilities. Our ability to do any of the foregoing could be affected by one of more of the
following factors:  
    the ability of our equipment, equipment suppliers and service providers to perform
as we expect; 14




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
    our ability to execute our strategy, which could be affected by our limited
experience in providing high-speed transmission services;
    our ability to effectively manage our third party relationships;
    our ability to secure suitable locations for our radios and antennas;
    our ability to manage the expansion of our operations, which could result in
increased costs, high employee turnover or damage to customer relationships;
    our ability to attract and retain qualified personnel, which may be affected by the
significant competition in our industry for persons experienced in information
technology and engineering;
    equipment failure or interruption of service, which could adversely affect our
reputation and our relations with our customers;
    our ability to accurately predict and respond to the rapid technological changes in
our industry and the evolving demands of the markets we serve; and,
    our ability to raise substantial additional capital to fund our growth, if
required. Our failure to adequately address the above factors would have a significant impact on
our ability to implement our business plan with respect to mobile backhaul and fiber network
extensions and our ability to pursue other opportunities that arise, which might negatively affect
our business. In light of our brief operating history, change of strategy, and adoption of fresh
start accounting, investors may have difficulty evaluating us. We have a limited operating history under our current business strategy. Our current
activities include services ranging from leasing spectrum to a diverse mix of fixed wireless
service operations. From our inception in 1993 through the first quarter of 2001, we acquired
spectrum rights through FCC auctions and purchase transactions, raised capital through public and
private offerings of securities, acquired equipment and roof access and usage rights, and developed
operating and support systems and networks. In 1998, we began to sell a variety of Internet
services to end-users in Seattle, WA, Portland, OR, and Phoenix, AZ. In late 1999, our strategy
evolved to providing high-speed transmission services, including Internet access, to businesses.
During 2000, we launched these services in ten markets. In the first quarter of 2001, we were
unable to secure additional funding sources to continue to finance our operations and service our
debt. In April 2001, we sought to reorganize our business under Chapter 11 of the Bankruptcy Code. As a result of the effectiveness of the Joint Plan of Reorganization that was approved by the
United States Bankruptcy Court for the District of Delaware on October 31, 2001, we adopted fresh
start reporting as of December 31, 2001 and eliminated our accumulated deficit. Additionally, upon
the effectiveness of the Joint Plan of Reorganization on December 20, 2001, we adopted a complete
change in strategy and a new management team. As a result, our recent financial results are not
comparable to periods prior to 2002. If our services do not achieve market acceptance we may lose or not obtain revenue and
our ability to achieve profitability would suffer. Because the provision of wireless high-speed transmission services represents an emerging
sector of the telecommunications industry, the demand for our services is uncertain. A substantial
market for our services may not develop. The demand for our services may be adversely affected by:  
    historical perceptions of the unreliability of previous wireless technologies;
    our bankruptcy and the bankruptcies of Teligent, Winstar (currently IDT Spectrum),
XO and other emerging telecommunications companies;
    concerns about the security of transmissions over wireless networks or links;
    the lack of market history of operational fixed wireless services; and
    the possible desire of customers to acquire telecommunications services from a single provider. 15




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The telecommunications market is highly competitive and we may be unable to compete
effectively, especially against competitors with greater financial and other resources, which may
affect our ability to attract customers and grow and maintain our sales. We operate in a highly competitive environment and may not be able to compete
successfully. In the short-term, we expect to face competition from other high capacity service
providers utilizing point-to-point telecommunications, broadband, fiber and other wireless
companies. As we seek more long-term opportunities to provide our services, we may face competition
from such providers, as well as from satellite communications companies, internet service
providers, cable television operators and others seeking to profit from the demand for wireless,
high-speed services. We also expect to compete with new providers and technologies not yet
introduced. To date, we do not have a significant market share in any of the markets in which we
are operating. Given the intense competition, we may be unable to compete effectively with these
and other technologies and service providers in the short-term, and consequently we may be unable
to attract customers and grow and maintain our sales, or we may experience difficulty in responding
to any longer-term opportunities that might develop. Many of our competitors are larger, have greater financial and other resources and have
more experience than we have. As a result, these competitors may be better able to develop and
exploit new and better technologies, adapt to changes in customer requirements, devote greater
resources to the marketing and sale of their services or more rapidly deploy telecommunication
services than we can. We may be unsuccessful in executing our strategy of leasing our spectrum to existing
telecommunications carriers in a manner that does not require significant sales and marketing
costs, other operating costs or capital expenditures. We presently have only eight employees (including our officers) and operate with limited
resources. Our ability to find and respond to opportunities to deliver our services in a
cost-effective manner may be limited by the number of personnel we employ and our lack of capital
and other operational resources. Even if we are able to find customers to whom we can provide
services, we may have to hire additional personnel without whom we may only be able to provide
limited support for those services, which could result in customer dissatisfaction. Additionally,
our competitors may be better able to seek opportunities to provide services and may be better able
to respond to such opportunities than we are. Our spectrum leasing strategy may not be accepted by the telecommunications carriers. Prior to the FCCs Secondary Market Ruling in October 2003, leasing small amounts of
spectrum was not previously widespread because of regulatory constraints. As a result, there is no
track record for companies pursuing this strategy. Subsequent to that ruling, the regulatory
constraints have been substantially reduced and spectrum holders are beginning to lease spectrum
with slightly more frequency. Despite the removal of the regulatory constraints, large
telecommunication carriers may not be willing to lease, rather than own, spectrum upon which their
business is dependent, decreasing demand for our leasing products, which could adversely affect our
revenues. There are few barriers to entry to spectrum leasing. Other entities hold similar FCC licenses to operate in the same markets as we do. These
entities may also lease spectrum to telecommunication companies. They may be able to offer lower
prices than we do or may have more spectrum available to lease in a market than we do, limiting the
growth of our business. ITEM 2.PROPERTIES The following is a summary of our principal facilities leases: SQUARE FOOTAGE
    
    LOCATION
    
    LEASE EXPIRATION DATE
    
    FACILITIES1,200
    
    Charlottesville, VA
    
    Monthly
    
    Corporate office8,300
    
    McLean, VA
    
    June 15, 2007
    
    Sales and Engineering
office33,400
    
    Herndon, VA
    
    March 30, 2008
    
    Teligents corporate
office which has been
subleased
 16




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ITEM 3.LEGAL PROCEEDINGS As more fully described in ITEM 1BUSINESS and ITEM 7MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, we sought protection under Chapter 11
of the Bankruptcy Code on April 20, 2001. We developed a Plan that was approved by the Court on
October 31, 2001. On December 20, 2001, the Plan was effective and we emerged from the proceedings
under Chapter 11 of the United States Bankruptcy Code pursuant to the terms of the Plan. ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter to a vote of the security holders during the fourth
quarter of 2004. 17




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ITEM 4A.EXECUTIVE OFFICERS OF THE COMPANY Our executive officers are as follows: Name
    
    Age
    
    PositionDean M. Johnson
    
    
    46
    
    
    Chief Executive Officer, President and DirectorSandra Thomas Watson
    
    
    48
    
    
    Vice President, Chief Financial Officer,
Secretary and TreasurerEvans Mullan
    
    
    45
    
    
    Vice President, Business DevelopmentLouis R. Olsen
    
    
    47
    
    
    Vice President, Engineering and Operations
 Dean M. Johnsonhas served as our Chief Executive Officer, President and Director since
December 2001. From February 2001 through December 2001, Mr. Johnson was President of Cardinal
Point Associates, a strategic and financial consultant to broadband wireless companies. From
November 1999 to February 2001, he was founder and President of MuseumCompany.com, Inc., a
specialty retailer of museum-related merchandise. Sandra Thomas Watsonhas served as our Vice President, Chief Financial Officer and
Treasurer since December 2001 and our Secretary since April 2002. From February 2001 through
December 2001, Ms. Watson was a consultant with Cardinal Point Associates, a strategic and
financial consultant to broadband wireless companies. From January 2000 to February 2001 she served
as Chief Financial Officer of MuseumCompany.com, Inc., a specialty retailer of museum-related
merchandise. Evans Mullanhas served as our Vice President, Business Development since December 2001.
From March 2000 to September 2001, he served as a Vice President in Operations at Winstar, a
broadband wireless provider, with executive responsibility for several different areas: Network
Management Center, Operations Support staff, and Customer Provisioning. From January 1999 to March
2000 he was Senior Director of Revenue Assurance for Winstar and served as Director of Program
Management for Winstar from May 1997 to January 1999. Louis R. Olsenhas served as Vice President of Engineering and Operations since January
2005. From October 2002 through August 2004, Mr. Olsen was a Principal Consultant for Alera
Solutions, an independent consulting company focused on wireless and video projects. From May 2001
through June 2002, Mr. Olsen was the Chief Technology Officer of Centennial Communications
Caribbean region, a wireless and fixed telecommunications provider. From December 1998 through May
2001, he was Vice President of Technology Development for Teligent, a fixed wireless service
provider. 18




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PART II ITEM 5.MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES The following table sets forth high and low bid quotations of our common stock traded
under the ticker symbol FRNS.OB as reported on the Over the Counter Bulletin Board. The
over-the-counter market quotations below reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions. Common Stock PRICE RANGEHigh
    
    
    LowFiscal year ended December 31, 2004First Quarter
    
    $
    3.85
    
    
    $
    2.55Second Quarter
    
    $
    4.45
    
    
    $
    3.01Third Quarter
    
    $
    8.00
    
    
    $
    3.65Fourth Quarter
    
    $
    14.00
    
    
    $
    4.75Fiscal year ended December 31, 2003First Quarter
    
    $
    0.38
    
    
    $
    0.22Second Quarter
    
    $
    0.40
    
    
    $
    0.35Third Quarter
    
    $
    0.70
    
    
    $
    0.40Fourth Quarter
    
    $
    2.70
    
    
    $
    0.66
 On January 26, 2005, the closing price of our common stock as reported by the Over the
Counter Bulletin Board was $10.80 per share. There were 969 holders of record of our common stock
on January 26, 2005. We have not paid any cash dividends in the past and do not anticipate paying any cash
dividends in the foreseeable future. We intend to retain earnings, if any, to finance the expansion
of our business and fund ongoing operations for the foreseeable future. Equity Compensation Plan Information The following table provides information about our equity compensation plans as of
December 31, 2004. Number of securitiesNumber of
    
    
    
    
    
    
    remaining available forsecurities to be
    
    
    Weighted-average
    
    
    future issuance underissued upon exercise
    
    
    exercise price of
    
    
    equity compensationof outstanding
    
    
    outstanding
    
    
    plans (excludingoptions, warrants
    
    
    options, warrants
    
    
    securities reflected inPlan Category
    
    and rights
    
    
    and rights
    
    
    column (a))(a)
    
    
    (b)
    
    
    (c)Equity
Compensation Plans
Approved by
Security Holders
    
    
    1,338,972
    
    
    $
    0.14
    
    
    
    51,283Equity Compensation
Plans Not Approved
by Security Holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,338,972
    
    
    $
    0.14
    
    
    
    51,283
 19




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##### 



ITEM 6.SELECTED FINANCIAL DATA Selected financial data presented below has been derived from and should be read in
conjunction with our audited consolidated financial statements and the notes thereto, and
Managements Discussion and Analysis of Financial Condition and Results of Operations included
elsewhere in this report. As more fully described in footnote 1 below, we adopted fresh start
financial reporting effective as of December 31, 2001 as a result of the court-approved Plan. Fresh
start financial reporting creates a new reporting entity whose assets are recorded at their
estimated fair value and liabilities are recorded at the present value of the amounts to be paid.
As a result, period to period comparisons may not be meaningful and are not indicative of future
results of the Company. Years ended December 31,Successor (1)
    
    
    Predecessor (1)(in thousands except per share data)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Statement of Operations Data:Revenues
    
    $
    104
    
    
    $
    140
    
    
    $
    295
    
    
    $
    629
    
    
    $
    1,241Loss from operations (2)
    
    
    (11,131
    )
    
    
    (2,736
    )
    
    
    (26,685
    )
    
    
    (79,847
    )
    
    
    (65,912
    )Net loss (3)
    
    
    (14,528
    )
    
    
    (4,180
    )
    
    
    (27,725
    )
    
    
    (257,077
    )
    
    
    (76,772
    )Basic and diluted net loss per share (4)
    
    
    (0.67
    )
    
    
    (0.21
    )
    
    
    (1.39
    )
    
    
    (6.52
    )
    
    
    (3.82
    )
 As of December 31,Successor (1)
    
    
    Predecessor (1)(in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance Sheet Data:Cash and cash equivalents
    
    $
    80,398
    
    
    $
    3,599
    
    
    $
    5,300
    
    
    $
    5,850
    
    
    $
    32,314Working capital (deficit)
    
    
    80,958
    
    
    
    3,139
    
    
    
    4,013
    
    
    
    4,595
    
    
    
    (3,642
    )FCC licenses, net
    
    
    21,662
    
    
    
    21,600
    
    
    
    21,600
    
    
    
    46,388
    
    
    
    366,652Total assets
    
    
    103,581
    
    
    
    25,566
    
    
    
    27,429
    
    
    
    53,694
    
    
    
    455,834Long-term debt
    
    
    
    
    
    
    10,694
    (7)
    
    
    8,756
    (6)
    
    
    6,883
    (5)
    
    
    110,669Convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    243,536Total stockholders equity
    
    
    98,630
    
    
    
    10,296
    
    
    
    13,126
    
    
    
    40,812
    
    
    
    14,871
   (1)
    
    The Company sought reorganization under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (the Court) on April 20, 2001. On
December 20, 2001, the Company emerged from bankruptcy. For financial reporting purposes, the
Company has reflected its emergence from bankruptcy as of December 31, 2001. Effective
December 31, 2001, the Company adopted fresh start financial reporting in accordance with
American Institute of Certified Public Accountants Statement of Position 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code (SOP 90-7). Successor
refers to activities and balances associated with the Company after December 20, 2001.
Predecessor refers to activities and balances associated with the Company on or prior to
December 20, 2001.(2)
    
    Includes expenses of (i) $24.8 million recorded in 2002 for the impairment of FCC licenses;
(ii) $42.6 million recorded for equipment impairment in 2001; and, (iii) expenses of $3.9
million and $9.3 million recorded for the impairment of a note receivable in 2001 and 2000,
respectively.(3)
    
    In 2001 includes $346.7 million in reorganization expenses and $128.9 million income from
gain on early extinguishments of debt as a result of the emergence from bankruptcy. Gain on
early extinguishment of debt was previously reported as an extraordinary item but has been
reclassified to a reorganization item in accordance with Statement of Financial Accounting
Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections.(4)
    
    Includes $3.27 income per share relating to an extraordinary gain on early extinguishment of
debt in 2001 and $1.46 loss per share relating to deemed preferred dividends in 2000.(5)
    
    Total principal of $11.0 million for Senior Secured Notes was allocated as $6.9 million to
long-term debt and $4.1 million to warrants which is included in stockholders equity.(6)
    
    Total original Senior Secured Note principal of $11.0 million increased by $1.1 million in
Senior Secured Notes issued in 2002 for paid-in-kind interest less $3.3 million of unamortized
original issue discount.(7)
    
    Total original Senior Secured Note principal of $11.0 million increased by $2.2 million in
Senior Secured Notes issued in 2003 and 2002 for paid-in-kind interest less $2.5 million of
amortized original issue discount. 20




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##### 



ITEM 7.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with the  Cautionary Statement
included at the beginning of this Annual Report on Form 10-K, our Consolidated Financial Statements
and related Notes, and other financial information appearing elsewhere in this Annual Report on
Form 10-K. Executive Overview From its inception in 1993 through the first quarter of 2001, the Company acquired
airwave capacity, or spectrum rights, through FCC auctions and purchase transactions, raised
capital through public and private offerings of securities, acquired equipment and roof rights, and
developed operating and support systems and networks. From 1996 to 2000, the Company utilized
several strategies to provide broadband Internet services. It invested heavily in the testing and
deployment of fixed wireless links and networks. In 1998, it began to sell a variety of
Internet services to end-users in Seattle, WA, Portland, OR, and Phoenix, AZ. In late 1999, the
Companys strategy evolved to providing high-speed transmission services, including Internet access
to businesses. During 2000, it launched these services in ten markets. In the first quarter of
2001, the Company was unable to secure additional funding sources to continue to finance operations
and service debt.  Reorganization The Company sought reorganization under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (the Court) on April 20, 2001 (the Petition
Date). It terminated nearly all of its employees, terminated operation of its networks and
eliminated customer support. A Joint Plan of Reorganization (Plan) was developed and was approved
by the Court on October 31, 2001. On December 20, 2001 (the Effective Date), the Plan was
effective and the Company emerged from the proceedings under Chapter 11 of the United States
Bankruptcy Code pursuant to the terms of the Plan. Under the Plan, the Company issued 20 million shares of new-post Chapter 11 common stock
(New Common Stock) to unsecured creditors and holders of Series A Preferred Stock (Old Preferred
Stock). Each holder of an unsecured claim received its pro rata share of 19 million shares of New
Common Stock. Each holder of Old Preferred Stock received its pro rata share of 1 million shares of
New Common Stock. Holders of pre-Chapter 11 common stock (Old Common Stock) and holders of any
other equity interest received no distributions under the Plan. All Old Common Stock, Old Preferred
Stock and all other equity interests such as employee stock options and warrants were canceled on
the Effective Date. Subsequent to the Effective Date, the Companys product offering consisted of leasing its
spectrum to others to construct high-speed wireless telecommunications networks. Its leasing
products, Express Link and Express Net, provide a way for telecommunications carriers and
enterprise customers to access interference-free, carrier class licensed spectrum. The Companys
leasing strategy allows it to utilize its FCC licenses to facilitate wireless telecommunications
services in a capital efficient manner. It seeks to identify, contact and serve existing
telecommunications carriers in a manner that does not require significant sales and marketing,
operating and capital expenditures. The recoverability of the Companys investment in its FCC
licenses is dependent on the successful execution of its business plan as it evolves. The Company currently has over 40 leases for spectrum on a link-by-link basis primarily
in the Southwestern and Eastern United States and has leased spectrum in two urban regions in the
Southwestern United States. Additionally, the Company has retained nine fixed transmission links
originated by its predecessor which customers incorporate into their telecommunication networks and
utilize to provide a primary telecommunication link or, in other cases, redundancy, back up or
diversity to other telecommunication services. In December 2003, the Company entered into an
Express Net contract with a large national telecommunications carrier. Under the terms of this
contract, the Company has leased a portion of its spectrum in two urban regions for seven years. On January 14, 2005, the Company completed the acquisition of substantially all of the
assets and assumed certain related liabilities of Teligent, Inc. and its subsidiary, Teligent
Services, Inc. (collectively, Teligent). The assets acquired from Teligent included 24 GHz
spectrum licenses, radio equipment and the infrastructure supporting the fixed wireless operations
including an operational cellular backhaul network in New York City. In consideration for these
assets, the Company issued approximately 25.2 million shares of common stock and a warrant to
purchase up to approximately 2.5 million additional shares of common stock. The Company will reflect the assets of Teligent and the acquired operations in the
Companys financial statements as of the acquisition date. The assets will be recorded at fair
market value at the date of acquisition as required by purchase 21




---



##### 



method accounting. The Company will allocate 39.4% and 58.1% of the $102.0 million purchase
price to the 24 GHz spectrum and goodwill, respectively. Subsequent to the Teligent acquisition, the Company is generating revenue by providing
cellular backhaul services in New York City. Since its inception, the Company has generated
operating and net losses and expects to generate operating and net losses and negative cash flows
for at least the next few years. The Company currently has only ten employees (including officers)
and operates with limited resources. The Company is currently focused on developing our business
opportunities. It does not plan to hire a significant number of additional employees or build the
infrastructure required to deliver services until it has signed long-term contracts with customers.
Due to the developmental stage of the Companys activities, management primarily focuses on cash
balances, cash flow and budgetary controls in evaluating the Companys financial condition and
operating performance. Results of Operations Year ended December 31, 2004 compared to year ended December 31, 2003 Revenues for the year ended December 31, 2004 decreased 25.7% to $104,000 from $140,000
in 2003. This decrease was the result of the decline in the number of dedicated wireless links the
Company has remaining from its predecessor. During the year ended December 31, 2004, the Company
continued to provide customers with nine dedicated links remaining from the predecessor. During the
year ended December 31, 2003, the Company provided its predecessors customers with up to 14
dedicated links including two OC-3 links. In 2004, the Company realized $66,000 in revenue from its
spectrum leasing program which it began in late 2003. At December 31, 2004, the Company had more
than 40 leases for its spectrum on a link-by-link basis and had leased spectrum in three urban
areas. Revenue under these leases is recognized ratably over the individual lease periods which
currently range from 12 to 84 months. Technical and network operations costs and expenses are comprised primarily of
engineering professional fees and compensation and related costs for operational development of, as
well as roof-top rent and backhaul for, dedicated wireless links. Technical and network operations
costs and expenses increased 2500% to $78,000 for year ended December 31, 2004, compared to $3,000
for year ended December 31, 2003. This increase resulted from the engagement of consultants and
hiring of staff to prepare for the integration of the Teligent assets. Technical and network
operations costs and expenses were 75% and 2% of revenues for the years ended December 31, 2004 and
2003, respectively. The Company expects these expenses to increase in future periods as it
executes its business plan to grow its fixed wireless operations. Sales and marketing costs and expenses are comprised primarily of compensation and
related costs as well as consulting fees and public relations expenses. These costs increased
359.9% or $1.4 million to $1.8 million for the year ended December 31, 2004, compared to $399,000
in 2003. This increase resulted primarily from an increase of $1.1 million in non-cash stock-based
compensation expense to $1.2 million for the year ended December 31, 2004 from $146,000 recorded
for the year ended December 31, 2003. The Company accounts for its stock options granted to
management as variable options. As a result, the Company records a non-cash stock-based
compensation expense for the increase in its stock price from December 31, 2003 to December 31,
2004 multiplied times the number of options granted to employees in sales and marketing roles. The
Companys stock price increased from $2.70 at December 31, 2003 to $13.90 at December 31, 2004.
Sales and marketing costs and expenses were 1764% and 285% of revenues for the years ended December
31, 2004 and 2003, respectively. The Company expects sales and marketing expenses (other than the
portion related to its options accounted for as variable) to increase in future periods as a result
of executing its business plan to grow its fixed wireless operations. As the Company is unable to
anticipate future increases or decreases in the price of its common stock, it is unable to predict
future overall trends in its reported sales and marketing expenses. General and administrative costs and expenses primarily consist of compensation,
occupancy expenses, professional fees and insurance. General and administrative costs and expenses
increased 301% or $7.1 million to $9.3 million for the year ended December 31, 2004, from $2.3
million for the year ended December 31, 2003. This increase resulted from an increase of $7.0
million in non-cash stock-based compensation expense to $8.1 million for the year ended December
31, 2004, from $1.1 million recorded in for the year ended December 31, 2003. The Company accounts
for its stock options granted to management and members of the Board of Directors as variable
options. As a result, the Company records a non-cash stock-based compensation expense for the
increase in its stock price from December 31, 2003 to December 31, 2004 multiplied times the number
of options granted to employees in general and administrative roles and Directors. The Companys
stock price increased from $2.70 at December 31, 2003 to $13.90 at December 31, 2004. General and
administrative costs and expenses were 9033% and 1672% of revenues for the years ended December 31,
2004 and 2003, respectively. The Company expects general and administrative expenses (other than
the portion related to its options accounted for as variable) to increase in future periods as a
result of executing its business plan to grow its fixed wireless operations. As the Company 22




---



##### 



is unable to anticipate future increases or decreases in the price of its common stock, it is
unable to predict future overall trends in its reported general and administrative expenses. In 2003, the Company recorded a non-cash charge of $124,000 to reduce its carrying value
of inventory to market. No such charge was deemed necessary in 2004. As a result of its annual impairment evaluation of the fair value of its FCC licenses,
the Company determined that its license portfolio, with a book value of $21.6 million, had a fair
market value of $89 million and that no impairment of the value of its FCC licenses occurred in
2004. While performing its impairment evaluation the Company considered (i) the increase in its
public equity value; (ii) private purchases of spectrum; and, (iii) the results of FCC auction #56. Depreciation and amortization expense of $6,000 for the year ended December 31, 2004
decreased 33.3% from $9,000 for 2003. Net expense for interest and other increased to $3.4 million for the year ended December
31, 2004 from $1.4 million in 2003. This increase is the result of the Company repaying all Senior
Notes on December 23, 2004, and recognizing the remaining unamortized debt discount. During the
year ended December 31, 2004 and 2003, the Company recorded $2.5 million and $818,000 of interest
expense relating to the amortization of original issue discount, respectively. During the year ended December 31, 2004, the Company has recorded a decrease of $27
million in its deferred tax valuation allowance based upon managements determination that the
recognition criteria for realization had not been met. At December 31, 2004, the Companys
valuation allowance was equal to its deferred tax asset. Year ended December 31, 2003 compared to year ended December 31, 2002 Revenues for the year ended December 31, 2003 decreased 52.5% to $140,000 from $295,000
in 2002. Revenues in 2003 and 2002 were primarily derived from Fast Ethernet metropolitan networks,
OC-3 services and dedicated business links which provide services emphasizing unique links rather
than links combined to form a network. At December 31, 2003 and 2002, the Company provided
customers with nine and 14 dedicated links, respectively, remaining from the predecessor. The
decrease in revenue in 2003 is a result of the decrease in the number of legacy links as customers
of the predecessor continued to disconnect their services. The Company realized minimal revenue
from its new spectrum leasing program which was launched in late 2003. At December 31, 2003, the
Company had 14 leases for its spectrum on a link-by-link basis and has leased spectrum in two urban
areas. Technical and network operations costs and expenses are comprised primarily of
compensation, facilities and backhaul rent and maintenance. Technical and network operations costs
and expenses decreased 90.3% to $3,000 for the year ended December 31, 2003, compared to $31,000 in
2002. This decrease resulted from the reduction in facilities and rent as a result of the declining
number of links remaining from the predecessor. Percentage of revenue comparison is not meaningful. Sales and marketing costs and expenses are comprised primarily of compensation and
related costs as well as consulting fees and advertising expenses. These costs increased 83.9% to
$399,000 for the year ended December 31, 2003, compared to $217,000 in 2002. This increase resulted
primarily from non-cash stock-based compensation expense of $146,000 recorded in 2003. Percentage
of revenue comparison is not meaningful. General and administrative expenses increased 21.7% to $2.3 million for the year ended
December 31, 2003 from $1.9 million for the year ended December 31, 2002. This increase resulted
from a non-cash stock-based compensation expense of $1.1 million recorded in 2003 offset by a
$200,000 reduction from 2002 in professional fees incurred in finalizing the bankruptcy and
$300,000 reduction from 2002 in costs incurred to support the Companys international subsidiaries.
Percentage of revenue comparison is not meaningful. In 2003, the Company recorded a non-cash charge of $124,000 to reduce its carrying value
of inventory to market. No similar adjustment was deemed necessary in 2002. As a result of its annual impairment evaluation of the fair value of its FCC licenses,
the Company determined that its license portfolio, with a book value of $21.6 million, had a fair
market value of $50.8 million and that no further decline in the value of its FCC licenses had
occurred during 2003. While performing its impairment evaluation the Company considered (i) the
increase in its public equity value; (ii) private purchases or restructurings for companies holding
similar licenses; and, (iii) the increase in the public equity value of companies providing similar
services or holding FCC licenses. The fair value of $50.8 million at December 31, 2003 was based
upon a valuation performed by an independent valuation firm. 23




---



##### 



Depreciation and amortization expense of $9,000 for the year ended December 31, 2003
decreased 55.0% from $20,000 for 2002. This decrease was due to the disposal of depreciable
equipment and fixtures as a result of closing the predecessors Kent, WA warehouse facility in
April 2002. Interest and other increased to $1.4 million for the year ended December 31, 2003 from
$1.0 million in 2002. This increase is a result of non-recurring other income of $421,000 realized
in 2002 related to the liquidation of excess equipment from the predecessor and other bankruptcy
matters. During the year ended December 31, 2003, the Company has recorded an increase of $1.3
million in its deferred tax valuation allowance based upon managements determination that the
recognition criteria for realization had not been met. At December 31, 2003, the Companys
valuation allowance was equal to its deferred tax asset. Liquidity and Capital Resources On April 20, 2001, the Company filed a voluntary petition with the Bankruptcy Court for
protection under Chapter 11 of the Bankruptcy Code. As a result of the Chapter 11 filing, the
Company was prohibited from paying, and creditors were prohibited from attempting to collect claims
or debts arising prior to the Petition Date. On October 31, 2001, the Bankruptcy Court approved the
Plan. On December 20, 2001, after the Company met all of the Conditions Precedent to the Effective
Date (as defined), the Plan was effective and the Company emerged from proceedings under Chapter 11
of the Bankruptcy Code. On the Effective Date of the Plan, the Company:  
    filed an Amended and Restated Certificate of Incorporation;
    canceled Old Common Stock, Old Preferred Stock and agreements to issue or purchase any
additional equity interests;
    issued 19 million shares of Common Stock to settle all unsecured creditor claims;
    issued 1 million shares of Common Stock to holders of Old Preferred Stock;
    issued $11.0 million of five-year senior secured notes which bear paid in-kind interest
at 9% and are secured by substantially all of the Companys assets (Senior Secured
Notes);
    issued 4 million fully-vested, five-year Class A Warrants with an exercise price of
$0.01 to holders of the Senior Secured Notes; and,
    paid the holder of the $11.3 million secured vendor financing claim $6.0 million in cash
in full satisfaction of the debt. In February 2002, the Company verified approximately 90% of the holders of unsecured
claims and 100% of the holders of Old Preferred Stock and distributed stock certificates of common
stock. In December 2003, the Company completed the verification process and distributed the
remaining 1.5 million shares of common stock. In May 2004, the Company issued 31,000 additional
shares of common stock to settle all remaining bankruptcy claims. On June 3, 2004, the U.S.
Bankruptcy Court for the District of Delaware ruled that all obligations and responsibilities
associated with the bankruptcy proceedings had been satisfied and closed the case. On December 14, 2004, we raised $89.5 million, net of agent fees, through the sale of
12.87 million shares of common stock in a private placement offering. The proceeds were used to
repay $14.4 million in existing senior indebtedness on December 23, 2004. We intend to use the
remaining proceeds from the offering:  
    to grow our existing mobile backhaul network and, as we receive new contracts, construct
additional mobile backhaul networks;
    to develop facilities for extending fiber optic telecommunications networks in selected
metropolitan markets, as we identify and contract with appropriate customers and partners;
    for other working capital purposes; and
    for general corporate purposes. During the year ended December 31, 2004, operating activities used cash of $1.5 million
as compared to $1.7 million during 2003. Cash used by operating activities resulted primarily from
the Companys net loss decreased by non-cash interest expense and non-cash stock-based compensation
expense. 24




---



##### 



Investing activities for the year ended December 31, 2004 used cash of $980,000 which
primarily consisted of $894,000 in professional and regulatory fees for the acquisition of
Teligent. The Teligent acquisition expenditures have been deferred and included in other assets as
of December 31, 2004 pending the closing of the transaction which occurred on January 14, 2005. Financing activities provided $79.3 million for the year ended December 31, 2004 as a
result of (i) the private placement of 12.9 million shares of common stock resulting in proceeds of
$89.5 million, net of agent fees and (ii) the private placement of 1.2 million shares of common
stock resulting in proceeds of $3.8 million, net of transaction expenses. Financing activities
provided $7,000 for the year ended December 31, 2003 as a result of employee stock options being
exercised. In 2001, the Company issued Senior Secured Notes bearing interest at the rate of 9% per
annum, payable quarterly through the issuance of additional Senior Notes. Interest is payable in
cash only upon a continuing event of default. During 2003, the Company issued $1.1 million of
Senior Secured Notes for paid-in-kind interest. On December 23, 2004, the Company repaid the Senior
Secured Notes in full. The Company had cash and cash equivalents of $80.4 million at December 31, 2004. In
December 2004, the Company sold 12.9 million shares of common stock resulting in proceeds of $89.5
million, net of agent fees. In January 2004, the Company also received $3.8 million of net proceeds
from the sale of 1.2 million shares of common stock and the issuance of 1.2 million warrants
exercisable for shares of common stock. Since its inception, the Company has incurred losses from operations and expects to continue
to incur losses and experience negative cash flows for the foreseeable future. Subsequent to the
Teligent acquisition, the Company is generating revenue by providing cellular backhaul services in
New York City. The Company currently has only ten employees (including officers) and operates with
limited resources. The Company is currently focused on developing its business opportunities. It
does not plan to hire a significant number of additional employees or build the infrastructure
required to deliver services until it has signed long-term contracts with customers. However, the
Company believes that its future technical and network operations expenses and sales and marketing
expenses will be greater than those incurred in 2004 in order to support the Teligent operations.
The Company believes that its cash resources are sufficient to fund its operations and capital
requirements beyond 2005 taking into account its current cash balance, limited operations and
historic annual cash burn. However, additional unforeseen expenditures may require the Company to
obtain additional financing. Contractual Obligations The following table summarizes the Companys contractual obligations as of December 31,
2004 (in thousands): Payment due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsContractual ObligationsOperating Lease Obligations
    
    $
    10,000
    
    
    $
    10,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Total
    
    $
    10,000
    
    
    $
    10,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
 Subsequent to December 31, 2004, the Company entered into a lease for office space in
Mclean, VA for use as its sales and engineering office. Rent under this lease is $121,000 annually
through June 15, 2007. As a result of the Teligent acquisition, the Company assumed a lease and sublease for all
of the office space in Herndon, VA formerly used as Teligents corporate offices as well as various
leases for communication towers and storage facilities. Rent commitments under these leases are as
follows: 25




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##### 



OperatingLeasePayments($ in thousands)Year ending December 31:2005
    
    $
    1,2662006
    
    
    1,2562007
    
    
    1,0002008
    
    
    390Thereafter
    
    
    43Total minimum lease payments
    
    
    3.955Less: total sublease payments
    
    
    (1,910
    )Total minimum lease payments, net of sublease payments
    
    $
    2,045
 Critical Accounting Matters and Significant Estimates The preparation of consolidated financial statements requires management to make
judgments based upon estimates and assumptions that are inherently uncertain. Such judgments affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. Management continuously evaluates its estimates and assumptions,
including those related to long-lived assets, inventories, income taxes, contingencies and
litigation, and the carrying values of assets and liabilities. Management bases its estimates on
historical experience and on various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different assumptions or
conditions. A summary of our most critical accounting policies and significant estimates used in the
preparation of our consolidated financial statements is as follows:  
    The Company accounts for its FCC licenses in accordance with the provisions of
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142) which requires that goodwill and intangible assets with indefinite lives not
be amortized, but be tested annually or whenever indicators of impairments arise.
Intangible assets that have finite lives continue to be amortized over their estimated
useful lives. The Company has determined that its FCC licenses have indefinite useful
lives due to the following:  o
    FCC spectrum is a non-depleting asset;o
    The licenses are integral to the business and the Company expects them to
contribute to cash flows indefinitely;o
    License renewal applications are generally authorized by the FCC subject
to certain conditions, without substantial cost under a stable regulatory,
legislative and legal environment;o
    Maintenance expenditures required to obtain future cash flows are not significant; and,o
    The Company intends to use these assets for the foreseeable future.  Given the nature of the Companys 39 GHz spectrum, significant judgment is required in
making an assessment as to whether the recorded carrying value of these assets exceeds the
estimated fair market value. At December 31, 2004, the Companys FCC licenses had a carrying
value of $21.6 million. During 2004, the Company performed a valuation of its spectrum under
SFAS No. 142 and determined that the fair market value of the spectrum was $89 million at
December 31, 2004. In performing this evaluation, the Company identified a number of factors
that are considered to be indicative of the value of its FCC licenses, including (i) the
increase in its public equity value; (ii) private purchases of similar licenses; and, (iii)
the results of FCC Auction #56. Each of the factors was then quantified and weighted in
deriving the estimated fair value.Several key assumptions were included in the valuation model: (i) the value of the FCC
licenses directly correlates with the public trading value of the Companys stock and that
of other public companies in the telecommunications industry; (ii) certain private purchases
of similar licenses are reflective of the fair value of the underlying assets; (iii) the
relative weights assigned to each factor represent the level of the factors relevance to
the estimation of the fair value of the FCC licenses; and, (iv) the model captures relevant
information impacting the fair value of these licenses. Any change in the above assumptions
could lead to a different result. The Company will continue to 26




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##### 



evaluate the fair value of its FCC licenses for impairment as events or changes in
circumstances indicate that the carrying value of these assets may not be fully recoverable.The Company faces various contingencies including the renewal of its FCC licenses in 2006 to
2011 and changing FCC regulations. The loss of some or all of the FCC licenses or the
imposition of FCC usage restrictions could adversely affect the Companys future business
prospects and operations and result in an impairment to the carrying value of these
intangible assets.The Companys 39 GHz and 24 GHz licenses are granted for initial ten-year terms with renewal
dates ranging from 2006 to 2014. In order for the licenses to be renewed, the Company must
demonstrate that it has provided substantial service during the license term. The level of
service that will be considered substantial may vary depending upon the type of product
offering. The FCC has provided specific guidance only for offerings that represent radio
transmissions from one fixed point to another fixed point, where it has indicated that the
licensee should have constructed four individual point-to-point radio transmission links per
channel per million persons in the market area. While all service offering are on a
point-to-point basis, the Company does not currently meet the substantial service guidance
provided by the FCC; however, the Company intends to meet this requirement before the
expiration date of its licenses. Although the Company intends to meet the substantial
service requirements, the FCC may modify its definition of substantial service and, in the
future, the Company may offer products for which the FCC establishes more stringent
substantial service requirements. The Company may be unable to meet the FCCs renewal
requirements and could lose its licenses. The loss of some of its licenses could limit the
expansion of the Companys business and harm its operating results.The Companys licenses are integral to its business. As a result, the Company believes that
it must focus on protecting this valuable asset as its business plan
evolves. Under FCC rules, licenses are renewed based upon service
provided as of the renewal date. The FCC does not consider service
provided during the ten year period for which the licenses are
granted. They evaluate whether substantial service is
provided as of the renewal date. With its
recent $93 million equity raise, the Company has the resources to grow its cellular backhaul
services. The Company continues to lease spectrum utilizing this non-capital intensive
method to put more of its FCC licenses to work. The Company plans to introduce new product
offerings utilizing its spectrum. Under its current business plan, the Company believes
that it will meet the FCCs substantial service
requirement as of its various license
renewal dates. The Company will continue to periodically assess its progress toward meeting
this requirement. If at any time the Company determines that it will most likely not meet
these requirements it will modify the life of the particular FCC licenses and begin
amortizing the cost over the remaining license period.
    The Company holds inventory, primarily radios, for demonstration and installation
purposes. In 2003, the Company recorded a loss to reduce these assets to their estimated
net realizable value. If actual market conditions are less favorable than those projected
by management, additional write-downs may be required. No additional write-downs were
deemed necessary during 2004. The Company evaluated the net realizable value of its
inventory at December 31, 2004 by comparing its carrying value of individual items with
market sales of similar items.
    The Company has recorded a full valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. In the event the Company were to
determine that it would be able to realize the deferred tax assets in the future in excess
of the net recorded amount, an adjustment to the deferred tax valuation allowance would
increase income in the period such determination is made.
    At December 31, 2004, other non-current liabilities included accrued property tax and
use tax liabilities of approximately $2.5million and $1.3 million, respectively,
that were incurred by the predecessor. Such liabilities are expected to be released as the
Company reaches settlement with the respective tax jurisdictions or at such time that a
basis exists for the reversal of this liability. While management believes the amounts
represent reasonable estimates of the amounts potentially owed by the Company, the amounts
ultimately paid to the respective jurisdictions could differ from the accrued amounts.
    The Company is subject to all of the risks inherent in an early-stage business in the
telecommunications industry. These risks include, but are not limited to: limited operating
history; management of a changing business; reliance on other third parties; competitive
nature of the industry; development and maintenance of efficient technologies to support
the business; employee turnover; and, operating cash requirements. Management expects
operating losses and negative cash flows to continue for the near term. Failure to generate
sufficient revenues could have a material adverse effect on the Companys results of
operations, financial condition and cash flows. The recoverability of these assets is
highly dependent on the ability of management to execute on its business plan. 27




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##### 



Inflation Management of the Company believes that its business has not been affected by inflation
to a significantly different extent than has the general economy. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2004, the Company had cash and cash equivalents of $80.4 million that
were held in bank accounts with an average annual interest rate of 1.7% and original maturity of
less than three months. The Companys investment policy provides that funds in excess of current
operating needs may be invested in cash equivalents, marketable securities issued by the U.S.
Government and its agencies, and commercial paper of domestic corporations. The policy prohibits
investing in instruments with maturities that exceed 365 days. The Companys investment priorities
are to minimize short-term risk and preserve capital. The Company has had no holdings of derivative
financial or commodity instruments in the past and has no current plans to do so in the future. The
Company has not conducted business in foreign currencies in the past and has no current plans to do
so in the future. ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28




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##### 



Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of First Avenue Networks, Inc.: We have audited the accompanying consolidated balance sheets of First Avenue Networks, Inc.
and its subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated
statements of operations, stockholders equity, and cash flows for the years then ended. We have
also audited the financial statement schedule appearing under Item 15(a)(2) for the years ended
December 31, 2004 and 2003. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). 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 financial statements referred to above present fairly, in all material
respects, the financial position of First Avenue Networks, Inc. and its subsidiaries as of December
31, 2004 and 2003, and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule appearing under Item 15(a)(2) for the
years ended December 31, 2004 and 2003 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated financial statements. /s/ KBA GROUP LLP
Dallas, Texas
January 19, 2005 29




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##### 



Report of Independent Registered Public Accounting Firm To Board of Directors and Stockholders of First Avenue Networks, Inc.: In our opinion, the accompanying consolidated balance sheet and the related consolidated
statement of operations, of changes in stockholders equity present fairly, in all material
respects, the financial position of First Avenue Networks, Inc. and its subsidiaries at December
31, 2002 and the results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index appearing under
Item 15 (a) (2) on page 42 present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these statements in
accordance with standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP
McLean, VA
March 3, 2003 30




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##### 



FIRST AVENUE NETWORKS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data) December 31,2004
    
    
    2003Current assets:Cash and cash equivalents
    
    $
    80,398
    
    
    $
    3,599Accounts receivable, net
    
    
    42
    
    
    
    34Prepaid expenses and other current assets
    
    
    282
    
    
    
    88Inventory
    
    
    273
    
    
    
    234Total current assets
    
    
    80,995
    
    
    
    3,955Property and equipment, net of accumulated depreciation
    
    
    25
    
    
    
    7FCC licenses
    
    
    21,662
    
    
    
    21,600Other assets
    
    
    899
    
    
    
    4Total assets
    
    $
    103,581
    
    
    $
    25,566Current liabilities:Accounts payable
    
    $
    40
    
    
    $
    22Accrued compensation and benefits
    
    
    271
    
    
    
    252Accrued taxes other than income taxes, current portion
    
    
    350
    
    
    
    350Deferred revenue, current portion
    
    
    60
    
    
    
    Other accrued liabilities
    
    
    220
    
    
    
    192Total current liabilities
    
    
    941
    
    
    
    816Senior secured notes to shareholders, net of unamortized discount
    
    
    
    
    
    
    10,694Deferred revenue, less current portion
    
    
    250
    
    
    
    Accrued taxes other than income taxes, less current portion
    
    
    3,760
    
    
    
    3,760Total liabilities
    
    
    4,951
    
    
    
    15,270Commitments and contingenciesStockholders equity:Common stock, $0.001 par value; 100,000,000 and
50,000,000 shares authorized and 34,158,016 and
20,048,846 shares issued and outstanding at December 31,
2004 and 2003, respectively
    
    
    34
    
    
    
    20Additional paid-in capital
    
    
    145,029
    
    
    
    42,181Accumulated deficit
    
    
    (46,433
    )
    
    
    (31,905
    )Total stockholders equity
    
    
    98,630
    
    
    
    10,296Total liabilities and stockholders equity
    
    $
    103,581
    
    
    $
    25,566
 The accompanying notes are an integral part of these consolidated financial statements. 31




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##### 



FIRST AVENUE NETWORKS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data) Years ended December 31,2004
    
    
    2003
    
    
    2002Revenues
    
    $
    104
    
    
    $
    140
    
    
    $
    295Costs and expenses:Technical and network operations
    
    
    78
    
    
    
    3
    
    
    
    31Sales and marketing
    
    
    1,848
    
    
    
    399
    
    
    
    217General and administrative
    
    
    9,303
    
    
    
    2,341
    
    
    
    1,924Inventory and equipment impairment charge
    
    
    
    
    
    
    124
    
    
    
    FCC license impairment charge
    
    
    
    
    
    
    
    
    
    
    24,788Depreciation and amortization
    
    
    6
    
    
    
    9
    
    
    
    20Total costs and expenses
    
    
    11,235
    
    
    
    2,876
    
    
    
    26,980Loss from operations
    
    
    (11,131
    )
    
    
    (2,736
    )
    
    
    (26,685
    )Interest and other:Interest expense to shareholders
    
    
    (3,652
    )
    
    
    (1,938
    )
    
    
    (1,873
    )Interest income
    
    
    127
    
    
    
    46
    
    
    
    109Gain on settlement of bankruptcy claims
    
    
    6
    
    
    
    424
    
    
    
    315Other, net
    
    
    122
    
    
    
    24
    
    
    
    409Total interest and other
    
    
    (3,397
    )
    
    
    (1,444
    )
    
    
    (1,040
    )Net loss
    
    $
    (14,528
    )
    
    $
    (4,180
    )
    
    $
    (27,725
    )Basic and diluted net loss per common share
    
    $
    (0.67
    )
    
    $
    (0.21
    )
    
    $
    (1.39
    )Weighted average common shares
    
    
    21,745
    
    
    
    20,006
    
    
    
    20,000
 The accompanying notes are an integral part of these consolidated financial statements. 32




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##### 



FIRST AVENUE NETWORKS, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders Equity
(in thousands) AdditionalCommon stock
    
    
    Paid-In
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    TotalBalances at December 31, 2001
    
    
    20,000
    
    
    $
    20
    
    
    $
    40,792
    
    
    $
    
    
    
    $
    40,812Settlement of pre-petition claims with common stock
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    39Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,725
    )
    
    
    (27,725
    )Balances at December 31, 2002
    
    
    20,000
    
    
    
    20
    
    
    
    40,831
    
    
    
    (27,725
    )
    
    
    13,126Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    1,343
    
    
    
    
    
    
    
    1,343Stock options exercised
    
    
    49
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    7Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,180
    )
    
    
    (4,180
    )Balances at December 31, 2003
    
    
    20,049
    
    
    
    20
    
    
    
    42,181
    
    
    
    (31,905
    )
    
    
    10,296Sale of common stock, net
    
    
    14,078
    
    
    
    14
    
    
    
    93,331
    
    
    
    
    
    
    
    93,345Issuance of common stock pursuant to terms of
reorganization plan
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    9,517
    
    
    
    
    
    
    
    9,517Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,528
    )
    
    
    (14,528
    )Balances at December 31, 2004
    
    
    34,158
    
    
    $
    34
    
    
    $
    145,029
    
    
    $
    (46,433
    )
    
    $
    98,630
 The accompanying notes are an integral part of this consolidated financial statement. 33




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##### 



FIRST AVENUE NETWORKS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands) Years ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net loss
    
    $
    (14,528
    )
    
    $
    (4,180
    )
    
    $
    (27,725
    )Adjustments to reconcile net loss to net cash used in operating activities:Provision for FCC license impairment
    
    
    
    
    
    
    
    
    
    
    24,788Depreciation and amortization
    
    
    6
    
    
    
    9
    
    
    
    20Non-cash interest expense to shareholders
    
    
    3,364
    
    
    
    1,938
    
    
    
    1,873Non-cash stock-based compensation expense
    
    
    9,517
    
    
    
    1,343
    
    
    
    Gain on cancellation of liabilities
    
    
    
    
    
    
    (365
    )
    
    
    (315
    )Other non-cash adjustments
    
    
    
    
    
    
    144
    
    
    
    (167
    )Changes in operating assets and liabilities:Accounts payable and other liabilities
    
    
    373
    
    
    
    (605
    )
    
    
    (99
    )Prepaid expenses and other assets
    
    
    (240
    )
    
    
    10
    
    
    
    97Net cash used by operating activities
    
    
    (1,508
    )
    
    
    (1,706
    )
    
    
    (1,528
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (24
    )
    
    
    (2
    )
    
    
    (21
    )Purchases of FCC Licenses
    
    
    (62
    )
    
    
    
    
    
    
    Deferred acquisition costs
    
    
    (894
    )
    
    
    

    
    
    
    Proceeds from disposition of property and equipment
    
    
    
    
    
    
    
    
    
    
    999Net cash provided (used) by investing activities
    
    
    (980
    )
    
    
    (2
    )
    
    
    978Cash provided by financing activities:Proceeds from the sale of common stock, net of agent fees
    
    
    93,345
    
    
    
    
    
    
    
    Proceeds from exercised stock options
    
    
    
    
    
    
    7
    
    
    
    Payment of senior secured notes to shareholders
    
    
    (14,058
    )
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    79,287
    
    
    
    7
    
    
    
    Net increase (decrease) in cash and cash equivalents
    
    
    76,799
    
    
    
    (1,701
    )
    
    
    (550
    )Cash and cash equivalents, beginning of year
    
    
    3,599
    
    
    
    5,300
    
    
    
    5,850Cash and cash equivalents, end of year
    
    $
    80,398
    
    
    $
    3,599
    
    
    $
    5,300Supplemental disclosure of cash flow information:Interest paid to senior note holders
    
    $
    288
    
    
    $
    
    
    
    $
    Supplemental disclosure of non-cash financing and investing activities:Issuance of senior secured notes to shareholders for
paid-in-kind interest
    
    
    908
    
    
    
    1,120
    
    
    
    1,055Amortization of original issue discount on senior secured notes
issued to shareholders
    
    
    2,456
    
    
    
    818
    
    
    
    818Settlement of bankruptcy claims by the distribution of common stock
    
    
    
    
    
    
    
    
    
    
    39
 The accompanying notes are an integral part of these consolidated financial statements. 34




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First Avenue Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements Note 1The Company First Avenue Networks, Inc. (collectively with its subsidiaries, the Company) owns over
750 wireless telecommunications licenses granted by the Federal Communications Commission (FCC)
that provide coverage of substantially all of the continental United States with 39 GHz spectrum.
This license portfolio represents over 1 billion channel pops, calculated as number of channels in
a given area multiplied by the population covered by these channels. The Company was previously known as Advanced Radio Telecom Corp. (ART). ART, with its
subsidiaries, filed a voluntary petition with the United States Bankruptcy Court for the District
of Delaware (the Bankruptcy Court) for protection under Chapter 11 of Title 11 of the United
States Code (the Bankruptcy Code) on April 20, 2001 (the Petition Date). In February 2002, the
shareholders approved amendments to the Certificate of Incorporation to change the Companys name

to First Avenue Networks, Inc. On October 31, 2001, the Bankruptcy Court approved the Companys Plan of Reorganization
filed with the Bankruptcy Court on September 27, 2001 (the Plan). On December 20, 2001 (the
Effective Date), the Company met all of the Conditions Precedent to the Effective Date (as
defined), the Plan was effective and the Company emerged from proceedings under Chapter 11 of the
Bankruptcy Code. For financial reporting purposes, the Company reflected its emergence from
bankruptcy as of the close of business on December 31, 2001 (Note 3). Since the acquisition of the assets of Teligent, Inc., the Companys fixed wireless
activities include services ranging from leasing spectrum to a diverse mix of fixed wireless
service operations. The Company expects these operations to further its long term objectives of
participating in and leading growing fixed wireless markets such as backhauling mobile phone
traffic and providing cost effective extensions to fiber optic networks. (See Note 13- Subsequent
Event) The Company operates a cellular backhaul network in New York City with over 65 links. It
plans to use this network as a foundation for future construction in the New York area and as a
reference account for future nationwide construction. The Company anticipates building to order
facilities that can support cellular traffic backhaul, metropolitan transport and fiber extensions
to bridge critical network gaps. The Company is subject to all of the risks inherent in an early-stage business in the
telecommunications industry. These risks include, but are not limited to: limited operating
history; management of a changing business; reliance on other third parties; competitive nature of
the industry; development and maintenance of efficient technologies to support the business;
employee turnover; and, operating cash requirements. Management expects operating losses and
negative cash flows to continue for the near term. Failure to generate sufficient revenues could
have a material adverse effect on the Companys results of operations, financial condition and cash
flows. The recoverability of assets is highly dependent on the ability of management to execute its
business plan. Note 2Summary of Significant Accounting Policies Consolidation- The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. Significant intercompany balances have been eliminated in
consolidation. Use of estimates- Preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect amounts reported in the financial statements. Actual results could
differ from those estimates. Among the more significant estimates made by management are fair value
of FCC licenses, liabilities and contingencies, and realization of deferred tax assets. Segment reporting- Statement of Financial Accounting Standards No. 131, Disclosure
about Segments of an Enterprise and Related Information establishes annual and interim reporting
standards for an enterprises operating segments and related disclosures about its products,
services, geographic areas, and major customers. The Company has determined that it operates in one
segment. Cash and cash equivalents- Cash and cash equivalents represent funds on deposit with
banks or investments with original maturities of three months or less when purchased that are
readily convertible into cash and not subject to significant risk from fluctuation in interest
rates. The Company places its temporary cash investments with major financial institutions in
amounts which, at times, exceed federally insured limits. 35




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##### 



Note 2Summary of Significant Accounting Policies (continued) Inventory Inventory consists of radios, indoor and outdoor device units and other parts
and accessories which were initially purchased by the Company to deploy in its telecommunications
networks. Inventory is valued at the lower of cost or market. During 2003, the Company recorded a
noncash charge of $124,000 to reduce inventory to market value. Property and equipment Property and equipment is stated at historical cost and is
comprised primarily of office equipment, including computer equipment and related software.
Depreciation is computed utilizing straightline methods over estimated useful lives, generally two
to five years. Repairs and maintenance costs are expensed as incurred and betterments are
capitalized. FCC licenses FCC licenses are granted for initial tenyear terms with renewal dates
ranging from 2006 to 2011. The Company adopted the provision of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) in 2001. Under the provisions
of SFAS 142, the Companys FCC licenses are deemed to have an indefinite useful life and are not
amortized. Impairment of longlived assets The Company evaluates its longlived assets for
impairment as events or changes in circumstances indicate that the carrying amount of such assets
may not be fully recoverable. In cases where undiscounted expected cash flows associated with such
assets are less than their carrying value, an impairment provision is recognized in an amount by
which the carrying value exceeds the estimated fair value of such assets. Recoverability of the carrying value of FCC licenses is dependent on numerous factors
including successful deployment of networks and radio links or sales of such assets to a third
party. The Company considers the FCC licenses to have an indefinite useful life under the
provisions of SFAS 142. The Company performs an impairment test on these assets on an annual basis
or if events and circumstances indicate the assets might be impaired. The impairment test compares
the estimated fair value of the FCC licenses with the carrying value of the assets. If the
estimated fair value is less than the carrying value an impairment loss will be recorded. In 2002,
the Company recorded an impairment loss of $24.8 million (Note 4). In performing its 2002 impairment evaluation the Company considered (i) the decline in
its public equity value; (ii) private purchases or restructurings for companies holding similar
licenses; and, (iii) the decline in the public equity value of companies providing similar services
or holding FCC licenses. The estimated fair value of FCC licenses of $21.6 million at December 31,
2002 was based upon a valuation performed by an independent valuation firm. During 2003 and 2004, the Company performed valuations of its spectrum under SFAS 142 and
determined that no further impairment had occurred. In performing its evaluations, the Company
considered (i) the increase in its public equity value; (ii) private purchases of similar licenses;
and, (iii) the increase in the public equity value of companies providing similar services or
holding FCC licenses. Transaction costs Direct costs associated with obtaining debt financing are deferred
and charged to interest expense using the effective interest rate method over the debt term. Direct
costs associated with the sale of capital stock are recorded as a reduction of proceeds. Direct
costs of obtaining commitments for financing are deferred and charged to expense over the
commitment term; cost and accumulated amortization are removed from the accounts upon repayment of
borrowings. Direct costs associated with acquisitions activities are deferred and included in the
purchase price allocation upon consummation of the transaction. As of December 31, 2004 an amount
of $894,000 is included in noncurrent assets representing the deferred direct costs associated
with the acquisition of Teligent. Revenue recognition Revenue from services provided to customers is recognized ratably
over the period such services are provided. Revenue from spectrum leasing is recognized ratably
over the lease term. Income taxes The Company accounts for income taxes utilizing the liability method of
accounting. Under the liability method, deferred taxes are determined based on differences between
financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years
in which differences are expected to reverse. Valuation allowances are established, when necessary,
to reduce deferred tax assets to amounts expected to be realized. Stock options The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations, including Financial
Accounting Standards Board Interpretation No. 44 Accounting for Certain Transactions Involving
Stock Compensation, for its stockbased compensation plan. Accordingly, compensation cost for
stock options granted to employees and directors is measured on the date of the grant to the extent
the current market price of the underlying stock exceeds the exercise price. The Company accounts
for stock options granted to nonemployees at fair value. 36




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##### 



Note 2Summary of Significant Accounting Policies (continued) Stock options (continued)- In September 2003, the Company canceled 940,000 options to
purchase common stock at a strike price of $3.96 which represented all of its outstanding options.
The Company replaced these options with 1,388,717 options to purchase common stock at a strike
price of $0.14. Of these options, 277,743 vested immediately and 277,743 vested on each of December
20, 2004 and 2003. The remainder vest equally on December 20, 2005 and 2006. The Company accounts
for the reissued options using the variable method of accounting. Accordingly, the Company has
recorded a non-cash compensation charge of $9.5 million and $1.3 million during the years ended
December 31, 2004 and 2003, respectively. The following table summarizes relevant information as to reported results under the
Companys intrinsic value method of accounting for stock awards, with supplemental information as
if the fair value recognition provisions of SFAS No. 123, Accounting for Stock Based
Compensation, (SFAS 123) as amended by SFAS 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, (SFAS 148) had been applied (in thousands, except per share data): For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Net loss, as reported
    
    $
    (14,528
    )
    
    $
    (4,180
    )
    
    $
    (27,725
    )Add: Stock-based compensation included in reported net loss
    
    
    9,517
    
    
    
    1,343
    
    
    
    Less: Stock-based compensation determined under fair value
based method for all awards
    
    
    (302
    )
    
    
    (358
    )
    
    
    (207
    )Net loss, as adjusted for fair value method for all
stock based awards
    
    $
    (5,313
    )
    
    $
    (3,195
    )
    
    $
    (27,932
    )Basic and diluted loss per share, as reported
    
    $
    (0.67
    )
    
    $
    (0.21
    )
    
    $
    (1.39
    )Basic and diluted loss per share, as adjusted
    
    $
    (0.24
    )
    
    $
    (0.16
    )
    
    $
    (1.40
    )
 The fair value for each option granted was estimated at the date of grant using a
Black-Scholes option pricing model, assuming no expected dividends and the following assumptions: For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Risk free interest rates
    
    
    N.A.
    
    
    
    3.11
    %
    
    
    4.33
    %Expected life (in years)
    
    
    N.A.
    
    
    
    5
    
    
    
    5Volatility
    
    
    N.A.
    
    
    
    100
    %
    
    
    100
    %
 There are no assumptions presented for 2004 since there were no options granted in 2004. Net loss per share- Calculation of loss per share excludes the effect of convertible
preferred stock, stock options and warrants to purchase common stock since inclusion in such
calculations would have been antidilutive. Shares excluded in per share calculations approximated
11.1 million, 5.3 million and 4.0 million in 2004, 2003 and 2002, respectively. Recent Accounting Pronouncements- In December 2004, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which replaces SFAS 123 and supercedes APB Opinion No. 25. SFAS 123R requires
all share-based payments to employees, including grants of employee stock options, to be recognized
in the financial statements based on their fair values. The pro forma disclosures previously
permitted under SFAS 123 no longer will be an alternative to financial statement recognition. For
the Company, SFAS 123R is effective for periods beginning after June 15, 2005. Early application of
SFAS 123R is encouraged, but not required. The Company plans to adopt SFAS 123R on July 1, 2005. Public companies are required to adopt the new standard using a modified prospective
method and may elect to restate prior periods using the modified retrospective method. Under the
modified prospective method, companies are required to record compensation cost for new and
modified awards over the related vesting period of such awards prospectively and record
compensation cost prospectively for the unvested portion, at the date of adoption, of previously
issued and outstanding awards over the remaining vesting period of such awards. No change to prior
periods presented is permitted under the modified prospective method. Under the modified
retrospective method, companies record compensation costs for prior periods retroactively through
restatement of such periods using the exact pro forma amounts disclosed in the companies
footnotes. Also, in the period of adoption and after, companies record compensation cost based on
the modified prospective method. The Company has not yet determined the method of adoption it will
use. 37




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##### 



Note 2Summary of Significant Accounting Policies (continued) Recent Accounting Pronouncements (continued)- The future impact of the adoption of SFAS
123R cannot be predicted as the Companys outstanding options are currently accounted for using the
variable method of accounting. However, had the Company adopted SFAS 123R in prior periods, the
impact of that standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net loss and loss per share included in Note 2 above. Note 3FCC Licenses The Company acquired its spectrum portfolio from 1996 through 2004 through purchase
transactions and participation in the FCC auction process. BroadStream- In August 2000, the Predecessor acquired certain 39 GHz licenses from
BroadStream Communications Corporation and its affiliates (the Seller) in exchange for 7.6
million shares of Old Common Stock. The total acquisition cost recorded for these licenses was
$89.2 million, comprised of the fair value of Old Common Stock issued of approximately $72.0
million, direct costs of $800,000 and related net deferred tax liabilities of $16.4 million (such
deferred tax liabilities being recorded as a result of the carry-over of the relatively low tax
basis in assets acquired in this non-taxable transaction). Pursuant to a purchase agreement between
the Predecessor and the Seller, the Company obtained a right to acquire, and the Seller obtained a
right to require the Company to acquire certain additional licenses for Old Common Stock (the
Purchase Agreement). The Company also entered into an agreement to make available to the Seller,
bridge loans of up to $30 million, pursuant to which the Company loaned $13.0 million in 2000. The
notes receivable bore interest at 10% per annum and were collateralized by a pledge of 3.9 million
shares of Old Common Stock acquired by Seller in the license acquisition transaction and by the
personal guarantee of an affiliate of the Seller. The notes were due in November 2000 and the
Seller defaulted on repayment. Upon the Sellers default on repayment of the notes receivable, the
Company was no longer obligated to issue an additional 416,667 shares of its Old Common Stock as
the final payment for licenses acquired in August 2000. In December 2000, the Seller made a
voluntary filing for relief under Chapter 11 of the Bankruptcy Code. During the year ended December
31, 2000, the Company recorded a provision for loan loss of $9.3 million that is included in
general and administrative expense. An additional provision for loan loss of $3.9 million was
recorded in 2001 as a result in the decrease in value of the collateral securing this note. The
Company made a claim in Sellers Chapter 11 proceedings and the Seller rejected the Purchase
Agreement in its Chapter 11 proceedings. In January 2003, the parties reached a settlement
agreement whereby in exchange for the defendant paying the Company $45,000 and transferring its
interest in a real estate partnership, both parties dropped all claims. Auction In 2000 the Company acquired certain 39 GHz licenses from the FCC for $77.0
million cash. In 2004, the Company acquired one 24 GHz license from the FCC for $62,000 in cash. Impairment- As a result of its annual impairment evaluation of the fair value of its FCC
licenses, the Company reduced the carrying value of the licenses by $24.8 million to a fair value
of $21.6 million at December 31, 2002. While performing its impairment evaluation the Company
considered (i) the decline in its public equity value; (ii) private purchases or restructurings for
companies holding similar licenses; and, (iii) the decline in the public equity value of companies
providing similar services or holding FCC licenses. For the years ended December 31, 2003 and 2004,
the Company performed an impairment evaluation and concluded that no further impairment had
occurred. For these evaluations, it considered (i) the increase in its public equity value; (ii)
private purchases of similar licenses; and, (iii) the increase in the public equity value of
companies providing similar services or holding FCC licenses. Note 4Property and Equipment Components of property and equipment at December 31, 2004 and 2003 were as follows (in
thousands): 2004
    
    
    2003Network assets in service
    
    $
    7
    
    
    $
    2Computer systems
    
    
    21
    
    
    
    14Furniture and equipment
    
    
    20
    
    
    
    8Total property and equipment
    
    
    48
    
    
    
    24Accumulated depreciation
    
    
    (23
    )
    
    
    (17
    )Property and equipment, net
    
    $
    25
    
    
    $
    7
 Depreciation expense approximated $6,000, $9,000 and $18,000 for the years ended December
31, 2004, 2003 and 2002, respectively. 38




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##### 



Note 5Accrued Taxes other than Income Taxes Accrued taxes other than income taxes include estimated pre-petition amounts due to
various state and local governments for use and personal property taxes. Included in the accrued
liability is $2.5 million relating to potential property tax assessments from a variety of
jurisdictions in locations where the Predecessor previously had equipment and $1.6 million of use
tax on equipment purchased by the Predecessor. It is possible that amounts ultimately paid to
jurisdictions could be less than the recorded accrued liability. Any potential excess accrual will
be reversed either upon settlement or at such time as a basis exists for making such a
determination. Note 6Income Taxes A reconciliation of the Companys effective tax rate as a percentage of loss before
income tax benefit and the federal statutory rate for the years ended December 31, 2004, 2003 and
2002 is summarized as follows: 2004
    
    
    2003
    
    
    2002Federal statutory rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Non-deductible interest
    
    
    (5.9)
    %
    
    
    (6.9)
    %
    
    
    State income tax, net of federal benefit
    
    
    2.0
    %
    
    
    2.0
    %
    
    
    2.0
    %Reduction in NOL due to debt discharge
    
    
    (217.2)
    %
    
    
    
    
    
    
    Other
    
    
    (0.4)
    %
    
    
    (0.4)
    %
    
    
    (1.2%
    )Change in valuation allowance
    
    
    186.5
    %
    
    
    (29.7)
    %
    
    
    (35.8%
    )Effective income tax rate
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 Deferred tax assets and liabilities for the Company at December 31 were as follows (in
thousands): 2004
    
    
    2003Deferred tax assets:Net operating loss carryforwards
    
    $
    62,779
    
    
    $
    92,911FCC license amortization and impairment
    
    
    19,282
    
    
    
    19,527Equipment depreciation and impairment
    
    
    1,571
    
    
    
    1,796Stock-based compensation
    
    
    4,018
    
    
    
    497Other
    
    
    33
    
    
    
    33Accrued liabilities
    
    
    1,608
    
    
    
    1,620Total deferred tax assets
    
    
    89,291
    
    
    
    116,384Valuation allowance
    
    
    (89,291
    )
    
    
    (116,384
    )Net deferred tax assets
    
    $
    
    
    
    $
    
 Deferred tax assets have been reduced by a valuation allowance based on managements
determination that the recognition criteria for realization have not been met. In 2004, the Company
decreased its deferred tax asset valuation allowance by approximately $27million. In 2003, the
Company increased its deferred tax asset valuation allowance by approximately $1.3 million,
respectively. In connection with the reorganization, the Predecessor realized a gain from the
extinguishment of certain indebtedness. This gain was not taxable since the gain resulted from the
reorganization under the Bankruptcy Code. However, the Successor was required, at the beginning of
its 2002 taxable year, to reduce certain of its tax attributes including (a) net operating loss
carryforwards (NOLs), (b) certain tax credits and (c) tax bases in assets in an amount equal to
such gain on extinguishment. The reorganization of the Company on the Effective Date constituted an
ownership change under Section 382 of the Internal Revenue Code and the use of the Companys NOLs
and tax credits generated prior to the ownership change, that are not reduced pursuant to the
provisions discussed above, are subject to an overall annual limitation of approximately $2.5
million. Future benefits, if any, derived from the use of these NOLs in the future will be reported
as a direct addition to additional paid-in-capital in accordance with Statement of Position 90-7. Note 7Senior Notes Upon emergence from bankruptcy, the Company issued $11.0 million of Senior Notes to
shareholders, with 4 million Class A Warrants exercisable for Common Stock pursuant to terms of the
Senior Note and Class A Warrant Purchase Agreement. The Senior Notes were due December 20, 2006, or
earlier upon change of control, and bear interest at the rate of 9% per annum. In January 2004, the
holders of the Senior Notes extended the maturity date to December 20, 2008. Interest 39




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##### 



Note 7Senior Notes (continued) on the Senior Notes was payable quarterly through the issuance of additional Senior Notes. The
Company issued $908,000 and $1.1 million of Senior Notes to shareholders to pay interest in each of the years ended December 31, 2004 and
2003. If an event of default has occurred and is continuing, interest is payable in cash. The
Senior Notes to shareholders were collateralized by all of the assets of the Company and its
subsidiaries. The Company recorded the issuance of Senior Notes and Class A Warrants by allocating
proceeds of $11.0 million to Senior Notes and Class A Warrants based on their estimated relative
fair values at the issuance date, resulting in $4.1 million assigned to Class A Warrants and $6.9
million to Senior Notes. The value ascribed to the Class A Warrants was recorded as debt discount
and an increase in additional paid-in capital of the Successor. Amortization of debt discount was
determined utilizing the effective interest rate method and was included as a component of interest
expense. On December 23, 2004 the Company repaid all Senior Notes using proceeds from the sale of
common stock (Note 9) and recognized the remaining unamortized debt discount. During the year ended
December 31, 2004 and 2003, the Company recorded $2.5 million and $818,000 of interest expense
relating to the amortization of original issue discount, respectively. The Senior Notes were subject to terms and conditions of the Senior Secured Note and
Class A Warrant Purchase Agreement which, among other things, contained covenants limiting the
Successors ability to incur additional debt, pay dividends or make other distributions, incur
liens, merge or sell assets, or enter into certain transactions with related parties. Note 8Capital Stock Sale of Common Stock- In January 2004, the Company sold 1.2 million units, each unit
comprised of one share of common stock and one warrant, for $3.60 per unit, yielding gross proceeds
of $4.4 million. The five-year warrants are exercisable immediately with an exercise price of
$1.83. As a condition of the sale, the holders of the Senior Notes agreed to extend the maturity of
these notes from December 20, 2006 to December 20, 2008. The notes continued to bear paid-in-kind
interest at the rate of 9% per annum that was payable quarterly through the issuance of additional
Senior Notes until the Senior Notes were repaid in full on December 23, 2004. On December 14, 2004, the Company sold an additional 12.87 million shares of common stock
for $7.25 per share yielding gross proceeds of $93.3 million. The Company paid $3.7 million to a
placement agent in connection with this sale of common stock. The Company issued to the purchasers
five-year warrants with an exercise price of $7.25 to acquire 1.9 million shares of common stock.
The warrants will become exercisable, subject to certain limitations (i) with respect to 25% of the
shares underlying the warrants on the 60 th day following the closing if the
Company has not filed a registration statement registering the issued shares with the Securities
and Exchange Commission (SEC) by such time, (ii) with respect to an additional 25% of the shares
underlying the warrants on the 90 th day following the closing if the Company
has not filed a registration statement registering the issued shares with the SEC by such time,
(iii) with respect to an additional 25% of the shares underlying the warrants on the
180 th day following the closing if the registration statement being used to
register the shares issued to the purchasers under has not been declared effective by the SEC by
such time, and (iv) with respect to the remaining 25% of the shares underlying the warrants on the
210 th day following the closing under the securities purchase agreement if
the registration statement being used to register the shares issued to the purchasers has not been
declared effective by the SEC by such time. As part of this transaction, the Company issued ten
year warrants to the placement agent to acquire 2.6 million shares of common stock. The warrants
are exercisable immediately with an exercise price of $7.25 per share. Using a Black-Scholes option
pricing model, assuming no expected dividends, a three year life, a risk free interest rate of
3.53% and a volatility of 131%, the value of these warrants is $21.6 million. Common Stock issued in accordance with the Reorganization Plan- In 2001, the Successor
issued 20 million shares of common stock to unsecured creditors and holders of Old Preferred Stock.
In February 2002, the Company verified approximately 90% of the holders of unsecured claims and
100% of the holders of Old Preferred Stock and distributed stock certificates of common stock. The
Company distributed 17,512,064 and 1,000,000 shares of common stock to holders of unsecured claims
and holders of Old Preferred Stock, respectively. In December 2003, the Company completed the
verification process and distributed the remaining 1,487,703 shares of common stock to creditors
with the remaining unsecured claims and to current holders of common stock on a pro rata basis
relative to their holdings. The Reorganization Plan provided that fractional shares would be
rounded down to the previous whole number. As a result only 19,999,767 shares were distributed. The
remaining 233 shares were canceled. In May 2004, the Bankruptcy Court approved the issuance of
31,000 additional shares of common stock to holders of unsecured claims. The Company distributed
these shares in May 2004 and on June 3, 2004, the Bankruptcy Court closed the case. 40




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##### 



Note 8Capital Stock (continued) Class A Warrants- In connection with issuance of the Senior Notes, the Successor issued
4 million Class A Warrants. Each warrant entitles the holder to purchase one share of common stock
at a price of $0.01 per share for a period of five years from the Effective Date. Stock Option Plan-The Stock Option Plan provides for the grant of incentive and
non-qualified options to purchase up to 1.44 million shares of common stock to directors, officers
and employees. The options granted vest ratably over five years and are exercisable for a ten-year
term. Options exercisable at December 31, 2004 were 833,000. There are 51,000 shares of common
stock reserved for future issuance under the Plan. A summary of stock option activity follows
(shares in thousands): Weighted AverageExercise PriceNumber of Shares
    
    
    per ShareBalance at January 1, 2002
    
    
    
    
    
    
    Options issued
    
    
    940
    
    
    $
    3.96Balance at December 31, 2002
    
    
    940
    
    
    $
    3.96Options canceled
    
    
    (940
    )
    
    $
    3.96Options issued
    
    
    1,389
    
    
    $
    0.14Options exercised
    
    
    (49
    )
    

    $
    0.14Balance at December 31, 2003
    
    
    1,340
    
    
    $
    0.14Options activity
    
    
    Balance at December 31, 2004
    
    
    1,340
    
    
    $
    0.14
 The weighted average remaining contractual life of options outstanding at December 31,
2004 is 7 years. Outstanding Options and WarrantsThe following table summarizes information about stock
options and warrants outstanding at December 31, 2004: Options/Warrants
    
    
    Weighted Average
    
    
    Options/Warrants
    
    
    Weighted AverageExercise Price
    
    Outstanding
    
    
    Remaining Life
    
    
    Exercisable
    
    
    Exercise Price$0.01*
    
    
    4,000,000
    
    
    
    2.0
    
    
    
    4,000,000
    
    
    $
    0.01$0.14**
    
    
    1,338,972
    
    
    
    7.0
    
    
    
    783,484
    
    
    $
    0.14$1.84*
    
    
    1,208,333
    
    
    
    4.0
    
    
    
    1,208,333
    
    
    $
    1.84$7.25*
    
    
    4,504,500
    
    
    
    5.0
    
    
    
    2,574,000
    
    
    $
    7.25Total
    
    
    11,051,805
    
    
    
    
    
    
    
    8,565,817
   *
    
    - Warrants**
    
    - Options issued to employees and directors Note 9401(k) Plan In 2002, the Company established a 401(k) Plan administered by a third party. The
Companys contribution for each of the years ended December 31, 2004, 2003 and 2002 was $9,000,
$5,700 and $5,000, respectively. Note 10Related Party Transactions At December 31, 2004, holders of approximately 39% of the fully diluted common stock own
approximately 93% (3.7 million) of the Class A Warrants. Representatives from two entities holding
approximately 27% of the common stock serve on the Companys Board of Directors. A member of our
Board of Directors periodically serves as a consultant to a holder of approximately 12% of the
outstanding common stock. The Company issued $980,000 and $1.1 million of Senior Notes for
paid-in-kind interest in the years ended December 31, 2004 and 2003, respectively, to holders of
the Senior Notes all of whom are shareholders. In 2004 the Company paid $288,000 in interest to
holders of the Senior Notes all of whom are shareholders. During 2002, the Company reported accounts payable to related parties of $258,000 which
represented professional fees and expense reimbursements due to Cardinal Point Associates (CPA)
that provided certain services to the Company during the bankruptcy period. The Companys Chief
Executive Officer and Chief Financial Officer were principals of CPA. During 2002, CPA and
Peninsula Partners, L.P., which owns approximately 15% of the Companys common stock and had
engaged CPA and previously paid their professional fees, sought approval by the Bankruptcy Court
for the Company to pay 41




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##### 



these fees. In December 2002, the Bankruptcy Court denied approval of the payment of these
fees and the Company reversed the liability and has included this amount in other income as gain on
reversal of liabilities. Note 11Commitments and Contingencies Leases and rent expense- The Company has entered into an operating lease, expiring in
2005, for office space. Future minimum payments under this non-cancelable operating lease are
$10,000 for 2005. Rent expense approximated $34,000 and $30,000 and $49,000 for 2004, 2003 and
2002, respectively. Contingencies- The Company is subject to certain claims and assessments and makes
routine filings with the FCC and state regulatory authorities. Management believes that resolution
of any such claims or matters arising from such filings, if any, will not have a material adverse
impact on the Companys consolidated financial position. License Renewal- Like other FCC licenses, the 39 GHz licenses which the Company holds
were granted for an initial ten-year term and have renewal dates ranging from 2006 to 2011. To
obtain renewal of a 39 GHz license, the licensee must demonstrate that it has provided substantial
service during its license term. What level of service is considered substantial will vary
depending upon the type of offering by the licensee, and the FCC has provided specific guidance
only for point-to-point offerings, where it has indicated the licensee should have constructed four
links per channel per million persons in the licensed market area. Licensees are required, prior to
the expiration date of their licenses, to file renewal applications with an exhibit demonstrating
compliance with the substantial service criteria. If an entity is deemed not to have provided
substantial service with respect to a license for which renewal is sought, the renewal will not be
granted and the license will be canceled. Note 12Fair Values of Financial Instruments Carrying amounts and estimated fair values of financial instruments were as follows at
December 31 (in thousands): 2004
    
    
    2003Carrying Amt.
    
    
    Fair Value
    
    
    Carrying Amt.
    
    
    Fair ValueCash and cash equivalents
    
    $
    80,398
    
    
    $
    80,398
    
    
    $
    3,599
    
    
    $
    3,599Senior Notes
    
    
    
    
    
    
    
    
    
    
    10,694
    
    
    
    9,939
 Carrying amounts reported in the consolidated balance sheets for cash and cash
equivalents approximate fair values. Fair value of Senior Notes is based upon the rate of return
that an investor would require to purchase similar debt from a similar company. Note 13Subsequent Event On January 14, 2005, the Company completed its acquisition of substantially all of the
assets and assumption of certain related liabilities of Teligent, Inc. and its wholly-owned
subsidiary, Teligent Services, Inc. (collectively, Teligent). The acquisition was made pursuant
to an Amended and Restated Asset Purchase Agreement, dated as of January 13, 2005. The assets
acquired from Teligent included 24 GHz spectrum licenses, radio equipment and the infrastructure
supporting the fixed wireless operations including an operational cellular backhaul network in New
York City. In consideration for these assets, the Company issued 25.2 million shares of common
stock and a warrant to purchase up to 2.5 million additional shares of common stock. An holder of
12% of the Companys common stock also holds a controlling interest in Teligent. Note 14Quarterly Financial Data (unaudited) Selected unaudited quarterly financial information is summarized as follows (in
thousands, except per share data): Quarter Ended
    
    
    Year Ended3/31/04
    
    
    6/30/04
    
    
    9/30/04
    
    
    12/31/04 (1)
    
    
    12/31/04Revenues
    
    $
    25
    
    
    $
    27
    
    
    $
    25
    
    
    $
    27
    
    
    $
    104Loss from operations
    
    
    (619
    )
    
    
    (1,038
    )
    
    
    (656
    )
    
    
    (8,818
    )
    
    
    (11,131
    )Net loss
    
    
    (1,097
    )
    
    
    (1,523
    )
    
    
    (1,158
    )
    
    
    (10,750
    )
    
    
    (14,528
    )Basic and diluted net loss per common share
    
    
    (0.05
    )
    
    
    (0.07
    )
    
    
    (0.06
    )
    
    
    (0.49
    )
    
    
    (0.67
    )
 42




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Quarter Ended
    
    
    Year Ended3/31/03
    
    
    6/30/03
    
    
    9/30/03
    
    
    12/31/03 (2)
    
    
    12/31/03Revenues
    
    $
    53
    
    
    $
    37
    
    
    $
    33
    
    
    $
    17
    
    
    $
    140Loss from operations
    
    
    (320
    )
    
    
    (285
    )
    
    
    (418
    )
    
    
    (1,713
    )
    
    
    (2,736
    )Net loss
    
    
    (361
    )
    
    
    (738
    )
    
    
    (870
    )
    
    
    (2,211
    )
    
    
    (4,180
    )Basic and diluted net loss per common share
    
    
    (0.02
    )
    
    
    (0.04
    )
    
    
    (0.04
    )
    
    
    (0.11
    )
    
    
    (0.21
    )
   (1)
    
    Net loss for the quarter includes an $8.3 million charge for variable accounting for
employee stock options and $1.8 million in recognition of remaining deferred debt issue cost
as a result of the repayment of Senior Notes on December 23, 2004.(2)
    
    Net loss for the quarter includes a $1.2 million charge for variable accounting for employee
stock options. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A.CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer,
the Company reviewed and evaluated the effectiveness of the Companys disclosure controls and
procedures pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based upon their evaluation, our Chief Executive Officer and our
Chief Financial Officer concluded that our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed by the Company in the
reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Security and Exchange Commissions rules and
forms, and to provide reasonable assurance that information required to be disclosed by the Company
in such reports is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. (b) Change in Internal Controls There have been no changes in the Companys internal controls over financial reporting
during the period being reported on, which could materially affect, or are reasonably likely to
materially affect, the Companys internal control over financial reporting. ITEM 9B.OTHER INFORMATION None. PART III ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under Election of Directors, Board of Directors and
Committees, Certain Transactions and Section 16(A) Beneficial Ownership Reporting Compliance
in our definitive Proxy Statement to be filed with the Commission in connection with our 2005
Annual Meeting of Stockholders (the Proxy Statement) is incorporated herein by reference. The Company has not adopted a code of ethics that applies to the Chief Executive Officer
and Chief Financial Officer because it has only eight employees (including officers). The Company
does not believe that a formal written code of ethics is necessary. ITEM 11.EXECUTIVE COMPENSATION The information set forth under Compensation and Related Matters in the Proxy Statement
is incorporated herein by reference. 43




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##### 



ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under Common Stock Ownership in the Proxy Statement is
incorporated herein by reference. ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under Certain Transactions in the Proxy Statement is
incorporated herein by reference. ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES The information set forth under Relationship with Independent Registered Public
Accounting Firm in the Proxy Statement is incorporated herein by reference. PART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  (a)
    The following documents are filed as part of this report:  (1)
    Consolidated Financial Statements: Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003.
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002.
Consolidated Statement of Changes in Stockholders Equity for the years ended December 31,
2004, 2003 and 2002.
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002.  (2)
    Financial Statement Schedules: Balance at
    
    
    Additions
    
    
    
    
    
    
    
    
    
    
    Balance(in thousands)
    
    Beginning
    
    
    Charged to Costs
    
    
    Charged
    
    
    
    
    
    
    at End ofDescription
    
    of Period
    
    
    and Expenses
    
    
    to Other
    
    
    Deductions
    
    
    PeriodYear ended December 31, 2004Allowance for doubtful accounts
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    1Valuation allowance for deferred tax assets
    
    
    116,384
    
    
    
    
    
    
    
    
    
    
    
    (27,093
    )
    
    
    89,291Year ended December 31, 2003Allowance for doubtful accounts
    
    
    28
    
    
    
    24
    
    
    
    
    
    
    
    (50
    )
    
    
    2Valuation allowance for deferred tax assets
    
    
    115,119
    
    
    
    
    
    
    
    1,265
    
    
    
    
    
    
    
    116,384Year ended December 31, 2002Allowance for doubtful accounts
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Valuation allowance for deferred tax assets
    
    
    105,188
    
    
    
    
    
    
    
    9,931
    
    
    
    
    
    
    
    115,119
  (b)
    Exhibits. Please see the Exhibit Index on page 44 of this Annual Report on Form 10-K. SIGNATURES Pursuant to the requirements of Section 13 or15(d)of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on this 10th day of May 2005. First Avenue Networks, Inc.By:
    
    /S/Sandra G. ThomasSandra G. ThomasChief Financial Officer
 44




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##### 



EXHIBIT INDEX ExhibitNo.
    
    Title2.1.
    
    Findings of Fact and Conclusions of Law Relating to, and Order under 11 U.S.C. Sections 1129(a) and (b)
Confirming, the Debtors and Official Committee of Unsecured Creditors Joint Plan of Reorganization of
Advanced Radio Telecom Corp., et al. under Chapter 11 of the Bankruptcy Code dated October 31, 2001. (1)2.2.
    
    Debtors and Official Committee of Unsecured Creditors Joint Plan of Reorganization under Chapter 11 of
the Bankruptcy Code dated September 20, 2001. (1)2.3.
    
    Disclosure Statement Pursuant to Section 1125 of the Bankruptcy Code in Respect of the Debtors and
Official Committee of Unsecured Creditors Joint Plan of Reorganization under Chapter 11 of the
Bankruptcy Code dated September 20, 2001. (1)3.1.
    
    Restated Certificate of Incorporation of the Registrant. (2)3.2.
    
    Amendment to Certificate of Incorporation of the Registrant dated February 14, 2002. (2)3.3
    
    Amended to Certificate of Incorporation of the Registrant dated June 7, 2004.3.4.
    
    Amended and Restated By-Laws of the Registrant. (6)4.1.
    
    Specimen of Common Stock Certificate. (2)4.2.
    
    Senior Secured Note and Class A Warrant Agreement. (3)4.3.
    
    Form of Class A Warrant. (3)4.4.
    
    First Avenue Networks, Inc. Stock Option Plan. (4)4.5
    
    Form Stock Purchase Warrant to subscribe for and purchase Common Stock of First Avenue Networks, Inc. (5)4.6
    
    Form of 9% Senior Secured Note due December 20, 2008. (5)10.1
    
    First Amendment to Senior Secured Note and Class A Warrant Purchase Agreement, dated January 26, 2004,
among the Company and the Purchasers named in Schedule I thereto. (5)10.2
    
    Common Stock and Warrant Purchase Agreement, dated January 28, 2004, by and between the Company and the
Investors party thereto. (5)10.3
    
    Securities Purchase Agreement dated as of December 14, 2004 by and among First Avenue Networks, Inc. and
the Purchasers listed on Schedule I attached thereto. (6)10.4
    
    Form of Common Stock Purchase Warrant issued by the Company to each of the Purchasers. (6)10.5
    
    Form of Common Stock Purchase Warrant issued to Tejas Securities Group, Inc.10.6
    
    Amended and Restated Asset Purchase Agreement, dated as of January 13, 2005, by and among First Avenue
Networks, Inc., Teligent Services Acquisition, Inc., Teligent, Inc. and Teligent Services, Inc. (7)10.7
    
    Third Amended and Restated Registration Rights Agreement, dated January 28, 2004, by and the Company and
the parties thereto. (7)10.8
    
    Warrant issued to Dr. Rajendra Singh. (7)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended.32.1
    
    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350.32.2
    
    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.
 45




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##### 



(1)
    
    Previously filed with the Companys Periodic Report on Form 8-K, dated January 4, 2002 and
incorporated by reference herein.(2)
    
    Previously filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 2001 and incorporated by reference herein.(3)
    
    Previously filed as an exhibit to Exhibit 2.2 of the Companys Periodic Report on Form 8-K,
dated January 4, 2002 and incorporated by reference herein.(4)
    
    Previously filed as an exhibit to the Companys Definitive Proxy Statement dated April 21,
2003 and incorporated by reference herein.(5)
    
    Previously filed as an exhibit to the Companys Report on Form 8-K dated January 29, 2004 and
incorporated by reference herein.(6)
    
    Previously filed as an exhibit to the Companys Report on Form 8-K dated December 14, 2004
and incorporated by reference herein.(7)
    
    Previously filed as an exhibit to the Companys Report on Form 8-K dated January 18, 2005 and
incorporated by reference herein. 46