U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Fiscal Year Ended December 31, 1999
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition Period From ________ to ________
Commission File No. 1-15383
USURF America, Inc.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 72-1346591
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8748 Quarters Lake Road, Baton Rouge, Louisiana 70809
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(225) 922-7744
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities Registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Exchange on Which Registered
Common Stock The American Stock Exchange
Securities Registered under Section 12(g) of the Exchange Act:
None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject of such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Registrant's revenues for its most recent fiscal year were $2,547,225.
The aggregate market value of the voting stock held by non-affiliates
computed based on the average of the closing bid and asked prices of such
stock as of April 11, 2000, was approximately $41,011,364.
The number of shares outstanding of the issuer's common equity as of April
11, 2000, was 13,120,845 shares of common stock, par value $.0001.
Documents Incorporated by Reference: Current Report on Form 8-K, date of
event: November 30, 1999;and Current Report on Form 8-K, date of event:
January 11, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No
[ X ]
<PAGE>
PART I
Item 1. Description of Business
History
In July 1999, we changed our name to "USURF America, Inc.", from "Internet
Media Corporation". We were incorporated on November 1, 1996, under the
name "Media Entertainment, Inc.", to act as a holding company in the
wireless cable and community (low power) television industries. Due to
current market conditions in the wireless cable industry, we have abandoned
efforts to develop our wireless cable properties. In furtherance of our
plan to focus on the exploitation of our Quick-Cell wireless Internet
access products, we assigned all of our community (low power) television
properties to New Wave Media Corp.
Since September 1998, we have acquired the following businesses:
- in September 1998, we acquired the assets and going business of
Desert Rain Internet Services, a Santa Fe, New Mexico-based ISP;
- in January 1999, we acquired CyberHighway, a Boise, Idaho-based ISP;
- in June 1999, we acquired Santa Fe Trail Internet Plus, Inc.,
another Santa Fe, New Mexico-based ISP;
- in July 1999, we acquired the business known as www.usurf.com, an
Internet e-commerce web portal;
- in August 1999, we acquired Net 1, Inc., an Alabama-based ISP; we
are seeking to rescind this transaction;
- in August 1999, we acquired Premier Internet Services, Inc., an
Idaho Falls, Idaho-based ISP;
- in November 1999, we acquired the customer base of Cyber Mountain,
Inc., a Denver, Colorado-based ISP, which was an affiliate-ISP in our
CyberHighway network;
- in December 1999, we acquired a portion of the customer base of
CyberHighway of North Georgia, Inc., a Demorest, Georgia-based ISP, which
was an affiliate-ISP in our CyberHighway network;
- in February 2000, we acquired The Spinning Wheel, Inc., a
Pocatello, Idaho-based ISP, which was an affiliate-ISP in our CyberHighway
network; and
- in February 2000, we acquired Internet Innovations, L.L.C., a Baton
Rouge, Louisiana-based web design firm.
Current Overview
Our management has committed all available current and future capital to
the commercial exploitation of our Quick-Cell wireless Internet access
products. It is these products upon which our future is based.
We will continue to pursue dial-up Internet access customer growth, but we
do not expect to commit any significant amount of capital to this effort.
Also, we will continue to develop our e-commerce business, through our web
portal e-tail.com, but we do not expect to commit any significant amount of
capital to this effort.
Recent Developments
We recently signed a letter of intent with US West. We expect to execute
final agreements with US West in the near future. US West, however,
already is providing services as though the final agreements had been
signed. Our alliance with US West is a key to our ability to establish
Quick-Cell systems at the rapid rate we are pursuing.
We have negotiated contracts with two companies that serve as Internet
backbone providers. These companies are NaviNet, Inc. and ioNET, Inc., a
subsidiary of PSINet, Inc. These agreements, plus our existing agreement
with Electric Lightwave, have, in effect, transformed us from a regional
ISP to a national ISP, an ISP that can provide dial-up Internet access in
the vast majority of the 100 largest metropolitan statistical areas in the
United States.
Proposed Transactions
We intend to search actively for business acquisitions, which may be in the
form of mergers, stock-for-stock exchanges or stock-for-assets
acquisitions. While we have established no specific criteria for
evaluating potential acquisition candidates, it is our management's
intention to pursue acquisition transactions with businesses with a history
of earnings or a potential for future growth, or both. We have filed a
registration statement on Form S-1 (SEC File No. 333-96027) to register
2,000,000 shares of our common stock for future issuance. We intend to
utilize the 2,000,000 shares so registered for this purpose in completing
any such acquisition. We have not agreed to acquire any particular
business with these shares. We cannot assure you that we will be able to
acquire any business through use of these shares, or otherwise.
Industry Background
Growth of the Internet; the World Wide Web.
The Internet, commonly known as the World Wide Web, or simply the Web, is a
collection of connected computer systems and networks that link millions of
public and private computers to form, essentially, the largest computer
network in the world. The Internet has experienced rapid growth in recent
years and is expected to continue its impressive growth, based on estimated
increases in the numbers of Web users, Web traffic and the number of Web
sites. International Data Corporation estimates that there were over 38
million Web users in the United States and over 68 million worldwide at the
end of 1997. International Data Corporation projects that the number of
Web users will increase to over 135 million in the United States and over
319 million worldwide by the end of 2002. In April 1998, the U.S.
Department of Commerce estimated that traffic on the Internet is doubling
every 100 days. It is estimated that the number of Web sites in the United
States will increase from approximately 450,000 in 1997 to nearly four
million in 2002.
The following factors, in our estimation, are primarily contributing to the
Internet's continued rapid growth:
- the Internet has become, on a global scale, an accepted
communication medium, enabling people to obtain and share information and
conduct business electronically;
- the proliferation of affordable personal computers;
- advances in the performance and speed of personal computers, modems
and networking components;
- improvements in telecommunication network infrastructures;
- ease of access to the Internet; and
- the increasing use of the Internet by businesses as a competitive
tool.
Internet Access.
Internet access services represent the means by which ISPs interconnect
business and consumer users to the Internet's resources. Access services
vary from dial-up modem access, like that provided by us, for individuals
and small businesses to high-speed dedicated transmission lines for
broadband access by large organizations to wireless Internet access
systems, like our Quick-Cell wireless Internet access products. An ISP
provides Internet access either by developing a proprietary network
infrastructure or by purchasing access service from a wholesale access
vendor, or through a combination of both. The rapid development and growth
of the Internet have resulted in a highly competitive and fragmented
industry consisting of approximately 4,500 ISPs in the United States, with
most having customer bases of less than 5,000 subscribers. The vast
majority of U.S.-based ISPs conduct their operations within a single city
or state, with just a small number of ISPs, such as EarthLink, providing
nationwide coverage. Due to the disparity between the large number of
smaller ISPs with limited resources and the emergence of a limited number
of national ISPs with their associated economies of scale, the ISP industry
is expected to undergo substantial consolidation.
Electronic Commerce Over the Internet.
The Internet has created a new communication and sales channel that enables
businesses to interact with large numbers of geographically dispersed
consumers and other businesses. With the recent growth of the Internet,
there have emerged many companies that focus solely on the Internet as the
medium for selling products or delivering services directly to purchasers,
bypassing traditional wholesale and retail channels. Moreover, businesses
are implementing sophisticated Web sites to effect electronic commerce
initiatives that offer competitive advantages. These businesses are
deploying an expanding variety of Internet-enabled applications, ranging
from Web-site marketing and recruiting programs to on-line customer
interaction systems, telecommunications services, integrated purchase order
and "just-in-time" inventory solutions for key customers and suppliers.
These on-line capabilities require increasingly complex Web sites and
accompanying support operations. In addition, advances in on-line security
and payment mechanisms are more adequately addressing consumers' concerns
associated with conducting transactions over the Internet, thereby
prompting more consumers and businesses to use the Internet as a medium for
commerce. Also, businesses continue to offer an ever-greater selection of
electronic commerce services. International Data Corporation estimates
that the number of consumers buying goods and services on the Internet will
grow from 17.6 million in 1997 to over 128 million in 2002, and that the
total value of goods and services purchased over the Internet by consumers
and businesses will increase from approximately $12 billion in 1997 to over
$425 billion by 2002.
Contract Internet Operations.
Electronic commerce, or e-commerce, is growing at an explosive pace. More
and more businesses are placing greater emphasis on their Internet
transaction and communication abilities and operations. Increasingly,
traditional businesses, as well as Internet-based businesses, require
non-congested and scalable Internet operations that will permit them to
engage in digital communication and commercial transactions anywhere in the
world, via the Internet.
Due to constraints posed by the lack of technical personnel with Internet
skills or experience, the high cost of advanced networking equipment and
the complexity of innovative Web solutions, many businesses do not have the
resources required to develop, maintain and update their Internet
facilities and systems, to maintain standards required for these companies
to conduct high levels of Internet-based business. As a result of these
constraints and other factors, many businesses are seeking to contract for,
or "outsource", their Internet facilities and systems requirements as the
preferred means for establishing and maintaining electronic commerce
solutions. To this end, we expect an increasing demand is developing for:
- Dedicated and broadband Internet access services to support
reliable, high speed and/or constantly connected Internet access and
communication;
- Web hosting and co-location services which enable businesses to
obtain equipment, technical expertise and infrastructure for their Internet
needs on an outsourced basis; and
- Electronic commerce solutions to sell goods and services on the Web
in a transactionally-secure environment.
By outsourcing Internet facilities and systems needs, businesses can then
focus on improving their business results, rather than expending financial
resources on additional staff and Internet-related assets necessary to
support their Internet operations.
Internet Service Opportunities.
The number of businesses and consumers accessing the Internet is expected
to continue to increase significantly in the foreseeable future. According
to Forrester Research, the market for providing access to the Internet for
businesses and consumers is expected to be approximately $18.4 billion in
2000. Additionally, as businesses and consumers are developing greater
levels of comfort in the use of the Internet for electronic commerce,
businesses are increasingly implementing sophisticated electronic commerce
solutions which, in turn, require significantly greater bandwidth and other
business services. In response to this demand, an increasing number of
ISPs are attempting to augment their basic Internet access services with a
wide range of business services. According to International Data
Corporation, the market for Web hosting and Internet security business
services is the fastest growing segment of the Internet services market,
with revenues expected to increase from approximately $350 million in 1997
to approximately $7 billion in 2000.
Our management believes that ISPs that offer both Internet access to broad
segments of the population and that offer a broad selection of business
services will be positioned to attain greater economies of scale through
lower network expansion and marketing costs on a per-subscriber basis. Our
management further believes that only a few national ISPs will be in a
position to benefit fully from this continued growth in Internet usage.
It is our management's opinion that the ISPs that will be in a position to
benefit most from the expected continued growth of the Internet likely will
be characterized by their:
- ability to respond quickly to market demands;
- ability to provide reliable coverage on a nationwide basis;
- superior technical skills and customer support capabilities;
- electronic commerce expertise and business services capabilities;
- brand name recognition and the ability to exploit multiple
marketing channels; and
- relatively lower network costs.
Strategic Relationships
We recently signed a letter of intent with US West. We expect to execute
final agreements with US West in the near future. US West, however,
already is providing services as though the final agreements had been
signed. US West will provide frame relay service, private line DS3
corporate backbone services, managed data services and access to radio
towers (as Quick-Cell server modem sites). Our alliance with US West is a
key to our ability to establish Quick-Cell systems at the rapid rate we are
pursuing. Our management is aware of nothing that would prevent us from
signing a final agreement with US West.
We have entered into agreements with NaviNet, Inc., ioNET, Inc., a division
of PSINet, Inc., and Electric Lightwave, with respect to such companies'
providing Internet backbone access throughout their respective networks.
Together, these companies provide Internet backbone access in a great
majority of U.S. markets. We pay these providers monthly per-customer
fees, which fees fluctuate, depending on the number of customers that
utilize these firms' access services. The services provided by these firms
to us are transparent to our customers, that is, our customers appear to
access the Internet directly through our point-of-presence. These
agreements are key to our ability to offer national dial-up access to our
customers.
Quick-Cell Wireless Internet Access
General.
"Wireless Internet" is a new type of communications spectrum recently
designated by the FCC. Wireless Internet access requires a transmission
facility maintained by an ISP employing a wireless system and the user's
modem (a transmitter/receiver modem) equipped with an antenna. Wireless
Internet capability allows users to access the Internet from a stationary
computer or, in some situations, from a mobile, lap-top computer located
within the wireless ISP's transmission area.
Our proprietary wireless Internet access system is marketed under the
"Quick-Cell" and "US.RF Wireless Internet System" (US.RF stands for United
States Radio Frequency) trade names.
The Quick-Cell wireless Internet access system is a turn-key,
plug-and-play, system that is capable of delivering customers Internet
access at burstable T-1 equivalent speeds, at prices that range from 40% to
60% below those charged for traditional T-1 hardwire Internet access
service. A single-cell Quick-Cell system can be deployed in less than one
week. Additional Quick-Cells can be added to a local system on an
as-needed basis. We currently have one full-scale Quick-Cell wireless
Internet access system in operation in Santa Fe, New Mexico.
Once we determine to construct a full-scale Quick-Cell wireless Internet
access system in a particular market, the construction of that full-scale
system, one that covers an area 12 miles in diameter, takes approximately
four to six weeks, depending on local regulatory schemes.
Quick-Cell Wireless Internet Access System.
Our proprietary Quick-Cell wireless Internet access system operates
primarily within a broadcast signal in the 2400 MHz band using two-way
modems (a transmitter/receiver modem) outfitted with antennae. Thus, our
Quick-Cell wireless Internet access system differs substantially in design
from the wireless Internet access available through cellular telephones and
differs substantially from traditional telephone-line-based ISPs, because
there is no reliance on hard wire to transfer data. Nevertheless, our
management believes our Quick-Cell wireless Internet system is capable of
greater utility at lower cost than these other modes of Internet access.
It is the belief of our management that our Quick-Cell wireless Internet
access system provides the following competitive advantages for attracting
potential consumer and business customers over other Internet access modes:
- Speed: the Quick-Cell system provides a minimum data transmission
speed of 64kbs, with data transmission speed capability of up to 10 Mbs;
- Lower Cost: the Quick-Cell system will, depending on the particular
market and desired Internet access speed, be offered at costs between 20%
to 60% less than available hard-wire Internet access (that is, less than
monthly ISP charges plus monthly telephone line charges) currently offered
by local telephone companies; the Quick-Cell system offers significant
savings over cellular-telephone-based Internet access methods;
- No Telephone Company Involvement: because the Quick-Cell system
does not utilize telephone lines, our customers will not be required to
incur the expense of a hard-wire telephone line through which to access the
Internet;
- Security/Encryption: the Quick-Cell system is designed to allow the
encryption (scrambling) of its broadcast signal, thereby offering a high
degree of security to customers, particularly business customers who wish
to transmit confidential information over the Internet;
- Mobility: the Quick-Cell system is able to permit service personnel
of a business to file contemporaneous reports, request and receive
technical assistance and perform other computer-based functions from a
customer's place of business or from a service vehicle, even if the service
vehicle is traveling to its next destination; and
- Ethernet/Networking Capability: the Quick-Cell system is compatible
with existing so-called "ethernet" systems. Generally, an ethernet can be
described as a self-contained network of desk-top computers, often located
in the same building, through which individual computer users can
communicate electronically (i.e., via e-mail), as well as access the
Internet. We can design and install an ethernet system in any existing
building by installing a wireless communications system that links all
computers, including computers that are to remain linked via hard wire, to
one another and provides all computer users access to the Internet.
We believe that our Quick-Cell wireless Internet access system is able to
satisfy any other special requirements of a potential customer, without
significantly adding to the system's cost to that customer.
Initially, we are marketing our Quick-Cell products to the business sector.
However, as each Quick-Cell system matures (within a six to nine month
period) we will begin to market heavily to home-based Internet users.
System Control Software.
We have developed software that enables us to control bandwidth speed of
each Quick-Cell system, as well each customer-premises modem, all from a
single remote location. This software allows us to increase or decrease
bandwidth as necessary and to monitor easily all bandwidth usage within
each Quick-Cell system. These capabilities allow us to provide cost
efficiencies to our customers.
Potential Future Applications.
It is our long-term objective to offer a full array of video entertainment
via our Quick-Cell systems. We believe our plans are easily achievable,
due to the fact that the Quick-Cell Internet connection can be routed to
the user's television, using existing, relatively inexpensive technology.
Assuming market conditions permit, we expect that, by the year 2005, each
of our Quick-Cell systems would be able to offer its subscribers many video
services, including some services that, given the rapid evolution of
technology, may not currently exist. The video entertainment services that
we expect to be able to offer include:
- Movies: we believe that we will be able to offer an ever-expanding
movie list, all of which would be available, in real time, at any time,
upon request of the subscriber. We expect that each movie would be sold,
or "rented", to subscribers at a cost that would be less than the same
movie were it to be rented from the local video rental store. The primary
impediment to our offering this service is its lack of capital with which
to acquire necessary equipment, as well as digitized copies of the desired
movies.
- Pay-Per-View Events: we believe that we will be able to offer to
its subscribers access to pay-per-view events, such as concerts and
sporting events, including boxing matches, such as are currently available
from time to time through local cable television systems. The primary
impediment to our offering this service is its lack of capital with which
to purchase necessary equipment, including satellite dishes.
- "Cable" Television: Although we expect that consumer acceptance
will be sluggish at first, our management believes that, with adequate
capital for equipment and advertising, as well as consumer education, we
will be able to provide a competitive offering of "cable" television
channels that would be equal to those offered by any local cable television
company and direct broadcast satellite systems. It is quite possible that
market forces will dictate that this type of service would not be
introduced to consumers for the foreseeable future.
These potential future services remain in the development stage and no
introduction date has been set by our management. All of the services
described appear to be feasible after initial tests, due to the high-speed
data transmission capabilities of our Quick-Cell system. Additional
applications are currently being developed by us. We cannot predict when
any or all of these services will be ready for commercial exploitation.
Current Markets.
Our Quick-Cell wireless Internet access system is operating in Santa Fe,
New Mexico. Customers are being placed on the Quick-Cell system daily.
Our sales personnel are actively working an interested-customer list of
over 900. We have also begun sales and installation efforts in Albuquerque
and Las Vegas, New Mexico. It is our goal to establish Quick-Cell systems
in 110 U.S. cities by the end of 2000. We believe we will be able to reach
this goal, but we may fall short of our goal, unless we obtain more
operating capital.
Early in 1999, we licensed several ISPs to operate our Quick-Cell systems.
Since that time, however, we have determined not to pursue the licensing of
ISPs, in favor of our plan to own and operate all Quick-Cell systems. The
licensed Quick-Cell system in Casper, Wyoming, operated for a period of
three months, but was discontinued, due to the sale of the licensee's ISP
business. The Santa Fe, New Mexico, licensee (Santa Fe Trail Internet
Plus, Inc.) was acquired by us, in June 1999.
Competition; Consumer Acceptance.
Our wireless Internet access business faces the same severe competition for
market share as does our dial-up Internet access business. Our Quick-Cell
wireless Internet access products potentially must also overcome an initial
lack of consumer acceptance, given the new and relatively unproven
(commercially) nature of the Quick-Cell products.
Other Wireless Products.
In January 1998, we delivered our first proprietary wireless DataLink
system. Our wireless DataLink system was delivered to the Baton Rouge
refinery of one of the largest international oil companies, the refinery
being the second largest in the U.S. The wireless DataLink system was
purchased to replace an existing hard-wire (T-1 telephone line) data
transmission system. The wireless DataLink system transfers data at the
rate of 2 megabytes per second. Since then, our management has determined
to focus all available resources on the development of our Quick-Cell
products, as a more efficient means of achieving short-term market share
and profitability. As we begin to achieve success in our Quick-Cell
wireless Internet access business, we anticipate that we will begin to
devote resources, if available, to the exploitation of these other
proprietary wireless products. Our management believes our wireless
DataLink system can address, on a wide-spread basis, the needs of
businesses to transmit ever-increasing volumes of data. We cannot assure
you that we will ever possess sufficient resources to exploit our wireless
DataLink system or that it will achieve wide-spread acceptance.
Dial-up Internet Access
In addition to our wireless Internet access business, we provide high
quality, full service dial-up Internet access to over 30,000 customers.
These dial-up customers are served primarily by our CyberHighway subsidiary.
Our Internet services include dial-up access, high speed access and other
value-added services, as well as Wireless Internet access to approximately
90 customers. Because CyberHighway began offering wireless Internet
service before its being acquired by us, the wireless Internet system
employed by CyberHighway is not the Quick-Cell system. However, we will,
over time, transfer all of the current wireless Internet customers onto our
Quick-Cell system.
Customers and Markets
We provide Internet access to approximately 30,000 customers, nearly all of
whom utilize our dial-up Internet access services. The largest
concentration of customers is in Idaho, where approximately 65% of our
customers reside. The bulk of the remaining Internet access customers are
located as follows: 10% in Wyoming, 5% in Georgia, 5% in Oregon, 5% in
Nevada, and 3% in Arizona, with the remaining subscriber base spread among
various other markets, including Denver, Colorado, and Jackson, Mississippi.
Based on data collected from certain of our customers, we believe that our
subscribers tend to reflect the typical Internet user composite which,
according to published surveys, indicates that over half of Internet users
are male, approximately 50% are between the ages of 25 and 45, about
one-third are college graduates and the average reported annual income of
users is substantially higher than the median U.S. level.
To date, our business customers have generally consisted of small and
medium-sized businesses. However, we expect that our Quick-Cell products
will allow us to compete effectively for larger business customers, who
tend to require larger amounts of bandwidth.
Sales and Marketing
Historically, CyberHighway's sales and marketing strategy was comprised of
three components: (1) direct response marketing, (2) affiliate-ISP program
and (3) corporate direct sales. Direct response marketing and the
affiliate-ISP program were responsible for most of CyberHighway's growth in
its subscriber base. However, the affiliate-ISP program has been
abandoned, and we are taking a more national approach, by offering national
service under the "USURF America" name, rather than the "CyberHighway" name.
With our agreements with national Internet backbone providers, we have
begun a national reseller program for our dial-up Internet access service.
Participating resellers receive monthly per customer residuals, as
compensation for their sales efforts. We expect that our national reseller
program will be fully underway by the end of the second quarter of 2000.
We engage in a variety of direct response marketing and various promotional
activities to stimulate consumer awareness of its Internet access services.
These marketing efforts are directed both to consumers who have not
previously subscribed to Internet access services and to Internet users who
may switch to our service. Radio advertising and direct mail distribution
have been the principal media used for direct response marketing to solicit
new subscribers. As discussed above, our marketing focus for our dial-up
Internet service has been changed to the national reseller program
structure. Our management believes this strategy is the most
cost-effective way to develop our dial-up Internet access business, while
permitting us to concentrate substantially all of our resources on the
exploitation of the Quick-Cell wireless Internet access products.
Because it is our belief that a consumer's selection of an Internet service
provider is most often influenced by a personal referral, we strive always
to deliver superior customer service and support.
Affiliate-ISP Program
>From its inception, CyberHighway employed an affiliate marketing program, a
technique designed to generate rapid expansion of CyberHighway's subscriber
base. Under this program, an existing ISP entered into a license agreement
with CyberHighway, wherein a local ISP obtained the right to use the
"CyberHighway" brand name and the local ISP allowed the connection of a
Kbps-speed frame relay data circuit to connect from the local ISP's POP to
CyberHighway's network operations center. In effect, under this license
arrangement, CyberHighway handles the local ISP's "backroom" operations,
that is, hardware and system management, thereby allowing the local ISP's
personnel to concentrate on marketing functions. In addition to certain
monthly circuit fees, the local ISP pays CyberHighway a monthly
per-customer royalty. These per-customer royalties average approximately
$1.75.
The affiliate-ISP program has been terminated.
Customer Service and Support
We are committed to the highest levels of customer satisfaction. We
believe that maintaining high levels of customer satisfaction will remain
as a key competitive factor that will differentiate us from other purveyors
of Internet-related services. We regularly review network utilization
rates, and refine and expand our network capabilities as necessary, to
ensure high levels of network performance and reliability.
We maintain customer support for telephone inquiries seven days a week,
with technical personnel available to address customer questions and
concerns, and we intend to begin to offer customer support 24 hours per
day, in the near future. We intend to continue to dedicate the resources
necessary to ensure that service calls are promptly answered and addressed
by a customer support representative, and that customer issues are resolved
promptly. Customers also can access customer support services through
e-mail correspondence or access trouble-shooting tips and configuration
information, as well as network status and performance reports, on our Web
site.
Consumer and business customers have very different support needs, as do
wireless Internet customers, especially as to technical requirements and
the sophistication of the user who makes the customer service inquiry. As
our subscriber base grows, we intend to implement a tiered customer support
system, where simple technical problems or other miscellaneous issues would
be handled by non-technical support staff and complex and/or time sensitive
technical questions would be referred to the trained technical support
staff for resolution.
Network Infrastructure
We have designed our network and related systems to provide fast and
reliable, high-quality Internet access services, while minimizing the
capital investment needed for infrastructure development. We continually
re-evaluate our network's structure and design so as to achieve maximum
capacity with available resources. We always seek innovative, cost-saving
measures as we expand our network, which is expected to provide maximum
flexibility as we pursue our growth strategy. We further believe that we
will be able to take advantage of market opportunities as they may develop,
whether due to technological advances or regulatory changes. Our objective
is to minimize both network costs and exposure to technological
obsolescence of equipment. We believe our agreements with NaviNet, PSINet,
Electric Lightwave and US West greatly enhance our ability to accomplish
these objectives.
Our current network consists of a state-of-the-art network operations
center located in Boise, Idaho, through which all subscribers log onto the
Internet. We do not have the capital to build a"mirror" network operations
center site, which would provide redundancy to our network and greatly
enhance the reliability of our the network.
We have almost completed an expansion of the Boise network operations
center, so that it will be able to process up to 150,000 customers without
further expansion.
Network Operations Center
Our network operation center monitors network traffic, quality of services
and security issues, as well as the performance of the equipment located at
each of our points-of-presence, to ensure reliable service. Our network
operations center is comprised of state-of-the-art equipment and an
uninterruptible power supply and is staffed 24 hours a day, seven days a
week, with technical and network security personnel. When an intruder, or
"hacker", enters our network, the network security personnel are able to
monitor the intruder's activities, create a report about such activities
and provide such information to customers who may have had their
proprietary information tampered with by the intruder. To date, neither we
nor any customer has incurred any material loss due to the efforts of hackers.
Other Internet Services
In addition to the services usually offered by ISPs, we offer a Web site
that facilitates e-commerce. This Web site is known as "e-tail.com".
During the last part of 2000, we will attempt to direct significant
Internet traffic to this site, but we lack capital to apply to the
development of this business. We intend, in the future, to have the
e-tail.com operations to specialize in business-to-business e-commerce
transactions, in addition to offering desirable products to consumers.
We have determined to focus on business-to-business Internet solutions, due
to our belief that this sector has not, historically, been well served by
Internet access and Internet-related service providers. We cannot assure
that our efforts in this area will be successful.
Competition
We will face severe competition from other wireless Internet access
providers, such as Metricom. However, we believe our Quick-Cell wireless
Internet access products are superior to other similar products.
The market for the provision of dial-up Internet access services is
extremely competitive and highly fragmented. Our competitors include many
large, nationally-known companies, such as America Online, Earthlink and
Flashnet. These and other companies possess greater resources,
particularly access to capital sources, market presence and brand name
recognition than do we. As there are no significant barriers to entry, we
expect that competition will intensify.
We also believe that the primary competitive factors determining success as
an ISP are:
- a reputation for reliability and high-quality service;
- effective customer support;
- access speed;
- pricing;
- effective marketing techniques for customer acquisition;
- ease of use; and
- scope of geographic coverage.
We believe that we can, and in the future will, more effectively compete in
our markets, due to (1) our commitment to providing fast and reliable,
high-quality Internet access and other Internet-related services, as well
as exemplary customer service and support, and (2) our Quick-Cell wireless
Internet access products. We cannot assure you that we will be able to
compete successfully.
Current and prospective competitors include many large, nationally-known
companies that possess substantially greater resources, financial and
otherwise, market presence and brand name recognition than do we. With
respect to our Internet access and other Internet-related services, we
currently compete, or expect to compete, for the foreseeable future, with
the following: national ISPs, numerous regional and local ISPs, most of
which have significant market share in their markets; established on-line
information service providers, such as America Online, which provide basic
Internet access, as well as proprietary information not available through
public Internet access; providers of web hosting, co-location and other
Internet-based business services; computer hardware and software and other
technology companies that provide Internet connectivity with their
products; telecommunications companies, including global long distance
carriers, regional Bell operating companies and local telephone companies;
operators that provide Internet access through television cable lines;
electric utility companies; communications companies; companies that
provide television or telecommunications through participation in satellite
systems; and, to a lesser extent, non-profit or educational Internet access
providers.
With respect to potential competitors, we believe that manufacturers of
computer hardware and software products, media and telecommunications
companies and others will continue to enter the Internet services market,
which will serve to intensify competition. In addition, as more consumers
and businesses increase their Internet usage, we expect existing
competitors to increase further their emphasis on Internet access and
electronic commerce initiatives, resulting in even greater competition.
The ability of competitors or others to enter into business combinations,
strategic alliances or joint ventures, or to bundle their services and
products with Internet access, could place us at a significant competitive
disadvantage.
Moreover, we expect to face competition in the future from companies that
provide connections to consumers' homes, such as telecommunications
providers, cable companies and electrical utility companies. For example,
recent advances in technology have enabled cable television operators to
offer Internet access through their cable facilities at significantly
higher speeds than existing analog modem speeds. These types of companies
could include Internet access in their basic bundle of services or offer
such access for a nominal additional charge. Any such developments could
materially and adversely affect our business, operating results and
financial condition.
Regulation
Quick-Cell Wireless Internet Access.
Our Quick-Cell wireless Internet access products operate in unregulated
portions of the spectrum, primarily in the 2400 MHz spectrum, and we expect
that these portions of the spectrum will remain unregulated.
Regulation of Internet Access Services.
We provide Internet access, in part, using telecommunications services
provided by third-party carriers. Terms, conditions and prices for
telecommunications services are subject to economic regulation by state and
federal agencies. As an Internet access provider, we are not currently
subject to direct economic regulation by the FCC or any state regulatory
body, other than the type and scope of regulation that is applicable to
businesses generally. In April 1998, the FCC reaffirmed that Internet
access providers should be classified as unregulated "information service
providers" rather than regulated "telecommunications providers" under the
terms of the Federal Telecommunications Act of 1996. As a result, we are
not subject to federal regulations applicable to telephone companies and
similar carriers merely because we provide our services using
telecommunications services provided by third-party carriers. To date, no
state has attempted to exercise economic regulation over Internet access
providers.
Governmental regulatory approaches and policies to Internet access
providers and others that use the Internet to facilitate data and
communication transmissions are continuing to develop and, in the future,
we could be exposed to regulation by the FCC or other federal agencies or
by state regulatory agencies or bodies. In this regard, the FCC has
expressed an intention to consider whether to regulate providers of voice
and fax services that employ the Internet, or IP, switching as
"telecommunications providers", even though Internet access itself would
not be regulated. The FCC is also considering whether providers of
Internet-based telephone services should be required to contribute to the
universal service fund, which subsidizes telephone service for rural and
low income consumers, or should pay carrier access charges on the same
basis as applicable to regulated telecommunications providers. To the
extent that we engage in the provision of Internet or Internet
protocol-based telephony or fax services, we may become subject to
regulations promulgated by the FCC or states with respect to such
activities. We cannot assure you that these regulations, if adopted, would
not adversely affect our ability to offer certain enhanced business
services in the future.
Regulation of the Internet.
Due to the increasing popularity and use of the Internet by broad segments
of the population, it is possible that laws and regulations may be adopted
with respect to the Internet pertaining to content of Web sites, privacy,
pricing, encryption standards, consumer protection, electronic commerce,
taxation, and copyright infringement and other intellectual property
issues. No one is able to predict the effect, if any, that any future
regulatory changes or developments may have on the demand for our Internet
access or other Internet-related services. Changes in the regulatory
environment relating to the Internet access industry, including the
enactment of laws or promulgation of regulations that directly or
indirectly affect the costs of telecommunications access or that increase
the likelihood or scope of competition from national or regional telephone
companies, could materially and adversely affect our business, operating
results and financial condition.
Employees
We have 24 employees, including five officers. Most of our hourly
employees are employed by CyberHighway. All of our officers have entered
into employment agreements.
None of our employees is covered by any collective bargaining agreement,
nor have we ever experienced a work stoppage. Our management believes
employee relations to be good. Much of our future success will depend, in
large measure, upon our ability to continue to attract and retain highly
skilled technical, sales, marketing and customer support personnel.
Certain Risk Factors
When evaluating an investment in USURF America, Inc., the risks and
uncertainties described below should be considered carefully. These risks
and uncertainties described are not the only risks and uncertainties faced
by us. Were any of the following risks actually to occur, our business,
financial condition or results of operations could be materially and
adversely affected. In this case, the trading price of our common stock
could decline, which could cause you to lose of all or part of your
investment in our common stock.
This Annual Report on Form 10-KSB contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including the risks described below and
elsewhere in this Annual Report.
Because we have a short operating history, there is a limited amount of
information about us upon which you can evaluate our business and potential
for future success.
We were incorporated in 1996 and have only a limited operating history
upon which you can evaluate our business and prospects. You must consider
the risks and uncertainties frequently encountered by early stage companies
in new and rapidly evolving markets, such as the market for Internet access
services. Some of these risks and uncertainties relate to our ability to:
- achieve customer acceptance of our Quick-Cell wireless Internet
access products;
- expand our subscriber base, wireless and dial-up, and
subscriber-related revenues;
- compete successfully in a highly competitive market;
- gain access to sufficient capital with which to support anticipated
growth;
- recruit and train qualified employees; and
- upgrade our network systems and infrastructure.
We cannot assure you that we will successfully address any of these risks
and uncertainties.
Our independent auditor expressed substantial doubt about our ability to
continue as a going concern.
In its opinion on our financial statements for the year ended December
31, 1999, our independent auditor, Postlethwaite & Netterville, expressed
substantial doubt about our ability to continue as a going concern. Please
review the Independent Auditor's Report and Note 16 to the consolidated
financial statements appearing elsewhere in this Annual Report.
We had an accumulated deficit of $12,616,830 as of December 31, 1999, and
we expect to continue to incur losses for the foreseeable future.
We have had substantial losses since our inception and our operating
losses may continue in the future. As we pursue full-scale sales and
installation of our Quick-Cell wireless Internet products, we expect our
operating expenses to increase significantly, especially in the areas of
sales and marketing. As a result of these expected cost increases, we will
need to generate increased quarterly revenues to become profitable.
Accordingly, we cannot assure you that we will ever become or remain
profitable. If our revenues fail to grow at anticipated rates or our
operating expenses increase without a commensurate increase in our
revenues, our financial condition will be adversely affected. Our
inability to become profitable on a quarterly or annual basis would have a
materially adverse effect on our business and financial condition.
Our results of operations may vary from quarter to quarter in future
periods, and, as a result, we may fail to meet the expectations of our
investors and analysts, which could cause our stock price to fluctuate or
decline.
Our revenues and results of operations have fluctuated in the past and
could fluctuate significantly in the future, as we follow our commitment of
resources to exploiting our Quick-Cell wireless Internet products. A
variety of factors, many of which are beyond our control, could cause our
operating results to fluctuate. These factors include:
- market acceptance of our Quick-Cell wireless Internet access
products and enhanced versions of our dial-up products and services;
- the rate of new Internet access subscriber acquisition;
- Internet access subscriber retention;
- changes in our pricing policies or those of our competitors;
- capital expenditures and other costs relating to the expansion of
our operations;
- the timing of new product introductions and service announcements
made by us or our competitors;
- personnel changes;
- the introduction of alternative technologies;
- the effect of any acquisitions made by us;
- increased competition in our markets; and
- new and/or more restrictive governmental regulations.
A significant portion of our operating expense is related to personnel
costs, marketing programs and overhead, which cannot be adjusted quickly
and are, therefore, relatively fixed in the short term. Our operating
expense levels are based, in part, on our expectations of future revenue.
If actual revenues are below our expectations, our results of operations
and financial condition would be materially and adversely affected.
Due to all of the foregoing factors and the other risks discussed in this
prospectus, you should not rely on period-to-period comparisons of our
results of operations as an indication of future performance. It is
possible that, in some future periods, our results of operations may be
below the expectations of public market analysts and investors. In this
event, the market price of our common stock is likely to fall.
Because we need more capital, we may not be able to maintain our aggressive
growth strategy.
We have implemented a very aggressive growth strategy, as we attempt to
exploit our Quick-Cell wireless Internet products. This strategy is
expected to place a significant strain on our managerial, operational and
financial resources. In particular, our planned wireless Internet
expansion will require significant capital with which to purchase equipment
necessary for the construction and implementation of locations. We may not
ever obtain needed capital. We believe that the growth of our wireless
Internet access business will be impeded, if impeded at all, primarily by a
lack of capital, rather than by a lack of customer acceptance.
We are attempting to improve our operational systems, procedures and
controls, in order to manage our growth. Should we fail to improve our
systems and controls, the quality and reliability of our services may
decline and levels of customer satisfaction could be harmed.
Without significant additional capital, we will not achieve our aggressive
growth plan.
Our ability to grow will depend, in large measure, on our ability to
expand our wireless Internet access business. This will require
significant equipment expenditures and advance expenditures and commitments
for leased telecommunications facilities and advertising. Our operations
provide a level of funds that permits us to grow at a slow rate. For us to
grow quickly, we must obtain significant additional capital. We cannot
assure you that we will be able to obtain needed additional capital.
Should available sources of financing be insufficient or unavailable, we
would reduce the scope of our growth plans.
Because we depend heavily on outside suppliers, we may experience shortages
of Quick-Cell equipment, which would cause us not to achieve our aggressive
growth plan.
We depend on third-party suppliers of hardware components and
telecommunications carriers to provide equipment and networking services.
We obtain our wireless-Internet-related equipment from a single source, and
acquire dial-up-related hardware components used in our network system from
just a few sources, including server/processors manufactured by Intel,
modems manufactured by Lucent Technologies and U.S. Robotics and high
performance routers, which are devices that receive and transmit data
between different networks, manufactured by Cisco Systems. We rely on a
few local telephone companies and others, such as U.S. West, Electric
Lightwave and GST, to lease data communications capacity via local
telecommunications lines and leased long-distance lines. We currently rely
on NaviNet, Inc., ioNET, Inc., a division of PSINet, Inc., and Electric
Lightwave for a significant portion of our Internet network, as well as
Internet backbone access in most markets.
We may not be able to manage successfully our growth, which could cause us
to operate at a loss.
As we implement our wireless Internet growth strategy, we expect to grow
rapidly for the foreseeable future, both by hiring new employees and
serving new geographic markets. Our expected growth will place a
significant strain on our management and operating and financial systems.
Our personnel, systems, procedures and controls may be inadequate to
support our future operations. In order to accommodate our expected
increase in size of our operations, we will need to hire, train and retain
appropriate personnel to manage our operations. We will also need to
improve our financial and management controls, reporting systems and
operating systems. We currently intend to reform several internal systems,
including our recruiting and management systems. We may encounter
difficulties in developing and implementing these new systems, which could
have a materially adverse effect on our results of operations.
We have not yet built a redundant network operations center that could help
avoid service interruptions.
Nearly all of our computer equipment, including critical equipment
dedicated to our Internet access services, is presently located at a single
facility in Boise, Idaho, and we have not yet built a "mirror" site. A
"mirror" site is a redundant network operations center that can process
Internet access customers, in the event the Boise network operations center
experiences service interruption. Because we lack a mirror site, the
occurrence of a natural disaster or the failure of one or more systems at
this network operations center could cause interruptions in Internet services.
In the ISP industry, extensive or multiple interruptions in Internet
services are a primary reason for customer decisions to cancel the use of a
particular Internet access service. Accordingly, any disruption of our
services, due to system failure, could materially and adversely affect our
business, financial condition and operating results.
Our future success will depend on our ability to keep pace with the
Internet's rapid technological changes, evolving industry standards and
changing customer needs.
The Internet access market is susceptible to rapid changes, due primarily
to technology innovations, as well as evolving industry standards, changes
in subscriber needs and frequent new service and product introductions.
New services and products based on new technologies or new industry
standards expose us to risks of equipment obsolescence. We must use
leading technologies effectively, continue to develop our technical
expertise and enhance our existing services on a timely basis to remain
competitive in this industry. While the development of our proprietary
wireless Internet access and other wireless technologies are expected to
aid us in our efforts to remain on the leading edge of Internet-related
technology, we cannot assure you that this will be the case.
Our ability to compete successfully in our markets also depends on the
continued compatibility of our services with products and systems utilized
and sold by various third parties. Although we intend to support emerging
standards in the Internet access market, as well as in the enhanced
business services market, we may not be able to do so. Our failure to do
so could cause us to lose a competitive position in our markets.
Even though our Quick-Cell wireless Internet access technology is a
leading-edge Internet access delivery system, we cannot be certain that
this technology will permit us to remain competitive in our markets.
Nevertheless, we will continue to pursue the development of faster, more
efficient Internet access technologies, though we may be unable to support
future product development costs.
Our growth plans depend on the continued growth and development of the
Internet and its infrastructure.
During the past five or so years, the use of the Internet has grown
exponentially. Although we believe our Quick-Cell wireless Internet access
technology is positioned as a replacement for traditional, hard-wire-based
Internet access, a portion of our expected growth depends on the continued
growth of the Internet, the growth of the dial-up access market, and the
continued development of the Internet as a viable commercial medium. If
the use of the Internet does not continue to grow or evolves in a way that
we are unable to address effectively, it is likely that our business,
financial condition and operating results would be materially and adversely
affected.
We cannot assure you that the growth of the Internet will continue or
that a sufficient number of consumers will adopt and continue to use the
Internet. Internet usage may be inhibited for a number of reasons, including:
- inadequate Internet infrastructure;
- security concerns; and
- inconsistent quality of service.
We cannot assure you that the Internet infrastructure will be able to
support expected growth or that the reliability and performance of the
Internet will not decline as a result of this growth. If widespread
outages or delays occur in the Internet network infrastructure in the
future, web usage could grow more slowly than anticipated or decline.
We face risks associated with government regulation of and legal
uncertainties surrounding the Internet.
All Internet-related activities have increasingly come under scrutiny by
state and federal regulators. These regulators may, with or without
rational bases, adopt additional laws and regulations relating to content,
user privacy, pricing and copyright infringement.
Any new law or regulation pertaining to the Internet, or the application
or interpretation of existing laws, could increase our cost of doing
business or otherwise have a materially adverse effect on our business,
results of operations and financial condition. The laws governing the
Internet, however, remain largely unsettled, even in areas where there has
been some legislative action. It may take several years to determine
whether and how existing laws governing intellectual property, copyright,
privacy, obscenity, libel and taxation apply to the Internet. In addition,
the growth and development of e-commerce may prompt calls for more
stringent consumer protection laws, both in the United States and overseas.
Our Quick-Cell wireless Internet access products operate in unregulated
portions of the spectrum, primarily in the 2400 MHz band, and we expect
that these portions of the spectrum will remain unregulated.
Breaches in security and computer viruses on the Internet may adversely
affect our business by slowing the growth of the Internet.
The need to transmit securely confidential information, such as credit
card and other personal information, over the Internet has been a
significant barrier to e-commerce and Internet communications. Any
well-publicized compromise of security could deter consumers and businesses
from using the Internet to conduct transactions that involve transmitting
confidential information, including purchases of goods and services.
Decreased Internet traffic as a result of general security concerns or
viruses could hurt our results of operations.
Consumers may not accept our Quick-Cell wireless Internet access products,
which would cause us to operate at a loss.
We intend to be the first wireless ISP of its kind in each of our
markets. While we expect that our wireless Internet access products will
be readily accepted by consumers, we cannot assure you that they will be
accepted by enough consumers to permit us to earn a profit.
We face severe competition for Internet access customers, and we may not be
able to compete effectively.
The market for Internet access services is extremely competitive and
highly fragmented. As there are no significant barriers to entry, we
expect that competition will intensify over time. We also believe that the
primary competitive factors determining success as an ISP are:
- a reputation for reliability and high-quality service;
- effective customer support;
- Internet access speed;
- pricing;
- effective marketing techniques for customer acquisition;
- ease of use; and
- scope of geographic coverage.
We believe we can, and in the future will, more effectively, compete in
our markets. However, if we cannot compete successfully in our markets,
our operating results and financial condition would be materially and
adversely affected.
Our competitors include many large, nationally-known companies, such as
America Online, Earthlink and Flashnet. These and other companies possess
greater resources, particularly access to capital sources, market presence
and brand name recognition than do we. In addition, we will face
competition from other wireless Internet access providers, such as
Metricom. We believe our Quick-Cell wireless Internet access products are
superior to other similar products.
We depend on our key personnel; the loss of any key personnel could disrupt
our operations, adversely affect our business and result in reduced
revenues and/or profits.
Our future success will depend on the continued services and on the
performance of our senior management and other key employees. In
particular, we depend on our president, David M. Loflin. While we have
entered into an employment agreement with Mr. Loflin, the loss of his
services for any reason could seriously impair our ability to execute our
business plan, which could reduce our revenues and have a materially
adverse effect on our business and results of operations. We have not
purchased any key-man life insurance.
Our ability to hire, train and retain qualified employees is crucial to our
ability to grow and to compete effectively.
To succeed, we must hire, train, motivate, retain and successfully manage
employees with skills related to the Internet and its rapidly changing
technologies. Because of the recent and rapid growth of the Internet,
professionals who have Internet expertise and can perform required
functions are, in many markets, scarce, and competition for these
individuals is intense. We might not be able to hire persons with needed
expertise or to train, motivate, retain and successfully manage the
employees we do hire. This could hinder our ability to compete
successfully in our markets. While our key employees are subject to
non-competition agreements, these agreements are difficult to enforce. As
a result, our employees may leave us for our competitors or start their own
companies in competition with us. If we fail to attract, train and retain
key personnel, our business would be materially and adversely affected.
Our directors and executive officers own enough of our common stock
effectively to control directors' elections and thereby control our
management policies.
Our directors and executive officers own approximately 30% of our common
stock. Two of our directors, as well as three other persons, have entered
into a voting agreement, whereby all of the shares subject to the voting
agreement must be voted for David M. Loflin and Waddell D. Loflin in
elections of directors. Currently, approximately 39% of our outstanding
shares of common stock are subject to this voting agreement. These
shareholders will be able effectively to control the outcome of corporate
actions requiring shareholder approval by majority action. Their stock
ownership may have the effect of delaying, deferring or preventing a change
in control of USURF America.
We owe our president over $500,000; we owe our president and two of our
vice presidents back salary.
We currently owe our president, David M. Loflin, approximately $520,000
(plus accrued interest) for money loaned to us over the past three years.
All of the funds loaned by Mr. Loflin are payable on demand and bear
interest at 8% per annum. Mr. Loflin has advised us that he does not
intend to demand repayment, until we are able to make the repayment without
adversely affecting our financial condition. We would experience a
materially adverse effect on our financial condition, should Mr. Loflin
change his intention.
Beginning in July 1999, a portion of the salaries of David M. Loflin and
one of our vice presidents, Waddell D. Loflin, began to accrue. The
collective rate of accrual is approximately $7,500 per month. The accrued
portion of their salaries will not be paid until payment would not
adversely affect our financial condition.
In addition, we have accrued $20,667 of the salary of our vice president
of corporate development, James Kaufman.
To exploit fully our wireless Internet access technologies and to remain
competitive in the future, we need financing, which may not be available on
terms acceptable to us, if at all.
We are attempting to secure capital for use in implementing our business
plan. Without a significant level of funding, we will not be able to
expand rapidly our wireless Internet business. We will also require
additional funding in the future, to sustain our anticipated growth. We
cannot assure you that we will obtain needed funding. Should we fail to
obtain needed funding, we would be unable to generate significant revenue
growth in the near term.
Because our business plan is not based on independent market studies, our
assumptions could prove to be incorrect, which would cause to operate at a
significant loss.
Our plans for implementing our business strategy and achieving
profitability are based on the experience, judgment and certain assumptions
of our key management personnel, and upon other available information
concerning the communications industry. We have not commissioned any
independent market studies concerning the extent to which customers will
utilize our services and products. We cannot assure you that our
assumptions will prove correct.
Future acquisitions or investments could disrupt our ongoing business,
distract our management and employees, increase our expenses and cause us
to realize lower profits or operate at a loss.
We anticipate that a portion of any future growth will be accomplished by
acquiring existing businesses with acquisition stock. The success of any
acquisitions will depend upon, among other things, our ability to integrate
acquired personnel, operations, products and technologies into our
organization effectively, to retain and motivate key personnel of acquired
businesses and to retain customers of acquired firms. We cannot assure you
that we will be able to identify suitable acquisition opportunities, obtain
any necessary financing on acceptable terms or successfully integrate
acquired personnel and operations. These difficulties could disrupt our
ongoing business, distract our management and employees, increase our
expenses and materially and adversely affect our results of operations.
Any future acquisitions would involve certain other risks, including the
assumption of additional liabilities, potentially dilutive issuances of
equity securities and diversion of management's attention from other
business concerns. Our issuance of acquisition stock will reduce your
ownership percentage of our common stock.
We may not be able to protect our intellectual property rights, which could
adversely affect our business.
We currently rely on common law principles for the protection of our
copyrights and trademarks and trade secret laws to protect our proprietary
intellectual property rights. We expect to file patent applications
relating to our Quick-Cell wireless Internet access products in the near
future. We will file trademark applications relating to the "Quick-Cell"
brand name, the "US.RF Wireless Internet" brand name and the "USURF
America" brand name in the near future. Without patent or trademark
protection, the existing trade secret and copyright laws afford us only
limited protection. Third parties may attempt to disclose, obtain or use
our technologies. Others may independently develop and obtain patents or
copyrights for technologies that are similar or superior to our
technologies. If that happens, we may need to license these technologies
and we may not be able to obtain licenses on reasonable terms, if at all.
The market price of our common stock will continue to be volatile, and it
may drop unexpectedly.
The market price of our common stock has fluctuated significantly in the
past and we expect this volatility to continue in the future. Since our
common stock became listed on the American Stock Exchange in October 1999,
the trading volume has become more consistent, though periodic fluctuations
in price still occur. Nevertheless, it is possible that the market price of
our common stock could fall below the price you paid for your shares of our
common stock.
In the past, securities class action litigation has often been brought
against a company following a period of volatility in the market price of
its securities. We may, in the future, be the target of similar
litigation. Securities litigation could result in substantial costs and
divert management's attention and resources, which could have a material
adverse effect on our business and the market price of our common stock.
We do not expect to pay cash dividends for the foreseeable future.
We do not anticipate the payment of cash dividends in the foreseeable
future. Rather we intend to re-invest any profits. During 1998, we
acquired shares of common stock of three private companies. Our board of
directors declared dividends as to all of the shares of each of these
private companies.
Our directors' liability for monetary damages is limited.
Our Articles of Incorporation, as amended, significantly limit the
liability of our directors to our shareholders for breaches of fiduciary or
other duties owed by them to USURF America.
The future sale of substantial amounts of our common stock may negatively
affect our stock price.
Upon the completion of our pending registration statement, substantially
all outstanding shares of our common stock will be eligible for resale to
the public, under the provisions of Rule 144 of the Rules and Regulations
of the SEC or otherwise. This amount of common stock represents a
significant overhang on the market for our common stock. If a substantial
number of shares comprising this overhang were sold in a short period of
time, the market price for our common stock could fall.
In general, under Rule 144, a person who has beneficially owned his
restricted stock for at least one year, including persons who may be deemed
"affiliates", would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the
then-outstanding shares of our common stock (approximately 131,000 shares
based on the current number of outstanding shares) or the average weekly
trading volume of trading on all national securities exchanges and/or
reported through the automated quotation system of a registered securities
association of our common stock during the four calendar weeks preceding
the filing of the Form 144 with respect to such sale. Sales under Rule 144
are also subject to certain manner of sale provisions and notice
requirements, and to the availability of current public information about
USURF America. However, a person who is not deemed to have been an
affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned his restricted shares for at least two years, would be
entitled to sell such shares under Rule 144 without regard to certain of
the requirements described above.
Cautionary Statement
This Annual Report on Form 10-KSB contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934.
All statements above, other than statements of historical facts included in
this Annual Report on Form 10-KSB, including those under "Proposed
Transactions" and "Quick-Cell Wireless Internet Access", are forward
looking in nature. These statements are subject to certain risks and
uncertainties, such as our ability to obtain additional capital on
favorable terms, changes in prices or demand for our products as a result
of competitive actions or economic factors, changes in the cost of
equipment, changes in operating costs resulting from new technologies or
inflation. Should one or more of these risks or uncertainties, among
others, materialize, our actual operating results may vary materially from
those estimated, anticipated or projected. Although we believe that the
expectations reflected by these forward-looking statements are reasonable
based on information currently available to us, we cannot assure you that
our expectations will prove to have been correct. All forward-looking
statements included in this Annual Report on Form 10-KSB and all subsequent
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary
statements.
Item 2. Description of Property
Properties
General.
We own all of the equipment necessary to conduct our ISP operations,
including servers, routers and modems. In addition, we own office
equipment necessary to conduct our business.
We lease approximately 650 square feet for our executive offices in Baton
Rouge, Louisiana, for a monthly rental of $776. CyberHighway leases two
separate facilities in the Boise, Idaho, area, for a combined monthly
rental of approximately $3,000. We lease approximately 500 square feet in
Santa Fe, New Mexico, for a monthly rental of approximately $800.
Wireless Cable Properties.
We own the rights to wireless cable channels in Poplar Bluff, Missouri,
Lebanon, Missouri, Port Angeles, Washington, The Dalles, Oregon, Sand
Point, Idaho, Fallon, Nevada, and Astoria, Oregon. We have abandoned our
efforts to develop these wireless cable properties, due to current market
conditions. Rather, we intend to develop these properties into operating
wireless Internet systems, at such time as two-way data transmission on
these frequencies is permitted.
Intellectual Property
We are nearing completion of patent applications relating to our Quick-Cell
wireless Internet access system. These patent applications are to be filed
as soon as they have been completed. Although we believe the Quick-Cell
system, or aspects thereof, to be patentable, we have no assurance that a
patent or patents will be granted. Also, we cannot assure you that the
steps taken by us will be adequate to prevent misappropriation of our
proprietary wireless Internet technologies or that third parties, including
competitors, will not independently develop technologies that are
substantially equivalent or superior to our proprietary wireless Internet
technologies.
We are preparing U.S. trademark applications for the following trademarks:
"Quick-Cell", "US.RF Wireless Internet", "US.RF Quick-Cell" and "USURF
America".
We have received authorization to use the products of each manufacturer of
software that is bundled in its software for users with personal computers
operating on the Windows or Macintosh platforms. While certain of the
applications included in our start-up kit for Internet access services
subscribers are shareware that we have obtained permission to distribute or
that are otherwise in the public domain and freely distributable, certain
other applications included in our start-up kit have been licensed where
necessary. We currently intend to maintain or negotiate renewals of all
existing software licenses and authorizations as necessary. We may also
enter into licensing arrangements for other applications, in the future.
Item 3. Legal Proceedings
In September 1999, we tendered the acquired shares of capital stock of Net
1, Inc. for rescission. We made this tender of rescission, due to numerous
and material misrepresentations made by Net 1 and its principals. We had
intended to commence arbitration to pursue its rescission claim. However,
one of the former owners of Net 1, Knud Nielsen, III, has instituted
arbitration, through the American Arbitration Association, and is seeking
to enforce certain registration rights associated with a portion of the
shares of our common stock received by him in the acquisition transaction.
Now, we have presented the rescission claim as a counterclaim in the
pending arbitration proceeding. The counterclaim will be made against Net
1 and its former owners, including Mr. Nielsen, wherein we seek to rescind
the acquisition transaction that occurred in August 1999, and recover the
250,000 shares of common stock issued in connection with the acquisition.
We have alleged fraud and the failure to make statements necessary to make
statements made not misleading. Although we believe we will be successful
in this arbitration proceeding, no prediction in this regard can be made.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of our security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
>From 1997 through October 14, 1999, our common stock was traded on the
NASD's OTC Bulletin Board, first under the symbol "MEME", then under the
symbol "USRF". The table below sets forth, for the periods indicated, the
high and low bid and asked prices for our common stock, as reported by the
OTCBB:
High High Low Low
Quarter/Period Ended: Bid Ask Bid Ask
December 31, 1997 $.75 $1.625 $.0625 $.21875
March 31, 1998 $2.00 $3.00 $.03125 $.08
June 30, 1998 $2.00 $2.0625 $.8125 $.875
September 30, 1998 $1.50 $1.625 $.75 $.84375
December 31, 1998 $5.3125 $5.50 $.50 $.53125
March 31, 1999 $13.50 $13.75 $3.34375 $2.00
June 30, 1999 $7.375 $5.6875 $3.5625 $3.60
September 30, 1999 $8.8125 $8.875 $3.28125 $3.4375
10/1/99 thru 10/14/99 $3.8125 $3.9375 $2.875 $3.00
These prices represented quotations between dealers without adjustment for
retail mark-ups, mark-downs or commissions, and may not have necessarily
represented actual transactions.
Beginning on October 15, 1999, our common stock began to be traded on the
American Stock Exchange, under the symbol "UAX". The table below sets
forth, for the period indicated, the high and low sales prices for our
common stock, as reported by the American Stock Exchange:
Quarter/Period Ended: High Low
10/15/99 thru 12/31/99 $5.875 $2.50
March 31, 2000 $11.00 $3.625
You should note that our common stock, like many newly-traded stocks, has
experienced significant fluctuations in its price and trading volume. We
cannot predict the future trading patterns of our common stock.
Holders
On April 11, 2000, the number of record holders of our common stock,
excluding nominees and brokers, was approximately 1,104 holding 13,120,845
shares.
Dividends
We have never paid cash dividends on our common stock. We intend to
re-invest any future earnings for the foreseeable future.
We have acquired shares of common stock of three private companies:
- 1,500,000 shares of New Wave Media Corp., in exchange for all of
our community-television-related assets;
- 400,000 shares of Argo Petroleum Corporation, in exchange for
10,000 shares of our common stock; and
- 800,000 shares of Woodcomm International, Inc., in exchange for
7,500 shares of our common stock.
Our board of directors declared dividends as to all of the shares of each
of these private companies. None of the three dividend distributions will
occur unless and until a registration statement relating to each
distribution transaction has been declared effective by the SEC.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Present Business Focus
In October 1999, our management determined to commit, for the foreseeable
future, all available capital to the commercial exploitation of our
Quick-Cell wireless Internet access products. We intend to continue to
pursue acquisitions of businesses complimentary to our core Internet access
business.
The results of operations discussed below reflect, on the whole, our
operating results based on our old business model. Because our Quick-Cell
wireless Internet access business permits us to operate on significantly
improved margins, as compared to operating margins in the dial-up Internet
access business, we expect our operating results, beginning with the second
quarter of Fiscal 2000, to show significant improvement. The level of
improved operating results cannot be predicted, however.
Background
In July 1999, we changed our name to "USURF America, Inc.", from "Internet
Media Corporation". We were incorporated on November 1, 1996, under the
name "Media Entertainment, Inc.", to act as a holding company in the
wireless cable and community (low power) television industries. Our
initial capitalization transaction included the purchase of Winter
Entertainment, Inc. and Missouri Cable TV Corp. Because USURF America,
Winter Entertainment and Missouri Cable TV were combined in a
reorganization of entities under common control, the presentation contained
in our consolidated financial statements, as they relate to Winter
Entertainment and Missouri Cable TV, have been prepared in a manner similar
to the pooling-of-interests method.
Due to current market conditions in the wireless cable industry, we have
abandoned our efforts to develop these wireless cable properties.
Nevertheless, in the opinion of our management, the licenses relating to
the various wireless cable frequencies continue to be of substantial future
value for use in our wireless Internet access business. We will be able to
utilize these frequencies at such time as the FCC approves two-way
communication on the wireless cable frequencies. Our management believes
this FCC approval of two-way communication to be imminent. However, our
wireless cable assets will become impaired, should the expected FCC
approval not be forthcoming. We can make no prediction with respect to the
FCC's actions in this regard.
In furtherance of our plan to focus on the exploitation of our Quick-Cell
wireless Internet access products and expansion of our other Internet
services, effective July 1, 1999, we assigned all of our community (low
power) television properties to New Wave Media Corp., in exchange for
1,500,000 shares of New Wave common stock. Our board of directors has
declared a dividend with respect to all 1,500,000 New Wave shares. These
shares of New Wave will be distributed to our shareholders, upon New Wave's
completion of a Securities Act registration of the distribution
transaction. This discussion includes the operations of our community
television segment through June 30, 1999.
Since our initial capitalization transactions, we have made the
acquisitions described below. Each of these acquisitions has been
accounted for as a purchase, not as a pooling of interests, with their
respective operating results being included in this discussion from the
various dates of acquisition:
- September 1998: we acquired the assets and going business of Desert
Rain Internet Services, a Santa Fe, New Mexico-based ISP, for $25,000 in cash.
- January 1999: we acquired CyberHighway, Inc., a Boise, Idaho-based
ISP for 2,000,000 shares of our common stock.
- June 1999: we acquired Santa Fe Trail Internet Plus, Inc., another
Santa Fe, New Mexico-based ISP, for 100,000 shares of our common stock.
- August 1999: we acquired the going business known as www.usurf.com,
for 150,000 shares of our common stock.
- August 1999: we acquired Premier Internet Services, Inc., an
Idaho-based ISP, for 127,000 shares of our common stock.
- August 1999: we acquired Net 1, Inc., an Alabama-based ISP, for
250,000 shares of our common stock. In September 1999, we tendered the
stock of Net 1 for rescission of the acquisition transaction. The
financial statements of Net 1 were not available to us from September 1,
1999, through December 31, 1999; therefore, the revenues and expenses of
Net 1 are not included in this discussion, nor are they included in our
statement of operations for Fiscal 99. Please refer to Notes 2 and 15 to
our financial statements appearing elsewhere in this Annual Report. Also,
please see the discussion below under Item 3. Legal Proceedings.
- November 1999: we acquired the customer base of Cyber Mountain,
Inc., a Denver, Colorado-based ISP, for 25,000 shares of our common stock.
- December 1999: we acquired a portion of the ISP-related equipment
and customer base of CyberHighway of North Georgia, Inc., a Demorest,
Georgia-based ISP, for 53,000 shares of our common stock.
The acquisition of CyberHighway fundamentally altered our outlook. Prior
to this acquisition, our growth plan called for either (1) the acquisition
of small, local ISPs located in certain key cities, then essentially
"plugging-in" our Quick-Cell wireless Internet access system into the
acquired ISP's network system and marketing the Quick-Cell system or (2)
the establishment of strategic relationships by licensing local ISPs in
certain key cities to exploit our Quick-Cell wireless Internet access
products. This growth strategy, while proving effective, proved also to be
slow and relatively expensive.
With the acquisition of CyberHighway, not only did we acquire approximately
27,000 dial-up customers and a state-of-the-art network operations center,
we also gained immediate access to customers in over 230 markets in which a
CyberHighway-owned or affiliate-ISP provides Internet services.
Acquisitions After December 31, 1999
Since December 31, 1999, we have completed two acquisitions:
- February 2000: we acquired The Spinning Wheel, Inc., an Idaho-based
ISP, for 81,063 shares of our common stock.
- February 2000: we acquired Internet Innovations, L.L.C., a Baton
Rouge, Louisiana-based web design firm, for 50,000 shares of our common stock.
Neither of these acquisitions is reflected in this discussion, as they were
treated as purchases and not as pooling-of-interests. Also, we do not
expect these acquisitions, on their own, to alter significantly our future
operating results.
Restructuring
In July 1999, sweeping changes were made to the management of CyberHighway.
These changes included completely replacing the board of directors and
officers of CyberHighway, as well as a significant workforce reduction.
Additional personnel reductions have been made. Certain business
functions, including customer support services, have been moved from the
Boise network operations center to our Santa Fe, New Mexico,
point-of-presence. The changes in the management of CyberHighway were made
due to differing managerial philosophies. Under the prior management,
CyberHighway had, during May 1999, begun to sustain operating losses,
primarily due to the addition of numerous salaried salespersons, who failed
to produce sales revenues. The new management of CyberHighway instituted
the restructuring and personnel reductions as the only means by which it
could return CyberHighway to a positive cash flow position. While
CyberHighway's cash flow returned, for a brief time, to a positive status,
in line with its 1998 cash flow results, CyberHighway has begun to operate
a loss of approximately $30,000 per month. We are attempting to reduce
operating expenses at CyberHighway so the operating losses will be
eliminated, or at least substantially eliminated.
Settlement Agreement
On November 30, 1999, we entered into a settlement agreement and mutual
release, which settled certain legal proceedings in which USURF America and
CyberHighway had been involved. The parties to the settlement agreement
were: USURF America, CyberHighway, Julius W. Basham, II, our former chief
operating officer and a current director, William Kim Stimpson and David W.
Brown. Messrs. Stimpson and Brown are former owner-employees of CyberHighway.
Pursuant to this settlement agreement, certain legal proceedings were
settled in full and we delivered to Messrs. Basham, Stimpson and Brown a
total of 340,000 shares of our common stock. We are paying the total sum
of $43,325 for reimbursement of attorneys' fees paid by Messrs. Basham,
Stimpson and Brown.
The 340,000 shares issued to Messrs. Basham, Stimpson and Brown were valued
at $2.6875 per share, or $913,750, in the aggregate. The price per share
assigned to the issued shares was the closing price of our common stock, as
reported by the American Stock Exchange, on November 30, 1999. The $43,325
being paid as reimbursement of attorneys' fees will be expensed in the year
ended December 31, 1999. With respect to the 340,000 shares, we will
suffer a charge against earnings in the amount of $913,750, or
approximately $.08 per share, which amount will be recognized in the year
ended December 31, 1999. The total charge against earnings in 1999
resulting from the settlement agreement was $957,075.
Shareholder Loans
Since our inception, our president, David M. Loflin, has made numerous
loans to us. During Fiscal 99, Mr. Loflin loaned us a total of $235,000
($25,000 of which was repaid during Fiscal 99), all of which is payable on
demand and bears interest at 8% per annum. In addition, during the first
quarter of Fiscal 2000, Mr. Loflin loaned us a total of $165,000 on the
same terms. The funds loaned during Fiscal 1999 were used primarily for
operating expenses, while the funds loaned during the first quarter of
Fiscal 2000 were used for the purchase of network equipment and for
operating expenses.
Mr. Loflin has advised us that he does not intend to demand payment of his
loans, until their repayment would not adversely affect our financial
position.
Results of Operations
Year Ended December 31, 1999, versus Year Ended December 31, 1998.
Prior to Fiscal 98, substantially all of our revenues were generated by our
community television segment. During Fiscal 98 and Fiscal 99, all of our
revenues were generated by our Internet segment. During 1999, we derived
our revenues from monthly customer payments for dial-up Internet access,
which average approximately $18.00 per customer. Also, we derive revenue
from per-customer royalty payments from our CyberHighway affiliate-ISPs,
which average approximately $1.75 per customer.
Our operating results for Fiscal 98 and Fiscal 99 are summarized in the
following table:
Fiscal 99 Fiscal 98
Revenues $ 2,547,225 $ 5,440
Cost of Goods Sold 1,152,721 --
Gross Profit 1,394,504 5,440
Operating Expenses 11,860,758 1,034,464
Other Expense 2,117,070 8,602
Loss from Operations 10,466,254 1,029,024
Net Loss 10,930,163 1,037,626
The dramatic increase in every line item, except "Other Expense", of our
statement of operations from Fiscal 98 to Fiscal 99 is attributable
primarily to our acquisition of CyberHighway, in January 1999, and to our
other 1999 acquisitions.
During both reporting periods, we issued a relatively large number of
shares of our common stock for consulting services. The value of the
consulting services received [number of shares issued multiplied by the per
share value assigned to the shares issued] under each agreement has been
expensed in equal monthly amounts over their respective terms.
Our net loss for Fiscal 98 is attributable in large measure to the issuance
of shares of our common stock pursuant to various consulting agreements, as
well as the payment of operating costs. During Fiscal 98, a total of
1,655,759 shares were issued to consultants; these shares have been valued
for financial accounting purposes at $1,556,900, in the aggregate. During
Fiscal 98, $311,889 was expenses due to Fiscal 97 consulting agreements and
$453,976 of the $1,556,900 in Fiscal 98 consulting agreements was expensed.
Also, during Fiscal 98, we issued a total of 80,000 shares of common stock
to certain of our directors. These shares were valued, for financial
reporting purposes, at $.56 per share, or $44,800, in the aggregate.
During Fiscal 99, we expensed approximately $92,000 each month, due to the
Fiscal 98 consulting agreements.
During Fiscal 99, however, our net loss is attributable in large measure to
the depreciation and amortization of acquired customer bases, goodwill and
other intangibles of $7,653,924, while an additional $1,945,935 in
professional fees, substantially all of which is attributable to stock
issuances under various consulting agreements, and $1,603,556 in salary and
commissions was expensed.
During Fiscal 99, we issued 566,000 shares of common stock under consulting
agreements; these shares have been valued for financial accounting purposes
at $2,216,000, in the aggregate. $2,000,000 of this amount will be expensed
in equal monthly amounts over five years, while the remaining $216,000 of
this amount will be expensed in equal monthly amounts over periods ranging
from three to six months.
Since Fiscal 99, we have issued 160,000 shares of common stock under
consulting agreements; these shares were valued at $3.00 per share, or
$480,000, in the aggregate, and will be expensed in equal monthly amounts
during Fiscal 2000.
During Fiscal 99, we incurred two significant charges against our earnings,
which appear in our statement of operations under the "Other Income
(Expense)" heading:
First, we suffered a charge of $1,164,561 arising out of our acquisition,
and subsequent tender for rescission, of Net 1. However, because we
remain the legal owner of Net 1, we are required by generally accepted
accounting principles to record Net 1 as a wholly-owned subsidiary from
the date of acquisition. The financial statements of Net 1 from
September
1 through December 31, 1999, were unavailable to us; therefore, the
revenues and expenses of Net 1 are not included in our statement of
operations for Fiscal 99. This is considered a departure from generally
accepted accounting principles, the effects of which have not yet been
determined. The total cost of the acquisition of Net 1 was $1,164,561,
which exceeded the fair value of the net assets of Net 1 by $1,164,561.
This excess was deemed to be impaired at December 31, 1999, due to the
change in the operating environment, and was, thus, recorded in our
statement of operations as an impairment loss. The future accounting
treatment of the Net 1 acquisition is not certain, and we cannot make any
prediction in this regard.
Second, we suffered a charge of $957,075 arising out a settlement
agreement and mutual release, which settled certain legal proceedings in
which USURF America and CyberHighway were involved. These legal
proceedings were settled in full by the issuance of 340,000 shares of our
common stock to the adverse parties and we are paying $43,325 for
reimbursement of their respective attorneys' fees. The 340,000 shares
were valued at $2.6875 per share, or $913,750, in the aggregate. The
price per share assigned to these shares was the closing price of our
common stock on November 30, 1999, as reported by the American Stock
Exchange.
For Fiscal 1999, our statement of operations reflects an income tax benefit
of $1,653,161, resulting from the difference in the bases of the acquired
customer bases for book versus tax purposes.
Internet Segment.
During Fiscal 98, this segment began to generate revenues, following the
acquisition of Desert Rain Internet Services, in September 1998. For all of
Fiscal 98, this segment operated at a small loss. For all of Fiscal 99,
the Internet segment generated all of our revenues and operated at a modest
loss. This segment's operating loss is due to the operating losses
occurring prior to the change in CyberHighway's management, one-time costs
associated with the corporate restructuring at CyberHighway, including
attorneys' fees, and operating losses that returned during the last two
months of Fiscal 99.
Community Television Segment.
During Fiscal 98 and Fiscal 99, this segment had no revenues and suffered a
nominal loss from operations. As discussed above, effective July 1, 1999,
we assigned all of our community television properties to New Wave Media Corp.
Wireless Cable Segment.
For Fiscal 98 and Fiscal 99, the wireless cable segment had no operating
activity. As described above, we have ceased, for the foreseeable future,
our wireless cable activities.
Pro Forma Results of Operations
Assuming that the CyberHighway acquisition had occurred on January 1, 1998,
USURF America would have had, on a pro forma basis for Fiscal 98, total
revenues of $2,454,596 (unaudited) and a net loss of $6,124,330
(unaudited). This loss is primarily attributable to the amortization of the
acquired customer base of CyberHighway. See Note 17 to our financial
statements included elsewhere in this Annual Report.
Liquidity and Capital Resources
December 31, 1999.
Historically, we have had a significant working capital deficit. At
December 31, 1999, our working capital deficit was $1,060,532, which is a
substantially larger deficit than our $240,806 deficit at December 31, 1998.
The following table sets forth our current assets and current liabilities
at December 31, 1999 and 1998:
1999 1998
Current Assets Cash $75,313 $7,232
Accounts Receivable 59,098 1,033
Inventory 21,207 --
Prepaids 5,500 --
Current
Liabilities Notes payable -
current portion $ 5,910 --
Accounts payable 363,665 17,493
Accrued payroll 118,157 --
Other current
liabilities 216,650 2,159
Accounts payable -
affiliate - 10,069
Property dividends
payable 43,750 57,519
Accrued interest to
stockholder 29,741 15,416
Notes payable to
stockholder 356,239 146,415
Deferred revenue 87,538 --
The large increase in our accounts payable is attributable to our expanded
operations following the acquisition of CyberHighway coupled with our lack
of working capital with which to pay our accounts payable as incurred.
Our accrued payroll at December 31, 1999, is attributable to accrued salary
of our president and two of our vice presidents.
The increase in other current liabilities is attributable to our expanded
operations as compared to our Fiscal 98 operations.
The increase in notes payable to stockholder from 1998 to 1999 represents
loans made to us by our president, David M. Loflin. All of this
indebtedness is due on demand and bears interest at 8% per annum. In
addition, during the first quarter of Fiscal 2000, Mr. Loflin loaned us an
additional $165,000 on the same terms. The funds loaned during Fiscal 1999
were used primarily for operating expenses, while the funds loaned during
the first quarter of Fiscal 2000 were used primarily for use in the
roll-out of our Quick-Cell wireless Internet access products, particularly
in Santa Fe, New Mexico, and for working capital. Mr. Loflin has advised
us that he does not intend to demand payment of his loans, until their
repayment would not adversely affect our financial position.
Our working capital deficit deterioration from 1998 to 1999 has occurred in
spite of the receipt of a total of $882,231 during 1999 in private sales of
our securities:
- January 1999: we received $290,000 from the sale of securities.
These funds were applied to operating expenses.
- May 1999: we received $105,000 from the sale of securities. These
funds were applied to operating expenses and the purchase of needed equipment.
- June 1999: we received $310,000 from the exercise of certain
warrants. Approximately 40% of the funds received from the exercise of
these warrants was used for working capital and the balance of these funds
was used to purchase needed Quick-Cell wireless Internet equipment and
other Internet-related equipment.
- August 1999: we received $27,321 from the exercise of certain
warrants. These funds were used for working capital.
- November 1999: we received $150,000 from the sale of securities.
These funds were used for operating expenses and for the purchase of needed
equipment.
We expect that, prior to the end of the first half of 2000, certain common
stock purchase warrants, representing an additional approximately
$1,300,000, will be exercised. However, we cannot assure you that these
warrants will be exercised or, if exercised, that the timing of their
exercise would significantly improve our financial position.
Without substantial additional investment, we will continue to experience a
working capital deficit and be unable to implement our aggressive growth
plan. We are seeking additional investments for this purpose, but we
cannot assure you that we will be successful in our efforts.
Commitment to Wireless Internet Business.
In October 1999, our management determined to apply, for the foreseeable
future, all available capital to the exploitation of our Quick-Cell
wireless Internet access products. However, we cannot assure you that we
will obtain sufficient capital with which to implement fully our growth plan.
Growth Strategy; Proposed Acquisitions.
During the past year, as we refined our growth strategy, we have determined
that, as a purveyor of Internet access, for us to achieve the greatest
growth and economies of scale, it is necessary for us to offer traditional
dial-up Internet access and our Quick-Cell wireless Internet access
products. Thus, to reach more Internet users, we will continue to provide
high quality dial-up Internet access service as we continue to deploy our
Quick-Cell wireless Internet access products.
We will also seek acquisitions of businesses that complement our core
business. We have not agreed to any acquisition of this nature, and we
cannot assure you that we will ever acquire another business.
Quick-Cell Wireless Internet Strategy.
We are attempting to implement a plan designed to establish our Quick-Cell
wireless Internet access products in 110 U.S. cities by the end of 2000. We
have reached an tentative agreement with US West that would provide us with
an extremely cost-effective connection to the Internet in our chosen
markets, into which our Quick-Cell wireless Internet access systems would
connect. We lack the capital needed to implement completely our growth
plan and we cannot assure you that we will be successful in obtaining any
capital.
USURF America National Reseller Program.
With recently secured local dial-up Internet access agreements with
national backbone providers, we have launched our "USURF America"
high-quality dial-up Internet access service. The marketing of its dial-up
access service is being accomplished by resellers, through our national
reseller program. The resellers of our dial-up Internet access services
receive continuing commissions for customers obtained through their
efforts. This program has not yet begun to yield meaningful subscriber
growth and we cannot assure you that our efforts in this regard will be
successful.
Community Television Stations.
In furtherance of our plan to focus on the exploitation of our Quick-Cell
wireless Internet access products, we assigned all of our community (low
power) television properties to New Wave Media Corp., in exchange for
1,500,000 shares of New Wave common stock. Our board of directors declared
a dividend with respect to all 1,500,000 New Wave shares.
Cash Flows from Operating Activities.
During Fiscal 99, our operations used $546,097 in cash compared to cash
used of $305,999 during Fiscal 98. In both periods, the use of cash in
operations was a direct result of the lack of revenues compared to the
operating expenses. While the trend toward using increasing amounts of
cash in operating activities remained continued, the large increase in the
dollar amounts from 1998 to 1999 is attributable to our increased
activities, due primarily to our acquisition of CyberHighway in January
1999. Should be continue to be unable to obtain significant amounts of
additional capital, we expect that we will continue to use cash in
operating activities at levels similar to those experienced in 1999.
Cash Flows from Investing Activities.
During Fiscal 99, our investing activities used cash of $412,785 compared
to $49,702 in Fiscal 98. During Fiscal 99, in our investing activities,
capital expenditures [purchases of equipment] of $614,193 offset cash
acquired in acquisitions and disposal of fixed assets. During 1998, in our
investing activities, the acquisition of Desert Rain Internet Services
[$24,666] and the purchase of equipment [$25,605] offset the payment of
organization costs. Because we lack working capital, we cannot predict our
cash flows from investing activities for all of 2000.
Cash Flows from Financing Activities.
For Fiscal 99, our financing activities provided $1,026,963 in cash. Of
this amount, $235,010 is attributable to loans from our president, $545,000
is attributable to private sales of securities and $337,321 is attributable
to the receipt of funds from the exercise of certain warrants. Payments on
notes payable represented a use of cash of $90,369. For Fiscal 98, our
financing activities provided $362,933 in cash, $30,133 of which is
attributable to loans from our president and $332,800 of which is
attributable to the private sale of securities. We cannot predict future
levels of cash flows from financing activities.
In March 2000, we received $325,000 in private sales of our securities.
65,000 units of securities consisting of one share of our common stock and
one common stock purchase warrant [exercisable at $7.50 per share] were
sold for $5.00 per unit.
Non-Cash Investing and Financing Activities.
During Fiscal 99, we issued 566,000 shares of common stock under consulting
agreements; these shares have been valued at $2,216,000, in the aggregate.
Since Fiscal 99, we have issued 160,000 shares of common stock under
consulting agreements; these shares were valued at $480,000, in the aggregate.
During Fiscal 98, non-cash investing and financing activities included the
issuance of 1,655,759 shares of our common stock issued for consulting and
legal services to be performed, valued at $1,556,900.
Pro Forma Liquidity and Capital Resources
Assuming that the CyberHighway acquisition had occurred on January 1, 1998,
USURF America would have had, on a pro forma basis, a working capital
deficit of $217,680 (unaudited), total assets of $21,816,500 (unaudited),
total liabilities of $5,792,653 (unaudited) and shareholders' equity of
$16,023,847 (unaudited). See Note 17 to our financial statements included
elsewhere in this Annual Report.
Management's Plans Relating to Future Liquidity
We continue to seek additional capital with which to operate and implement
our aggressive growth plan. In March 2000, we obtained a total of $325,000
in a private offering of our securities. Even with this capital, we remain
substantially illiquid. We require approximately $1,000,000 to become
relatively liquid and to pursue aggressively the installation and marketing
of our Quick-Cell wireless Internet access systems.
We expect that, prior to the end of the first half of 2000, warrants
representing an additional approximately $1,300,000 will be exercised. We
cannot assure you that any of these warrants will ever be exercised.
Our current operations will not be sufficient, on their own, to provide
operating capital and to provide capital with which to pursue our growth
strategy. We continue to seek capital with which to implement our growth
strategy. We cannot assure you that we will ever secure capital necessary
for our growth strategy to be implemented.
Capital Expenditures
During Fiscal 1999, we made $614,193 in equipment purchases. Currently, we
lack capital to make any significant capital expenditures. However, during
2000, we expect to apply substantially all of our available capital, if
any, to (1) the purchase of Quick-Cell wireless Internet equipment and the
construction of local Quick-Cell wireless Internet access systems and/or
(2) the acquisition of one or more businesses that compliment our core
business. We continue our aggressive pursuit of capital with which to
implement our growth strategy.
Year 2000 Issues
We experienced no problems related to Year 2000 issues. During our efforts
to become completely Year 2000 compliant, we incurred expenses of
approximately $75,000.
CERTAIN STATEMENTS CONTAINED IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 AND ARE, THUS, PROSPECTIVE. THESE FORWARD-LOOKING STATEMENTS
ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE MOST SIGNIFICANT OF SUCH
RISKS, UNCERTAINTIES AND OTHER FACTORS IS OUR ABILITY TO OBTAIN CAPITAL IN
AMOUNTS NECESSARY FOR US TO ACCOMPLISH OUR PLAN FOR THE EXPLOITATION OF OUR
QUICK-CELL WIRELESS INTERNET ACCESS PRODUCTS, AS WELL AS CONSUMER
ACCEPTANCE OF THESE PRODUCTS.
Item 7. Financial Statements
The financial statements required to be furnished under this Item 7 are
attached at the end of this Annual Report on Form 10-KSB. An index to our
financial statements is also included below in Item 13(a).
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure
On January 11, 2000, we dismissed Weaver and Tidwell, L.L.P. as our
independent auditor. At the time of the dismissal, there was no
disagreement with respect to any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
On January 24, 2000, we engaged Postlethwaite & Netterville as our new
independent auditor, which firm audited our financial statements for the
year ended December 31, 1999. The audit committee of our board of
directors recommended this change in auditors and the full board approved
the change.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors and Executive Officers
The following table sets forth the officers and directors of USURF America.
Name Age Position(s)
David M. Loflin(1) 42 President and Director
Waddell D. Loflin (1) 50 Vice President, Secretary and Director
Christopher L. Wiebelt 41 Vice President - Finance and
Chief Financial Officer
James Kaufman 36 Vice President - Corporate Development
Darrell D. Davis 36 Vice President - U.S. Internet Operations
Richard N. Gill 42 Director
Ross S. Bravata 41 Director
Michael Cohn 42 Director
_____________
(1) David M. Loflin and Waddell D. Loflin are brothers.
Our current officers and directors serve until the next annual meeting of
our board of directors or until their respective successors are elected and
qualified. All officers serve at the discretion of our board of directors.
Family relationships between our officers and directors are noted above.
Certain information regarding the backgrounds of each of the officers and
directors is set forth below.
David M. Loflin, President and Director, has, for more than the past five
years, owned and operated Gulf Atlantic Communications, Inc., a Baton
Rouge, Louisiana-based wireless technology firm specializing in development
of wireless cable systems and broadcast television stations. Gulf Atlantic
has designed, constructed and operated two wireless cable systems: (1)
Baton Rouge, Louisiana, and (2) Selma, Alabama. Mr. Loflin developed and
currently operates one television station, WTVK-TV11, Inc. (a Warner
Brothers Network affiliate), Channel 11 in Baton Rouge, Louisiana. For
over ten years, Mr. Loflin has served as a consultant for Wireless One, one
of the largest wireless communications firms in the United States. Mr.
Loflin is a member of the Wireless Cable Association International and the
Community Broadcasters Association.
Waddell D. Loflin, Vice President, Secretary and Director, has, for more
than the past five years, served as Vice President of Operations and
Treasurer of Gulf Atlantic Communications, Inc. and WTVK-TV11, Inc., both
in Baton Rouge, Louisiana. In addition, Mr. Loflin serves as Production
Manager and Film Director for WTVK-TV11, Inc. Mr. Loflin served as General
Manager for Baton Rouge Television Company, Baton Rouge, Louisiana, a
wireless cable system, where he directed the development and launch of such
wireless cable system. Also, Mr. Loflin has devoted over five years to
demographic research relating to the wireless cable industry. Mr. Loflin
is a member of the Wireless Cable Association International and the
Community Broadcasters Association. Mr. Loflin holds a B.A. degree in
Social Sciences from Oglethorpe University, Atlanta, Georgia.
Christopher L. Wiebelt, Vice President - Finance and Chief Financial
Officer, served as Vice President of Finance for Dynatech Corp. from 1994
through September 1997, and as President of a subsidiary of Dynatech Corp.
from March 1996 through September 1997. From September 1997 to March 1999,
Mr. Wiebelt served as President and Chief Financial Officer of Specialty
Lighting, Inc., a Baton Rouge, Louisiana-based private manufacturing firm.
>From March 1999 to September 1999, Mr. Wiebelt conducted a private
accounting practice in Baton Rouge. Since September 1999, Mr. Wiebelt has
worked for USURF America, and, in February 2000, he became its Vice
President - Corporate Finance and Chief Financial Officer.
James Kaufman, Vice President - Corporate Development, received a B.S.
degree in Journalism from the University of Colorado, Boulder, Colorado.
>From 1994 to 1995, Mr. Kaufman was a registered representative with D.E.
Fry, a Denver, Colorado-based broker-dealer. From 1995 to 1996, Mr.
Kaufman was a registered representative with A.G. Edwards, a St. Louis,
Missouri-based broker-dealer. From 1997 to February 1999, Mr. Kaufman
served as Director of Corporate Development for B. Edward Haun & Company, a
Denver, Colorado-based investment banking and research firm.
Darrell D. Davis, Vice President - U.S. Internet Operations, owned and
operated Santa Fe Trail Internet Plus, Inc., a Santa Fe, New Mexico-based
ISP, from 1996 to June 1999, when Santa Fe Trail was acquired by USURF
America. From 1994 to 1996, Mr. Davis was employed by Galaxy Computer
Services, Santa Fe, New Mexico. In 1995, Mr. Davis declared Chapter 7
bankruptcy.
Richard N. Gill, Director, has, for more than the past five years, served
as Chairman of the Board, President and General Manager of Campti-Pleasant
Hill Telephone Company, Inc., a Pleasant Hill, Louisiana-based independent
telecommunications company involved in the cellular telephone service
industry, the wireless cable industry and the Internet service provider
industry. Mr. Gill currently serves on the Board of Directors of Artcrete,
Inc., and is on the Advisory Board of Peoples State Bank, Pleasant Hill,
Louisiana. Mr. Gill currently serves as a member of the Industry
Telecommunication Advisory Committee for the Electrical Engineering
Department at the University of Southwestern Louisiana, Lafayette,
Louisiana. Mr. Gill is a past-Chairman and current member of the Louisiana
Telephone Association. Mr. Gill is also a member of the United States
Telephone Association and the National Telephone Cooperative Association.
Ross S. Bravata, Director, has, since 1981, worked for Novartis (formerly
Ciba Corporation), in various positions, and currently serves as a Senior
Control Systems Technician. In such capacity, Mr. Bravata supervises the
service and maintenance of electronic instrumentation. Since 1988, Mr.
Bravata has served as a director and principal financial officer of CG
Federal Credit Union, Baton Rouge, Louisiana. Also, Mr. Bravata has, since
its inception in 1994, served as a director of Trinity's Restaurant, Inc.,
in Baton Rouge, Louisiana.
Michael Cohn, Director, has, for over 20 years, owned and operated Arrow
Pest Control, Inc., Baton Rouge, Louisiana. In addition, Mr. Cohn owns
Arrow Pest Control of New Orleans, Wilson and Sons Exterminating in Mobile,
Alabama, and Premier Termite and Pest Control in Florida.
Executive Committee
Our board of directors created an Executive Committee to facilitate
management between meetings of the full board of directors. David M.
Loflin, Waddell D. Loflin and Ross S. Bravata comprise the Executive
Committee.
Our bylaws provide that the Executive Committee has the authority to
exercise all powers of the board of directors, except the power:
- Declare dividends;
- Sell or otherwise dispose of all or substantially all of our assets;
- Recommend to our shareholders any action requiring their approval; and
- Change the membership of any committee, fill the vacancies thereon
or discharge any committee.
The Executive Committee, in general, acts on all matters requiring approval
of our board of directors.
Audit Committee
In September 1999, our board of directors created an Audit Committee,
consisting of three members, the majority of whom must be outside
directors. The initial members of the Audit Committee are David M. Loflin,
Michael Cohn and Richard N. Gill. The Audit Committee has the
responsibility to review internal controls, accounting policies and
financial reporting practices, to review the financial statements, the
arrangements for, and scope of, the independent audit as well as the
results of the audit arrangement and to review the services and fees of the
independent auditors, their independence and recommend to the board of
directors for its approval and for the ratification by our shareholders the
engagement of the independent auditors to serve the following year in
examining our accounts. The Audit Committee has held one meeting, wherein
it recommended the recent change in our independent auditor.
Compensation of Directors
In March 1998, four of our directors, Waddell Loflin, Ross S. Bravata,
Richard N. Gill and Michael Cohn, were issued 20,000 shares each of our
common stock as a bonus for their services as directors. These shares were
valued at $.80 per share by the board of directors; however, for financial
reporting purposes, these shares were valued at $.56 per share, the last
closing bid price for our common stock prior to issuance.
No other compensation has been paid to any of our directors for their
services as directors. It is possible that our management could begin to
pay our directors for meetings attended or grant a small number of stock
options for their services. However, no specific determination in this
regard has been made.
Employment Contracts and Termination of Employment and
Change-in-Control Agreements
>From inception through 1997, our president, David M. Loflin, and one of our
vice presidents, Waddell D. Loflin, served without compensation. During
1999, these officers received salaries of $62,500 [$27,083 of this amount
has been accrued] and $46,667 [$10,417 of this amount has been accrued],
respectively.
In June 1999, each of Messrs. Loflin entered into an employment agreement.
Since July 1999, Messers. Loflin have accrued a portion of their salaries
($150,000 and $100,000 per year, respectively), and a portion of their
salaries will be continue to be accrued until such time as we are able to
pay their accrued salaries without adversely affecting our financial
condition.
Our vice president of finance and chief financial officer, Christopher L.
Wiebelt, entered into an employment agreement.
Our vice president for corporate development, James Kaufman, and our vice
president of U.S. Internet operations, Darrell Davis, have entered into
employment agreements. During 1999, Mr. Kaufman receive salary of $103,333
[$20,667 of this amount has been accrued].
We have no compensatory plan or arrangement that results or will result
from the resignation, retirement or any other termination of an executive
officer's employment or from a change in control or a change in an
executive officer's responsibilities following a change-in-control.
Option/SAR Grants in Last Fiscal Year
We have never granted any stock appreciation rights (SARs), nor do we
expect to grant any SARs in the foreseeable future.
Indemnification of Directors and Officers
Article X of the Articles of Incorporation of USURF America provides that
no director or officer shall be personally liable to USURF America or its
shareholders for damages for breach of fiduciary duty as a director
officer; provided, however, that such provision shall not eliminate or
limit the liability of a director or officer for (1) acts or omissions
which involve intentional misconduct, fraud or a knowing violation of law
or (2) the payment of dividends in violation of law. Any repeal or
modification of Article X shall be prospective only and shall not adversely
affect any right or protection of a director or officer of USURF America
existing at the time of such repeal or modification for any breach covered
by Article X which occurred prior to any such repeal or modification. The
effect of Article X is that directors and officers will experience no
monetary loss for damages arising out of actions taken (or not taken) in
such capacities, except for damages arising out of intentional misconduct,
fraud or a knowing violation of law, or the payment of dividends in
violation of law.
As permitted by Nevada law, our bylaws provide that we will indemnify our
directors and officers against expense and liabilities they incur to
defend, settle or satisfy any civil, including any action alleging
negligence, or criminal action brought against them on account of their
being or having been directors or officers unless, in any such action, they
are judged to have acted with gross negligence or willful misconduct.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers or control
persons pursuant to the foregoing provisions, we have been informed that,
in the opinion of the SEC, such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
Compliance with Section 16(a) of the Securities Exchange Act
We became subject to the provisions of Sections 16(a) of the Securities
Exchange Act of 1934 on October 14, 1999. Section 16(a) requires
directors, executive officers and persons who own more than 10% of our
outstanding common stock to file with the SEC an Initial Statement of
Beneficial Ownership of Securities (Form 3) and Statements of Changes of
Beneficial Ownership of Securities (Form 4). Directors, executive officers
and greater-than-10% shareholders are required by SEC regulation to furnish
copies to us of all Section 16(a) forms they file.
Based on a review of copies of these reports furnished to us, we believe
that all of our directors, executive directors and greater-than-10%
beneficial owners filed their respective Form 3 reports; all of the Form 3
reports were filed late. However, the Form 3 report of Darrell Davis, one
of our officers, has not yet been filed. Form 5 reports for 1999 for all
officers and directors are due and have not yet been filed. Form 4 reports
for certain of our officers and directors are due and have not yet been
filed. We have requested that all of these persons file the required reports.
Based on a review of the copies of these reports furnished to us, it
appears that Julius W. Basham, II, a former officer, director and
10%-owner, is current in his filings of required Forms 4 and Form 5.
Item 10. Executive Compensation
Executive Compensation
The following table sets forth in summary form the compensation received
during each of the last three completed fiscal years by our Chief Executive
Officer and each executive officer who received total salary and bonus
exceeding $100,000 during any of the last three fiscal years.
Long-
term
Compen-
sation
Other Awards All
Annual of other
Name and Compen- Stock Compen-
Principal Salary Bonus sation Options sation
Position Year $ $ $ # $
- --------- ---- ------ ----- ------- ------- -------
David M. Loflin 1999 $62,500(1) $-0- $-0- 0 $-0-
President [Prin- 1998 $55,000 $-0- $-0- 0 $-0-
cipal Executive 1997 $-0- $-0- $-0- 0 $-0-
Officer]
Waddell D. Loflin 1999 $41,667(2) $-0- $-0- 0 $-0-
[Vice President 1998 $48,000 $-0- $-0- 0 $-0-
and Secretary] 1997 $-0- $-0- $-0- 0 $-0-
James Kaufman 1999 $103,333(3) $-0- $-0- 0 $-0-
[Vice President, 1998 $-0- $-0- $-0- 0 $-0-
Corporate Devel- 1997 $-0- $-0- $-0- 0 $-0-
opment]
Julius W.
Basham II 1999 $133,762 $-0- $-0- 0 $-0-
[Former Chief 1998 $-0- $-0- $-0- 0 $-0-
Operating 1997 $-0- $-0- $-0- 0 $-0-
Officer]
___________
(1) $27,083 of this amount has been accrued.
(2) $10,417 of this amount has been accrued.
(3) $20,667 of this amount has been accrued; $82,666 of this amount is
payable in shares of our stock.
Employment Contracts and Termination of Employment and
Change-in-Control Agreements
Each of our officers have entered into employment agreement, as well as
confidentiality agreements and agreements not to compete.
Name of Officer Position(s) Term Salary Date
- --------------- ----------- ---- ------ ----
David M. Loflin President 7 years $150,000(1) 6/1/99
Waddell D. Loflin Vice President 7 years $100,000(2) 6/1/99
and Secretary
Christopher L.
Wiebelt Vice President, 3 years $75,000 2/15/00
Finance and
Chief Financial
Officer
James Kaufman Vice President, 1 year $120,000(3) 3/22/99
Corporate (renew-
Development able)
Darrell Davis Vice President, 3 years $84,000 10/4/99
U.S. Internet
Operations
____________
(1) Mr. Loflin has agreed to defer payment of a portion of his salary until
we are able to pay it. As at December 31, 1999, we owed Mr. Loflin
deferred salary in the amount of $27,083.
(2) Mr. Loflin has agreed to defer payment of a portion of his salary until
we are able to pay it. As at December 31, 1999, we owed Mr. Loflin
deferred salary in the amount of $10,417.
(3) Mr. Kaufman has agreed to defer payment of a portion of his salary
until we are able to pay it. As at December 31, 1999, we owed Mr. Kaufman
deferred salary in the amount of $20,667; $82,666 is payable in shares of
our stock.
In January 1999, we entered into an employment agreement with Julius W.
Basham, II, currently a director and our former chief operating officer.
Pursuant to the terms of a settlement agreement, Mr. Basham resigned as
chief operating officer on January 4, 2000.
Option/SAR Grants in Last Fiscal Year
We did not grant any options to any person during the fiscal year ended
December 31, 1999. We have never granted any stock appreciation rights
(SARs), nor do we expect to grant any SARs in the foreseeable future.
Item 11. Security Ownership of Certain Beneficial Owners and Management
There are 13,120,845 shares of our common stock issued and outstanding.
The following table sets forth certain information regarding the current
beneficial ownership of our common stock, by (1) persons known to be
beneficial owners of more than 5% of our common stock, (2) each our
officers and directors and (3) our officers and directors, as a group.
Unless otherwise noted, the address of the listed persons is 8748 Quarters
Lake Road, Baton Rouge, Louisiana 70809.
Name and Shares
Address of Owned Percent
Beneficial Owner Beneficially Owned(1)
- ---------------- ------------ --------
David M. Loflin(2) 3,500,903 25.73%
Waddell D. Loflin(2) 120,000 *
Julius W. Basham, II(2) 909,000 6.68%
6176 Laurelwood Drive
Reno, Nevada 89509
James Kaufman 452,500 3.32%
665 W. Velarde Drive
Thousand Oaks, California 91360
Christopher L. Wiebelt 7,500 *
Darrell Davis 70,000 *
Richard N. Gill 20,000 *
Ross S. Bravata 32,000 *
Michael Cohn 213,000(3) 1.56%
All officers and directors
as a group (8 persons) 4,080,903 29.99%
_______________
* Less than 1%.
(1) Based on 13,606,322 shares outstanding, assuming the issuance of all
485,477 shares underlying currently exercisable warrants.
(2) All of the shares owned by this shareholder are subject to a voting
agreement and must be voted for David M. Loflin and Waddell D. Loflin in
all elections of directors.
(3) 80,000 of these shares have not been issued, but underlie currently
exercisable warrants.
Item 12. Certain Relationships and Related Transactions
Founders
In November 1996, David M. Loflin purchased 1,600,000 shares of our common
stock for $1,600 and Waddell D. Loflin, purchased 200,000 shares of our
common stock for $200.
Loans by Officers
Since our inception, we have received loans and advances on open account
from David M. Loflin in the total amount of approximately $560,000. These
loans and advances bear interest at eight percent per annum and are payable
on demand. To date, $40,000 of these loans have been repaid to Mr. Loflin.
Mr. Loflin has advised us that he does not intend to demand further payment
of any of these loans and advances until such time as repayment would not
adversely affect our financial condition.
Subscription Agreements
Effective December 20, 1996, we entered into a subscription agreement with
David M. Loflin, whereby we issued 1,578,512 shares of our common stock to
Mr. Loflin in exchange for assignments of licenses and leases of licenses
of television channels and wireless cable television channels and options
to acquire these assets, as follows: Monroe/Rayville, Louisiana (channel
26), Natchitoches, Louisiana (channel 38), Port Angeles, Washington
(channels H1-2-3), Astoria, Oregon (channels H2-3), Sand Point, Utah
(channels B1-2-3; C1-2-3), The Dalles, Oregon (channels B1-2-3; C1-2-3),
and Fallon, Nevada (channels E1-2-3-4; H3)
These assets were valued at $1,826,873, which was determined pursuant to a
market report and appraisal prepared by Broadcast Services International,
Inc., Sacramento, California. A more complete description of this
appraisal appears below, under the heading "Appraisal". Mr. Loflin's total
acquisition costs of these assets are unknown. Accordingly, our financial
statements attribute no value to these assets.
Effective December 20, 1996, we entered into a subscription agreement with
Waddell D. Loflin, whereby we issued 104,249 shares of our common stock to
Mr. Loflin in exchange for an assignment of the license of television
channel 36 in Bainbridge, Georgia.
These assets were valued at $120,652, which was determined pursuant to the
appraisal described above. Mr. Loflin's acquisition costs of these assets
are unknown. Accordingly, our financial statements attribute no value to
these assets.
Reorganizations
Effective December 31, 1996, we entered into an agreement and plan of
reorganization, whereby we purchased television station K13VE Channel 13 in
Baton Rouge, Louisiana. In this transaction, David M. Loflin received
227,336 shares of our common stock for his ownership in this television
station. The television station was valued at $263,106, which was
determined pursuant to the appraisal described above. Mr. Loflin's
acquisition costs relating to the rights to K13VE Channel 13 were $6,750.
An additional $10,587 in costs was capitalized.
Effective December 31, 1996, we entered into an agreement and plan of
reorganization, whereby we purchased licenses and leases of licenses of
wireless cable television channels in Poplar Bluff, Missouri, and Lebanon,
Missouri. In this transaction, David M. Loflin received 1,179,389 shares
of our common stock valued at $1,364,553; Ross S. Bravata, one of our
directors, received 42,887 shares of our common stock valued at $49,620;
and Michael Cohn, one of our directors, received 53,608 shares of our
common stock valued at $62,024. The values assigned to the assets acquired
from Messrs. Loflin, Bravata and Cohn were determined pursuant to the
appraisal described above. The acquisition cost of these assets was
$179,611, which is reflected in our financial statements. At the time of
this transaction, Messrs. Bravata and Cohn were not directors.
Securities Purchases
In March 1997, Michael Cohn purchased 20,000 shares of our common stock for
$50,000 in cash. At the time of this transaction, Mr. Cohn was not a director.
In January 1999, Mr. Cohn purchased 30,000 units of our securities in a
private offering, at a purchase of $4.50 per unit, or $135,000 in the
aggregate. Each unit purchased by Mr. Cohn consisted of one share of our
common stock and one common stock purchase warrant to purchase one share of
our common stock at an exercise price of $7.00 per share. Mr. Cohn
purchased units on the same terms and conditions as were offered to
unaffiliated persons.
In November 1999, Mr. Cohn purchased 50,000 units of our securities in a
private offering, at a purchase of $3.00 per unit, or $150,000 in the
aggregate. Each unit purchased by Mr. Cohn consisted of one share of our
common stock and one common stock purchase warrant to purchase one share of
our common stock at an exercise price of $7.00 per share. Mr. Cohn
purchased units on the same terms and conditions as were offered to
unaffiliated investors.
Stock Bonus
In March 1998, four of our directors, Waddell Loflin, Ross S. Bravata,
Richard N. Gill and Michael Cohn, were issued 20,000 shares each of our
common stock as a bonus for their services as directors. These shares were
valued by the board of directors at $.80 per share. However, for financial
reporting purposes, these shares were valued at $.56 per share, the last
closing bid price for our common stock prior to issuance.
Employment Agreements
Each of our officers have entered into employment agreement, as well as
confidentiality agreements and agreements not to compete.
Name of Officer Position(s) Term Salary Date
- --------------- ----------- ---- ------ ----
David M. Loflin President 7 years $150,000(1) 6/1/99
Waddell D. Loflin Vice President 7 years $100,000(2) 6/1/99
and Secretary
Christopher L.
Wiebelt Vice President, 3 years $75,000 2/15/00
Finance and
Chief Financial
Officer
James Kaufman Vice President, 1 year $120,000(3) 3/22/99
Corporate (renew-
Development able)
Darrell Davis Vice President, 3 years $84,000 10/4/99
U.S. Internet
Operations
____________
(1) Mr. Loflin has agreed to defer payment of a portion of his salary until
we are able to pay it. As at December 31, 1999, we owed Mr. Loflin
deferred salary in the amount of $27,083.
(2) Mr. Loflin has agreed to defer payment of a portion of his salary until
we are able to pay it. As at December 31, 1999, we owed Mr. Loflin
deferred salary in the amount of $10,417.
(3) Mr. Kaufman has agreed to defer payment of a portion of his salary
until we are able to pay it. As at December 31, 1999, we owed Mr. Kaufman
deferred salary in the amount of $20,667; $82,666 is payable in shares of
our stock.
In January 1999, we entered into an employment agreement with Julius W.
Basham, II, currently a director and our former chief operating officer.
Pursuant to the terms of a settlement agreement, Mr. Basham resigned as
chief operating officer on January 4, 2000. During 1999, Mr. Basham
received total cash compensation of $133,762.
Voting Agreement
On January 29, 1999, David W. Loflin, Waddell D. Loflin, Julius W. Basham,
David W. Brown and Wm. Kim Stimpson entered into a voting agreement,
whereby all of these persons are required to vote all shares owned by them
for David M. Loflin and Waddell D. Loflin in all elections of directors of
USURF America. Currently, approximately 4,529,903 shares are subject to
this voting agreement.
Settlement Agreement
On November 30, 1999, we entered into a settlement agreement and mutual
release, which settled certain legal proceedings in which USURF America and
CyberHighway, had been involved. The parties to the settlement agreement
were: USURF America, CyberHighway, Julius W. Basham, II, William Kim
Stimpson and David W. Brown.
Under the settlement agreement, the following legal proceedings have been
settled in full: (1) David W. Brown, Plaintiff v. USURF America, Inc. and
Cyberhighway, Inc., Defendants, in the District Court of the Fourth
Judicial District of the State of Idaho, in and for the County of Ada,
Civil Case No. CV OC 9904230D; (2) Julius W. Basham, II, Individual
Plaintiff, David W. Brown, William Kim Stimpson, Individuals, Involuntary
Party Plaintiffs v. USURF America, Inc., formerly known as Internet Media,
Inc., in the District Court of the Fourth Judicial District of the State of
Idaho, in and for the County of Ada, Civil Case No. CVOC 9904382D; and (3)
David W. Brown, Claimant v. Cyberhighway, Inc., Respondent, Industrial
Commission, State of Idaho, IDOL 3362-1999.
Other material terms of the settlement agreement include
- each and every of the claims made in the legal proceedings
described above by Basham, Stimpson and Brown were dismissed with prejudice
and any other potential claims of Basham, Stimpson and Brown against USURF
America and/or CyberHIghway released;
- USURF America and CyberHighway released any and all claims against
Basham, Stimpson and Brown;
- Basham, Stimpson and Brown each reaffirmed their existing
agreements not to compete, with the exception that Brown is now able to
seek any employment opportunity, except that Brown remains prohibited from
working for any person or entity engaged in the 2.4 GHz wireless Internet
access industry;
- Basham, Stimpson and Brown each reaffirmed their existing
confidentiality agreements in their entirety;
- USURF America delivered a total of 340,000 shares of common stock,
as follows: 215,000 shares to Basham; 34,000 shares to Stimpson; and 91,000
shares to Brown;
- Basham resigned as chief operating officer of USURF America;
- USURF America shall, as reimbursement for attorneys fees incurred
by Basham, Stimpson and Brown, pay the total sum of $43,325, in 10 equal
installments payable every other week, to the law firm of Givens Pursley,
Boise, Idaho;
- each of Basham, Stimpson and Brown acknowledged that the voting
agreement among Basham, Stimpson, Brown, David M. Loflin and Waddell D.
Loflin remained in full force and effect; and
- nothing contained in the settlement agreement is construed as an
admission of liability by any party to the settlement agreement.
For a discussion on the financial impact of the settlement agreement,
please see "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
The board of directors determined that entering into the settlement
agreement was in the best interest of USURF America.
H + N Partners
During 1998, we issued a total of 187,000 shares of our common stock to H +
N Partners, a fictitious name division of B. Edward Haun & Company, a
Denver, Colorado-based investment banking and research firm in which James
Kaufman, our Vice President - Corporate Development, was a partner. Mr.
Kaufman received a portion of the shares issued to H + N Partners. 37,000
of the shares were valued at $2.00 per share and 150,000 of the shares were
valued at $2.50 per share. All of the shares issued to H+N Partners were
the subject of effective registration statements filed with the SEC. Mr.
Kaufman was not an officer at the time of the stock issuances to H + N
Partners.
Also during 1998, in connection with a private offering of our securities,
we issued to H + N Partners 56,667 warrants to purchase a like number of
shares of our common stock at an exercise price of $1.25 per share and
56,667 warrants to purchase a like number of shares of our common stock at
an exercise price of $1.50 per share. H+N Partners is a selling
shareholder under this prospectus as to all of the shares underlying these
warrants. Mr. Kaufman was not an officer at the time of the warrant
issuances to H + N Partners.
Appraisal
Background.
The appraisal referred to above was prepared by Broadcast Services
International, Inc., a Sacramento, California-based communications
appraisal firm. The report of Broadcast Services was based on 1990 Census
Data. With respect to the wireless cable markets, the engineering studies
relied upon by Broadcast Services indicate the number of households within
the broadcast radius using the 1200 MHZ frequency. The 1200 MHZ frequency
was assumed, due to Broadcast Service's experience that, given all of the
variables that may be present in a market-by-market system build-out, the
actual benchmark performance is more truly reflected by using the higher
(1200 MHZ) frequency, such that the signal attenuation is not over-stated.
Valuation formulas for the wireless cable markets were based on initial
public offerings within the wireless cable industry during the past three
years. The formulas used in evaluation of the broadcast channels were
based on recent sales and market evaluation techniques employed by the
Community Broadcasters Association, among others.
Use of Appraisal.
At our inception, the board of directors adopted a plan that provided that
our initial capitalization be 6,000,000 shares. 1,800,000 of these shares
were sold as founders' stock and 360,000 shares were sold to a public
company for distribution as a dividend. The balance of these shares,
3,840,000 shares, were to be utilized to acquire assets, which were
acquired pursuant to the subscription agreements and the reorganization
agreements described above. The board of directors utilized the appraisal
as a means to allocate the 3,840,000 shares among the assets acquired, as
follows:
Appraised Value Shares of Common Historical Cost
Transaction of Assets Acquired Stock Issued of Assets
- ----------- ------------------ ---------------- ---------------
Subscription
Agreement
with David M.
Loflin $1,826,873 1,578,512 Unknown
Subscription
Agreement
with Waddell D.
Loflin 120,652 104,249 Unknown
First
Reorganization 263,106 227,336 $ 17,337
Second
Reorganization 2,233,555 1,929,903 $179,611
Total $4,444,186 3,840,000 $196,948
The apparent $1.157 per share value was determined by dividing the
3,840,000 shares of our common stock allocated by the board of directors
for asset acquisition into the $4,444,186 total appraised value of the
assets acquired. The board of directors utilized this apparent per share
value for corporate purposes, that is, the determination of consideration
received for the issuance of shares of our common stock. However, the
independent appraiser did not value the shares of our common stock issued
in consideration of the assets acquired. Rather, the independent appraiser
valued only the assets acquired by us in the various transactions. The
$1.157 per share figure was utilized by the board of directors primarily as
a means of allocating the 3,840,000 shares among the four asset acquisition
transactions consummated in completing its plan for our initial
capitalization. Thus, the $1.157 figure, while utilized in two ways by the
board of directors, was determined arbitrarily by the board of directors
and is not based on any accounting or other financial criteria.
The appraised value of the assets described above bears no relationship to
the costs of the assets to the affiliates from whom they were acquired.
Item 13. Exhibits and Reports on Form 8-K
(a)(1) Financial Statements
Index to Financial Statements of USURF America
Independent Auditor's Report
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2) Exhibits
Exhibit No. Description
----------- -----------
23.1 Consent of Weaver and Tidwell, L.L.P.,
Independent Auditor
(b) Reports on Form 8-K
During the three months ended December 31, 1999, we filed a Current Report
on Form 8-K, date of event: November 30, 1999, wherein we reported the
execution of a settlement agreement and mutual release with the former
owners of our CyberHighway subsidiary. This Current Report on Form 8-K is
incorporated herein by this reference.
Subsequent to December 31, 1999, on January 24, 2000, we filed a Current
Report on Form 8-K, date of event: January 11, 2000, wherein we reported a
change of our independent auditor. This Current Report on Form 8-K is
incorporated herein by this reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
USURF AMERICA, INC.
By: /s/ David M. Loflin
David M. Loflin
President
In accordance with the Exchange Act, this report has ben signed below by
the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
/s/ David M. Loflin Date: April 13, 2000
David M. Loflin
President (Principal Executive Officer)
and Director
/s/ Waddell D. Loflin Date: April 13, 2000
Waddell D. Loflin
Vice President, Secretary and Director
/s/ Christopher L. Wiebelt Date: April 13, 2000
Christopher L. Wiebelt
Vice President - Corporate Finance and Chief
Financial Officer (Principal Financial Officer)
/s/ James Kaufman Date: April 13, 2000
James Kaufman
Vice President - Corporate Development
/s/ Darrell Davis Date: April 13, 2000
Darrell Davis
Vice President - U.S. Internet Operations
/s/ Ross S. Bravata Date: April 13, 2000
Ross S. Bravata
Director
/s/ Richard N. Gill Date: April 13, 2000
Richard N. Gill
Director
/s/ Michael Cohn Date: April 13, 2000
Michael Cohn
Director
Supplemental Information to be Furnished With Reports Filed Pursuant to
15(d) of the Exchange Act by Non-reporting Issuers.
As of the date of this Annual Report on Form 10-KSB, no annual report or
proxy material has been sent to security holders of USURF America. It is
anticipated that an annual report and proxy material will be furnished to
security holders subsequent to the filing of this Annual Report on Form
10-KSB.
<PAGE>
INDEX TO FINANCIAL STATEMENTS OF USURF AMERICA, INC.
Independent Auditor's Report
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
USURF America, Inc. and Subsidiaries
Baton Rouge, Louisiana
We have audited the accompanying consolidated balance sheet of USURF
America, Inc. (formerly Internet Media Corporation) and Subsidiaries as of
December 31, 1999, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the year then ended.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The consolidated
balance sheet of USURF America, Inc. and Subsidiaries as of December 31,
1998, and the consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years ended December 31, 1998
and 1997, were audited by other auditors whose report dated April 9, 1999,
on those statements included an explanatory paragraph that raised
substantial doubt about the Company's ability to continue as a going concern.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
As described in Note 2 to the financial statements, the revenues and
expenses subsequent to the acquisition of a company acquired using the
purchase method of accounting have not been included in the accompanying
financial statements as required by generally accepted accounting
principles. The effects on the accompanying financial statements have not
been determined.
In our opinion, except for the effects on the 1999 financial statements
discussed in the preceding paragraph, the financial statements referred to
in the first paragraph present fairly, in all material respects, the
financial position of USURF America, Inc. and Subsidiaries as of December
31,1999, and the results of its operations and cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 16 to the
consolidated financial statements, the Company has significant operating
losses. In addition, the Company has excess current liabilities over
current assets of approximately $1,060,000. These conditions raise
substantial doubt about its ability to continue as a going concern.
Management's plans regarding these matters are also described in Note 16.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Postlethwaite and Netterville, APAC
Baton Rouge, Louisiana
April 8, 2000
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Director's and Stockholders
Internet Media Corporation
We have audited the accompanying consolidated balance sheet of USURF
America, Inc., and subsidiaries, (formally Internet Media Corporation and
subsidiaries), as of December 31, 1998, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows
for the years ended December 31, 1998 and 1997. These consolidated
financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of USURF America, Inc. and subsidiaries as of December 31, 1998,
and the consolidated results of their operations and their cash flows for
the years ended December 31, 1998 and 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 16, the Company has limited capital resources and a loss from
operations since inception, all of which raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also discussed in Note 16. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
April 9, 1999
<PAGE>
USURF AMERICA, INC. AND SUBSIDIARIES
BATON ROUGE, LOUISIANA
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
CURRENT ASSETS
Cash and cash equivalents $ 75,313 $ 7,232
Accounts receivable-net 59,098 1,033
Inventory 21,207 -
Prepaid expenses and
other current assets 5,500 -
161,118 8,265
PROPERTY AND EQUIPMENT
Cost 1,501,233 248,679
Less: accumulated depreciation (421,786) (1,412)
1,079,447 247,267
INVESTMENTS 68,029 43,750
OTHER ASSETS
Acquired customer base-net 11,764,650 10,932
Goodwill-net 5,681,992 -
Other intangibles-net 782,580 23,275
Other assets 7,353 170
18,236,575 34,377
TOTAL ASSETS $19,545,169 $ 333,659
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable-current portion $ 5,910 $ -
Accounts payable 363,665 17,493
Accrued payroll 118,157 -
Other current liabilities 216,650 2,159
Accounts payable-affiliate - 10,069
Property dividends payable 43,750 57,519
Accrued interest to stockholder 29,741 15,416
Notes payable to stockholder 356,239 146,415
Deferred revenue 87,538 -
1,221,650 249,071
LONG-TERM LIABILITIES
Deferred income taxes 3,883,210 -
5,104,860 249,071
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value
Authorized: 100,000,000 shares
Issued and outstanding:
12,786,116 in 1999; 8,497,259
in 1998 1,279 850
Additional paid-in capital 28,918,638 2,874,189
Accumulated deficit (12,616,830) (1,686,667)
Subscriptions receivable (860) (860)
Deferred consulting (1,861,918) (1,102,924)
14,440,309 84,588
TOTAL LIABILTIES AND
STOCKHOLDERS' EQUITY $19,545,169 $ 333,659
The accompanying notes are an integral part of these statements.
<PAGE>
USURF AMERICA, INC. AND SUBSIDIARIES
BATON ROUGE, LOUISIANA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
REVENUES
Internet access revenues $2,268,511 $ 5,440 $ -
Equipment sales 278,714 - -
Internet access costs
and cost of goods sold (1,152,721) - -
Gross profit 1,394,504 5,440 -
OPERATING EXPENSES
Depreciation and
amortization 7,653,924 4,394 2,721
Professional fees 1,945,935 813,517 530,669
Rent 132,395 15,823 11,877
Salaries and commissions 1,603,556 154,924 44,733
Advertising 125,034 - -
Other 399,914 45,806 29,385
11,860,758 1,034,464 619,385
LOSS FROM OPERATIONS (10,466,254) (1,029,024) (619,385)
OTHER INCOME (EXPENSE)
Other income 23,875 - 596
Litigation settlement (957,075) - -
Impairment loss (1,164,561) - -
Interest expense (19,309) (8,602) (6,015)
(2,117,070) (8,602) (5,419)
LOSS BEFORE INCOME TAX (12,583,324) (1,037,626) (624,804)
INCOME TAX BENEFIT 1,653,161 - -
NET LOSS $(10,930,163) $(1,037,626) $ (624,804)
Net loss per common share $(0.96) $(0.14) $(0.10)
Weighted average number
of shares outstanding 11,419,641 7,361,275 6,193,678
The accompanying notes are an integral part of these statements.
<PAGE>
USURF AMERICA, INC. AND SUBSIDIARIES
BATON ROUGE, LOUISIANA
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Sub-
scrip-
Accum- tions Deferred
Common Paid-in ulated Receiv- Con-
Shares Stock Capital Deficit vable sulting Total
------ ----- ------- ------- ------- -------- -----
Balance,
Decem-
ber 31,
1996
6,000,000 $ 600 $ 198,508 $ (24,237) $ (2,160) $ - $
172,711
Issuance of
common stock
for future
services
404,000 40 749,960 - - (750,000)
-
Payment
on sub-
scription
receivable
- - - - 1,300 -
1,300
Issuance of
common
stock for
cash
20,000 2 49,998 - - -
50,000
Recognition
of services
performed
for stock
- - - - - 438,111
438,111
Net loss
- - - (624,804) - -
(624,804)
Balance,
December
31, 1997
6,424,000 642 998,466 (649,041) (860) (311,889)
37,318
Issuance of
common
stock for
future
services
1,655,759 166 1,556,734 - - (1,556,900)
-
Issuance of
common
stock for
cash
400,000 40 332,760 - - -
332,800
Issuance of
common
stock for
investments
17,500 2 43,748 - - -
43,750
Declared
dividends
- - (57,519) - - -
(57,519)
Amortization
of deferred
consulting
- - - - - 765,865
765,865
Net loss
- - - (1,037,626) - -
(1,037,626)
Balance,
December
31, 1998
8,497,259 850 2,874,189 (1,686,667) (860) (1,102,924)
84,588
Issuance of
common
stock for
future
services
566,000 57 2,215,943 - - (2,216,000)
-
Issuance of
common
stock for
acqui-
sitions
3,030,000 303 21,586,726 - - -
21,587,029
Issuance of
common
stock for
cash
115,000 11 394,989 - - -
395,000
Exercise of
warrants
176,857 18 337,304 - - -
337,322
Issuance of
subscription
agreement
50,000 5 149,995 - (150,000) -
-
Proceeds
on sub-
scription
receivable
- - - - 150,000 -
150,000
Issuance of
stock per
employment
agreement
11,000 1 43,311 - - -
43,312
Expenses to
be paid by
issuance
of common
stock
- - 257,167 - - -
257,167
Issuance of
common
stock for
settlement
340,000 34 913,716 - - -
913,750
Stock
warrants
- - 145,298 - - -
145,298
Amortization
of deferred
consulting
- - - - - 1,457,006
1,457,006
Net loss
- - - (10,930,163) - -
(10,930,163)
Balance,
December
31, 1999
12,786,116 $1,279 $28,918,638 $(12,616,830) $(860) $(1,861,918)
$14,440,309
The accompanying notes are an integral part of these statements.
<PAGE>
USURF AMERICA, INC. AND SUBSIDIARIES
BATON ROUGE, LOUISIANA
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss $(10,930,163) $(1,037,626) $ (624,804)
Adjustment to
reconcile net loss
to net cash used
in operating
activities
Depreciation and
amortization 7,653,924 4,394 2,721
Consulting fees
recognized 1,457,006 765,865 438,111
Litigation settlement 913,750 - -
Impairment loss 1,164,561 - -
Legal fees 126,500 - -
Compensation expense 319,301 - -
Deferred income taxes (1,653,161) - -
Loss on disposal 280 - -
Changes in operating
assets and liabilities
Accounts receivable 35,537 (809) 85
Inventory 49,518 - -
Prepaid expenses and
other current assets 7,980 - -
Accounts payable (36,857) 1,787 -
Accrued payroll 118,157 (39,310) 71,767
Other current
liabilities 215,929 - -
Other assets and
liabilities (11,555) (300) -
Deferred revenue 23,196 - -
Net cash used in
operating activities (546,097) (305,999) (112,120)
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds on disposal
of fixed assets 15,090 - -
Cash acquired in
acquisitions 186,318 (24,666) -
Payment of organization
costs - 569
Purchases of licenses
and rights to leases
of licenses - - (5,000)
Capital expenditures (614,193) (25,605) (14,964)
Net cash used in
investing activities (412,785) (49,702) (19,964)
CASH FLOWS FROM
FINANCING ACTIVITIES
Payments on notes
payable (65,369) - -
Payments on notes
payable-stockholder (25,000) - -
Payments on subscriptions
receivable 150,000 - 1,300
Proceeds from note
payable-stockholder 235,010 30,133 66,282
Issuance of common
stock for cash 395,000 332,800 50,000
Warrants exercised 337,322 - -
Net cash provided
by financing
activities 1,026,963 362,933 117,582
Net increase (decrease)
in cash and cash
equivalents 68,081 7,232 (14,502)
Cash and cash equivalents,
Beginning of period 7,232 - 14,502
Cash and cash equivalents,
End of period $75,313 $ 7,232 $ -
The accompanying notes are an integral part of these statements.
<PAGE>
USURF AMERICA, INC. AND SUBSIDIARIES
BATON ROUGE, LOUISIANA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
USURF America, Inc. (USURF), formerly Internet Media Corporation, was
incorporated as Media Entertainment, Inc. in the State of Nevada on
November 1, 1996. USURF currently operates as in internet service provider
(ISP), in the inter-mountain west region of the United States, with primary
operations in Boise, Idaho. USURF's original purpose was to operate as a
holding company in the wireless cable television and community (low power)
television industries, as well as other segments of the communications
industry. Until January 1999, the Company was in the development stage.
In 1998 the Company changed its focus to concentrate in the wireless
internet communications industry. The Company later ceased efforts to
develop the wireless cable and low power television business areas and
assigned all of its assets from the low power television activities to New
Wave Media Corp. in exchange for a 15% ownership interest in New Wave Media
Corp.
Effective December 31, 1996, USURF acquired all of the outstanding common
stock of Winter Entertainment, Inc., a Delaware corporation incorporated on
December 28, 1995 (WEI), and Missouri Cable TV Corp., a Louisiana
corporation incorporated on October 9, 1996 (MCTV). WEI operates a
community television station in Baton Rouge, Louisiana; MCTV owns wireless
cable television channels in Poplar Bluff, Missouri, which system has been
constructed and is ready for operation, and Lebanon, Missouri. Effective
October 8, 1998, the Company formed Santa Fe Wireless Internet, Inc. (Santa
Fe), a New Mexico corporation, to hold the assets acquired from Desert Rain
Internet Services. Santa Fe was organized to provide wireless internet
access. The acquisition of WEI and MCTV by USURF was accounted for as a
reorganization of companies under common control. The assets and
liabilities acquired were recorded at historical cost in a manner similar
to a pooling of interests. The acquisition of Santa Fe was accounted for
as a purchase whereby cost is allocated to the assets acquired.
On January 29, 1999, the Company acquired all the stock of CyberHighway,
Inc., a Boise, Idaho-based ISP, by issuing 2,000,000 shares of stock valued
at approximately $15,940,000. In addition, 325,000 shares of common stock
were issued in payment of a finder's fee arising out of this acquisition.
This acquisition fundamentally altered USURF's outlook, providing the
Company with an extensive dial-up customer base, as well as
technologically-advanced operations facilities and immediate access to
customers in internet services markets dominated by CyberHighway-owned or
affiliate service providers. This acquisition was accounted for as a
purchase business combination
In June 1999, USURF acquired all the stock of Santa Fe Trail Internet Plus,
Inc., a Santa Fe, New Mexico-based ISP, by issuing 100,000 shares of stock
valued at approximately $400,000. This acquisition was accounted for as a
purchase business combination. Disclosure of what operations would have
been as if the transaction had occurred at the beginning of the period, and
as of the beginning of the preceding period, are not shown due to the
transaction being immaterial to the financial statements taken as a whole.
In July 1999, USURF acquired all of the stock of Premier Internet Services,
Inc., an Idaho-based ISP, by issuing 127,000 shares of stock valued at
approximately $508,000. This acquisition was accounted for as a purchase
business combination. Disclosure of what operations would have been as if
the transaction had occurred at the beginning of the period, and as of the
beginning of the preceding period, are not shown due to the transaction
being immaterial to the financial statements taken as a whole.
In August 1999, USURF acquired the www.usurf.com domain by issuing 150,000
shares of stock valued at approximately $863,000.
In December 1999, USURF acquired a portion of the ISP-related equipment and
customer base of Cyber Highway of North Georgia, Inc., a Demorest,
Georgia-based ISP. In November 1999, the Company acquired the customer
base of Cyber Mountain, Inc., a Denver, Colorado-based ISP.
Principles of Consolidation
The accompanying consolidated financial statements include all the accounts
of USURF and all wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
A material estimate that is particularly susceptible to significant change
is the amortization of intangibles. In estimating the period over which to
amortize the acquired customer bases, management obtains information from
industry data.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less from the date of purchase to be cash
equivalents.
Inventory
Inventory consists of internet access equipment held for sale and is valued
at the lower of cost or market. Cost is determined using the specific
identification method.
Property and Equipment
Property and equipment are stated at cost and are depreciated principally
by the straight-line method over the estimated useful lives of the assets,
ranging from 3 to 15 years. Included in property and equipment are
wireless modems, most of which are not placed in service at December 31,
1999, and are therefore, not being depreciated.
Revenue Recognition
The Company maintains license agreements with affiliate ISP's to provide
internet access to affiliates' customers. License fees are typically
billed in the month the services are provided. The Company charges direct
customers (residential and business subscribers) monthly access fees to the
internet and recognizes the revenue in the month the access is provided.
For certain subscribers billed in advance, the Company recognizes the
revenue over the period the billing covers. Revenue for other services
provided, including set-up fees charged to customers and affiliates, and
equipment sales are recognized as the service is performed or the equipment
is delivered.
Costs of Access Revenues
Costs of access revenues primarily consist of telecommunications expenses
inherent in the network infrastructure. Costs of access revenues also
include fees paid for lease of the Company's backbone, as well as license
fees for Web browser software based on a per-user charge, other license
fees paid to third-party software vendors, product costs, and contractor
fees for distribution of software to new subscribers.
Income Taxes
Deferred income tax assets and liabilities are computed for differences
between financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the period in which the differences are
expected to affect taxable income. Valuation allowances are established
when realization is less than 50% probable. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Financial Instruments and Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and trade
receivables. The Company maintains its cash in bank deposit accounts,
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not exposed to
any significant credit risk on cash.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers and markets, which comprise the
Company's customer base. The Company generally does not require
collateral, and receivables are generally due within 30 days.
Fair Values of Financial Instruments
The carrying amounts of financial instruments including cash, trade
receivables, accounts payable and accrued expenses approximate fair value
because of the immediate or short-term maturities of these instruments.
The difference between the carrying amount and fair value of the Company's
long-term debt is not significant.
Loss Per Common Share
Basic loss per common share has been computed by dividing the net loss by
the weighted average number of shares of common stock outstanding
throughout the period. Calculation of diluted loss per common share is not
presented because the effects of potential common stock issuable upon
exercise of stock options and contingently issuable shares would be
antidilutive.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets, primarily acquired customer bases,
are stated on the basis of cost and are amortized, principally on a
straight-line basis, over the estimated future periods to be benefited
(generally 3 years). Goodwill and other intangible assets are periodically
reviewed for impairment to ensure they are appropriately valued. Conditions
which may indicate an impairment issue exists include a negative economic
downturn or a change in the assessment of future operations. In the event
that a condition is identified which may indicate an impairment issue
exists, an assessment is performed using a variety of methodologies,
including cash flow analysis, estimates of sales proceeds and independent
appraisals. Where applicable, an appropriate interest rate is utilized,
based on location specific economic factors. See Note 2.
Advertising
The Company expenses advertising costs as incurred. During the year ended
December 31, 1999, the Company incurred approximately $125,000, in
advertising costs.
Investments
Investments include minority interests held in three non-public companies
recorded at cost, which approximates fair value.
2. NET 1, INC. ACQUISITION
On August 23, 1999, the Company acquired Net 1, Inc. (Net 1) in a business
combination accounted for as a purchase. Net 1 is primarily engaged as an
ISP in Alabama. In September, 1999 the Company tendered the shares of
capital stock obtained in the acquisition of Net 1 for rescission of the
transaction (see Note 15). However, legally the Company is still the owner
of the outstanding shares of Net 1 and is required by generally accepted
accounting principles to record Net 1 as a wholly owned subsidiary from the
date of acquisition.
The financial statements of Net 1 were not available to the Company from
September 1, 1999 through December 31, 1999; therefore, the revenues and
expenses of Net 1 are not included in the accompanying statement of
operations for the year ended December 31, 1999. This is considered a
departure from generally accepted accounting principals, of which, the
effects on the Company have not been determined.
The total cost of the acquisition was $1,164,561, which exceeded fair value
of the net assets of Net 1 by $1,164,561. The excess was deemed to be
impaired at December 31, 1999 due to the change in the operating
environment and was recorded in the accompanying financial statements as an
impairment loss.
3. PROPERTY AND EQUIPMENT
Classifications of property and equipment and accumulated depreciation were
as follows at December 31, 1999 and 1998:
1999 1998
Wireless cable equipment $ 188,091 $ 188,091
Equipment 906,047 60,588
Furniture and fixtures 37,487 -
Office equipment 338,531 -
Leasehold improvements 31,077 -
1,501,233 248,679
Accumulated depreciation (421,786) (1,412)
Property and equipment, net $1,079,447 $247,267
4. INTANGIBLES
Classification of intangibles and accumulated amortization at December 31st
were as follows:
1999 1998
Acquired customer base $16,676,433 $ 11,818
Goodwill 8,126,616 -
Other 940,186 27,750
25,743,235 39,568
Accumulated amortization (7,514,013) (5,361)
$18,229,222 $ 34,207
5. WIRELESS CABLE ASSETS
Property and equipment includes wireless cable station equipment, which is
operational but has not been put into use. The equipment is recorded at
cost of approximately $188,000 and is not being depreciated. In addition,
the Company owns licenses in the wireless cable markets, which operate on
the same frequencies and will be used in the wireless internet market.
The Company's ability to provide two-way interactive internet service on
its current channel license agreements depends on pending Federal
Communication Commission (FCC) approval of two-way communication on the
related frequencies. Management believes approval by the FCC is imminent;
however, if such approval is not obtained, future recoverability of the
carrying value may become impaired.
6. LICENSES AND RIGHTS TO LEASES OF LICENSES
The Company owns licenses or rights to leases of licenses in the following
wireless cable and community television markets:
Wireless Cable Market Expiration Date
Poplar Bluff, Missouri October 16, 2006
Lebanon, Missouri October 16, 2006
Port Angeles, Washington December 21, 2003
Astoria, Oregon December 21, 2003
Sand Point, Idaho August 09, 2006
The Dalles, Oregon August 09, 2006
Fallon, Nevada August 09, 2006
Application for renewal of licenses must be filed within a certain period
prior to expiration.
7. NOTE PAYABLE TO STOCKHOLDER
1999 1998
Note payable to stockholder,
interest accrues at 8%,
due on demand and unsecured. $356,239 $146,415
8. NOTE PAYABLE
The note payable of $5,910 at December 31, 1999, consists of a note payable
to a bank with interest at 9.25%, due in monthly payments of $2,887, with
final payment due February 25, 2000, secured by accounts receivable,
inventory and equipment.
9. INCOME TAXES
The significant components of deferred tax assets and liabilities were as
follows at December 31:
1999 1998
Deferred tax liabilities
Amortization of intangibles $3,883,210 $ -
Deferred tax assets
Net operating loss
carryforwards 2,313,159 573,467
Less - valuation allowance (2,313,159) (573,467)
- -
Net deferred tax liability $3,883,210 $ -
The net changes in the valuation allowance for the periods ended December
31, 1999 and 1998 were $1,739,692 and $352,793, respectively.
The deferred tax liability results from the acquisitions of Cyberhighway,
Inc., Santa Fe Trail Internet Plus, Inc., and Premier Internet Services,
Inc. in tax free reorganizations, in which there is no tax basis in the
acquired customer base.
The Company has a net operating loss carry forward of approximately
$6,800,000 available to offset future income for income tax reporting
purposes, which will ultimately expire between 2011 and 2014 if not utilized.
10. SOURCES OF SUPPLIES
The Company relies on local telephone companies and other companies to
provide data communications. Although management believes alternative
telecommunications facilities could be found in a timely manner, any
disruption of these services could have an adverse effect on operating
results.
The Company maintains various vendors for required products, such as
modems, terminal services and high-performance routers, which are important
components of its network. Some of the Company's suppliers have limited
resources and production capacity. If the suppliers are unable to meet the
Company's needs as it is building out its network infrastructure, then
delays and increased costs in the expansion of the Company's network
infrastructure could result, having an adverse effect on operating results.
11. COMMITMENTS
The Company has contracts with various telephone companies and other
companies to provide data communication services. The terms on these
agreements range from month-to-month to five years. Future obligations
under these agreements as of December 31, 1999 are as follows for the years
ending December 31:
2000 $820,000
2001 540,000
2002 330,000
2003 140,000
2004 100,000
12. RELATED PARTY
The Company has issued stock pursuant to various consulting agreements.
Deferred consulting costs, which are valued at the stock price on the date
of the agreements, are recorded as a reduction of shareholder's equity and
will be amortized over the life of the agreements.
In March 1998, four directors of the Company were issued 20,000 shares each
of Company common stock as a bonus for their services as directors.
Compensation expense of approximately $45,000 was recorded based on the
fair value of the common stock on the date of issue.
13. WARRANTS
Warrants outstanding at December 31, 1999 consists of the following:
56,667 issued on May 18, 1999, pursuant to an Investment Banking Agreement,
with an exercise price of $1.25, exercisable for a period of four years
from issuance.
56,667 issued on May 18, 1999, pursuant to an Investment Banking Agreement,
with an exercise price of $1.50, exercisable for a period of four years
from issuance.
34,000 issued on May 18, 1999, pursuant to a Selling Agreement, with an
exercise price of $1.25, exercisable for a period of five years from
issuance, of which 21,857 were exercised during 1999.
60,000 issued on January 20, 1999, pursuant to a private offering, with an
exercise price of $7.00, exercisable for a period of two years from
issuance, redeemable by the Company at any time the bid price of the
Company's common stock has been at or above $8.50 per share for five
consecutive trading days.
35,000 issued on June 4, 1999, pursuant to a private offering, with an
exercise price of $7.00, exercisable for a period of one year from
issuance, redeemable by the Company at any time the bid price of the
Company's common stock has been at or above $10.00 per share for five
consecutive trading days.
60,000 issued on December 1, 1999, pursuant to a Consulting Agreement, with
an exercise price of $3.50, exercisable for a period of five years from
issuance. The Company does apply SFAS No. 123, Accounting for Stock-Based
Compensation, in accounting for the stock warrants issued to non-employees
in connection with the original stock issuance. The Company has recorded
expense of $145,298 pursuant to the issuance of these warrants. The fair
value of the warrants granted to non-employees is estimated on the date of
the grant using the assumption of an expected life of 5 years, and a
risk-free interest rate of 5.0%.
50,000 issued on August 27, 1999, pursuant to a Subscription Agreement,
with an exercise price of $6.00, exercisable for a period of three years
from issuance.
14. SETTLEMENT AGREEMENT
On November 30, l999, the Company entered into a settlement agreement and
mutual release, which settled certain legal proceedings in which USURF and
CyberHighway had been involved. The parties to the settlement agreement
were: USURF, CyberHighway, the former operating officer and a former
director, and two former owner-employees (collectively the plaintiffs) of
CyberHighway.
Pursuant to this settlement agreement, certain legal proceedings were
settled in full by issuance of 340,000 shares of USURF common stock to the
plaintiffs. The Company is paying the total sum of $43,325 for
reimbursement of attorneys' fees paid by the plaintiffs.
The 340,000 shares issued were valued at $2.6875 per share, or $913,750, in
the aggregate. The price per share assigned to the issued shares was the
closing price of the common stock, as reported by the American Stock
Exchange. The total charge against earnings in 1999 resulting from the
settlement agreement was $957,075.
15. COMMITMENTS AND CONTINGENCIES
In September l999, the Company tendered the shares of capital stock
obtained in the acquisition of Net 1, Inc. (See Note 2) for rescission of
the transaction. The Company had intended to commence arbitration to
pursue its rescission claim. However, one of the former owners of Net 1,
has instituted arbitration, through the American Arbitration Association,
and is seeking to enforce certain registration rights associated with a
portion of the shares of the Company's common stock received by him in the
acquisition transaction.
The Company will present the rescission claim as a counterclaim in the
pending arbitration proceeding. The counterclaim will be made against Net
1 and its former owners, wherein the Company will seek to rescind the
acquisition transaction that occurred in August 1999, and recover the
250,000 shares of common stock issued. Although the Company believes it
will be successful in this arbitration proceeding, no prediction in this
regard can be made.
16. GOING CONCERN
These financial statements are presented on the basis that the Company is a
going concern. Going concern contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business over a
reasonable length of time. The accompanying financial statement shows that
current liabilities exceed current assets by approximately $1,060,000 at
December 31, 1999. The Company's president loaned the Company
approximately $210,000 during fiscal 1999 and loaned an additional $165,000
subsequent to year-end. The appropriateness of using the going concern
basis is dependent upon continued funding by the Company's president,
obtaining additional financing or equity capital and, ultimately, to
achieve profitable operations. The uncertainty about these conditions
raises substantial doubt about its ability to continue as a going concern.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Management plans to raise capital by obtaining financing and eventually,
through public offerings. Management intends to use the proceeds from any
borrowings to acquire and develop markets to implement its Wireless
Internet Access System and sell its service. The Company believes that
these actions will enable it to carry out its business plan and ultimately
to achieve profitable operations.
17. SIGNIFICANT BUSINESS COMBINATION
On January 29, 1999, the Company acquired all of the capital stock of
CyberHighway, Inc. (CyberHighway), an Idaho corporation.
The acquisition was effected pursuant to a Plan and Agreement of
Reorganization dated January 20, 1999 between the Company and CyberHighway.
The Company paid the shareholders of CyberHighway approximately
$15,940,000 through the issuance of 2,000,000 shares of common stock. The
purchase price was based upon the weighted average closing price of the
Company's common stock for five days prior and subsequent to the
acquisition date.
The transaction was accounted for as a purchase. The purchase price was
allocated to the underlying assets purchased and liabilities assumed based
on their fair market values at the acquisition date.
The following table summarizes the net assets purchased in connection with
the CyberHighway acquisition and the amount attributable to cost in excess
of net assets acquired:
Net assets acquired $ 372,472
Acquired customer base 15,566,787
Other assets 5,260,690
Deferred tax liability (5,260,690)
The following shows the unaudited proforma condensed balance sheets of the
Company and CyberHighway as if the acquisition occurred on December 31, 1998:
Historical
Cyber- Proforma Proforma
USURF Highway Adjustments
Consolidated
Current assets $ 8,265 $306,018 $ - $
314,283
Property and
equipment, net 247,267 408,558 (72,692)
583,133
Other assets 43,920 13,480 -
57,400
Intangibles 34,207 - 20,827,477
20,861,684
Total assets $ 333,659 $728,056 $20,754,785
$21,816,500
Historical
Cyber- Proforma Proforma
USURF Highway Adjustments
Consolidated
Current liabilities $ 249,071 $ 282,892 $ - $
531,963
Deferred tax liability - - 5,260,690
5,260,690
Stockholders' equity 84,588 445,164 15,494,095
16,023,847
Total liabilities
and stockholders'
equity $ 333,659 $ 728,056 $20,754,785
$21,816,500
The following unaudited proforma condensed statements of operations assumes
the CyberHighway acquisition occurred on January 1, 1998. In the opinion
of management, all adjustments necessary to present fairly such unaudited
pro forma condensed statements of operations have been made.
Historical
Cyber- Proforma Proforma
USURF Highway Adjustments
Consolidated
Revenues $ 5,440 $2,449,156 $ - $
2,454,596
Expenses
Internet access cost - 510,036 -
510,036
Equipment cost - 326,488 -
326,488
Depreciation and
amortization 4,394 138,674 6,918,262
7,061,330
General and
administrative 1,030,070 1,292,526 -
2,322,596
Selling - 110,397 -
110,397
Total operating
expense 1,034,464 2,378,121 6,918,262
10,330,847
Operating income
(loss) (1,029,024) 71,035 (6,918,262)
(7,876,251)
Other income (expense) (8,602) 6,960 -
(1,642)
Income (loss) before
taxes (1,037,626) 77,995 (6,918,262)
(7,877,893)
Income tax benefit - - (1,753,563)
(1,753,563)
Net income (loss) ($1,037,626) $ 77,995 ($5,164,699)
($6,124,330)
Net income (loss)
per share ($0.14) $31.51 ($0.65)
Weighted average
number of
shares
outstanding 7,361,275 2,475
9,361,275
18. SUBSEQUENT EVENTS
On February 1, 2000, the Company through its wholly owned subsidiary,
CyberHighway, Inc., acquired the Spinning Wheel, Inc. for 81,063 shares of
common stock. This acquisition will be accounted for as a purchase
business combination. On February 8, 2000, the Company formed USURF
America Internet Design, Inc., a wholly owned subsidiary. On February 16,
2000, the Company through this subsidiary acquired Internet Innovations,
LLC for 50,000 shares of common stock. These acquisitions will be accounted
for as purchase business combinations. Disclosure of what operations would
have been as if the transaction had occurred at the beginning of the period
are not shown due to the transactions being immaterial to the financial
statements taken as a whole.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITOR
As independent auditos, we hereby consent to the inclusion in this Annual
Report on Form 10-KSB of our report dated April 9, 1999, relating to the
consolidated financial statements of USURF America, Inc. and subsidiaries
(formerly Internet Media Corporation) as of December 31, 1998 and the
related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years ended December 31, 1998 and 1997.
/s/
WEAVER AND TIDWELL, L.L.P.
Fort Worth, Texas
April 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 75,313 7,232
<SECURITIES> 0 0
<RECEIVABLES> 59,098 1,033
<ALLOWANCES> 0 0
<INVENTORY> 21,207 0
<CURRENT-ASSETS> 161,118 8,265
<PP&E> 1,501,233 248,679
<DEPRECIATION> (421,786) (1,412)
<TOTAL-ASSETS> 19,545,169 333,659
<CURRENT-LIABILITIES> 1,221,650 249,071
<BONDS> 0 0
0 0
0 0
<COMMON> 1,279 850
<OTHER-SE> 14,439,030 83,738
<TOTAL-LIABILITY-AND-EQUITY> 19,545,169 333,659
<SALES> 2,547,225 5,440
<TOTAL-REVENUES> 2,547,225 5,440
<CGS> 1,152,721 0
<TOTAL-COSTS> 11,860,758 1,035,464
<OTHER-EXPENSES> 2,097,761 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 19,309 8,603
<INCOME-PRETAX> (12,583,324) (1,037,626)
<INCOME-TAX> 1,653,161 0
<INCOME-CONTINUING> (10,930,163) (1,037,626)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,930,163) (1,037,626)
<EPS-BASIC> (0.96) (0.14)
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