<PAGE>
As filed with the Securities and Exchange Commission on December 3, 1999
Registration Statement No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
CYPRESS COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
----------------
<TABLE>
<CAPTION>
Delaware 4813 58-2330270
<S> <C> <C>
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
ofIncorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
----------------
Fifteen Piedmont Center, Suite 710
Atlanta, Georgia 30305
(404) 869-2500
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
----------------
R. Stanley Allen
Chief Executive Officer
Cypress Communications, Inc.
Fifteen Piedmont Center, Suite 710
Atlanta, Georgia 30305
(404) 869-2500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<CAPTION>
Gilbert G. Menna, P.C. John D. Watson, Jr., Esq.
<S> <C>
Goodwin, Procter & Hoar LLP Latham & Watkins
Exchange Place 1001 Pennsylvania Ave., N.W., Suite 1300
Boston, Massachusetts 02109-2881 Washington, D.C. 20004-2505
(617) 570-1000 (202) 637-2200
</TABLE>
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
<CAPTION>
Title of Each Class of Proposed Maximum Aggregate
Securities to be Registered (1) Offering Price (2) Amount of Registration Fee
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value per share $150,000,000 $39,600
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) This Registration Statement also relates to rights to purchase shares of
Series A Junior Participating Cumulative Preferred Stock of the Registrant,
par value $0.01 per share, at a cash exercise price per unit of $[ ],
subject to adjustment. The rights to purchase preferred stock will be
attached to all shares of Common Stock outstanding as of, and issued
subsequent to, a day prior to effectiveness of this Registration Statement
pursuant to the terms of the Registrant's Stockholder Rights Plan dated
[ ], 1999. Until the occurrence of certain events described in
Stockholder Rights Plan, the rights to purchase preferred stock are not
exercisable, are evidenced by the certificate for the Common Stock and will
be only transferred with the Common Stock.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the SEC, acting pursuant to Section 8(a), may
determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor a +
+solicitation of an offer to buy these securities in any jurisdiction where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 3, 1999
PRELIMINARY PROSPECTUS
[ ] Shares
[CYPRESS COMMUNICATIONS LOGO]
Common Stock
--------------
This is an initial public offering of [ ] shares of common stock of Cypress
Communications, Inc. We are selling all of the shares of common stock offered
under this prospectus.
It is currently estimated that the initial public offering price will be
between $[ ] and $[ ] per share. We have applied to have our common stock
approved for listing on the Nasdaq National Market under the symbol "CYCO."
See "Risk Factors" beginning on page 7 about risks you should consider before
buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
--------------
<TABLE>
<CAPTION>
Per
Share Total
----- ------
<S> <C> <C>
Public offering price........................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to us................................ $ $
</TABLE>
--------------
The underwriters may purchase up to an additional [ ] shares of common stock
from us at the initial public offering price less the underwriting discount to
cover over-allotments.
The underwriters expect to deliver the shares against payment in New York, New
York on [ ], 2000.
--------------
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
J.C. Bradford & Co.
The date of this prospectus is [ ], 2000.
<PAGE>
PROSPECTUS SUMMARY
The following summary provides an overview of selected information and does
not contain all the information you should consider. Therefore, you should also
read the more detailed information set out in this prospectus and the financial
statements.
Cypress Communications, Inc.
Our Company
We are a building-centric integrated communications provider serving small
and medium-sized businesses in major metropolitan markets throughout the United
States. We provide a comprehensive single-source communications solution
including feature-rich digital telephones, local and long distance voice
services, high speed, always-on Internet access, business television, voice
messaging, e-mail, web site hosting, 24x7 remote systems monitoring, firewall
protection and many other enhanced communications services. Our services are
delivered over state-of-the-art fiber-optic, digital and broadband networks
that we design, construct, own and operate inside large and medium-sized office
buildings. We differentiate ourselves from other communications companies by
providing a single-source solution with a high degree of customer service and
responsiveness. As of November 30, 1999, we were operating our networks in 113
buildings representing approximately 29 million rentable square feet in 12
major metropolitan areas. Overall, we have agreements with building owners and
property managers, including Boston Properties, Brookfield, Cornerstone, Lend
Lease, Shorenstein, Tower Realty and Vornado, giving us the right to install
and operate our networks in more than 700 buildings representing more than 232
million rentable square feet in 50 major metropolitan areas.
Our Market Opportunity
Dun & Bradstreet estimates that there are approximately 1.3 million small
and medium-sized businesses in the United States. According to industry
sources, small and medium-sized businesses spent over $47 billion for voice
communication services and over $14 billion for data and Internet services in
1998. These sources project that by 2002 these businesses will spend over $53
billion on voice services and $40 billion on data and Internet services. Many
of these small and medium-sized businesses are located in office buildings
within our targeted markets. We estimate that there are approximately 8,000
office buildings with greater than 100,000 square feet, representing over 2.2
billion rentable square feet, located in the major metropolitan areas in which
we currently operate or plan to operate in the future.
We believe it has become increasingly difficult for small and medium-sized
businesses to evaluate the many new products, services and carriers that are
available in today's communications marketplace. In addition, while most large
corporations build or lease dedicated high speed networks and complex
communications equipment, most small and medium-sized businesses, due to cost
and network infrastructure constraints, have traditionally not had affordable
access to the advanced communications services they require. We believe there
is significant market demand for an integrated communications provider that can
provide a high-quality, affordable single-source solution addressing all of the
communications needs of small and medium-sized businesses.
Our Solution
Our solution offers small and medium-sized businesses the following
advantages:
. A comprehensive communications solution from a single source. We
effectively function as our customers' communications manager and
provide a "one stop shopping" solution for all of their communications
needs.
1
<PAGE>
. A reliable, feature-rich communications package typically available only
to large corporations. We provide our customers features, performance
levels and pricing that traditionally
have been available only to large corporations. Hallmarks of our service
include high speed, always-on Internet access, state-of-the-art,
feature-rich telephone equipment and reliable performance supported by
our multiple carriers, redundant network components and emergency power
back-ups.
. Rapid installation and service expansion with minimal capital outlay by
customers. Because we own and operate our in-building networks, we are
able to deliver our comprehensive package of services to a new customer
within a few days of receiving an order and can often provide same day
service for existing customers requesting new services. Additionally,
because our customers typically rent their telephone systems from us,
they avoid significant capital outlays and substantially mitigate the
risks of encountering communications capacity constraints or having
their phone system become technologically obsolete.
. On-site or near-site customer service and support. Each of our customers
is assigned a dedicated, experienced account team available on a 24x7
basis to address customer inquiries.
Our Strategy
We have developed a business strategy designed to achieve significant
market penetration and deliver superior customer service while maximizing
operating margins. Key components of this strategy include the following:
. Providing a broad range of communications services under long-term
customer contracts. We offer our customers a well-supported, broad suite
of services under contracts which are typically three years in length.
By continually expanding our product portfolio, our goal is to ensure
that a customer need never look beyond Cypress to fulfill any
communications need.
. Providing superior customer service. We assign to each customer a
dedicated account team in order to ensure superior customer service and
readily available customized technical support.
. Controlling the critical "last few feet." Our ownership of the physical
connection between our customers and out-of-building networks
strengthens our position as "gatekeeper" to our in-building customers
and allows us to provision services more efficiently while better
ensuring service quality.
. Leveraging our experience and first mover advantage to secure license
agreements with building owners. By executing license agreements with
building owners we gain the right to install and operate our networks in
multi-tenant office buildings. As one of the first building-centric
integrated communications providers, we intend to capitalize on our
experience, reputation and referenceable customer base to rapidly secure
additional license agreements with building owners.
. Deploying cost effective, flexible networks. Because we commit capital
only after we have entered into a long-term license agreement, the up-
front capital we deploy is highly success-based and modest on a per-
building basis, usually less than $90,000 on a typical 250,000 square
foot building. In addition, in order to minimize operating costs and
maximize network capacity and reliability, we use a combination of
transmission technologies provided by multiple vendors.
. Opportunistically pursuing additional strategic acquisitions and
relationships. We opportunistically pursue acquisitions and other
strategic relationships which enable us to expand our customer base or
geographic presence or provide us with additional management, sales or
technical personnel. We intend to seek such opportunities both
domestically and abroad.
2
<PAGE>
Recent Developments
. Since September 30, 1999, we have sold 4,161,974 shares of our series C
preferred stock for total proceeds of approximately $79.1 million.
Investors include private equity investors such as Alta Communications,
Beacon Capital Partners, The Centennial Funds, Gramercy Communications
Partners and Nassau Capital and large commercial property owners and
managers such as AEW Capital Management, Boston Properties, Brookfield,
Cornerstone, Shorenstein, Transwestern and Vornado.
. In November and December 1999, we entered into stock warrant agreements
and master license agreements with several owners and operators of
office buildings in which we agreed to issue warrants to acquire up to
an aggregate of 2,476,592 shares of our common stock at an exercise
price of $19 per share. The warrants will be issued upon the execution
of property-specific license agreements covering buildings listed in the
master license agreements, and the number of shares underlying these
warrants will be determined in accordance with the stock warrant
agreements. These master license agreements give us the right to operate
our networks in more than 570 buildings representing more than 197
million rentable square feet.
. In November 1999, we entered into an agreement to acquire approximately
19% of the common stock of SiteConnect, a Seattle-based building-centric
communications services provider, in exchange for 62,500 shares of our
common stock. The agreement gives us a one-year option to purchase the
remaining outstanding shares of common stock of SiteConnect for
approximately $5 million of our common stock valued at the initial
public offering price. Currently, SiteConnect is providing primarily
data communications services to customers in ten commercial office
buildings in Seattle.
The address of our principal executive offices is Fifteen Piedmont Center,
Suite 710, Atlanta, Georgia 30305 and our telephone number is (404) 869-2500.
Our website address is www.cypresscom.net. The information on our website is
not a part of this prospectus.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered............. [ ] shares
Common stock to be outstanding [ ] shares
after the offering..............
Use of proceeds.................. We intend to use approximately $[ ]
of the net proceeds for the construction of
additional in-building networks and the
purchase of communications equipment and the
remainder for working capital and general
corporate purposes.
Proposed Nasdaq National Market CYCO
Symbol..........................
</TABLE>
The number of shares of common stock that will be outstanding after this
offering is based on the shares outstanding as of [ ], 1999, plus:
. [ ] shares of common stock to be sold by us in this offering;
. 7,292,302 shares of common stock to be issued at the completion of this
offering upon the conversion of all of our outstanding convertible
preferred stock; and
. 62,500 shares of common stock to be issued in connection with our
agreed-upon investment in SiteConnect.
The number of shares of common stock to be outstanding after this offering
excludes:
. [ ] shares of common stock issuable pursuant to the over-allotment
option;
. 1,294,660 shares of common stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $6.17;
. [ ] shares of common stock reserved for issuance under our stock
option plan; and
. up to 2,476,592 shares of common stock issuable upon the exercise of
warrants with an exercise price of $19 per share. Upon issuance, the
warrants will be exercisable for a period of ten years, but cannot be
exercised until six months following completion of this offering.
4
<PAGE>
Summary Financial and Other Data
You should read the following summary financial and other data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes, all of which
appear elsewhere in this prospectus. The following summary statement of
operations data for the year ended December 31, 1998 and the balance sheet data
as of December 31, 1998 have been derived from our audited financial
statements. The summary statement of operations data for the nine months ended
September 30, 1998 and 1999 and the summary balance sheet data as of September
30, 1999 are derived from our unaudited financial statements. Operating results
for the nine months ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the entire year.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------ ------------------------
Pro Forma
1997(1) 1998 1998 1999
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.................. $ 709,402 $ 2,417,816 $ 1,428,497 $ 5,227,727
Operating expenses:
Cost of services......... 603,114 1,539,846 944,760 3,248,377
Sales and marketing...... 448,916 1,470,107 1,075,039 2,466,844
General and
administrative.......... 822,923 2,436,221 1,597,974 5,604,135
Depreciation and
amortization............ 521,264 891,788 587,800 1,650,253
----------- ----------- ----------- -----------
Total operating
expenses................ 2,396,217 6,337,962 4,205,573 12,969,609
----------- ----------- ----------- -----------
Operating loss............ (1,686,815) (3,920,146) (2,777,076) (7,741,882)
Interest income, net...... 113,922 232,279 66,911 168,120
----------- ----------- ----------- -----------
Loss before income taxes.. (1,572,893) (3,687,867) (2,710,165) (7,573,762)
Income tax benefit........ 59,252 -- -- --
----------- ----------- ----------- -----------
Net loss ................. $(1,513,641) $(3,687,867) $(2,710,165) $(7,573,762)
=========== =========== =========== ===========
Net loss per share of
common stock:
Basic and diluted........ $ (2.58) $ (6.29) $ (4.63) $ (12.92)
=========== =========== =========== ===========
Weighted average shares of
common stock
outstanding:
Basic and diluted........ 585,979 585,979 585,979 585,979
=========== =========== =========== ===========
</TABLE>
- --------
(1) We were formed as a limited liability company under the laws of Georgia on
August 16, 1995. On July 15, 1997, we completed a reorganization in which
our predecessor company was merged into a Delaware corporation. The pro
forma 1997 statement of operations data reflect the July 15, 1997
reorganization as if it occurred on January 1, 1997. See Note 1 to our
financial statements.
5
<PAGE>
The pro forma balance sheet information below reflects the sale since
September 30, 1999 of 4,161,974 shares of our series C preferred stock for
total proceeds of approximately $79.1 million and the issuance of 62,500 shares
of our common stock to occur in connection with our agreed-upon investment in
SiteConnect.
The pro forma as adjusted balance sheet information reflects the above
adjustments, as well as receipt of the estimated net proceeds of $[ ]
from this offering, assuming an initial public offering price of $[ ] per
share, and the conversion upon the completion of this offering of all
convertible preferred stock into common stock.
<TABLE>
<CAPTION>
As of
December 31,
1998 As of September 30, 1999
------------ --------------------------------------
(unaudited)
Pro Forma
Actual Actual Pro Forma As Adjusted
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............. $11,057,696 $ 3,378 $ 79,080,878 $
Property and equipment,
net..................... 6,291,413 11,645,639 11,645,639 11,645,639
Total assets............. 20,571,247 15,196,621
Total liabilities........ 2,368,935 4,509,297 4,509,297 4,509,297
Convertible redeemable
preferred stock......... 21,317,263 21,376,037 100,453,537 --
Stockholders' (deficit)
equity.................. (3,114,951) (10,688,713)
</TABLE>
As used in the table below, EBITDA consists of net loss excluding net
interest, income taxes and depreciation and amortization. EBITDA does not
reflect our non-cash expenses, which we expect will increase considerably as we
deploy additional in-building networks. We believe that because EBITDA is a
measure of financial performance it is useful to investors and analysts as an
indicator of a company's ability to fund its operations and to service or incur
debt. However, EBITDA is not a measure calculated under generally accepted
accounting principles. Other companies may calculate EBITDA differently from
us. It is not an alternative to operating income as an indicator of our
operating performance or an alternative to cash flows from operating activities
as a measure of liquidity, and investors should consider these measures as
well. We do not expect to generate positive EBITDA in the near term.
<TABLE>
<CAPTION>
Pro Forma Nine Months Ended
Year Ended Year Ended September 30,
December 31, December 31, -------------------------
1997(1) 1998 1998 1999
------------ ------------ ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Other Operating Data:
Net cash used in
operating activities... $ (813,847) $ (2,914,905) $(1,971,373) $ (5,775,126)
Net cash used in
investing activities... (2,091,625) (4,991,641) (1,691,993) (5,172,675)
Net cash provided by
(used in) financing
activities............. 6,128,811 15,293,177 15,535,276 (106,517)
EBITDA.................. (1,165,551) (3,028,358) (2,189,276) (6,091,629)
Capital expenditures.... (1,190,723) (2,887,243) (1,691,993) (5,392,075)
Markets served.......... 2 4 2 9
Buildings served........ 19 39 24 96
Rentable square feet in
buildings served....... 3.6 million 11.0 million 5.5 million 23.5 million
</TABLE>
- --------
(1) The pro forma 1997 data reflects the July 15, 1997 reorganization as if it
occurred on January 1, 1997. See Note 1 to our financial statements.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before you decide
to buy our common stock. You should also consider the other information in this
prospectus. Our business, financial condition or results of operations could be
harmed by any of the following risks. The trading price of our common stock
could decline due to any of the following risks, and you might lose all or part
of your investment.
We expect our losses to continue to increase for the foreseeable future
Since our formation we have generated increasing negative EBITDA and larger
net losses each quarter. We have not achieved profitability and expect to
continue to incur increasing negative EBITDA and larger net losses for the
foreseeable future. For 1998, we had negative EBITDA of $3,028,358 and a net
loss of $3,687,867 on revenues of $2,417,816. For the first nine months of
1999, we had negative EBITDA of $6,091,629 and a net loss of $7,573,762 on
revenues of $5,227,727. In addition, we expect to continue to incur significant
costs as we deploy additional in-building networks and, as a result, we will
need to generate significant revenue to achieve profitability, which may not
occur.
Our business has grown rapidly and our business model is still evolving, which
makes it difficult to evaluate our prospects
We have grown our business rapidly and have experienced significant losses
in our efforts to penetrate the building-centric communications market. We will
continue to make substantial capital expenditures in deploying our networks
before we know whether our business plan can be successfully executed. As a
result, there is a risk that our business will fail. Additionally, our limited
operating history makes it difficult to evaluate the execution of our business
model thus far.
We are an early-stage company and if we do not grow rapidly or obtain
additional capital we will not succeed
We began operating our first in-building network in June 1996 and were
operating 113 in-building networks as of November 30, 1999. Because the
communications industry is capital intensive, rapidly evolving and subject to
significant economies of scale, as a relatively small organization we are at a
competitive disadvantage. The growth we must achieve to reduce that
disadvantage will put a significant strain on all of our resources. In
particular, we will require substantial additional capital to finance our
operations in the future according to our current business plan. If we fail to
grow rapidly or obtain additional capital we may not be able to compete with
larger, more well established companies.
Our business plan cannot succeed unless we continue to obtain license
agreements with building owners and managers
Our business depends upon our ability to install in-building networks. The
failure of building owners to grant or renew access rights on acceptable terms
could substantially reduce our potential customer base. Current federal and
state regulations do not require building owners to make space available to us,
or to do so on terms that are reasonable or nondiscriminatory. Building owners
may decide not to permit us to install our networks in their buildings or may
elect not to renew our license agreements. Non-renewal of these agreements
would reduce our revenues and we might not recover all of our infrastructure
costs.
We must place our network infrastructure in additional buildings before our
competitors do or we will face a substantial competitive disadvantage
Our success will depend upon our ability to quickly obtain license
agreements and install our in-building networks in many more buildings. This is
crucial in order to establish a first-mover advantage. We may not be
7
<PAGE>
able to accomplish this. Each building in which we do not build a network is
particularly vulnerable to competitors. In addition, future expansions and
adaptations of our network infrastructure may be necessary to respond to growth
in the number of customers served, increased capacity demands and changes to
our services; otherwise other companies could be encouraged to compete in
buildings where we have installed networks.
We may not be able to manage our growth, which could harm our business
Future expansion will place significant additional strains on our personnel,
financial and other resources. The failure to efficiently manage our growth
could adversely affect the quality of our services, our business and our
financial condition. Our ability to manage our growth will be particularly
dependent on our ability to develop and retain an effective sales force and
qualified technical and managerial personnel. The competition for qualified
sales, technical and managerial personnel in the communications industry is
intense, and we may not be able to hire and retain sufficient qualified
personnel. In addition, we may not be able to maintain the quality of our
operations, to control our costs, to maintain compliance with all applicable
regulations, and to expand our internal management, technical, information and
accounting systems in order to support our desired growth.
Our business will be harmed if our information support systems are not further
developed
Sophisticated information processing systems, including billing, are vital
to our growth and our ability to achieve operating efficiencies. A failure of
these systems could substantially impair our ability to provide services, send
invoices and monitor our operations. Among the systems we have identified as
being presently inadequate to meet the increased demands of our anticipated
growth are work-flow and customer priority management, human resources, sales
and customer support and fixed asset management, and there may be other systems
we have not identified that are in need of improvement. We estimate that
modifying or replacing these systems will cost approximately $10 million in
fiscal year 2000. Our plans for the development and implementation of these
systems rely largely upon acquiring products and services offered by third-
party vendors and integrating those products and services. We may be unable to
implement these systems on a timely basis or at all, and these systems may not
perform as expected. We may also be unable to maintain and upgrade our
operational support systems as necessary.
We operate in a highly competitive market, and we may not be able to compete
effectively against established competitors with greater financial resources
and diverse strategic plans
We face competition from many entities with significantly greater financial
resources, well-established brand names, larger customer bases and diverse
strategic plans and technologies. We compete against many communications
companies which provide individual or bundled services. Numerous companies may
also seek to enter our market and may expose us to severe price competition for
our services or for building access rights. We expect competition to intensify
in the future. We expect significant competition from traditional and new
communications companies, including local, long distance, cable modem,
Internet, digital subscriber line, microwave, mobile and satellite data service
providers, some of which are detailed below. If these potential competitors
successfully focus on our market, we may face intense competition which could
harm our business.
We face competition from other building-centric communications providers
Some competitors are attempting to gain access to office buildings in our
target markets. These companies include Advanced Radio Telecom, Allied Riser
Communications, Broadband Office, Intermedia, NEXTLINK, OnSite Access, RCN
Telecom Services, SiteLine, Teligent, Urban Media and Winstar. Some of these
competitors are seeking to develop exclusive relationships with building
owners. To the extent these competitors are successful, we may face
difficulties in building our networks and marketing our services within some of
our target buildings. Our agreements to use utility shaft space within
buildings are generally not exclusive. An owner of any of the buildings in
which we do not have exclusive rights to install a network could also give
similar rights to one of our competitors. Certain competitors already have
rights to install networks in
8
<PAGE>
some of the buildings in which we have rights to install our networks. It will
take a substantial amount of time to build networks in all the buildings in
which we intend to exercise our rights under our license agreements and master
license agreements. Each building in which we do not build a network is
particularly vulnerable to competitors. It is not clear whether it will be
profitable for two or more different companies to operate broadband networks
within the same building. Therefore, it is critical that we build our networks
in additional buildings quickly. Once we have done so, if a competitor installs
a network in the same building, it is likely that there will be substantial
price competition.
We face competition from local telephone companies
Incumbent local telephone companies, including GTE and the Regional Bell
Operating Companies, have several competitive strengths which may place us at a
competitive disadvantage. These competitive strengths include an established
brand name and reputation and significant capital to rapidly deploy or leverage
existing communications equipment and broadband networks. Competitive local
telephone companies often market their services to tenants of buildings within
our target markets and selectively construct in-building facilities.
We face competition from long distance companies
We will face strong competition from long distance companies. Many of the
leading long distance carriers, including AT&T, MCI WorldCom and Sprint, could
begin to build their own in-building voice and data networks. The newer
national long distance carriers, such as Level 3, Qwest and Williams
Communications, are building and managing high speed fiber-based national voice
and data networks, partnering with Internet service providers, and may extend
their networks by installing in-building facilities and equipment.
We face competition from fixed wireless service providers
We may lose potential customers to fixed wireless service providers. Fixed
wireless service providers can provide high speed communications services using
microwave or other facilities or satellite earth stations on building rooftops.
Some of these providers have targeted small and medium-sized business customers
and have a business strategy that is similar to ours. These providers include
Advanced Radio Telecom, MCI WorldCom, NEXTLINK, Sprint, Teligent and Winstar.
We face competition from Internet service providers, digital subscriber line
companies and cable-based service providers
The services provided by Internet service providers, digital subscriber line
companies and cable-based service providers can be used by our potential
customers instead of our services. Internet service providers, such as
Concentric Networks, EarthLink, GTE Internetworking, MindSpring, Prodigy,
PSINet, Sprint, the UUNET subsidiary of MCI WorldCom, and Verio, provide
Internet access to residential and business customers, generally using the
existing communications infrastructure. Digital subscriber line companies
and/or their Internet service provider customers, such as Covad, Network Access
Solutions, NorthPoint and Rhythms NetConnections, typically provide broadband
Internet access. Cable-based service providers, such as Excite@Home and its
@Work subsidiary, High Speed Access, RCN Telecom Services and Road Runner, also
provide broadband Internet access. On-line service providers, such as America
Online, Microsoft Network, Prodigy and WebTV, provide Internet connectivity,
ease-of-use and a stable environment for modem connections. These various
providers may also offer traditional or Internet-based voice services to
compete with us.
Alternative technologies pose competitive threats
In addition to the fiber-optic technology that our networks employ, there
are other technologies that provide greater bandwidth than traditional copper
wire transmission technology and may be used instead of our data services.
Furthermore, these technologies may be improved and other new technologies may
develop that provide greater bandwidth than the fiber-optic based technology we
utilize. Existing alternative technologies include:
9
<PAGE>
. Digital Subscriber Line Technology. Digital subscriber line technology
was developed to produce higher data transfer rates over the existing
copper-based telephone network. The data transfer rates for digital
subscriber lines are reported to range between 144,000 bits of data per
second and six million bits of data per second.
. Cable Modems. Cable modems can allow users to send and receive data
using cable television distribution systems. According to industry
sources, cable modem users typically experience download speeds of 1.5
million bits of data per second.
. Wireless Technologies. Wireless technologies, such as satellite and
microwave communications systems, can provide high speed data
communications. Satellite systems, such as DirecPC, can offer high
download speeds that are advertised at 400,000 bits of data per second
or higher.
. Integrated Services Digital Networks. Integrated services digital
networks have been offered by the incumbent local telephone companies
over the existing copper-based telephone network for some time. These
services offer data transfer speeds of 128,000 bits of data per second.
The development of new technologies or the significant penetration of
alternative technologies into our target market may reduce the demand for our
services and harm our business.
Legislation and government regulation could adversely affect us
The provision of basic communications services is subject to significant
regulation at the federal and state level. The Federal Communications
Commission, or FCC, regulates carriers providing interstate and international
communications services. State public utilities commissions and municipalities
exercise jurisdiction over intrastate communications services. Many of our
services are subject to federal, state and/or local regulation. If we fail to
comply with all applicable regulations or experience delays in obtaining
required approvals, our business could be harmed. Additionally, compliance with
these regulatory requirements may be costly. Regulations governing
communications services also change from time to time in ways that are
difficult to predict. Such changes may harm our business by increasing
competition, decreasing revenue, increasing costs or impairing our ability to
offer services.
Regulation of access to office buildings could negatively affect our business
There have been proposals to require that commercial office buildings give
access to competitive providers of telecommunications services. If these
proposals are adopted and regulatory or legal requirements change access rights
to our target buildings or our networks, these requirements will facilitate our
competitors' entry into buildings where we have access rights, which in turn
will diminish the value of our access rights and adversely affect our
competitive position, especially in buildings in which we have exclusive access
rights. Recently, the FCC initiated a regulatory proceeding relating to utility
shaft access in multiple tenant buildings, and a bill was introduced in
Congress regarding the same topic. Some of the issues being considered in these
developments include requiring building owners to provide utility shaft access
to telecommunications carriers, and requiring some telecommunications providers
to provide access to other telecommunications providers. We do not know whether
or in what form these proposals will be adopted.
We rely on third parties for voice and data transmission capacity
We rely upon other communications carriers to provide transmission capacity
from the buildings we serve. Our failure to obtain adequate connections from
other carriers on a timely basis could delay or impede our ability to provide
services and generate revenue. We have experienced, and expect to continue to
experience, delays in obtaining transmission capacity. In addition, in some of
our target markets there is only one established carrier available to provide
the necessary connection. This increases our cost and makes it extremely
difficult, if not impossible, to obtain redundant connections. Sufficient
capacity or redundant capacity
10
<PAGE>
may not be readily available from third parties at commercially reasonable
rates, if at all. Our failure to obtain sufficient redundant connectivity could
result in an inability to provide service in certain buildings and service
interruptions, which could in time lead to loss of customers and damage to our
reputation.
We are also dependent upon the systems of our network capacity providers.
Therefore, any systems failures experienced by our suppliers could harm our
business.
We must make capital expenditures before generating revenues, which may prove
insufficient to justify those expenditures
We typically install an in-building network before we have any customers in
that building. Since we generally do not solicit customers within a building
until our network is in place we may not be able to recoup all of our
expenditures within any building. Prior to generating revenues in a building,
we must incur initial capital expenditures that are usually less than $90,000
on a typical 250,000 square foot building. In November and December 1999, we
entered into a number of master license agreements, the aggregate effect of
which is likely to increase the average size of the buildings we serve and
therefore increase our average initial capital expenditures for network
installation. Our expenditures will also vary depending on the size of the
building and whether we encounter any construction-related difficulties. After
initial installation of our network, our capital expenditures continue to grow
based on the extent to which we add customers within a building.
Our networks may be vulnerable to unauthorized access which could interfere
with the provision of our services
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Remediating the effects of computer viruses and
alleviating other security problems may require interruptions, incurrence of
costs and delays or cessation of service to our customers. Unauthorized access
could jeopardize the security of confidential information stored in our
computer systems or those of our customers. Although we intend to continue to
implement industry-standard and other security measures, such measures may be
circumvented on our systems in the future.
As an Internet access provider, we may incur liability for information
disseminated through our network
The law relating to the liability of Internet access providers and on-line
services companies for information carried on or disseminated through their
networks is unsettled. As the law in this area develops, the potential
imposition of liability upon us for information carried on and disseminated
through our network could require us to implement measures to reduce our
exposure to such liability, which may require the expenditure of substantial
resources or the discontinuation of certain products or service offerings. Any
costs that are incurred as a result of such measures or the imposition of
liability could harm our business.
If we lose key personnel, we may be unable to successfully operate our business
Our success depends to a significant degree upon the continued contributions
of our principal management and sales personnel, many of whom would be
difficult to replace. We do not have employment contracts with our key
personnel. The loss of the services of any key personnel could harm our
business.
Year 2000 problems could disrupt our business
During the next year, many software programs may not recognize calendar
dates beginning in the Year 2000. This problem could cause computers or
machines that utilize date dependent software to either shut down or provide
incorrect information. If we, or any of our key suppliers, customers or service
providers, fail to mitigate internal and external Year 2000 risks, we may
temporarily be unable to provide services or engage in any other business
activities, including customer billing, which could harm our business.
11
<PAGE>
Our existing stockholders will own [ ]% of the outstanding common stock, and
thus will control all matters requiring a stockholder vote and, as a result,
could prevent or delay a change of control
Upon completion of this offering, our existing directors, officers and
greater-than-five-percent stockholders and their affiliates will, in the
aggregate, beneficially own approximately [ ]% of the outstanding shares of
common stock, or [ ]% if the underwriters' over-allotment option is exercised
in full. If all of these stockholders were to vote together as a group, they
would have the ability to exert significant influence over our board of
directors and its policies. For instance, these stockholders would be able to
control the outcome of all stockholders' votes, including votes concerning
director elections, charter and by-law amendments and possible mergers,
corporate control contests and other significant corporate transactions. This
concentration of stock ownership could have the effect of preventing or
delaying a change of control or otherwise discouraging a potential acquiror
from attempting to obtain control of us, which in turn could harm the market
price of our common stock or prevent our stockholders from realizing a takeover
premium over the market price for their shares of common stock.
Provisions in our amended and restated certificate of incorporation and bylaws
may discourage takeover attempts
Provisions in our amended and restated certificate of incorporation and
bylaws may have the effect of preventing or delaying a change of control or
changes in our management. These provisions include:
. the right of the board of directors, without stockholder approval, to
issue shares of preferred stock and to establish the voting rights,
preferences, and other terms of any preferred stock;
. the right of the board of directors to elect a director to fill a
vacancy created by the expansion of the board of directors;
. the ability of the board of directors to alter our bylaws without prior
stockholder approval;
. the election of three classes of directors to each serve three year
staggered terms;
. the elimination of stockholder voting by consent;
. the removal of directors only for cause;
. the vesting of exclusive authority in the board of directors and
specified officers (except as otherwise required by law) to call special
meetings of stockholders; and
. advance notice requirements for stockholder proposals and nominations for
election to the board of directors.
These provisions may have the effect of preventing or delaying a change of
control or impeding a merger, consolidation, takeover or other business
combination, which in turn could preclude our stockholders from recognizing a
premium over the prevailing market price of the common stock.
In [ ] 1999, we adopted a stockholder rights plan. This plan entitles
our stockholders to rights to acquire additional shares of our common stock
when a third party acquires 15% of our common stock or commences or announces
its intent to commence a tender offer for at least 15% of our common stock.
This plan could delay, deter or prevent a change of control.
There may not be an active market for our common stock
Our stock may not be actively traded. This may result in price volatility
and poor execution of buy and sell orders for investors. The initial public
offering price may bear no relationship to the price at which the common stock
will trade upon completion of this offering and the stock might not trade at or
above the initial public offering price. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
12
<PAGE>
The market price of our stock could be subject to substantial price and volume
fluctuations
Historically, stock prices and trading volumes for emerging communications
companies fluctuate widely for a number of reasons, including some reasons
which may be unrelated to their businesses or results of operations. This
market volatility could depress the price of our common stock without regard to
our operating performance. In addition, our operating results may be below the
expectations of public market analysts and investors. If this were to occur,
the market price of our common stock would likely significantly decrease. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against such companies. Such litigation, if instituted, could result in
substantial costs and a diversion of management's attention and resources,
which could harm our business.
You will suffer immediate and substantial dilution
The initial public offering price per share will be substantially higher
than the net tangible book value per share immediately after the offering. If
you purchase common stock in this offering, you will incur dilution of $[ ]
per share from the price per share you paid based on our pro forma as adjusted
net book value at September 30, 1999. We also have a large number of
outstanding stock options and warrants to purchase our common stock with
exercise prices significantly below the initial public offering price of the
common stock. To the extent these options and warrants are exercised, there
will be further dilution.
Future sales and issuances of our common stock could adversely affect our stock
price
Substantial sales of our common stock in the public market following this
offering, or the perception by the market that such sales could occur, could
lower our stock price or make it difficult for us to raise additional equity
capital in the future. After this offering, we will have [ ] shares of
common stock outstanding. Of these shares, the [ ] shares sold in this
offering, or [ ] shares if the underwriters' over-allotment is exercised
in full, will be freely tradeable. Of the remaining [ ] shares, [ ]
shares are subject to 180-day lock-up agreements. Of these shares, up to
[ ] shares may be available for sale in the public market 180 days after
the date of this prospectus, subject to compliance with Rule 144, and the
balance will be available for sale at various times thereafter, also subject to
compliance with Rule 144. In addition, after this offering, we also intend to
register [ ] shares of common stock for issuance under our stock option
plan and [ ] shares of common stock under our employee stock purchase
plan. As of November 30, 1999, options to purchase 1,294,660 shares of common
stock were issued and outstanding, of which options to purchase 229,631 shares
have vested. Additionally, up to 2,476,592 common shares are issuable upon the
exercise of warrants that may be issued to several property owners and
operators pursuant to stock warrant agreements and master license agreements
executed in November and December 1999. These warrants will be exercisable for
a period of ten years, but cannot be exercised until six months following
completion of this offering. We cannot predict if future sales or issuances of
our common stock, or the availability of our common stock for sale, will harm
the market price for our common stock or our ability to raise capital by
offering equity securities.
Members of our board serve on the boards of our potential competitors, which
may create conflicts of interest
Some members of our board of directors may serve as directors of other
communications or Internet services companies which might compete with us. To
the extent that any of these companies presently offer, or at some future point
begin to offer, integrated communications services similar to the services that
we provide, there may be conflicts of interest between the fiduciary duties
owed by these individuals to us and the duties owed to these other companies.
We have not adopted specific policy guidelines to address these potential
conflicts of interest, and if these conflicts of interest arise they may be
resolved on terms that are not in the best interests of all of our
stockholders.
13
<PAGE>
Impairment of our intellectual property rights could harm our business
We regard certain aspects of our products, services and technology as
proprietary and attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our products, services or technology without authorization, or to
develop similar technology independently.
We currently have a patent application pending for our fiber-optic
infrastructure and network configuration. This patent may not be issued to us,
and if issued, it may not protect our intellectual property from competition
which could seek to design around or invalidate this patent.
We are aware of several other companies in our and other industries which
use the word "Cypress" in their corporate names. We are in the process of
attempting to secure a trademark for the name "Cypress Communications." Even if
we are able to secure this trademark, other companies could challenge our use
of the word "Cypress." If such a challenge is successful, we could be required
to change our name and lose the goodwill associated with the Cypress
Communications name in our markets.
Our forward-looking statements are speculative and may prove to be wrong
Some of the information under the captions "Summary," "Risk Factors," "Use
of Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risk and uncertainties, there
are important factors, including the factors discussed in this "Risk Factors"
section of the prospectus, that could cause actual results to differ materially
from those expressed or implied by these forward-looking statements.
14
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of our common stock in this
offering will be approximately $[ ], based on an assumed initial
public offering price of $[ ] per share, after deducting the estimated
underwriting discount and our estimated offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $[ ]. We expect to use our net proceeds
as follows:
. approximately $[ ] will be used for the construction of in-
building networks and the purchase of communications equipment; and
. the remainder will be used for working capital and general corporate
purposes.
A portion of the net proceeds may also be used to acquire or invest in
complementary businesses, technologies, services or products. However, we
currently have no plans, agreements or commitments with respect to any such
transaction, and we are not currently engaged in any negotiations with respect
to any such transaction.
Pending such uses, we will invest these proceeds in government securities
and other short-term, investment-grade securities.
DIVIDEND POLICY
To date, we have never declared or paid any cash dividends on shares of our
common stock. We currently intend to retain our earnings for future growth and
development of our business and, therefore, do not anticipate paying cash
dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
You should read this table in conjunction with the sections entitled
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Use of Proceeds" and our financial
statements and the related notes included elsewhere in this prospectus.
The following cash and capitalization table sets forth as of September 30,
1999:
. Our actual cash and capitalization.
. Our pro forma cash and capitalization after giving effect to:
- - the sale of 4,161,974 shares of our series C preferred stock since
September 30, 1999; and
- - the issuance of 62,500 shares of our common stock to occur in
connection with our agreed-upon investment in SiteConnect.
. Our pro forma as adjusted cash and capitalization to reflect, in
addition:
- - the receipt of the estimated net proceeds of $[ ] from this
offering, assuming an initial public offering price of $[ ] per
share; and
- - the conversion upon the completion of this offering of all
convertible preferred stock into common stock.
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------------
(unaudited)
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------ -----------
<S> <C> <C> <C>
Cash and cash equivalents.............. $ 3,378 $ 79,080,878 $
============ ============ ========
Capital lease obligations, including
current portion of $223,001........... 557,701 557,701 557,701
------------ ------------ --------
Preferred stock:
$.001 par value; 1,211,140 shares
designated Series A, 1,211,140 shares
issued and outstanding, actual and
pro forma; 0 shares issued and
outstanding, pro forma as adjusted... 6,039,809 6,039,809
$.001 par value; 1,339,575 shares
designated Series B, 1,339,575 shares
issued and outstanding, actual and
pro forma; 0 shares issued and
outstanding, pro forma as adjusted... 10,704,559 10,704,559
$.001 par value; 579,613 shares
designated Series B-1, 579,613 shares
issued and outstanding, actual and
pro forma; 0 shares issued and
outstanding, pro forma as adjusted... 4,631,669 4,631,669
$.001 par value; 4,210,526 shares
designated Series C, 0 shares issued
and outstanding, actual; 4,161,974
shares issued and outstanding, pro
forma; 0 shares issued and
outstanding, pro forma as adjusted... -- 79,077,500
------------ ------------ --------
Total preferred stock.............. 21,376,037 100,453,537
------------ ------------ --------
Shareholders' (deficit) equity:
Common stock, $.001 par value;
4,576,464 shares authorized, 585,979
shares issued and outstanding,
actual; 648,479 shares issued and
outstanding, pro forma; [ ] shares
issued and outstanding, pro forma as
adjusted............................. 586 649
Additional paid-in capital............ 1,767,350
Accumulated deficit................... (12,456,649) (12,456,649)
------------ ------------ --------
Total shareholders' (deficit)
equity............................ (10,688,713)
------------ ------------ --------
Total capitalization............... $ 11,245,025 $ $
============ ============ ========
</TABLE>
16
<PAGE>
The cash and capitalization table excludes:
. any shares of common stock to be issued pursuant to the over-allotment
option;
. 1,294,660 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $6.17 per share as
of November 30, 1999;
. [ ] shares of common stock reserved for issuance under our stock
option plan; and
. up to 2,476,592 shares of common stock issuable upon the exercise of
warrants with an exercise price of $19 per share. The warrants will be
exercisable for a period of ten years, but cannot be exercised until six
months following completion of this offering.
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was $[ ],
or $[ ] per share of outstanding common stock, after giving effect to the
adjustments shown in the pro forma column under "Capitalization" and the
conversion upon completion of this offering of all convertible preferred stock
into common stock. The pro forma net tangible book value per share represents
our total tangible assets less total liabilities, divided by [ ] shares of
common stock outstanding on a pro forma basis before this offering. Dilution
per share represents the difference between the amount per share paid by
investors in this offering and the pro forma net tangible book value per share
after this offering. After giving effect to this offering, the pro forma as
adjusted net tangible book value at September 30, 1999 would have been
$[ ], or $[ ] per share. This represents an immediate increase in net
tangible book value of $[ ] per share to existing stockholders and an
immediate dilution in net tangible book value of $[ ] per share to new
investors purchasing shares at the initial public offering price. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................ $
----
Pro forma net tangible book value per share before this offering...... $
Increase per share attributable to new investors......................
Pro forma net tangible book value per share after this offering........
----
Dilution per share to new investors.................................... $
====
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of
September 30, 1999, the difference between existing stockholders and new
investors with respect to the number of shares of common stock purchased, the
total consideration paid and the average price per share paid. These amounts do
not include estimated underwriting discounts and commissions and offering
expenses payable by us. The table assumes that the initial public offering
price will be $[ ].
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration Average
-------------- -------------- Price
Number Percent Amount Percent per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................
New investors...........................
---- ---- ---- ---- ----
Total ..................................
==== ==== ==== ==== ====
</TABLE>
The foregoing table assumes no exercise of stock options or warrants. As of
September 30, 1999, there were options outstanding to purchase 853,160 shares
of common stock at a weighted average exercise price of $3.18 per share.
Between October 1, 1999 and November 30, 1999 additional options were granted
to purchase 441,500 shares of common stock at a weighted average exercise price
of $10.58 per share. In November and December 1999, we entered into stock
warrant agreements and master license agreements with several property owners
and operators in which we agreed to issue warrants to acquire up to 2,476,592
shares of our common stock at an exercise price of $19 per share. To the extent
outstanding options and warrants are exercised, there will be further dilution
to new investors. In addition, we may agree to issue additional warrants to
acquire common stock to property owners and operators in the future and we may
issue equity securities to pay for acquisitions.
18
<PAGE>
SELECTED FINANCIAL DATA
You should read the following selected financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes, all of which
appear elsewhere in this prospectus. The following selected statement of
operations data for the year ended December 31, 1996, the 6 1/2 months ended
July 15, 1997, the 5 1/2 months ended December 31, 1997 and the year ended
December 31, 1998, and the selected balance sheet data as of December 31, 1998
have been derived from the audited financial statements of our predecessor
company and our company and the related notes. The selected statement of
operations data for the period from our inception (August 16, 1995) to December
31, 1995 and for the nine months ended September 30, 1998 and 1999, and the
selected balance sheet data as of September 30, 1999 are derived from our
unaudited financial statements. Operating results for the nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the entire year.
<TABLE>
<CAPTION>
Predecessor(1) Cypress
---------------------------------------- ----------------------------------------------------
Period from 6 1/2
Inception Months 5 1/2 Months Nine Months Ended
(August 16, 1995) Year Ended Ended Ended Year Ended September 30
to December 31, July 15, December 31, December 31, ------------------------
December 31, 1995 1996 1997 1997 1998 1998 1999
----------------- ------------ --------- ------------ ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ 83,556 $ 248,235 $ 461,167 $ 2,417,816 $ 1,428,497 $ 5,227,727
Operating expenses:
Cost of services....... -- 131,771 221,596 381,518 1,539,846 944,760 3,248,377
Sales and marketing.... -- 12,189 122,055 326,861 1,470,107 1,075,039 2,466,844
General and
administrative........ 117,086 640,704 255,175 567,748 2,436,221 1,597,974 5,604,135
Depreciation and
amortization.......... 694 53,808 66,217 288,737 891,788 587,800 1,650,253
--------- --------- --------- ----------- ----------- ----------- -----------
Total operating
expenses.............. 117,780 838,472 665,043 1,564,864 6,337,962 4,205,573 12,969,609
--------- --------- --------- ----------- ----------- ----------- -----------
Operating loss.......... (117,780) (754,916) (416,808) (1,103,697) (3,920,146) (2,777,076) (7,741,882)
Interest income, net.... -- 13,939 6,253 107,669 232,279 66,911 168,120
--------- --------- --------- ----------- ----------- ----------- -----------
Loss before income
taxes.................. (117,780) (740,977) (410,555) (996,028) (3,687,867) (2,710,165) (7,573,762)
Income tax benefit...... -- -- -- 59,252 -- -- --
--------- --------- --------- ----------- ----------- ----------- -----------
Net loss................ $(117,780) $(740,977) $(410,555) $ (936,776) $(3,687,867) $(2,710,165) $(7,573,762)
========= ========= ========= =========== =========== =========== ===========
Net loss per share of
common stock:
Basic and diluted...... $ (1.60) $ (6.29) $ (4.63) $ (12.92)
=========== =========== =========== ===========
Weighted average shares
of common stock
outstanding:
Basic and diluted...... 585,979 585,979 585,979 585,979
=========== =========== =========== ===========
</TABLE>
- --------
(1) We were formed as a limited liability company under the laws of Georgia on
August 16, 1995. On July 15, 1997, we completed a reorganization
transaction in which our predecessor company was merged into a Delaware
corporation. See Note 1 to our financial statements.
19
<PAGE>
The pro forma balance sheet information below reflects:
. the sale of 4,161,974 shares of our series C preferred stock since
September 30, 1999; and
. the issuance of 62,500 shares of our common stock to occur in connection
with our agreed-upon investment in SiteConnect.
The pro forma as adjusted balance sheet information reflects all of the
above adjustments, and:
. the receipt of the estimated net proceeds of $[ ] from this
offering, assuming an initial public offering price of $[ ] per share;
and
. the conversion upon the completion of this offering of all convertible
preferred stock into common stock.
<TABLE>
<CAPTION>
As of
December 31,
1998 As of September 30, 1999
------------ -------------------------------------
(unaudited)
Pro Forma
Actual Actual Pro Forma As Adjusted
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents.............. $11,057,696 $ 3,378 $79,080,878 $
Property and equipment,
net...................... 6,291,413 11,645,639 11,645,639 11,645,639
Total assets.............. 20,571,247 15,196,621
Total liabilities......... 2,368,935 4,509,297 4,509,297 4,509,297
Convertible redeemable
preferred stock.......... 21,317,263 21,376,037 100,453,537 --
Stockholders' (deficit)
equity................... (3,114,951) (10,688,713)
</TABLE>
As used in the table below, EBITDA consists of net loss excluding net
interest, income taxes and depreciation and amortization. EBITDA does not
reflect our non-cash expenses, which we expect will increase considerably as we
deploy additional in-building networks. We believe that because EBITDA is a
measure of financial performance it is useful to investors and analysts as an
indicator of a company's ability to fund its operations and to service or incur
debt. However, EBITDA is not a measure calculated under generally accepted
accounting principles. Other companies may calculate EBITDA differently from
us. It is not an alternative to operating income as an indicator of our
operating performance or an alternative to cash flows from operating activities
as a measure of liquidity, and investors should consider these measures as
well. We do not expect to generate positive EBITDA in the near term.
<TABLE>
<CAPTION>
Predecessor Cypress
------------------------------ --------------------------------------------------------
6 5 Nine Months Ended
Year Ended 1/2 Months Ended 1/2 Months Ended Year Ended September 30,
December 31, July 15, December 31, December 31, -------------------------
1996 1997 1997 1998 1998 1999
------------ ---------------- ---------------- ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Other Operating Data:
Net cash used in
operating activities... $ (638,707) $ (236,525) $ (577,322) $ (2,914,905) $(1,971,373) $ (5,775,126)
Net cash used in
investing activities... (638,638) (352,359) (1,739,266) (4,991,641) (1,691,993) (5,172,675)
Net cash provided by
(used in) financing
activities............. 1,721,975 165,979 5,962,832 15,293,177 15,535,276 (106,517)
EBITDA.................. (701,108) (350,591) (814,960) (3,028,358) (2,189,276) (6,091,629)
Capital expenditures.... (518,638) (352,359) (838,364) (2,887,243) (1,691,993) (5,392,075)
Markets served.......... 1 1 2 4 2 9
Buildings served........ 15 16 19 39 24 96
Rentable square feet in
buildings served....... 2.4 million 2.6 million 3.6 million 11.0 million 5.5 million 23.5 million
</TABLE>
20
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a building-centric integrated communications provider serving small
and medium-sized businesses in major metropolitan markets in the United States.
Since the inception of our predecessor company in August 1995, our principle
activities have included securing license agreements with building owners and
real estate managers that enable us to install our in-building fiber-optic,
digital and broadband networks, marketing our services to tenants and hiring
qualified personnel to support our rapid growth. We began operating in-building
networks in June 1996 and currently provide services in 113 buildings
representing approximately 29 million rentable square feet. Overall, we have
secured agreements giving us the right to operate our networks in over 700
buildings representing more than 232 million rentable square feet.
Building and expanding our business will continue to require us to incur
significant capital expenditures. These expenditures will consist primarily of
purchases of communication equipment and construction costs associated with
building our in-building networks. We attempt to maximize the benefit of
deployed capital by investing in network assets only after entering into a
long-term license agreement with a property owner. In addition, we do not
expend capital on a customer until we have signed a contract with that
customer. As a result, a large portion of our capital expenditures is success-
based. On a typical 250,000 square foot building, our up-front capital
investment is usually less than $90,000 which includes the purchase and
installation of our riser system and associated network equipment. As we begin
to successfully penetrate a building, in order to provide additional network
capacity and customer premise equipment our capital deployment in that building
may grow to over $275,000.
We have experienced operating losses and generated negative EBITDA and
expect to continue to generate losses and negative EBITDA for the foreseeable
future while we continue to construct in-building networks and expand our
customer base and internal information systems. As a result of our limited
operating history, prospective investors have limited operating and financial
data upon which to evaluate our performance.
Factors Affecting Future Operations
Revenue. We generate revenues from selling voice, data and other services
and from the rental of telephone systems and other customer premise equipment
to tenants in the buildings in which we own and operate our networks. The
majority of our revenues are generated on a monthly recurring basis. The
remainder are derived from non-recurring charges for installations and other
one-time services. Our customer contracts typically range between one and seven
years in length and are usually designed to coincide with our customers' office
space leases. The typical length of our customer contracts is three years.
Cost of services. Our cost of services consists primarily of leased
transport charges, which are lease payments to communications providers for the
transmission facilities used to connect our in-building networks to incumbent
local exchange carriers and other competitive local and long distance carriers
networks. Other costs include per minute charges paid to long distance
providers for use of their networks, the monthly fees we pay to our Internet
backbone providers, and labor costs associated with installing equipment and
changing customers' services. We expect these costs to increase in aggregate
dollar amount as we continue to grow our business but to decline as a
percentage of revenues due to economies of scale, expected improvements in
technology and price competition from an increased number of vendors from which
we can lease voice and data transport.
Sales and marketing expenses. Sales and marketing expenses include
applicable employee salaries and commission payments, marketing, advertising
and promotional expenses and payments to building owners who enter into long-
term license agreements with us in exchange for a modest percentage of the
gross revenues we generate from their tenants. We expect to incur significant
sales and marketing expenses as we continue to grow our business and build our
brand.
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General and administrative expenses. General and administrative expenses
include costs associated with the recruiting and compensation of corporate
administration, customer care and technical services personnel as well as costs
of travel and entertainment, back office systems and legal, accounting and
other professional services. We expect these costs to increase significantly as
we expand our operations, but decline as a percentage of revenues due to
economies of scale.
Depreciation and amortization. Depreciation and amortization expenses
include depreciation of network related equipment, information systems,
furniture, fixtures, leasehold improvements and the amortization of goodwill
and acquired tenant contracts. We expect depreciation and amortization expenses
to increase significantly as we install our networks in more buildings.
In November and December 1999, we entered into stock warrant agreements and
master license agreements with several property owners and operators in which
we agreed to issue warrants to acquire up to 2,476,592 shares of our common
stock at an exercise price of $19 per share. These warrants will be issued upon
the execution of property-specific license agreements covering buildings listed
in the master license agreements, and the number of shares of common stock
underlying the warrants will be determined in accordance with the terms of the
stock warrant agreements. The measurement date for valuing the warrants will be
the date(s) on which the property owners or managers effectively complete their
performance requirements.
Based upon the current structure of the agreements governing the warrants,
we expect that the fair value of the warrants will be capitalized and amortized
over the applicable term of the license agreements with property owners and
operators. Depending on the prevailing fair market value of the warrants at the
measurement date, we will incur significant non-cash amortization charges.
Amortization of deferred compensation. Amortization of deferred compensation
is a result of granting stock options to our employees with exercise prices per
share treated for accounting purposes as below the fair value of our common
stock at the dates of grant. We are amortizing the deferred compensation over
the vesting period of the applicable option. Although we have not recognized
deferred compensation in previous quarters, we expect to do so in the current
and future quarters and such amounts could be material.
Acquisition strategy. We intend to opportunistically pursue acquisitions or
other strategic relationships to expand our customer base or geographic
presence. These activities could significantly impact our results of operations
and require us to raise additional capital earlier than expected.
In November 1999 we entered into an agreement to acquire approximately 19%
of the common stock of SiteConnect, a Seattle-based building-centric
communications service provider, in exchange for 62,500 shares of our common
stock. The agreement gives us a one-year option to purchase the remaining
outstanding shares of common stock of SiteConnect for approximately $5 million
of our common stock valued at the initial public offering price. Currently,
SiteConnect is providing primarily data communications services to customers in
ten commercial office buildings in Seattle.
Results of Operations
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September
30, 1998
Revenues. Revenues for the nine months ended September 30, 1999 increased
266% to $5.2 million from $1.4 million for the same period in the prior year.
The increase in revenues relates to the addition of new customers, the
acquisition of the assets and customers of MTS Communications Company in
December 1998 (see Note 9 to our financial statements) and the provisioning of
additional services to existing customers.
Cost of services. Cost of services for the nine months ended September 30,
1999 increased 243.8% to $3.2 million, or 62.1% of revenues, from $944,760, or
66.1% of revenues, for the same period in the prior year. The increase in cost
of services was due to an increase in the number of leased facilities
connecting our
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buildings to local, long distance and Internet backbone providers and our
greater volume of voice and data traffic. As of September 30, 1999 we had
networks installed in 96 buildings versus 24 buildings installed at September
30, 1998.
Sales and marketing expenses. Sales and marketing expenses for the nine
months ended September 30, 1999 increased 129.5% to $2.5 million, or 47.2% of
revenues, from $1.1 million, or 75.3% of revenues, for the same period in the
prior year. The increase in expenses was due primarily to a 170% increase in
the size of our direct sales force, increased revenue sharing payments made to
property owners with whom we have license agreements, and increased promotion
of our services via direct marketing and advertising in our licensed buildings.
The decrease in sales and marketing expenses as a percentage of revenue related
primarily to the additional revenue attributable to the acquisition of the
assets of MTS Communications without a comparable increase in sales and
marketing expenses.
General and administrative expenses. General and administrative expenses for
the nine months ended September 30, 1999 increased 250.7% to $5.6 million, or
107.2% of revenues, from $1.6 million, or 111.9% of revenues, for the same
period in the prior year. The increase in general and administrative expenses
was due primarily to a $3.2 million increase in salaries, benefits and
recruiting expenses related to the hiring of additional personnel, a $369,000
increase in travel and entertainment expenses primarily related to marketing to
property owners and operators and expenses associated with personnel travelling
to oversee and conduct the installation of our networks in additional
buildings, and increases in accounting, consulting and legal fees. We expect
general and administrative expenses to continue to grow as we hire additional
personnel and incur additional expenses to support the growth of our
operations.
Depreciation and amortization. Depreciation and amortization for the nine
months ended September 30, 1999 increased to $1.7 million from $587,800 for the
same period in the prior year. This increase was primarily due to increased
capital expenditures related to deploying our networks and intelligent in-
building platforms and amortization of goodwill and tenant contracts related to
the acquisition of MTS Communications.
Interest income, net. Interest income, net for the nine months ended
September 30, 1999 increased to $168,120 from $66,911 for the same period in
the prior year. The increase in interest income, net was due to increased
investments in short-term interest bearing investments as a result of investing
the proceeds raised from our Series B preferred stock offering in September
1998. Interest expense was nominal in both periods.
Results for the Year Ended December 31, 1998, the 5 1/2 Months Ended December
31, 1997, the 6 1/2 Months Ended July 15, 1997, and the Year Ended December 31,
1996
Revenues. Revenues were $2.4 million, $461,167, $248,235 and $83,556 for the
year ended December 31, 1998, the 5 1/2 months ended December 31, 1997, the 6
1/2 months ended July 15, 1997, and the year ended December 31, 1996,
respectively. The growth in revenues was the result of the addition of new
customers and the provision of additional services to existing customers.
Cost of services. Cost of services was $1.5 million, $381,518, $221,596, and
$131,771 for the year ended December 31, 1998, the 5 1/2 months ended December
31, 1997, the 6 1/2 months ended July 15, 1997, and the year ended December 31,
1996, respectively. The growth in cost of services was the result of our
providing services to an increased number of customers and an increase in the
number of leased facilities connecting our buildings to local, long distance
and Internet backbone providers.
Sales and marketing expenses. Sales and marketing expenses were $1.5
million, $326,861, $122,055, and $12,189 for the year ended December 31, 1998,
the 5 1/2 months ended December 31, 1997, the 6 1/2 months ended July 15, 1997,
and the year ended December 31, 1996, respectively. The growth in selling and
marketing costs was the result of increases in the size of our direct sales
force, increased license fee payments made to property owners with whom we have
license agreements and increased promotion of our services via direct marketing
and advertising in our licensed buildings.
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<PAGE>
General and administrative expenses. General and administrative expenses
were $2.4 million, $567,748, $255,175, and $640,704 for the year ended December
31, 1998, the 5 1/2 months ended December 31, 1997, the 6 1/2 months ended July
15, 1997, and the year ended December 31, 1996, respectively. The growth in
general and administrative expenses was the result of increased salaries and
benefits related to the hiring of additional personnel, increased travel and
entertainment related to the installation of new sites and marketing to
property owners, and increases in accounting, consulting and legal fees.
Depreciation and amortization. Depreciation and amortization was $891,788,
$288,737, $66,217, and $53,808 for the year ended December 31, 1998, the 5 1/2
months ended December 31, 1997, the 6 1/2 months ended July 15, 1997, and the
year ended December 31, 1996, respectively. These increases were related to our
increased capital expenditures during the periods. Additionally, the year ended
December 31, 1998 and the 5 1/2 months ended December 31, 1997 include
amortization of goodwill recorded in connection with the acquisition of our
predecessor company.
Interest income, net. Interest income, net was $232,279, $107,669, $6,253,
and $13,939 for the year ended December 31, 1998, the 5 1/2 months ended
December 31, 1997, the 6 1/2 months ended July 15, 1997, and the year ended
December 31, 1996, respectively. The increase in interest income, net was due
to increased investments in short-term interest bearing investments as a result
of investing the proceeds raised from our series A preferred stock offering in
July 1997 and our series B preferred stock offering in September 1998. Interest
expense was nominal in all periods.
Liquidity and Capital Resources
We have required significant capital to fund the construction and
installation of our in-building fiber-optic, digital and broadband networks. As
of September 30, 1999, we had made capital expenditures of $11.7 million since
inception. We expect that our capital expenditures will increase substantially
in future periods as we construct our networks and purchase more communications
equipment. We will continue to seek access to additional buildings. If we are
successful in gaining access to additional buildings, we will have substantial
needs for additional capital for an indefinite period. We also expect to have
substantial and increasing negative EBITDA and net losses.
Since the inception of our predecessor company in August 1995, we have
raised approximately $100.7 million through the issuance of common and
preferred stock. From August 1995 through June 1996, we funded our capital
expenditures and operating losses through the issuance of common stock. In
1997, 1998 and 1999 we sold shares of preferred stock for aggregate proceeds of
$6.0 million, $15.3 million and $79.1 million, respectively. All of the
proceeds from these issuances were or will be used to fund operating losses,
working capital and capital expenditures for the construction and installation
of our in-building networks.
As of September 30, 1999, we had $557,701 in capital lease obligations
outstanding. We assumed the majority of these capital lease obligations through
our acquisition of the assets of MTS Communications. Our capital lease
obligations contain no provisions that would limit our future borrowing
ability.
We estimate that our net proceeds from the sale of common stock in this
offering will be approximately $[ ], based upon an assumed initial public
offering price of $[ ] per share, after deducting the estimated underwriting
discount and our estimated offering expenses. If the underwriters' over-
allotment option is exercised in full, we estimate that our net proceeds will
be approximately $[ ]. We intend to use approximately $[ ] of the
net proceeds from this offering for construction of in-building networks and
the purchase of communications equipment and the remainder for working capital
and general corporate purposes. We may also use a portion of the net proceeds
to acquire or invest in complementary businesses, technologies, services or
products. However, we currently have no material commitments or agreements with
respect to any of these types of transactions.
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<PAGE>
We estimate that the net proceeds of this offering in addition to our cash
on hand will be sufficient to fund our operations and the projected deployment
of our network through mid-2001. We do, however, expect to continue our growth,
expansion and the further development of our network and services beyond that
point. Accordingly, we expect that we will eventually need to arrange for
additional sources of capital through the issuance of debt or equity or bank
borrowings. We have no commitments for any such additional financing, and we
cannot be sure that we will be able to obtain any such additional financing at
the times required and on terms and conditions acceptable to us. In such event,
our growth could slow and operations could be adversely affected.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of many factors. These factors
include:
. the timing of execution of license agreements;
. our ability to meet or exceed our construction schedules;
. obtaining favorable prices for purchases of equipment;
. our ability to develop, acquire and integrate the necessary operational
support systems;
. the cost of network development in each of our markets;
. demand for our services;
. the nature and penetration of new services that may be offered by us;
. regulatory changes; and
. changes in technology and competitive developments beyond our control.
Recent Accounting Pronouncements
We do not believe that any recent accounting pronouncements will have a
material impact on our financial statements.
Quantitative And Qualitative Disclosure About Market Risk
Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio. We typically do not attempt to reduce or hedge our market exposure
on our investment securities because a substantial majority of our investments
are in fixed-rate, short-term securities. We do not have any derivative
instruments. The fair value of our investment portfolio or related income would
not be significantly impacted by either a 100 basis point increase or decrease
in interest rates due mainly to the fixed-rate, short-term nature of the
substantial majority of our investment portfolio. As of September 30, 1999 we
had no debt outstanding, other than capital leases.
Year 2000 Compliance
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, certain
computer programs that have time-sensitive software may recognize a date ending
in "00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities. To ensure that our computer
systems and applications will function properly beyond 1999, we have
implemented a Year 2000 program. This program has been implemented in five
phases:
Phase I. Preliminary Activity. In this phase we educated ourselves as to the
criticality, risks, size and scope of the Year 2000 problem.
Phase II. Problem Determination. In this phase we performed an inventory and
assessment to determine which portions of our hardware and software would have
to be replaced or modified in order for our
25
<PAGE>
Phase I. Preliminary Activity. In this phase we educated ourselves as to the
criticality, risks, size and scope of the Year 2000 problem.
Phase II. Problem Determination. In this phase we performed an inventory and
assessment to determine which portions of our hardware and software would have
to be replaced or modified in order for our networks and management systems to
function properly after December 31, 1999. We also determined the readiness of
the various telecommunications providers that we rely upon to deliver many of
our services. Such determinations were based in part on the representations made
by our hardware, software and service vendors as to the Year 2000 compliance of
the systems we use. However, there can be no assurances that any vendor
representations received by us were accurate or complete. There can be also no
assurances that elements critical to our operation have not been overlooked.
Phase III. Plan Complete & Resources Committed. During Phase III, we
designed a plan to make the necessary modifications to and/or replace the
impacted software and hardware and committed the resources toward the execution
of such a plan. While we believe we have substantially completed our plan for
achieving Year 2000 compliance, the discovery of additional systems requiring
remediation could adversely impact the current plan and the resources required
to implement the plan.
Phase IV. Operational Sustainability. We are actively engaged in Phase IV,
utilizing both internal and external resources to reprogram, or replace, and
test certain components of our networks and information processing systems for
Year 2000 compliance and scheduling the installation of other necessary
hardware and software upgrades. We have conducted a variety of tests to ensure
that our equipment is Year 2000 compliant, focusing primarily on those systems
whose failure would pose the greatest risks to customer use of our networks.
There can be no assurance that we have identified all critical systems. We will
not likely test all of our equipment and will rely upon vendor representations,
if received, where tests are not conducted.
Phase V. Fully Compliant. We anticipate becoming fully compliant with
respect to the most critical components of our networks no later than December
15, 1999, which is prior to any anticipated impact on our operating systems. We
presently believe that with modifications to existing software and conversions
to new software and hardware, the Year 2000 issue will not pose significant
operational problems for our systems or have any adverse impact on our
customers. However, if such modifications and conversions are not made, or are
not completed in a timely fashion, the Year 2000 problem could harm or make our
networks temporarily unavailable to our customers, thereby harming our
reputation and business.
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BUSINESS
Overview
We are a building-centric integrated communications provider currently
serving small and medium-sized businesses in major metropolitan markets
throughout the United States. We offer our customers a full range of
communications services, including feature-rich digital telephones, local and
long distance voice services, high speed, always-on Internet access, business
television and other enhanced communications services. We deliver these
services over state-of-the-art fiber-optic, digital and broadband networks that
we design, construct, own and operate inside large and medium-sized office
buildings. We differentiate ourselves from other communications companies by
providing a single-source communications solution with a high degree of
customer service and responsiveness. Our customers are assigned a single
dedicated on-site or near-site support team to address their sales and service
needs. Our customers also benefit from the convenience and efficiency of
receiving a single integrated bill for all of their communications services.
We began providing bundled communications services and operating in-building
networks in June 1996 in Atlanta. As of November 30, 1999, we were operating
our networks in 113 buildings representing approximately 29 million rentable
square feet in 12 major metropolitan areas, including Atlanta, Boston, Chicago,
Dallas, Denver, Houston, Los Angeles, Miami, New Orleans, Orange County, San
Diego and Washington, D.C. Overall, we have license agreements with building
owners and property managers giving us the right to install and operate our
networks in more than 700 buildings representing more than 232 million rentable
square feet in 50 major metropolitan areas. The typical length of our license
agreements is ten years.
Since the inception of our predecessor company in 1995, we have raised
approximately $100.7 million in capital through private equity financing with
financial and strategic investors. Our investors include private equity
investors such as Alta Communications, Beacon Capital Partners, The Centennial
Funds, Gramercy Communications Partners and Nassau Capital and large commercial
property owners and managers such as AEW Capital Management, Boston Properties,
Brookfield, Cornerstone, Shorenstein, Transwestern and Vornado.
Market Opportunity
According to Dun & Bradstreet, there are approximately 1.3 million small and
medium-sized businesses in the United States, which typically employ between 10
and 500 employees. According to industry sources, small and medium-sized
businesses spent over $47 billion in 1998 for voice communication services.
While the demand for voice services is expected to grow at a modest pace to
over $53 billion in 2002, the demand for data and Internet services from this
market segment is projected to grow at a substantially greater pace. It is
estimated that small and medium-sized businesses spent more than $14 billion
for data and Internet services during 1998, and industry sources project that
growth in data and Internet services will increase at a compound annual growth
rate of approximately 29% per year through 2002.
We are targeting this growing market segment by constructing our fiber-
optic, digital and broadband networks in the office buildings in which many
small and medium-sized businesses are located. According to Torto Wheaton, a
nationally recognized real estate consulting firm, as of September 1999 there
were over 8,100 office buildings with over 100,000 square feet representing
approximately 2.2 billion rentable square feet of office space located in the
major metropolitan areas in which we currently operate or plan to operate in
the future.
As the communications market has grown rapidly over the past five years,
businesses have become inundated with offerings of new products, services and
carriers. As a result, it has become increasingly difficult for small and
medium-sized businesses, most of which do not have a dedicated communications
staff, to evaluate the vast array of communications options that are available.
In addition, these businesses have had to contend with the cost and complexity
of retaining multiple vendors in order to procure the various communications
services they require.
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We believe there is a significant demand in the market for an integrated
communications provider who can offer the various communications services that
small and medium-sized businesses require. While most large enterprises build
or lease dedicated high speed networks and complex communications equipment,
most small and medium-sized businesses, due to cost and network infrastructure
constraints, are not able to enjoy the levels of service and functionality that
such facilities and equipment can provide. For example, the majority of small
and medium-sized businesses access the Internet through relatively slow dial-up
connections, often at speeds of 56,000 bits per second or less. International
Data Corporation forecasts that dedicated high speed connections to the
Internet for small and medium-sized businesses will grow from approximately
240,000 connections in 1998 to over 770,000 connections in 2000, representing a
compound annual growth rate of 79%. We believe that this suggests there is a
significant opportunity for communications providers with the ability to
provide affordable high-speed Internet connectivity in addition to other
enhanced communications services.
Our Solution
We provide small and medium-sized businesses a broad range of communications
services over our own in-building state-of-the-art fiber-optic, digital and
broadband networks. Our solution offers these businesses a number of important
advantages, including:
. A comprehensive communications solution from a single source. We
effectively function as our customers' communications manager and
provide them with a "one stop shopping" solution. As a result, we
greatly reduce the administrative burden typically associated with
managing multiple communications vendors. Our comprehensive package of
communications services typically includes providing feature-rich
digital telephones, local and long distance voice services, high speed,
always-on Internet access, business television, voice messaging and e-
mail. We also offer web site hosting, domain name registration, 24x7
remote systems monitoring, firewall protection and many other enhanced
communications services. We offer our services at competitive prices and
deliver a single bill for all services rendered. We are continually
expanding and upgrading the products and services that we offer our
customers, so that as their needs evolve, our products and services
evolve with them.
. A reliable, feature-rich communications package typically available only
to large corporations. In addition to offering a comprehensive package
of communications services, we provide our small and medium-sized
business customers features and performance levels that traditionally
have been available only to large corporations. We provide voice
services using state-of-the-art equipment from leading manufacturers,
which enables us to offer our customers a variety of enhanced services.
In addition, our networks are designed to alleviate the "bandwidth
bottlenecks" that can exist in multi-tenant commercial buildings. We
provide our customers affordable, high speed, always-on Internet access
at transmission speeds up to 3.0 million bits of data per second. We
also have the ability to provide significantly greater speeds should our
customers require such capacity in the future. In addition, to ensure
reliable performance, we utilize multiple carriers, redundant network
components, emergency power back-ups and critical spares.
. Rapid installation and service expansion with minimal capital outlay by
customers. Because we own and operate our in-building networks, we are
able to deliver our comprehensive package of services to a new customer
within a few days of receiving an order. In addition, we are often able
to provide same day service for existing customers requesting new
services or features, such as increased Internet speeds or additional
lines. Additionally, because our customers typically rent their
telephone systems and related premise equipment from us, they avoid
significant capital outlays and substantially mitigate the risks of
being constrained by network capacity or having their phone system
become technologically obsolete.
. On-site or near-site customer service and support. Upon signing up for
service, each of our customers is assigned a dedicated, experienced
account team. This team is either on-site or near-site and is available
on a 24x7 basis to address customer inquiries. We believe that our high
standard of customer service will continue to enhance our ability to
acquire and retain customers.
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Strategy
Our objective is to be a leading provider of integrated communications
services to small and medium-sized businesses. To achieve this objective, we
have developed a business strategy designed to achieve significant market
penetration and deliver superior customer service while maximizing operating
margins. Key components of this strategy include the following:
. Providing a broad range of communications services under long-term
customer contracts. We intend to continually add to and upgrade our
service offerings in order to attract new customers and further
penetrate our existing customer base. We sell our services under
contracts which are typically three years in length. We believe our
ability to provide a "one-stop shopping" solution will enable us to
continue to enter into long-term contracts with our customers. In
addition, we believe that our broad product portfolio also contributes
to our low customer defection, or churn rates. In short, our goal is to
ensure that a customer or potential customer need never look beyond
Cypress to fulfill any communications need.
. Providing superior customer service. As part of our continuous effort to
attract and retain customers, we are dedicated to providing the highest
levels of customer service and satisfaction in the industry. We assign
to each customer a dedicated team of customer service personnel that is
either on-site or near-site. Consequently, we believe that the level of
customer service and technical support we offer in terms of
responsiveness and customer knowledge exceeds that offered by
competitors who provide customer support on a regional or national
basis.
. Controlling the critical "last few feet." We own and manage the in-
building infrastructure over which we provide services to our customers,
including the actual physical connection between our customers and out-
of-building networks. We believe this affords us important and
sustainable competitive advantages and allows us to:
- strengthen our position as "gatekeeper" to our in-building
customers;
- provision services more quickly and efficiently; and
- better control service quality.
. Leveraging our experience and first mover advantage to secure license
agreements with building owners. As one of the first building-centric
integrated communications providers in the United States, we will
continue to leverage our experience and first mover advantage to secure
additional license agreements with building owners. Before a building
owner will enter into a long-term contract with a communications
provider, the building owner must be confident that the provider is
capable of offering superior service to building tenants throughout the
life of the license agreement and thereafter. We believe our experience,
industry reputation and referenceable customer base give us a meaningful
competitive advantage with respect to instilling this confidence. In
addition, while we target all types of property owners and managers, we
have developed significant expertise in establishing strategic
relationships with owners of individual buildings or small groups of
buildings. These owners represent one of the largest single types of
ownership of office space in the country. We believe that over the long
term this competitive advantage will be particularly important because
many of the larger multi-market building owners will eventually sign
license agreements with either ourselves or our competitors.
. Deploying cost effective, flexible networks. A substantial portion of
our network related capital expenditures are made only after we have
entered into a long-term license agreement with a property owner. The
capital we deploy is highly success-based and modest on a per-building
basis. For example, our initial capital expenditures in a typical
building with approximately 250,000 rentable square feet are usually
less than $90,000, which includes the purchase and installation of our
riser system and associated network equipment. Furthermore, our networks
are designed using an open standard architecture which enables us to
rapidly and cost effectively incorporate the latest
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<PAGE>
technological developments. In addition, in order to minimize operating
costs while maximizing capacity and redundancy, we deploy networks using
a combination of fiber-optic, copper and point-to-point microwave
transmission solutions.
. Opportunistically pursuing additional strategic acquisitions and
relationships. We opportunistically pursue acquisitions and other
strategic relationships which enable us to expand our customer base or
geographic presence or provide us with additional management, sales or
technical personnel. For example, in December 1998 we acquired the
assets of MTS Communications, which provided us access to 14 additional
buildings and expanded our footprint to the greater Los Angeles area. In
November 1999 we entered into an agreement to acquire approximately 19%
of the common stock of SiteConnect, a building-centric data
communications provider serving ten buildings in Seattle, with an option
to purchase the balance of the company. We intend to continue to seek
such domestic opportunities as well as explore international
opportunities either alone or with strategic partners.
Our Communications Services
We use our state-of-the-art in-building networks to provide small and
medium-sized businesses with a full range of voice, data, video and other
enhanced communications services. We also provide paging and, in some markets,
wireless telephone services through agreements with leading carriers. Close
contact with our customers by our direct sales force and customer service
personnel enables us to tailor our service offerings to meet customers' needs
and to creatively package our services to provide "one-stop shopping" solutions
for those customers. Services we offer are summarized as follows:
Cypress Services Currently Available
<TABLE>
<CAPTION>
Voice Services Data Services Video/Wireless/Other
-------------- ------------- --------------------
<S> <C> <C>
. Local Dialtone . High Speed Internet Access . Business Television
. Long Distance . Electronic Mail . Wireless Telephony
. Voice Mail . Web Hosting . Paging
. Telephone Equipment . Domain Name Services . Installation & Cabling
. Audio Conferencing . Firewall Services . Move, Add & Change Services
. Toll Free Services . SmartWatch
. Calling Cards . SmartView
</TABLE>
Voice services. The vast majority of our voice services customers rent their
telephones from us. This ensures a compatible interface with our state-of-the-
art in-building switching equipment and provides customers with a number of key
benefits, including:
. access to an advanced, feature-rich telephone system which few small
businesses could afford to buy and support on their own;
. a significant reduction in up-front capital costs; and
. reduced risk of technological obsolescence.
Our voice offerings include both traditional telephone services, such as
local and long distance services, as well as value-added services, such as
integrated voice messaging, audio conferencing, calling cards and toll-free
number services. Additional enhanced features include call waiting, call
forwarding, dialback and caller ID.
Data services. One of our most popular services is high speed, always-on
Internet access. We provide this service using our patent pending fiber-optic
infrastructure and network configuration. The key features of this service are:
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<PAGE>
. Dedicated connectivity. Our service is always on, providing
instantaneous connections and the capability to receive or transmit
information continuously.
. Range of speed options. Customers currently subscribe to delivery speeds
between 64,000 bits of data per second and 3.0 million bits of data per
second, but we have the capacity to provide up to 100.0 million bits of
data per second in response to customer demand. In addition, using
commercially available equipment, we can increase the transmission speed
of our infrastructure to one billion bits of data per second.
. Scalability. We can usually increase our customers' bandwidth speed
within minutes of receiving a customer request.
. Flexibility. We can deliver different speeds of service to specific
computers or groups of computers within a customer's office.
. Security. Because each customer's Internet service is provided over
dedicated fiber-optic strands, a customer's Internet traffic is secure
from that of other customers in the building.
In addition to our Internet access service, we offer other enhanced data
services such as web site hosting, e-mail, domain name registration and
firewall services. We also offer our customers SmartWatch services, in which we
provide 24-hour monitoring of web and e-mail servers, and SmartView services,
which enables our customers to monitor their bandwidth usage via the Internet.
Video, wireless and other services. In many of our buildings, we offer our
customers a comprehensive package of business television services consisting of
news, business, sports and network programming. We deliver these services
directly to our customers over our in-building networks using a combination of
direct broadcast satellite services and off-air antennas for local channels.
Our customers can elect to receive more or less programming depending on their
needs. In addition to voice, data and video services, we also offer our
customers a variety of other enhanced communications services, such as paging
and, in some markets, wireless telephony, which we are able to provide through
agreements we have with leading carriers. We also provide on-site installation,
including installing telephone systems and configuring and connecting customer
computer equipment to our networks, as well as highly responsive move, add and
change services. We will continue to investigate, test and add, where
appropriate, complementary products and services to maintain our "one stop
shopping" strategy.
Network Architecture
We design, install, own and operate our networks inside buildings which we
serve under long-term license agreements with building owners or operators. Our
in-building networks typically consist of the following:
. a state-of-the-art riser system utilizing fiber-optic cable, broadband
coaxial cable and copper wire;
. intelligent communications platforms usually located in the building;
. high capacity leased facilities connecting our networks to the networks
of selected local, long distance and Internet backbone service
providers;
. in many instances, high capacity leased facilities interconnecting our
in-building networks; and
. for our data services, high capacity leased facilities using either hub-
and-spoke or ring architectures to move data traffic to and from a
central point of presence that we establish in each market.
The following diagram displays our typical in-building network architecture:
[DIAGRAM]
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<PAGE>
Riser systems inside buildings. Inside buildings, we design, install, own
and manage a vertical communications infrastructure, also known as the riser
system, that typically runs inside vertical utilities shafts from the
building's basement to the top floor. Our riser systems typically are comprised
of high capacity fiber-optic cable, broadband coaxial cable and copper wire.
These systems are designed to carry a full range of voice, data and video
traffic. We believe our riser systems have the capacity to accommodate all of
our customers' current and anticipated broadband needs.
Feeder systems inside buildings. Inside buildings, we also design, install,
own and manage a horizontal communications infrastructure, known as the feeder
system, that typically runs from our riser systems into our customers'
premises. Our feeder systems typically utilize high capacity fiber-optic cable,
broadband coaxial cable and copper wire. These systems are installed only upon
our signing a service contract with a customer. Key benefits of our feeder
systems design are as follows:
Voice Services
. Our feeder systems provide a compatible connection between our
customers' telephone equipment and our in-building state-of-the-art
switching equipment.
Data Services
. We install our feeder link directly into our customer's local area
networks, thereby eliminating the need for our customers to purchase and
maintain their own Internet routers and switches.
. Our customer gains an always-on, secure connection to our network using
a link known as an Ethernet connection. These Ethernet connections allow
us to provide in-building transmission speeds ranging from 10.0 million
to 1.0 billion bits of data per second.
Video Services
. We connect our feeder systems to multi-point distribution equipment
allowing us to cost-effectively deliver video programming to multiple
television sets within a customer's office.
Intelligent platforms inside buildings. Inside almost all of the buildings
we serve, we have intelligent switching, routing and distribution platforms
that connect our riser systems to the networks of select local, long distance
and Internet backbone service providers. Our intelligent platforms include data
switches and routers, voice switches, and other video and communications
equipment purchased from leading manufacturers including Nortel Networks and
Cisco Systems. In the case of a multi-building real estate complex, we are
usually able to provide our services in all buildings within that complex by
deploying a single intelligent platform in one of the buildings and connecting
the other buildings in the complex to that platform. This results in
significant cost savings and reduced capital expenditures.
Leased facilities outside buildings. We connect the intelligent platforms in
our buildings to leased network facilities of selected local, long distance and
Internet backbone service providers that provide the out-of-building transport
necessary to provide full service to our customers. In some instances, as in
the case of a multi-building complex, we may interconnect a number of buildings
using leased facilities known as "private line" or "point-to-point"
connections.
For our Internet services, we have a central market point of presence, at
which we aggregate and disseminate traffic to and from all of the buildings we
serve in that market. We typically connect each building to the central market
point of presence using leased high capacity facilities, on a carrier's fiber-
optic ring wherever available. These lines are leased from carriers that have
previously installed fiber in the local market. There are generally several
providers in each market who are able to provide us with connectivity for
traffic between buildings and the point of presence.
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<PAGE>
At our point of presence, we install the electronic equipment necessary to
provide our data services in the metropolitan area. This equipment includes
network servers, traffic routers, bandwidth managers and other related
communications equipment. We connect each point of presence to more than one
Internet backbone service provider to provide diverse Internet connectivity to
our network. Most points of presence are connected to at least one other point
of presence in a different market over a dedicated leased facility to increase
redundancy.
Advantages of our Network Architecture. The architecture of our network
provides us with significant competitive advantages, including the ability to:
. rapidly connect customers without the need to arrange local phone lines
and circuits for each new line added;
. capitalize on advanced Internet-protocol-based technology to construct a
more efficient and lower cost network;
. provide low cost, high performance services;
. offer always-on, secure data connections to our network and the
Internet; and
. provide a flexible platform for bandwidth upgrades and new service
offerings as communications technology and applications continue to
develop.
Network Management and Monitoring. We are implementing a state-of-the-art
automated alarm and control system to further enhance our network monitoring
capabilities. Our trained system engineering personnel use our control system
to monitor and control our networks on a 24x7 basis. This system enables fault
alarm monitoring, system control, environmental monitoring, remote system
diagnostics, physical security monitoring, redundancy control, and usage
statistics. This Internet-enabled system allows our technicians to access and
control our systems over Internet, Intranet or local or wide area network
configurations, as well as through a dial-up connection in the unlikely event
of loss of Internet-based communications. Service affecting events are
automatically detected and immediately reported to both technical personnel
located in our network operations center and market-based field support
engineers who address network issues either remotely or directly on-site. Field
engineering personnel in our markets are equipped with a full set of parts and
spares necessary to support their routine service calls and we also maintain
complete spare systems in the unlikely event of a disaster.
Our network operations center also supports a 24x7 hotline for help desk
support. We intend to supplement this center with a geographically diverse
backup network operations center site to supplement day-to-day operations and
act as a disaster recovery site for the main network operations center.
Construction
We have developed and implemented a cost-efficient, team-based approach to
constructing and expanding our in-building networks. We have formulated
implementation procedures which incorporate standardized construction drawings
and modular equipment racking configurations to allow us to maintain high
quality repeatable construction standards for all of our installations with
minimal use of equipment space. As a result of our extensive experience gained
from having constructed over 100 in-building networks and our standardized
installation procedures, we can often begin serving customers within 45 to 60
days from the time that a property manager approves our network design. As a
result of our standardized repeatable construction process and our extensive
engineering capabilities, we are typically able to initially install our
networks for less than $90,000 per building. Thereafter, we are able to cost-
effectively deploy capital and expand our networks as needed to accommodate
customer demand.
We deploy teams of building survey engineers, regional project managers and
system implementation technicians who manage our network construction in three
phases:
33
<PAGE>
Phase 1. A Cypress building survey engineer performs an in-depth building
site survey to analyze a building's specific construction requirements, tenant
profile and availability of out-of-building communications infrastructure. We
then tailor our standardized implementation template to the specific needs of
the building. The resulting proposed design plan is then submitted to building
management for final approval.
Phase 2. We assign a regional project manager to manage the in-building
infrastructure construction process. The project manager reviews the
implementation plan and supervises a team of Cypress employees and third-party
contractors which installs the riser system and related communications
equipment. The regional product manager also consults with our network facility
management group to secure the appropriate network communication facilities and
with our system procurement group to ensure that the proper equipment is
purchased and available for installation when needed.
Phase 3. Once the network installation is complete, a system implementation
technician works with the network operations center to test and calibrate all
remote alarm and automated diagnostic testing features. When the acceptance
testing is finished, the technician completes the required building site
documentation and a dedicated local account team is notified to commence sales
efforts.
Marketing and Sales
We directly market our services to the tenants in buildings in which we have
secured long-term license agreements from property owners or managers. We
leverage our relationships with property owners and managers as a first and
primary means of creating tenant awareness of our services. Upon our entering a
building, property owners or managers will typically send a letter to tenants
on their letterhead introducing Cypress, describing the nature and benefits of
our service offerings and highlighting the complete package of business
communications products that we are able to offer. Shortly thereafter, we will
conduct a promotional in-building event, typically in the building lobby, where
we will demonstrate our voice, Internet and video services to generate sales
leads. After our initial service launch we continue to work closely with the
building owner, property management and leasing representatives. Our typical
license agreements enable us to display our signage and marketing materials
within the leasing office and other high traffic locations within a building.
Our agreements also contain provisions whereby our building owners, management
and leasing representatives agree to advise tenants of the availability of our
services. In most cases, property owners or managers will also notify us as new
tenants enter the building.
Our goal is to offer a comprehensive communications solution and in effect
to become our customers' outsourced communications department. As such, our
sales approach is highly consultative. In our initial sales meetings we work
closely with prospective customers to assess their particular communications
needs. We also carefully analyze the communication bills from their current
vendors to understand a prospect's usage patterns and current cost. We then
return to the prospect with a highly customized, comprehensive proposal which
is typically more cost effective, feature-rich and easier to administer than
their current communications package.
We typically assign one permanent account team for every five or six
buildings. The account team typically consists of one account executive, one
customer service representative and one on-site or near-site technician. Our
technicians and engineers provide our customers with customized technical
consulting on the use and availability of our various services. This is
generally highly valued by small and medium-sized businesses that often have
limited information technology staffs and expertise. We believe that using
dedicated account teams enhances our ability to build and retain long-term
customer relationships and our ability to cross-sell and upgrade service
offerings.
Our sales efforts are supported by our marketing department which, in
addition to creating various "point of sales" promotional materials, works with
outside advertising and public relations firms to develop a targeted, highly
cost-effective marketing approach to build Cypress brand awareness.
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<PAGE>
Real Estate Selection and Marketing
Property Selection
The criteria that our real estate professionals consider in targeting
buildings includes the buildings' location and size, the number of tenants, the
tenant mix, the proximity of the building to other buildings in which we hold
existing license agreements, and the expected time and cost involved in
installing our networks. In addition, we generally prefer buildings with some
tenant vacancy, or anticipated near-term tenant roll-over, because we believe
new tenants are particularly receptive to our single-source communications
solution. Once we have determined that a building or collection of buildings
meets our criteria, one of our real estate professionals contacts the property
owner or operator in an attempt to negotiate a license agreement which will
provide us access to the buildings.
License Agreements and Arrangements with Property Owners and Operators
We believe we present a compelling value proposition to property owners and
operators. In our negotiation with these property owners and operators, we
emphasize the following value-added benefits of doing business with Cypress:
. we pay property owners a fixed rental fee and/or a modest percentage of
the revenue we receive from providing communications services to the
tenants in their buildings;
. we enhance the marketability of the building to prospective tenants by
providing a complete communications solution with advanced features that
may not be available in other buildings; and
. we install our network architecture at no cost to the property owner.
Our Real Estate Relationships and Opportunities
We currently have approximately 700 office buildings, representing
approximately 232 million rentable square feet, in which we have installed, or
have the right to install, our communications infrastructure. According to
Torto Wheaton, a nationally recognized real estate consulting firm, there are
more than 3,900 office buildings representing approximately 950 million square
feet of rentable office space in the 12 metropolitan markets in which we
currently provide our services. We recently entered into master license
agreements with property owners and operators that will allow us to enter 38
additional metropolitan markets. Torto Wheaton covers 32 of these markets and,
according to them, there are more than 3,900 office buildings representing
approximately 1.2 billion square feet of rentable office space in these 32
additional markets. Accordingly, this data indicates that there are more than
7,800 office buildings representing approximately 2.1 billion square fee of
rentable office space in 44 of the 50 markets in which we currently provide, or
have the right to provide, our services.
We have established excellent working relationships with real property
owners and operators across the commercial real estate industry, including
private owners, pension funds and pension fund advisors, public real estate
operating companies such as public real estate investment trusts, property
managers, life insurance companies and foreign owners of domestic real estate.
In total, the property owners and operators with whom we have an existing
relationship own or operate more than 1,500 buildings representing
approximately 435 million rentable square feet.
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<PAGE>
Set forth below is a table which summarizes our success to date in obtaining
license agreements and constructing our in-building networks. The table also
presents information regarding the size and composition of our market
opportunity. This table was compiled using data from Torto Wheaton and includes
information regarding only buildings with 100,000 rentable square feet or more,
as we currently do not plan to target buildings of less than this size.
<TABLE>
<CAPTION>
Target Buildings Target Buildings Square Feet
------------------------------- -------------------------------
In Operation or In Operation or
Market Under Agreement Total in Market Under Agreement Total in Market
- ------ --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Atlanta, GA............. 75 332 21,684,357 83,634,783
Baltimore, MD........... 3 105 1,457,229 19,927,964
Boston, MA.............. 44 395 16,342,567 91,377,085
Charlotte, NC........... 6 64 2,754,752 16,271,405
Chicago, IL............. 34 505 17,183,568 151,796,466
Cincinnati, OH.......... 1 74 235,884 17,850,830
Cleveland, OH........... 2 79 875,323 22,057,817
Columbus, OH............ 5 64 1,403,895 12,866,860
Dallas, TX.............. 36 421 11,985,029 110,629,685
Denver, CO.............. 21 229 10,171,402 51,044,012
Detroit, MI............. 2 180 524,256 41,004,906
Fort Worth, TX.......... 2 69 1,325,355 15,143,802
Ft. Lauderdale, FL...... 2 54 365,146 8,999,124
Hartford, CT............ 1 55 155,221 11,812,220
Honolulu, HI............ 4 37 1,895,410 8,168,251
Houston, TX............. 37 368 8,013,500 100,971,894
Indianapolis, IN........ 2 63 816,639 13,508,804
Kansas City, MO......... 4 116 778,132 22,475,756
Long Island, NY......... 4 98 454,750 18,723,382
Los Angeles, CA......... 63 481 14,993,007 122,718,947
Miami, FL............... 9 107 2,520,277 21,383,132
Minneapolis, MN......... 13 161 6,204,979 43,133,751
Nashville, TN........... 3 65 667,967 81,119,299
New Jersey Metro North.. 8 369 1,963,861 78,157,916
New York, NY............ 37 749 30,066,352 352,401,110
Oakland, CA............. 6 132 1,050,470 25,487,180
Orange County, CA....... 2 174 351,037 32,464,968
Orlando, FL............. 6 69 894,518 12,064,976
Philadelphia, PA........ 10 204 4,613,902 53,180,369
Phoenix, AZ............. 16 138 4,541,990 26,711,581
Sacramento, CA.......... 7 68 1,462,446 11,922,261
Salt Lake City, UT...... 3 53 517,986 9,299,970
San Diego, CA........... 8 75 1,756,161 15,472,693
San Francisco, CA....... 60 208 20,883,113 54,007,043
San Jose, CA............ 12 103 1,779,239 15,592,513
Seattle, WA............. 4 140 2,262,129 33,752,054
St. Louis, MO........... 6 102 1,761,595 21,571,718
Stamford, CT............ 1 87 100,389 17,130,048
Tampa, FL............... 6 77 1,974,505 16,975,417
Washington, D.C. ....... 83 828 19,479,558 168,288,519
Westchester County, NY.. 1 83 234,185 16,050,416
West Palm Beach, FL..... 2 40 450,104 8,214,621
Wilmington, DE.......... 1 22 438,843 4,818,524
Other................... 50 * 12,745,441 *
----- ----------- -------------
Total................. 702 7,843 232,136,469 2,060,184,072
</TABLE>
- --------
* Data not available for certain markets in which we currently provide, or have
the right to provide, our services. These markets include Memphis, Milwaukee,
Montreal, New Orleans, Pittsburgh, Richmond and San Antonio.
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<PAGE>
Customer Service and Technical Support
We believe that we maintain a standard of customer service higher than other
companies serving small and medium-sized businesses and that this is a key
factor in our low customer turnover rate. The hallmarks of our service include:
. Dedicated Support Teams for Timely Response. We typically designate on-
site or near-site teams of one account executive, one customer service
representative and one technician to a territory which usually includes
five or six buildings grouped as closely as possible. These teams are
closely supported by Internet sales engineers and technicians certified
in Nortel, Cisco and Microsoft technologies. Customers benefit from this
arrangement because our dedicated account teams, in addition to being
physically located near our customers, are familiar with our customers'
particular communications packages and, accordingly, are able to more
efficiently respond to their needs. The team approach also further
personalizes our customer relationships.
. Dial "H-E-L-P" for Service. In Atlanta, our largest market, a customer
need only dial "H-E-L-P" (4357 on a telephone key pad) from any
telephone that is part of our network to be connected to our customer
service team. In most cases, our customer's name will appear on our
customer service representatives telephone display, allowing us to
answer the calling party using their name, further supporting the
personalized relationship between Cypress and our customers. If a
customer is not near a telephone connected to our network, we provide a
regular ten digit contact number to reach our customer service
representatives. We are implementing this system in our other markets as
well.
. Remote System Monitoring and Service Modifications. Many elements of our
networks can be controlled and modified remotely from a customer service
office or our network operations center, allowing us to respond to
customers more rapidly and with minimal disruption. For example, we can
increase a customer's bandwidth allocation within minutes of being
contacted or we can add additional lines and voice mail boxes to a
customer's existing services without the need to make an on-site service
call.
. Efficient On-Premises Service Modifications. Some move, add and change
services require a visit to our customers' premises. For example, when a
customer expands the number of employees in their office, we will send a
customer service representative to manage this expansion and a
technician to install additional cabling and telephones. Because our
networks are modular and scalable even at the customer premises level,
we can typically add the necessary services and equipment with minimal
disruption to our customer's regular operations.
. Continuous Training. Upon implementation of the Cypress solution for a
new customer, the members of the dedicated support team introduce
themselves to the end-users at the customer's premises and explain the
functionality of the new equipment and services for which the customer
has contracted. We provide further training when the customer expands
its services or adds new employees. We believe our emphasis on training
reduces calls to our customer service team and encourages quick adoption
of and higher usage rates for installed services, which we believe leads
to increased demand for bandwidth upgrades and additional services.
Regulation
Many of our services are subject to federal, state and/or local regulation.
The FCC's regulations generally focus on interstate or international services
whereas state and municipal regulations impact intrastate services.
Voice Services
To the extent that our provision of voice services constitutes shared tenant
services, the FCC generally does not regulate shared tenant services providers
where they are not considered resellers of interstate services. In many states,
shared tenant services providers are subject to less regulation than
competitive local exchange
37
<PAGE>
carriers, or CLECs, but in certain states, shared tenant services providers are
subject to significant regulations, including regulations concerning, among
other things, 911 services. If we are a CLEC in any state, we generally will be
subject to far more federal, state and local regulations than if we are simply
a shared tenant services provider. Most states require that CLECs, among other
things, become certified as a telecommunications carrier and file tariffs
setting forth the terms, conditions and prices for services that are classified
as intrastate. CLEC's obligations also include, among other things, the duty to
complete calls originated by competing carriers under reciprocal arrangements
or through mutual exchange of traffic without explicit payment, the obligation
to permit resale of their telecommunications services without unreasonable
restrictions or conditions, and the duty to provide dialing parity, number
portability and access to rights of way.
Other voice services or products that we provide may also be subject to FCC,
state or local regulation. Two examples are as follows: (i) customer premises
equipment provided by us must comply with the technical requirements of Part 68
and may not harm the network; and (ii) under FCC regulations, as a toll-free
subscriber, we are prohibited from acquiring more toll-free numbers than we
intend to use or from acquiring toll-free numbers with the intent to sell them.
Numerous rulings and regulations will impact upon our ability, as well as
that of our competitors, to successfully compete for the provision of local
services at multiple unit premises. For example, in August 1996, the FCC
released the Local Competition Order, which, among other things, (i)
implemented the interconnection, network unbundling and resale provisions of
the Telecommunications Act of 1996; and (ii) created rules to deal with
reciprocal compensation for the transport and termination of local
telecommunications, non-discriminatory access to rights of way and related
matters. A related FCC order adopted on the same day established rules
implementing the Telecommunications Act with respect to local and toll dialing
parity among competitors, nondiscriminatory access to telephone numbers,
operator services, directory assistance and listings, and network information,
and reform of numbering administration.
The U.S. Supreme Court largely upheld the FCC's Local Competition Order, but
remanded the matter for further proceedings on the issue of which incumbent
local exchange carrier, or ILEC, network elements must be made available to
competitive local exchange carriers. On September 15, 1999, the FCC adopted
rules reaffirming that ILECs must provide unbundled access to most of the
original list of mandatory network elements, as well as, for the first time, to
subloops and dark fiber loops and transport. The FCC declined to require that
incumbent telephone companies make their facilities used to provide packet-
switched services, such as digital subscriber line equipment, available to
competitors as an unbundled network element, except in limited circumstances.
The Local Competition Order remains under review by the Eighth Circuit on the
substantive merits of the FCC's "TELRIC" forward-looking cost methodology for
the pricing of network elements. The Eighth Circuit heard oral argument on this
issue on September 17, 1999.
At the state level, many issues remain open regarding how new local
telephone carriers will be regulated. For example, although the
Telecommunications Act preempts the ability of states to forbid local service
competition, the Telecommunications Act preserves the ability of states to
impose reasonable terms and conditions of service, to regulate right-of-way
use, to promote universal service, and to impose other regulatory requirements.
In addition, state commissions have significant responsibility under the
Telecommunications Act to oversee the use of the ILECs network elements and
wholesale local services, and such commissions arbitrate disputes concerning
interconnection agreements.
The level of competition that we face with respect to long distance services
may also be impacted by federal and state statutes, rulings and regulations.
The Telecommunications Act establishes the foundation for substantial new
future competition for our long distance services through elimination or
modification of previous prohibitions on the provision of inter-LATA long
distance services by the Regional Bell Operating Companies, or RBOCs. The RBOCs
are now permitted to provide inter-LATA long distance service outside of the
region in which they are the dominant local carrier. They also are allowed to
provide long distance services through their cellular and other mobile service
affiliates within their region.
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Under the Telecommunications Act, the RBOCs will be allowed to provide in-
region inter-LATA services upon specific approval of the FCC and satisfaction
of other conditions, including a checklist intended to facilitate competitive
entry into local exchange markets. Bell Atlantic, SBC-Ameritech and other RBOCs
have begun efforts to obtain authority from the FCC to offer in-region long
distance services in certain of the states in their respective regions. The FCC
has rejected all of the applications to date, but Bell Atlantic's pending
application for New York, which must be decided by the FCC by no later than
December 1999, has won the endorsement of the New York PSC. The Department of
Justice, however, believes that the application is inadequate in certain
critical respects.
Data Services
Currently, the Internet and data services that we are providing are
generally not regulated by the FCC or by the majority of states in which we
operate in most respects. As recently as August 1999, the Chairman of the FCC
submitted a draft strategic plan to Congress (the August Report) that
establishes as an FCC policy initiative the goal to "continue to resist
regulatory intervention in the deployment of Internet and data services."
Similarly, in an April 10, 1998 report to Congress (the April Report), the FCC
determined that Internet service providers, or ISPs, should not be treated as
telecommunications carriers and should not be regulated. In the April Report,
the FCC did conclude that certain services offered over the Internet, such as
phone-to-phone IP telephony, may be functionally indistinguishable from
traditional telecommunications service offerings, and their non-regulated
status may have to be re-examined.
Internet service providers currently do not have to pay access charges to
local exchange carriers (i.e. charges for Internet traffic handled in part by
local telephone companies), but it is difficult to predict whether this policy
will remain in effect. In addition, in the April Report, the FCC suggested that
phone-to-phone Internet telephony providers may in the future be required to
pay access charges because these providers may be reclassified as
"telecommunication carriers" in which case they would be subject to the full
panoply of FCC regulations applicable to telecommunication carriers.
With respect to universal service payments (i.e. payments to certain
carriers to ensure, among other things, that local service to rural areas
remains inexpensive), ISPs are generally not providing telecommunications
services, and therefore they are not subject to universal service payments,
except that phone-to-phone Internet telephony providers might be characterized
as "telecommunication carriers" and thus may be required to contribute to
universal service.
In addition, we may be affected by various statutes, regulations and court
cases relating to the liability of Internet service providers and other on-line
service providers for information carried on or through their services or
equipment, including in the areas of copyright, indecency/obscenity, defamation
and fraud.
Video and Wireless Services
As for our provision of video services, we are subject to FCC, state and/or
local regulations, although typically to a lesser extent than franchised cable
operators. The regulations affecting franchised cable operators affect us, even
where they do not apply to us, because such regulations can either strengthen
or weaken our competitors. For example, the elimination of certain rate
regulations previously applicable to franchised cable operators may strengthen
that group of competitors.
Many FCC proceedings concerning video services may impact upon our business
as well. For example, our business may very well be affected by the FCC's
ruling in November 1998 in the OTARD proceeding. In that proceeding, the FCC
ruled that owners of multiple unit premises generally cannot forbid tenants
from installing certain telecommunications devices and antennas, including DBS
antennas under a certain size, in certain areas, such as balconies leased to
the tenant. Accordingly, DBS and certain other video services providers may be
able to provide greater competition to us because in many instances a property
owner will not be able to prevent them from providing their video services.
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<PAGE>
In a proceeding decided in June 1998, the FCC ruled that under certain
conditions private cable operators could use a service provided by local
exchange carriers that would enable the private cable operators to provide
video services to properties to which they otherwise could not profitably
serve. This decision may strengthen private cable operators, who are potential
competitors. Our competition with regard to the provision of video services may
also increase as a result of the Telecommunications Act repeal of the
telco/cable cross-ownership prohibition, which previously prohibited ILECs from
providing cable television service.
Given that we do not have PCS or cellular licenses but rather rent or sell
pagers and wireless phones and resell the services of wireless providers, we
are subject to less federal regulation with respect to these services. In
addition, wireless providers are subject to numerous regulations, many of which
may change at any time. To the extent such providers are affected by changes in
regulations, we may be indirectly affected.
Multiple Unit Premises
In light of our focus on providing services to office buildings and other
multiple unit premises (but not multiple dwelling units), laws and proceedings
directly affecting this portion of the telecommunications market may impact our
business. Examples of such laws include, without limitation, the OTARD
proceeding discussed above and mandatory access laws to the extent they apply
to office buildings. Mandatory access laws are laws that have been enacted in
certain states and municipalities that prevent property owners of certain
multiple unit premises from prohibiting some or all of the following providers
from serving the owners' properties:
telecommunications providers, Internet services providers, franchised cable
operators or video services providers. While many of these laws apply only to
multiple dwelling units, to the extent such laws apply to commercial properties
or are subsequently amended to cover commercial properties, these laws would
benefit our competitors by enabling them to obtain access to buildings that
they otherwise may be prevented from serving.
In addition, in a proceeding initiated on June 10, 1999 concerning multiple
unit premises issues, the FCC will address numerous issues, including, without
limitation, the following:
. whether the FCC should adopt its tentative conclusion that utilities
must allow telecommunications and cable service providers access to
rooftop and other rights-of-way and utility shaft conduit in multiple
tenant environments on just, reasonable and nondiscriminatory rates,
terms and conditions;
. whether incumbent local telephone companies should make available
unbundled access to riser cable and wiring within multiple tenant
environments;
. whether building owners offering access to any telecommunications
provider should be required to make comparable access available to all
such providers on a nondiscriminatory basis, and whether the FCC has the
authority to impose such a requirement;
. whether the FCC should forbid telecommunications providers from entering
into exclusive contracts with building owners;
. whether the FCC should modify its rules concerning the demarcation point
between facilities controlled by the telephone company and by the
property owner on multiple unit premises in an effort to promote
competition, and whether the FCC's rules regarding disposition of such
wiring upon the termination of the telecommunications provider's service
at the property should mirror the rules applicable for wiring used for
video services; and
. whether the FCC should require property owners of multiple unit premises
to permit tenants to attach to property under the tenant's exclusive
possession antennas used for telecommunications and other fixed wireless
services to the same extent that the property owner must permit such
attachment for certain antennas and devices used to receive video
services under the OTARD ruling.
We cannot predict the outcome of the issues considered in this proceeding.
If, however, the FCC's rulings make it easier for competitors to compete with
us by, for example, preventing property owners from restricting access to their
buildings to competitors, we may face increased competition.
40
<PAGE>
Legislation also has been introduced in the U.S. Congress that addresses
issues relating to telecommunications access to buildings owned or used by the
federal government, including legislation, that if passed, would prevent
federal agencies from entering into leases with building owners unless the
owners agree to provide nondiscriminatory access to competitive carriers. We
cannot predict the outcome of this legislation, nor what effect, if any, it may
have on our business if it is enacted.
Conclusion
The foregoing is a brief summary of some of the many federal, state and
local laws that may affect us. It is impossible to predict with certainty how
these, as well as other laws that may affect us, may change, and how such
changes may affect our business as well as the business of our competitors.
Intellectual Property
We regard certain aspects of our products, services and technology as
proprietary and attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our products, services or technology without authorization, or to
develop similar technology independently.
We currently have a patent application pending for our fiber-optic
infrastructure and network configuration. This patent may not be issued to us,
and if issued, it may not protect our intellectual property from competition
which could seek to design around or invalidate this product.
Employees
As of November 30, 1999, we had 167 full-time employees. We are not party to
any collective bargaining agreements covering any of our employees, have never
experienced any material labor disruption and are unaware of any current
efforts or plans to organize our employees. We consider our relationships with
our employees to be good.
Facilities
Our headquarters are located in facilities consisting of approximately 9,000
square feet in Atlanta, Georgia which we occupy under a lease which expires in
July 2005. We also occupy approximately 8,000 square feet of temporary space in
Atlanta under leases of less than one year, and we are currently negotiating a
lease for approximately 20,000 square feet which will replace these temporary
quarters. In addition, our engineering personnel, network operating facilities
and warehousing and distribution functions are scheduled to be relocated to a
new facility consisting of approximately 32,000 square feet in Norcross,
Georgia under a lease which expires in November 2006. We also occupy offices in
various major U.S. markets under leases of various terms. As we expand into new
markets we will continue to add office space as needed.
Legal Proceedings
We may from time to time be involved in legal proceedings in the ordinary
course of our business. We are not currently involved in any pending legal
proceedings that are expected to have a material adverse effect on our
business.
41
<PAGE>
MANAGEMENT
Executive Officers, Key Employees and Directors
Our executive officers, key employees and directors, their position and
their ages as of November 24, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
R. Stanley Allen........ 41 Chief Executive Officer and Director
Ward C. Bourdeaux, Jr... 41 Executive Vice President and Director
Mark A. Graves.......... 40 President, Chief Operating Officer and Secretary
Barry L. Boniface....... 37 Chief Financial Officer
Raymond Potts........... 36 Vice President of Marketing and Sales
Eugene H. Kreeft........ 50 Vice President of Engineering
Alistair Sloan.......... 35 Vice President of Internet Services
Claire S. Schenk........ 50 Director of Human Resources
William P. Egan......... 54 Director
John C. Halsted......... 35 Director
Jeffrey H. Schutz....... 48 Director
Laurence S. Grafstein... 39 Director
Randall A. Hack......... 52 Director
</TABLE>
R. Stanley Allen is a co-founder of Cypress and has served as our Chief
Executive Officer and a director since August 1995. From August 1995 until
September 1998, he also served as our President. From March 1994 to May 1996,
Mr. Allen was President and Chief Executive Officer of Applied Video
Technologies, Inc., a wireless cable and communications investment and
development company. From 1991 to 1994, Mr. Allen was President of American
Quality Cable Corporation, a wireless cable television operator. Mr. Allen has
also held positions as Manager-Real Estate Consulting for Coopers & Lybrand and
Analyst for Wellington Real Estate, an affiliate of Boston-based Wellington
Management Company. Mr. Allen was a Director for Wireless Cable of Atlanta
before its acquisition by BellSouth in 1997 and was also a Director for the
Wireless Cable Association. Mr. Allen received a Bachelor of Arts degree in
Economics and a Master of Business Administration degree from the University of
Virginia.
Ward C. Bourdeaux, Jr. is a co-founder of Cypress and has served as our
Executive Vice President and a director since August 1995. From January 1993 to
April 1995, Mr. Bourdeaux served as Director of Development for RealCom Office
Communications, where he was responsible for entering into new license
agreements, and for the renewal of existing agreements nationally. Prior to
that, he spent over nine years in the commercial real estate industry with
Cushman & Wakefield and Carter & Associates. Mr. Bourdeaux received a Bachelor
of Arts degree in Communications from the University of Alabama.
Mark A. Graves has served as our President since September 1998 and our
Chief Operating Officer and Secretary since September 1997. From September 1997
until September 1998, he also served as our Chief Financial Officer. From March
1994 to September 1997, Mr. Graves was Executive Director of Corporate
Development for BellSouth Corporation, where he was involved in mergers,
acquisitions and other strategic transactions. Mr. Graves' activities
principally involved BellSouth Corporation's wireline telephone company,
Internet services unit and wireless data partnerships. From May 1989 to
February 1994, Mr. Graves was a Principal at Sterling Payot Company, a private
investment firm in San Francisco, where he provided advisory services in
strategy and finance predominantly to media and telecommunications companies,
including Pacific Telesis in its spin-off of PacTel Corp., which was renamed
AirTouch Communications. Prior to joining Sterling Payot Company, Mr. Graves
held positions at The First Boston Corporation and United Technologies
Corporation. Mr. Graves received a Bachelor of Arts degree in Economics and a
Master of Business Administration degree from Harvard University.
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<PAGE>
Barry L. Boniface has served as our Chief Financial Officer since October
1998. From September 1994 to October 1998, Mr. Boniface was Executive Director
of Corporate Development for BellSouth Corporation, where he was responsible
for domestic and international mergers, acquisitions, divestitures and other
strategic transactions. Mr. Boniface's activities principally involved
BellSouth's domestic and international wireless telephone services and
competitive local exchange carrier activities. Prior to that, Mr. Boniface was
a principal in Berkshire Partners, Inc., a merchant banking firm based in
Dallas, Texas. He has also held the positions of Chief Operating Officer for
Global Business Acceleration, Inc., an early stage software development
company, and Vice President in the Corporate Finance Department at Principal
Financial Securities, Inc., an investment banking firm. Mr. Boniface received a
Bachelor of Business Administration degree in Management Information systems
from Southern Methodist University and a Master of Business Administration
degree from the Goizueta Business School at Emory University.
Raymond F. Potts has served as our Vice President of Marketing and Sales
since October 1999. From September 1997 to October 1999, Mr. Potts was Regional
Vice President for Sales, Operations and Marketing for the midwest territory of
Teligent, Inc., a wireless telecommunications company. From 1996 to September
1997, Mr. Potts served as Vice President of Sales for the midwest region of
Cable & Wireless, Inc., a wireless telecommunications company. Prior to that,
Mr. Potts spent in excess of ten years in various senior-level sales and
service management positions for Midcom Communications, Sprint, LCI and TFN
Communications. Mr. Potts received a Bachelor of Business Administration degree
from St. Joseph's College in Rensselaer, Indiana.
Eugene H. Kreeft has served as our Vice President of Engineering since
February 1999. From 1991 until February 1999, Mr. Kreeft was an Executive Vice
President of Preferred Networks Inc., an outsourcing services provider to the
wireless industry which he founded in 1991. From 1989 to 1991, Mr. Kreeft
served as Director of Technical Support, U.S. Operations, for Glenayre
Technologies, a developer and provider of personal telecommunications systems.
Prior to that, Mr. Kreeft was employed by BBL Industries, Inc., a paging
equipment manufacturer, where he served as both Vice President of Engineering
and Manufacturing and Vice President of Applications/New Product Development.
Mr. Kreeft has also held management and engineering positions with Motorola,
RAM Broadcasting, AT&T, Western Union Microwave Systems, Highland Telephone
Company and Delaware Telephone Company.
Alistair Sloan has served as our Vice President of Internet Services since
September 1999. From January 1998 until September 1999, Mr. Sloan was our
Manager of Internet Services. Prior to joining Cypress, Mr. Sloan was Project
Manager at Systems Atlanta, where he consulted with clients on Internet and
Wide Area Networking design and security. Prior to that, Mr. Sloan was a
manager of Internet Connect, a division of Systems Atlanta specializing in
dedicated business Internet connectivity. Mr. Sloan has also held positions
with Ingram Micro, Inc. and has been an independent consultant in the field of
LAN networking. Mr. Sloan received a Bachelor of Arts degree in Political
Science from the University of Bridgeport.
Claire S. Schenk has served as our Director of Human Resources since June
1999. From June 1996 until May 1999, Ms. Schenk was Vice President for Human
Resources for Trism, Inc., a national specialized transportation company
headquartered in Atlanta. From December 1989 until June 1996, Ms. Schenk was
Vice President, Senior Business Partner for two national mortgage companies.
Ms. Schenk also has ten years of human resources management experience with
Sheraton Corporation and Six Flags Corporation. Ms. Schenk received a Bachelor
of Arts degree in Psychology from Emory University.
William P. Egan has served as a director since February 1997. Mr. Egan is a
founding partner of Burr, Egan, Deleage & Co. and Alta Communications, an
affiliated firm. For over twenty years, Mr. Egan has invested in a wide variety
of companies in the information technology, life sciences and communications
industries. He is a past President and Chairman of the National Venture Capital
Association. Mr. Egan received a Bachelor of Arts degree from Fairfield
University and a Master of Business Administration degree from the University
of Pennsylvania. He serves as a director of Cephalon, Inc.
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<PAGE>
John C. Halsted has served as a director since October 1998. Mr. Halsted
serves as Senior Vice President of Beacon Capital Partners, Inc. and Chief
Investment Officer of Beacon Venture Partners, Beacon Capital's venture capital
subsidiary. From 1993 to 1997, Mr. Halsted was Vice President at Harvard
Private Capital Group. From 1991 to 1993, Mr. Halsted was an Associate with
Simmons & Company, an investment banking firm in Houston, Texas. Mr. Halsted
received a Master of Business Administration degree from The Harvard Business
School and a Bachelor of Arts degree in Economics from The University of
California at Berkeley.
Jeffrey H. Schutz has served as a director since November 1996. Mr. Schutz
is a general partner of The Centennial Funds, a venture capital firm based in
Denver, Colorado that focuses on electronic communications companies. Since
1981, Centennial has invested more than $700 million in pioneering
entrepreneurial ventures in communications networks, services, and
technologies. Mr. Schutz received an AB in Economics from Middlebury College
and a Master of Business Administration degree from the Colgate Darden Graduate
School of Business Administration at the University of Virginia. Mr. Schutz is
a director of Crown Castle International Corp., Enhance Media, Inc. and Point-
To-Point, Inc.
Laurence S. Grafstein has served as a director since November 1999. Mr.
Grafstein is Managing Director and co-founder of Gramercy Communications
Partners, Inc., a private equity firm specializing in telecommunications
investments. From February 1996 to May 1999, Mr. Grafstein was a Managing
Director and head of the global telecommunications investment banking practice
at Credit Suisse First Boston, a global investment bank. From February 1994 to
February 1996, Mr. Grafstein was a Managing Director of Wasserstein Perella &
Co., a global investment bank. Mr. Grafstein received a Bachelor of Arts degree
from Harvard University, a Master of Philosophy degree from Balliol College of
Oxford University, where he was a Rhodes Scholar and president of the Oxford
Union Society, and an LLB from the University of Toronto Law School. Mr.
Grafstein is a director of Z-Tel Technologies, Inc.
Randall A. Hack has served as a director since November 1999. He is a Senior
Managing Director of Nassau Capital. From 1990 to 1994, Mr. Hack served as
President and Chief Executive Officer of the Princeton University Investment
Company, where he had overall management responsibility for Princeton's multi
billion-dollar endowment of publicly traded securities and private investments.
From 1979 to 1988, he was President and Chief Executive Officer of Matrix
Development Group, a commercial and industrial real estate development firm,
which he founded. Mr. Hack received a Bachelor of Arts degree from Princeton
University and a Master of Business Administration degree from Harvard
University. He serves as a director of OmniCell.com, Inc., Cornerstone
Properties, Acacia Capital Corp., KMC Telecom, Inc. and Crown Castle
International Corp.
Board Composition
The number of directors is currently fixed at nine. We currently have seven
directors and two vacancies. Pursuant to our existing stockholders agreement,
one of the vacancies will be filled by a nominee designated by Boston
Properties, Cornerstone and Shorenstein, who collectively own 710,526 shares of
our series C preferred stock, and the other vacancy will be filled by a nominee
designated jointly by certain preferred stockholders and members of management.
Following this offering, the board of directors will be divided into three
classes, each of whose members will serve for a staggered three-year term. At
each annual meeting of stockholders, a class of directors will be elected for a
three-year term to succeed the directors of the same class whose terms are
expiring.
Committees of the Board of Directors
Our bylaws provide that our board of directors may designate one or more
board committees. We currently have an audit committee and a compensation
committee.
Audit Committee. The audit committee is responsible for recommending to the
Board of Directors the engagement of our outside auditors and reviewing our
accounting controls and the results and scope of audits and other services
provided by our auditors. The members of the audit committee are Messrs. Hack,
Halsted and Grafstein.
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<PAGE>
Compensation Committee. The compensation committee is responsible for
reviewing and approving the amount and type of consideration to be paid to
senior management. The members of the compensation committee are Messrs. Egan,
Halsted and Schutz.
Other Committees. The board of directors may establish, from time to time,
other committees to facilitate the management of our business.
Director Compensation
Directors who are employees receive no additional compensation for their
services as directors. Non-employee directors do not currently receive any cash
compensation for their service as directors, although the board of directors
may in the future determine to pay such a fee. Non-employee directors are
eligible to participate in our 2000 Stock Option and Incentive Plan at the
discretion of the full board of directors.
Executive Compensation
The following table sets forth in summary form the compensation that was
paid to our Chief Executive Officer and the other most highly compensated
executive officers whose aggregate compensation exceeded $100,000 in the year
ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Annual Compensation
Compensation ------------
---------------- Securities
Name and Principal Underlying
Position Salary Bonus Options
- ------------------ -------- ------- ------------
<S> <C> <C> <C>
R. Stanley Allen.......... $152,917 $52,666 --
Chief Executive Officer
Mark A. Graves............ 142,917 41,333 10,000
President, Chief
Operating Officer
and Secretary
Ward C. Bourdeaux, Jr. ... 132,000 107,643 --
Executive Vice President
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth information related to stock options granted
to our named executive officers during the year ended December 31, 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------
Percent of Potential Realizable
Number of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation For
Options Employees Price Option Terms(1)
Grant in Fiscal Per Expiration -----------------------
Name (#) Year(%) Share Date 5% 10%
- ---- ---------- ---------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
R. Stanley Allen........ -- -- -- -- -- --
Mark A. Graves.......... 10,000 5.13% 4.80 10/1/08 $ 30,187 $ 76,500
Ward C. Bourdeaux, Jr... -- -- -- -- -- --
</TABLE>
- --------
(1) Potential realizable value is based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until expiration of the ten-year term. These numbers are calculated
based on SEC requirements and do not reflect our projection or estimate of
future stock
45
<PAGE>
price growth. Potential realizable values are computed by multiplying the
number of shares of common stock subject to a given option by the fair
market value of the common stock on the date of grant and assuming that the
aggregate stock value derived from that calculation compounds at the annual
5% or 10% rate shown in the table for the entire ten-year term of the
option and subtracting from that result the aggregate option exercise
price. Actual realizable value, if any, will be dependent on the future
price of the common stock on the actual date of exercise, which may be
earlier than the stated expiration date.
Fiscal Year-End Option Values
The following table sets forth the number of shares covered by both
exercisable and unexercisable options as of December 31, 1998 and the year-end
value of exercisable and unexercisable options as of December 31, 1998 for the
named executive officers.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Options at
December 31, 1998 December 31, 1998(1)
----------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ---------------- ---------------------------------
<S> <C> <C> <C> <C>
R. Stanley Allen........ 35,188 75,352
Mark A. Graves.......... 25,618 84,852
Ward C. Bourdeaux, Jr... 35,618 74,852
</TABLE>
- --------
(1) The value of the unexercised in-the-money options at December 31, 1998 was
calculated using an assumed initial public offering price of $[ ] per
share.
Recent Option Grants
On November 30, 1999, we granted options to purchase an aggregate of
336,000 shares of our common stock to our employees. The exercise price of
these options is $11.40 per share. The options generally vest 20% per year
over a five-year period and expire ten years from the date of grant.
The following table sets forth information regarding options granted to
certain of our executive officers on November 30, 1999. The potential
realizable value at the assumed annual rates of price appreciation for all
options set forth below was calculated using the assumed initial public
offering price of $[ ] as the fair market value on the date of grant.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------
Percent of Potential Realizable
Number of Total Value at Assumed
Securities Options Annual Rates of Stock
Underlying Granted to Exercise Price Appreciation For
Options Employees Price Option Terms(1)
Grant on 11/30/99 Per Expiration ------------------------
Name (#) (%) Share Date 0% 5% 10%
- ---- ---------- ----------- -------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
R. Stanley Allen........ 14,000 4.17% $11.40 11/30/09
Mark A. Graves.......... 28,000 8.33 11.40 11/30/09
Ward C. Bourdeaux, Jr... 42,000 12.50 11.40 11/30/09
Barry L. Boniface....... 56,000 16.67 11.40 11/30/09
Eugene H. Kreeft........ 10,000 2.98 11.40 11/30/09
</TABLE>
Stock Plans
1997 Management Option Plan
Our 1997 Management Option Plan was initially adopted by our board of
directors and approved by our stockholders on July 15, 1997. We established
this plan to provide officers, directors, key employees and consultants the
ability to acquire an ownership interest in Cypress. The options generally
vest 20% per year and
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<PAGE>
expire ten years after issuance. At November 30, 1999, there were options to
purchase a total of 1,294,660 shares of common stock granted under this plan,
of which options to purchase 229,631 shares have vested. Although no further
options will be granted under this plan, the unvested options will continue to
vest in accordance with this plan.
2000 Stock Option and Incentive Plan
Our 2000 Stock Option and Incentive Plan (the "2000 Stock Plan") was
initially adopted by our board of directors and approved by our stockholders in
[ ] 2000. The 2000 Stock Plan permits us to make grants of:
. incentive stock options;
. non-qualified stock options;
. stock appreciation rights;
. restricted stock;
. deferred stock awards;
. unrestricted stock;
. performance share awards; and
. dividend equivalent rights.
Under the 2000 Stock Plan, the aggregate number of shares available for
grants of awards shall be [ ] shares of common stock, subject to
adjustment in the event of a stock split, stock dividend or other change in
capitalization. Any shares forfeited from awards under the 2000 Stock Plan will
also be available for future awards under the 2000 Stock Plan. No common stock
has been issued to date under the 2000 Stock Plan.
2000 Stock Plan Administration. The 2000 Stock Plan provides for
administration by a committee of not fewer than two non-employee directors, as
appointed by the board of directors from time to time or by the full board of
directors (the "Committee"). The Committee has full power to select, from among
the individuals eligible for awards, the participants to whom awards will be
granted, to make any combination of awards to participants, and to determine
the specific terms and conditions of each award, subject to the provisions of
the 2000 Stock Plan.
Eligibility and Limitations on Grants. All officers, employees, directors
and key persons (including consultants and prospective employees) are eligible
to participate in the 2000 Stock Plan, subject to the discretion of the
Committee. From and after the date awards made under the 2000 Stock Plan become
subject to Section 162(m) of the Internal Revenue Code, no participant may
receive options or stock appreciation rights to purchase more than [
] shares of common stock (subject to adjustment for stock splits, stock
dividends and other change in capitalization) during any one calendar year
period, as stated above.
Option Terms. The Committee has authority to determine the terms of options
granted under the 2000 Stock Plan. However, Incentive Options will have an
exercise price that is not less than 100% of the fair market value of the
shares of common stock on the date of the option grant and Non-Qualified
Options, other than those granted in lieu of a participant's cash compensation
at the participant's election with the consent of the Committee, will have an
exercise price that is not less than 85% of the fair market value of the shares
of common stock on the date of the option grant.
At the discretion of the Committee, stock options granted under the 2000
Stock Plan may include a "re-load" feature pursuant to which an optionee
exercising an option by the delivery of shares of common stock would
automatically be granted an additional stock option (with an exercise price
equal to the fair market value of the common stock on the date the additional
stock option is granted) to purchase that number of shares of common stock
equal to the number delivered to exercise the original stock option. The
purpose of this feature is to enable participants to maintain their equity
interest without dilution.
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<PAGE>
Acceleration Upon a Merger, Sale or Change of Control of Company. Upon
(i) dissolution or liquidation of Cypress, (ii) the sale of all or
substantially all the assets of Cypress, (iii) a merger, reorganization or
consolidation of Cypress, (iv) the sale of all of the stock of Cypress, or
(v) a change of control of Cypress, unless otherwise provided in the award
agreements, all outstanding awards granted pursuant to the 2000 Stock Plan
shall become fully exercisable or fully vested and nonforfeitable. In the event
of certain transactions, such as a merger, consolidation, dissolution or
liquidation, the Committee in its discretion may provide for appropriate
substitutions or adjustments of outstanding stock options or SARs;
alternatively, outstanding stock options and SARs will terminate and the holder
will receive a cash payment equal to the excess of the fair market value per
share over the applicable exercise price, multiplied by the number of shares of
common stock covered by the stock option or SAR.
Amendments and Termination. The board of directors may at any time amend or
discontinue the 2000 Stock Plan and the Committee may at any time amend or
cancel any outstanding award for the purpose of satisfying changes in law or
for any other lawful purpose, but no such action shall adversely affect the
rights under any outstanding awards without the holder's consent. To the extent
required by the Internal Revenue Code to ensure that options granted under the
2000 Stock Plan qualify as Incentive Options, plan amendments shall be subject
to approval by our stockholders.
2000 Employee Stock Purchase Plan
Our 2000 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by
our board of directors in [ ] 2000 and was subsequently approved
by our stockholders. Up to [ ] shares of common stock may be
issued under the Purchase Plan.
The first offering under the Purchase Plan will begin on the effective date
of this offering and end on [ ], 2000. Subsequent offerings will commence on
each [ ] and [ ] thereafter and will have a duration of six months.
Generally, all employees who are customarily employed for more than 20 hours
per week as of the first day of the applicable offering period will be eligible
to participate in the Purchase Plan. An employee who owns or is deemed to own
shares of stock representing in excess of 5% of the combined voting power of
all classes of our stock will not be able to participate in the Purchase Plan.
During each offering, an employee may purchase shares under the Purchase
Plan by authorizing payroll deductions of up to 10% of his or her cash
compensation during the offering period. The maximum number of shares that may
be purchased by any participating employee during any six-month offering period
is limited to the number of whole shares which is less than or equal to $12,500
divided by the closing price per share on the first day of the applicable
offering period. Unless the employee has previously withdrawn from the
offering, his or her accumulated payroll deductions will be used to purchase
common stock on the last business day of the period at a price equal to 85% of
the fair market value of the common stock on the first or last day of the
offering period, whichever is lower. For purposes of the initial offering
period, the fair market value of common stock on the first day of the offering
period shall be the offering price to the public. Under applicable tax rules,
an employee may purchase no more than $25,000 worth of common stock in any
calendar year. No common stock has been issued to date under the Purchase Plan.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock as of December 1, 1999. The percentage of beneficial ownership
is based on 7,878,280 shares of our common stock outstanding as of such date,
after giving effect to the conversion of all of our outstanding shares of
convertible preferred stock into common stock. The table sets forth such
information with respect to:
. each stockholder who is known by us to beneficially own 5% or more of
the common stock;
. each of our directors;
. each of the executive officers named in the "Summary Compensation
Table"; and
. all of our executive officers and directors as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned
by such stockholder.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission. The information
is not necessarily indicative of beneficial ownership for any other purpose.
Under these rules, beneficial ownership includes any shares as to which the
individual or entity has sole or shared voting power or investment power and
any shares as to which the individual or entity has the right to acquire
beneficial ownership within 60 days after December 1, 1999, through the
exercise of any stock option or other right.
<TABLE>
<CAPTION>
Shares Beneficially Percent Beneficially
Owned Owned
------------------- ------------------------
Before After
Name of Beneficial Owner Number Offering Offering
- ------------------------ ------------------- ---------- ----------
<S> <C> <C> <C>
Centennial Holdings V,
L.P.(2)................. 1,831,145 23.2%
Alta Communications,
Inc.(3)................. 1,359,711 17.3
Beacon Capital Partners,
Inc.(4)................. 967,105 12.3
Nassau Capital
L.L.C.(5)............... 657,895 8.4
Gramercy Communications
Partners, Inc.(6)....... 657,895 8.4
R. Stanley Allen(7)...... 212,729 2.7
Ward C. Bourdeaux,
Jr.(8).................. 149,917 1.9
Jeffrey H. Schutz(9)..... -- --
William P. Egan(3)....... 1,359,711 17.3
John C. Halsted(4)....... 967,105 12.3
Randall A. Hack(5)....... 657,895 8.4
Laurence S.
Grafstein(6)............ 657,895 8.4
Mark A. Graves(10)....... 63,532 *
All directors and
executive officers as a
group (13 persons)(11).. 4,095,136 50.9
</TABLE>
- --------
* Represents less than 1% of the outstanding shares of common stock.
(1) Assumes the underwriters do not elect to exercise the over-allotment
option to purchase an additional [ ] shares of common stock.
(2) Represents shares of common stock beneficially owned by investment funds
affiliated with Centennial Holdings V, L.P., of which Mr. Schutz is a
general partner, including 1,784,095 shares of common stock beneficially
owned by Centennial Fund V, L.P. and 47,050 shares of common stock
beneficially owned by Centennial Entrepreneurs Fund V, L.P. Mr. Schutz
disclaims beneficial ownership of the shares of common stock held by these
funds, except to the extent of his proportionate pecuniary interest in
such funds.
(3) Represents shares of common stock beneficially owned by investment funds
affiliated with Alta Communications, Inc., of which Mr. Egan is a general
partner, including 1,329,312 shares of common stock beneficially owned by
Alta Communications VI, L.P. and 30,399 shares of common stock
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<PAGE>
beneficially owned by Alta Comm S by S, LLC. Mr. Egan disclaims beneficial
ownership of the shares of common stock held by these funds, except to the
extent of his proportionate pecuniary interest in such funds.
(4) Represents shares of common stock beneficially owned by investment funds
affiliated with Beacon Capital Partners, Inc., of which Mr. Halsted is an
executive officer, including 45,387 shares of common stock beneficially
owned by Tenant Communications, Inc., 895,402 shares of common stock
beneficially owned by Building Communications, LLC and 26,316 shares of
common stock beneficially owned by Investor Communications LLC. Building
Communications, LLC disclaims beneficial ownership of the shares of
common stock held by Investor Communications LLC. Mr. Halsted disclaims
beneficial ownership of the shares of common stock held by these funds,
except to the extent of his proportionate pecuniary interest in such
funds.
(5) Represents shares of common stock beneficially owned by investment funds
affiliated with Nassau Capital L.L.C., of which Mr. Hack is a member,
including 647,588 shares of common stock beneficially owned by Nassau
Capital Partners III L.P. and 10,307 shares of common stock beneficially
owned by NAS Capital Partners I L.L.C. Mr. Hack disclaims beneficial
ownership of the shares of common stock held by these funds, except to
the extent of his proportionate pecuniary interest in such funds.
(6) Represents shares of common stock beneficially owned by an investment
fund affiliated with Gramercy Communications Partners, Inc., of which Mr.
Grafstein is a Managing Director, including 657,895 shares of common
stock beneficially owned by Gramercy Cypress LLC. Mr. Grafstein disclaims
beneficial ownership of the shares of common stock held by this fund,
except to the extent of his proportionate pecuniary interest in such
fund.
(7) Includes 55,212 shares of common stock held by Mr. Allen subject to
options exercisable as of December 1, 1999 or within 60 days thereafter.
(8) Includes 55,212 shares of common stock held by Mr. Bourdeaux subject to
options exercisable as of December 1, 1999 or within 60 days thereafter.
(9) Does not include shares of common stock beneficially owned by investment
funds affiliated with Centennial Holdings V, L.P., of which Mr. Schutz is
a general partner. Mr. Schutz, acting alone, does not have voting or
investment power over these shares, and as a result, disclaims beneficial
ownership of the shares of common stock held by these funds, except to
the extent of his proportionate pecuniary interest in such funds.
(10) Includes 47,712 shares of common stock held by Mr. Graves subject to
options exercisable as of December 1, 1999 or within 60 days thereafter.
(11) Includes 173,436 shares of common stock held by all directors and
executive officers as a group subject to options exercisable as of
December 1, 1999 or within 60 days thereafter.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We were formed as a limited liability company under the laws of Georgia on
August 16, 1995 as Cypress Communications, L.L.C. We completed a reorganization
on July 15, 1997 in which the operations of the predecessor company were merged
into Cypress Communications, Inc., a Delaware corporation.
In connection with our reorganization on July 15, 1997, we issued an
aggregate of 585,979 shares of our common stock to nine persons, including
Messrs. Allen and Bourdeaux, Centennial Holdings V, L.P. and Alta
Communications, in exchange for membership interests in our predecessor
company. On that date, we also issued an aggregate of 1,200,140 shares of our
series A preferred stock for $5 per share to eight investors, including Messrs.
Allen, Bourdeaux and Graves, Centennial Holdings V, L.P. and Alta
Communications. On March 9, 1998, we issued 11,000 shares of our series A
preferred stock to Mr. Graves for $5 per share.
On September 30, 1998, we issued an aggregate of 1,333,200 shares of our
series B preferred stock to investors, including Messrs. Allen, Bourdeaux and
Graves, Centennial Holdings V, L.P., Alta Communications and Beacon Capital
Partners for $8 per share. On that same date, we also issued 579,613 shares of
our series B-1 preferred stock to Beacon Capital Partners for $8 per share. On
February 1, 1999 we issued an aggregate of 6,375 shares of our series B
preferred stock to Mr. Boniface and another employee for $8 per share. The only
difference between the series B and B-1 preferred stock is that the series B-1
is nonvoting preferred stock.
Since September 30, 1999, we have issued an aggregate of 4,161,974 shares of
our series C preferred stock to investors, including Messrs. Allen, Bourdeaux,
Graves and Boniface, Centennial Holdings V, L.P., Alta Communications, Beacon
Capital Partners, Nassau Capital and Gramercy Communications Partners for $19
per share. Purchasers of our series C preferred stock also included certain
property owners and operators who had also executed master license agreements.
In November and December 1999, we entered into stock warrant agreements and
master license agreements with several property owners and operators whereby we
agreed to issue warrants to acquire shares of our common stock at an exercise
price of $19 per share. The number of shares of common stock these property
owners and operators will be entitled to purchase will be determined in
accordance with the provisions of these agreements, up to a maximum of
2,476,592 shares. The warrants will be issued upon the execution of property-
specific license agreements covering buildings listed in the master license
agreements.
Certain of our directors are affiliated with certain of our principal
stockholders. Mr. Schutz is a general partner of Centennial Holdings V, L.P.
Mr. Egan is a general partner of Alta Communications. Mr. Halsted is an
executive officer of Beacon Capital Partners. Mr. Hack is a member of Nassau
Capital. Mr. Grafstein is a Managing Director of Gramercy Communications
Partners.
During 1999, we entered into a consulting arrangement with William Zierden,
an investor in The Centennial Funds. In accordance with this arrangement, Mr.
Zierden provided consulting services to us and has received fees totaling
approximately $92,868 in fiscal 1999.
For all future transactions, we have adopted a conflict of interest policy
whereby all material transactions between Cypress and our officers, directors
and other affiliates must be approved by a majority of the members of our board
of directors, including a majority of the disinterested members, and be on
terms no less favorable to us than could be obtained from additional
unaffiliated third parties. In addition, any loans to our officers, directors
and other affiliates must be for bona fide business purposes only.
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<PAGE>
Third Amended and Restated Stockholders Agreement
In connection with the sale of our series C preferred stock, all of our then
existing stockholders entered into a stockholders agreement. This agreement
provides for, among other things, the nomination of and voting for a total of
nine directors of Cypress, as follows:
. two management representatives designated by the founding stockholders;
. one representative designated by each of The Centennial Funds, Alta
Communications, Beacon Capital Partners, Nassau Capital and Gramercy
Communications Partners, for a total of five representatives;
. one representative designated by Boston Properties, Shorenstein and
Cornerstone, voting together as a group; and
. one outside representative designated jointly by certain of the
preferred stockholders mentioned above and members of management.
The stockholders agreement generally restricts the transfer of any shares of
common or preferred stock held by the parties thereto by granting certain
parties rights of first refusal, rights of first offer and participation rights
in connection with any proposed transfer by any other party, subject to certain
exceptions. In addition, the stockholders agreement generally provides that the
parties thereto will have the right of first refusal and participation rights
in any subsequent offering of equity securities or securities convertible into
equity securities, subject to certain exceptions, including a registered public
offering. The provisions of the stockholders agreement regarding nomination and
voting and transferability of shares automatically terminate upon the closing
of this offering.
At any time after the effective date of this offering, certain parties to
the stockholders agreement may require us to register all or any portion of
their shares by filing one registration statement utilizing a Form S-1 and
unlimited registration statements utilizing a Form S-3, subject to certain
qualifications. The parties will also be entitled to unlimited piggyback
registration rights in connection with any registration by us of securities for
our own account or the account of other stockholders. The registration rights
available under the stockholders agreement will terminate when all shares owned
by the parties to the agreement may be immediately sold under Rule 144 and our
stock is listed on a national securities market or traded in the Nasdaq Stock
Market.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary describes the material terms of our capital stock. To
fully understand the actual terms of the capital stock you should refer to our
amended and restated certificate of incorporation. The following summary gives
effect to the conversion of all outstanding shares of preferred stock upon
completion of this offering. The summary does not give effect to the exercise
of outstanding warrants or options to purchase common stock.
Authorized and Outstanding Capital Stock
There are currently 585,979 shares of common stock, 1,211,140 shares of
series A preferred stock, 1,339,575 shares of series B preferred stock, 579,613
shares of series B-1 preferred stock, 4,161,974 shares of series C preferred
stock and no shares of series C-1 preferred stock issued and outstanding. At
and subject to the closing of this offering, all of the outstanding shares of
preferred stock will be automatically converted into an aggregate of 7,292,302
shares of common stock on a one-for-one basis.
Following the offering, our authorized capital stock will consist of [
] shares of common stock, of which [ ] will be issued and
outstanding, and [ ] shares of undesignated preferred stock
authorized and issuable in one or more series designated by our board of
directors, of which no shares will be issued and outstanding.
Common Stock
Voting Rights. The holders of our common stock have one vote per share.
Holders of our common stock are not entitled to vote cumulatively for the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority, or by a plurality in the case of election of
directors, of the votes entitled to be cast at a meeting at which a quorum is
present, voting together as a single class, subject to any voting rights
granted to holders of any then outstanding preferred stock. Except as otherwise
provided by law and our amended and restated certificate of incorporation,
amendments to our certificate of incorporation must be approved by a majority
of the voting power of the common stock.
Dividends. Holders of common stock will share ratably in any dividends
declared by our board of directors, subject to the preferential rights of any
preferred stock then outstanding. Dividends consisting of shares of common
stock may be paid to holders of shares of common stock.
Other Rights. In the event of any merger or consolidation of Cypress with or
into another company as a result of which shares of common stock are converted
into or exchangeable for shares of stock, other securities or property,
including cash, all holders of common stock will be entitled to receive the
same kind and amount, on a per share of common stock basis, of such shares of
stock and other securities and property, including cash. On liquidation,
dissolution or winding up of Cypress, all holders of common stock are entitled
to share ratably in any assets available for distribution to holders of shares
of common stock. No shares of common stock are subject to redemption or have
preemptive rights to purchase additional shares of common stock.
Preferred Stock
Our board of directors is authorized to issue shares of preferred stock in
one or more series, to establish the number of shares in each series and to fix
the designation, powers, preferences and rights of each such series and the
qualifications, limitations or restrictions thereof, in each case, if any, as
are permitted by Delaware law and as the board of directors may determine by
adoption of any amendment of our amended and restated certificate of
incorporation, without any further vote or action by our stockholders. Because
our board of directors has the power to establish the preferences and rights of
each class or series of preferred stock, it may afford the stockholders of any
series or class of preferred stock preferences, powers and rights, voting or
otherwise, senior to the rights of holders of shares of our common stock. The
issuance of shares of preferred stock could have the effect of delaying,
deferring or preventing a change in control of Cypress.
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<PAGE>
Warrants
In November and December 1999, pursuant to the execution of master license
agreements and stock warrant agreements, we agreed to issue warrants to acquire
up to 2,476,592 shares of common stock to several owners and operators of
office buildings. The warrants will have an exercise price of $19 per share of
common stock, and will be exercisable for a period of ten years. However, the
warrants cannot be exercised until six months following completion of this
offering. The number of shares of common stock underlying the warrants may be
adjusted if certain property-specific license agreements are not executed in
accordance with the provisions of the master license agreements relating to the
owner's or operator's real estate portfolio.
Options
As of November 30, 1999:
. options to purchase a total of 1,294,660 shares of common stock at a
weighted average exercise price of $6.17 per share were outstanding, of
which options to purchase 229,631 shares have vested; and
. up to [ ] additional shares of common stock may be subject to options
granted in the future.
Indemnification Matters
Our amended and restated certificate of incorporation contains a provision
permitted by Delaware law that generally eliminates the personal liability of
directors for monetary damages for breaches of their fiduciary duty, including
breaches involving negligence or gross negligence in business combinations,
unless the director has breached his or her duty of loyalty, failed to act in
good faith, engaged in intentional misconduct or a knowing violation of law,
paid a dividend or approved a stock repurchase in violation of the Delaware
General Corporation Law or obtained an improper personal benefit. This
provision does not alter a director's liability under the federal securities
laws and does not affect the availability of equitable remedies, such as an
injunction or rescission, for breach of fiduciary duty. Our bylaws provide that
directors and officers shall be, and in the discretion of our board of
directors, non-officer employees may be, indemnified by Cypress to the fullest
extent authorized by Delaware law, as it now exists or may in the future be
amended, against all expenses and liabilities reasonably incurred in connection
with service for or on behalf of Cypress. The bylaws also provide for the
advancement of expenses to directors and, in the discretion of our board of
directors, officers and non-officer employees. The bylaws also provide that the
right of directors and officers to indemnification shall be a contract right
and shall not be exclusive of any other right now possessed or hereafter
acquired under any bylaw, agreement, vote of stockholders or otherwise. We also
have directors' and officers' insurance against certain liabilities and have
entered into indemnification agreements with each of our directors and certain
officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Cypress as
described above, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. At present, there is no
pending material litigation or proceeding involving any director, officer,
employee or agent of Cypress in which indemnification will be required or
permitted.
Anti-takeover Effects of Certain Provisions of Delaware Law and our Amended and
Restated Certificate of Incorporation and Bylaws
Certain provisions of our amended and restated certificate of incorporation
and amended and restated bylaws, which provisions are summarized below, may be
considered to have an anti-takeover effect and may delay, deter or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
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Classified Board of Directors
Our board of directors is divided into three classes of directors serving
staggered three-year terms, and one-third of the board of directors will be
elected each year. Our classified board, together with certain other provisions
of our amended and restated certificate of incorporation authorizing the board
of directors to fill vacant directorships or increase the size of the board of
directors, may deter a stockholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
vacancies created by such removal with its own nominees.
Further Amendment of the Amended and Restated Certificate of Incorporation
Any further amendments to our certificate of incorporation must first be
approved by a majority of our board of directors and thereafter approved by the
affirmative vote of a majority, and in some instances 80%, of the outstanding
shares entitled to vote with respect to such amendment.
Bylaw Provisions
Our amended and restated bylaws provide that a special meeting of
stockholders may be called only by our board of directors and specified
officers unless otherwise required by law. Our amended and restated bylaws
provide that only those matters included in the notice of the special meeting
may be considered or acted upon at that special meeting unless otherwise
provided by law. In addition, as described in the following paragraph, our
amended and restated bylaws include advance notice and informational
requirements and time limitations on any director nomination or any new
proposal which a stockholder wishes to make at an annual meeting of
stockholders.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
Our amended and restated bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates
for election as directors at an annual meeting of stockholders, must provide
timely notice in writing. To be timely, a stockholder's notice must be
delivered to or mailed and received at our principal executive offices not less
than ninety (90) days prior to the anniversary date of the immediately
preceding annual meeting of stockholders. If the annual meeting is called for a
date that is not within thirty (30) days before or after such anniversary date,
notice by the stockholder in order to be timely must be received not later than
the close of business on the 15th day following the date on which notice of the
date of the annual meeting was mailed to stockholders or made public, whichever
occurs first. Our amended and restated bylaws also specify certain requirements
as to the form and content of a stockholder's notice. These provisions may
preclude stockholders from bringing matters before an annual meeting of
stockholders or from making nominations for directors at an annual meeting of
stockholders.
Stockholder Rights Plan
We intend to adopt a stockholder rights plan to help ensure that our
stockholders receive fair and equal treatment in the event of any proposed
acquisition of Cypress. The rights plan may delay, deter or prevent a change of
control of Cypress and, therefore, could adversely affect stockholders' ability
to realize a premium over the then-prevailing market price for our common stock
in connection with such a transaction.
In connection with the adoption of the rights plan, our board of directors
will declare a dividend distribution of one preferred stock purchase right for
each outstanding share of common stock to stockholders of record as of a day
prior to effectiveness of the registration statement of which this prospectus
is a part (the "record date"). Each right will entitle its registered holder to
purchase from us a unit consisting of one ten-thousandth of a share of our
Series A Junior Participating Cumulative Preferred Stock, par value $0.01 per
share, at a cash exercise price per unit of $[ ], subject to adjustment.
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The rights initially will not be exercisable and will be attached to and
will trade with all shares of common stock outstanding as of, and issued
subsequent to, the record date. The rights will separate from the common stock
and will become exercisable upon the earlier of the following (a "distribution
event"):
. the close of business on the tenth calendar day following the first
public announcement that a person or group of affiliated or associated
persons, referred to as an "acquiring person," has acquired beneficial
ownership of 15% or more of the outstanding shares of common stock; or
. the close of business on the tenth business day following the
commencement of a tender offer or exchange offer that could result upon
its completion in a person or group becoming the beneficial owner of 15%
or more of the outstanding shares of common stock; or
. the declaration by the board of directors that a person or group that
has become the beneficial owner of 15% or more of the outstanding shares
of common stock is an "adverse person."
The shareholder rights plan grandfathers any person who or which, together
with all their respective affiliates and associates, beneficially owns 15% or
more of the outstanding shares of common stock as of the date on which we
announce the adoption of the rights plan. In the case of a grandfathered
person, the rights will separate from the common stock and will become
exercisable upon the earlier of the first two events described above, provided
that for such purposes the applicable percentage for such grandfathered person
is not 15% but is instead the percentage ownership of the outstanding common
stock owned by such person as of the date on which we announce the adoption of
the rights plan, plus 1%. In addition, a grandfathered person will not be an
acquiring person unless it acquired additional shares of our common stock after
the date on which we announce the adoption of the rights plan in excess of the
applicable grandfathered percentage.
If a person becomes an acquiring person, the stockholder rights plan
provides that as of the close of business ten calendar days after the first
public announcement of that event, each holder of a right will be entitled to
receive, upon payment of the exercise price, shares of preferred stock of our
company having a market value of twice the exercise price of the right. If we
are acquired in a merger or similar transaction, the stockholder rights plan
provides that as of the close of business ten calendar days following the first
public announcement of that event, each holder of a right will be entitled to
receive, upon payment of the exercise price, shares of common stock of the
acquiring company having a market value of twice the exercise price of the
right.
In the event that our board of directors approves a transaction that it has
determined is in the best interest of our stockholders but that otherwise would
cause a distribution event under the rights plan, the board may, in connection
with such approval, redeem the rights for a nominal price. Once the rights are
redeemed, the transaction can proceed without causing a distribution event. The
rights plan could make it more difficult for a third party to acquire, and
could discourage a third party from acquiring or seeking to acquire, Cypress or
a large block of our common stock.
Statutory Business Combination Provision
Following the offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date
such person became an "interested stockholder" unless:
. before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
. upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
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. following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a meeting of stockholders
by the affirmative vote of the holders of 66 2/3% of the outstanding
voting stock of the corporation not owned by the interested stockholder.
The term "interested stockholder" generally is defined as a person who,
together with affiliates and associates, owns, or, within the prior three
years, owned, 15% or more of a corporation's outstanding voting stock. The term
"business combination" includes mergers, asset sales and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from an amendment approved by
holders of at least a majority of the outstanding voting stock. Neither our
amended and restated certificate of incorporation nor our bylaws contains any
such exclusion.
Trading on the Nasdaq National Market System
We have applied to have our common stock approved for listing on the Nasdaq
National Market System under the symbol "CYCO."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be [ ].
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. No prediction can be made as to the effect, if any, that sales of common
stock or the availability of common stock for sale will have on the market
price of our common stock. The market price of our common stock could drop due
to sale of a large number of shares of our common stock or the perception that
such sales could occur. These factors could also make it more difficult to
raise funds through future offerings of common stock.
After this offering, [ ] shares of common stock will be outstanding.
Of these shares, the [ ] shares sold in this offering will be freely
tradeable without restriction under the Securities Act, except that any shares
held by our "affiliates" as defined in Rule 144 under the Securities Act may be
sold only in compliance with the limitations described below. The remaining
[ ] shares of common stock are "restricted securities" within the meaning
of Rule 144 under the Securities Act. The restricted securities generally may
not be sold unless they are registered under the Securities Act or are sold
pursuant to an exemption from registration, such as the exemption provided by
Rule 144 under the Securities Act.
In connection with this offering, our existing officers, directors and
certain stockholders, who will own a total of [ ] shares of common stock
after the offering, have entered into lock-up agreements pursuant to which they
have agreed not to offer or sell any shares of common stock for a period of 180
days after the date of this prospectus without the prior written consent of
Bear, Stearns & Co. Inc., which may in its sole discretion, at any time and
without notice, waive any of the terms of these lock-up agreements. Following
the lock-up period, these shares will not be eligible for sale in the public
market without registration under the Securities Act unless such sale meets the
conditions and restrictions of Rule 144 as described below.
In general, under Rule 144 as currently in effect, any person or persons
whose shares are required to be aggregated, including an affiliate of ours, who
has beneficially owned shares for a period of at least one year is entitled to
sell, within any three-month period, commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of:
. 1% of the then outstanding shares of common stock, which is expected to
be approximately [ ] shares upon the completion of this offering, or
. the average weekly trading volume in the common stock during the four
calendar weeks immediately preceding the date on which the notice of
such sale on Form 144 is filed with the Securities and Exchange
Commission.
Sales under Rule 144 are also subject to certain provisions relating to
notice and manner of sale and the availability of current public information
about us during the 90 days immediately preceding a sale. In addition, a person
who is not an affiliate of ours during the 90 days preceding a sale and who has
beneficially owed the shares proposed to be sold for at least two years would
be entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and other conditions described above. The foregoing summary of
Rule 144 is not intended to be a complete description.
Our employees, directors, officers or consultants who purchased our shares
in connection with a written compensatory plan or contract may be entitled to
rely on the resale provisions of Rule 701. Rule 701 permits non-affiliates to
sell their Rule 701 shares without having to comply with the public
information, holding period, volume limitation or notice provisions of Rule
144. Affiliates may sell their Rule 701 shares without having to comply with
Rule 144's holding period restrictions. In each of these cases, Rule 701 allows
the shareholders to sell 90 days after the date of this prospectus.
Prior to the expiration of the lock-up agreement, we intend to register on a
registration statement on Form S-8:
. a total of 1,294,660 shares of common stock issuable upon the exercise
of options issued under our 1997 Management Option Plan;
58
<PAGE>
. a total of up to [ ] shares of common stock reserved for future
issuance pursuant to the 2000 Stock Plan; and
. a total of [ ] shares of common stock reserved for future issuance
pursuant to the 2000 Purchase Plan.
The Form S-8 will permit the resale in the public market of shares so
registered by non-affiliates without restriction under the Securities Act.
In November and December 1999, we entered into stock warrant and master
license agreements with several property owners and operators in which we
agreed to issue warrants to acquire up to 2,476,592 shares of our common stock
at an exercise price of $19 per share. These warrants will be issued to these
property owners and operators upon the execution of property-specific license
agreements, and the number of shares of common stock underlying the warrants
will be determined in accordance with the provisions of the stock warrant
agreements. The warrants will be exercisable for a period of ten years, but
cannot be exercised until six months following completion of this offering.
Upon such exercise, the holders of these warrants are entitled to request that
we register the shares of common stock underlying their warrants in any future
registration statement which we may file. If we are unable to accommodate such
request within 18 months following this offering, these holders are entitled to
require that we register their shares under the Securities Act. After these
shares are registered, they will become freely tradeable without restriction
under the Securities Act.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus, we will not sell or offer to sell or otherwise dispose of any
shares of common stock without the prior written consent of Bear, Stearns & Co.
Inc., except that we may issue, and grant options to purchase, shares of common
stock under our stock option and employee purchase plan. During this lock-up
period, we may also issue additional warrants to acquire common stock in
connection with the execution of additional license agreements and additional
equity securities to pay for possible acquisitions, so long as the recipients
of such securities are also subject to the 180 day lock-up period and the total
amount of such securities does not exceed 20% of the shares of common stock
outstanding upon completion of this offering.
Upon completion of this offering and subject to the 180 day lock-up period
described above, the holders of approximately [ ] shares of our common
stock, including the shares to be issued upon conversion of all of our
outstanding convertible preferred stock, are entitled to request that we
register their shares under the Securities Act or to have their shares included
in a future registration statement which we may file. After these shares are
registered, they will become freely tradeable without restriction under the
Securities Act.
59
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
between us and the underwriters named below, who are represented by Bear,
Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation and
J.C. Bradford & Co., the underwriters have severally agreed to purchase from us
the following respective numbers of shares of common stock at the public
offering price less the underwriting discount set forth on the cover page of
this prospectus.
<TABLE>
<CAPTION>
Number
of
Underwriter: Shares
------------ ------
<S> <C>
Bear, Stearns & Co. Inc. .............................................
Donaldson, Lufkin & Jenrette Securities Corporation...................
J.C. Bradford & Co. ..................................................
-----
Total...............................................................
=====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of a comfort letter from our accountants, the listing of the common
stock on the Nasdaq National Market and no occurrence of an event that would
have a material adverse effect on our business. The underwriters are obligated
to purchase and accept delivery of all the shares, other than those covered by
the over-allotment option described below, if they purchase any of the shares.
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to [ ]
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise such option solely to cover over-allotments, if
any, made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $[ ] per share. The underwriters may allow,
and such dealers may re-allow, a concession not in excess of $[ ] per share
on sales to other dealers. After the initial offering of the shares to the
public, the representatives of the underwriters may change the public offering
price and such concessions. The underwriters do not intend to confirm sales to
any accounts over which they exercise discretionary authority.
The following table shows the underwriting discount to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of the common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share....................................... $ $
Total........................................... $ $
</TABLE>
At our request, the underwriters have reserved for sale at the initial
public offering price up to [ ] shares of our common stock to be sold in
this offering for sale to certain persons designated by us. The number of
shares available for sale to the general public will be reduced to the extent
that any reserved shares are purchased. Any reserved shares not so purchased
will be offered by the underwriters on the same basis as the other shares
offered hereby.
60
<PAGE>
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the common stock. Specifically, the underwriters may over-
allot shares of the common stock in connection with this offering, thereby
creating a short position in the common stock for their own account.
Additionally, to cover such over-allotments or to stabilize the market price
of the common stock, the underwriters may bid for, and purchase, shares of the
common stock in the open market. Finally, the representatives, on behalf of
the underwriters, also may reclaim selling concessions allowed to an
underwriter or dealer if the underwriting syndicate repurchases shares
distributed by that underwriter or dealer. Any of these activities may
maintain the market price of our common stock at a level above that which
might otherwise prevail in the open market. The underwriters are not required
to engage in these activities and, if commenced, may end any of these
activities at any time.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
We have applied to list our common stock on the Nasdaq National Market
under the symbol "CYCO."
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
will be determined by negotiation among us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of generally
comparable companies; and
. estimates of our business potential.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus, we will not sell or offer to sell or otherwise dispose of any
shares of common stock without the prior written consent of Bear, Stearns &
Co. Inc., except that we may issue, and grant options to purchase, shares of
common stock under our stock option and employee stock purchase plans. During
this lock-up period, we may also issue additional warrants to acquire common
stock in connection with the execution of additional license agreements and
additional equity securities to pay for possible acquisitions, so long as the
recipients of such securities are also subject to the 180 day lock-up period
and the total amount of such securities does not exceed 20% of the shares of
common stock outstanding upon completion of this offering.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for Cypress by Goodwin, Procter & Hoar LLP. Certain legal matters related
to the sale of the common stock offered hereby will be passed upon for the
underwriters by Latham & Watkins, Washington, D.C.
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included in reliance upon the authority of said firm
as experts in giving said reports.
61
<PAGE>
ADDITIONAL INFORMATION
In 1997 we decided to retain Arthur Andersen LLP as our independent public
accountants and dismissed our former auditors. The former auditors' report on
our financial statements for the period from inception (August 16, 1995) to
December 31, 1995 and for the year ended December 31, 1996 does not cover our
financial statements included in this prospectus. Such report did not contain
an adverse opinion or disclaimer of opinion and was not modified as to
uncertainty, audit scope or accounting principles. There were no disagreements
with the former auditors on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure at the time of
the change or with respect to our financial statements for 1995 and 1996,
which, if not resolved to the former auditors' satisfaction, would have caused
them to make reference to the subject matter of the disagreement in connection
with their report. Prior to retaining Arthur Andersen LLP, we had not consulted
with Arthur Andersen LLP regarding accounting principles.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the
common stock we are offering by this prospectus. This prospectus does not
include all of the information contained in the registration statement. You
should refer to the registration statement and its exhibits for additional
information. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, the references are not necessarily
complete and you should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other document. When
we complete this offering, we will also be required to file annual, quarterly
and special reports, proxy statements and other information with the SEC. We
intend to furnish to our stockholders annual reports containing audited
financial statements for each fiscal year.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at
450 Fifth Street, NW, Washington, DC 20549; 7 World Trade Center, Suite 1300,
New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You may also obtain copies of the documents
at prescribed rates by writing to the Public Reference Section of the SEC at
450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the operation of the public reference
facilities. Our SEC filings are also available at the office of the Nasdaq
National Market. For further information on obtaining copies of our public
filings at the Nasdaq National Market you should call (212) 656-5060.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Cypress Communications, Inc. and Cypress Communications, L.L.C.
Report of Independent Public Accountants................................. F-2
Balance Sheets--December 31, 1997 and 1998 and September 30, 1999
(Unaudited)............................................................. F-3
Statements of Operations for the Year Ended December 31, 1996, the 6 1/2
Months Ended July 15, 1997, the 5 1/2 Months Ended December 31, 1997,
the Year Ended December 31, 1998, and the Nine Months Ended September
30, 1998 and 1999 (Unaudited)........................................... F-4
Statements of Members' Equity for the Year Ended December 31, 1996 and
the 6 1/2 Months Ended July 15, 1997 and Statements of Stockholders'
Equity (Deficit) for the 5 1/2 Months Ended December 31, 1997 and the
Year Ended December 31, 1998............................................ F-5
Statements of Cash Flows for the Year Ended December 31, 1996, the 6 1/2
Months Ended July 15, 1997, the 5 1/2 Months Ended December 31, 1997,
the Year Ended December 31, 1998, and the Nine Months Ended September
30, 1998 and 1999 (Unaudited)........................................... F-6
Notes to Financial Statements............................................ F-7
MTS Communications Company, Inc.
Report of Independent Public Accountants................................. F-19
Statements of Operations for the Year Ended December 31, 1997 and for the
Period From January 1, 1998 through December 7, 1998.................... F-20
Statements of Stockholders' Equity (Deficit) for the year ended December
31, 1997 and the Period from January 1, 1998 through December 7, 1998... F-21
Statements of Cash Flows for the Year Ended December 31, 1997 and for the
Period from January 1, 1998 through December 7, 1998.................... F-22
Notes to Financial Statements............................................ F-23
Pro Forma Financial Statements
Statement of Operations for the Year Ended December 31, 1998............. F-27
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cypress Communications, Inc.:
We have audited the accompanying balance sheets of CYPRESS COMMUNICATIONS,
INC. (a Delaware corporation and Successor Company to Cypress Communications,
L.L.C.) as of December 31, 1997 and 1998 and the related statements of
operations, changes in stockholders' equity (deficit), and cash flows for the 5
1/2 months ended December 31, 1997 and the year ended December 31, 1998. We
have also audited the statements of operations, changes in members' equity, and
cash flows of CYPRESS COMMUNICATIONS L.L.C. (a Delaware corporation and
Predecessor Company) for the year ended December 31, 1996 and the 6 1/2 months
ended July 15, 1997. These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cypress Communications,
Inc. as of December 31, 1997 and 1998 and the results of its operations and its
cash flows for the 5 1/2 months ended December 31, 1997 and for the year ended
December 31, 1998 and the results of operations and cash flows of Cypress
Communications, L.L.C. for the year ended December 31, 1996 and the 6 1/2
months ended July 15, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 24, 1999
F-2
<PAGE>
CYPRESS COMMUNICATIONS, INC.
(Successor Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1997 1998 1999
----------- ----------- -------------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents............ $ 3,671,065 $11,057,696 $ 3,378
Accounts receivable, net
of allowance for
doubtful accounts of
$9,945, $79,520, and
$212,985 in 1997, 1998,
and 1999 respectively.. 203,168 1,119,784 1,818,483
Note receivable......... 0 200,000 0
Prepaid expenses and
other.................. 44,423 26,238 174,994
----------- ----------- ------------
Total current assets... 3,918,656 12,403,718 1,996,855
----------- ----------- ------------
Property and equipment,
net..................... 1,609,791 6,291,413 11,645,639
----------- ----------- ------------
Other assets:
Cost in excess of net
assets acquired, net of
accumulated
amortization of
$166,306, $499,629, and
$755,455 in 1997, 1998,
and 1999,
respectively........... 1,496,758 1,248,283 992,457
Tenant contracts, net of
accumulated
amortization of $11,944
and $119,444 in 1998
and 1999,
respectively........... 0 418,056 310,556
Long-term investment.... 120,000 120,000 100,600
Other................... 0 89,777 150,514
----------- ----------- ------------
Total other assets..... 1,616,758 1,876,116 1,554,127
----------- ----------- ------------
Total assets........... $ 7,145,205 $20,571,247 $ 15,196,621
=========== =========== ============
<CAPTION>
Pro Forma
September 30,
1999
(Note 10)
-------------
(unaudited)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........ $ 255,012 $ 381,032 $ 1,807,248
Accrued expenses........ 254,160 1,272,685 2,144,348
Current portion of
capital lease
obligations............ 24,826 192,635 223,001
----------- ----------- ------------
Total current
liabilities........... 533,998 1,846,352 4,174,597
Long-term portion of
capital lease
obligations............. 60,811 522,583 334,700
----------- ----------- ------------
Total liabilities...... 594,809 2,368,935 4,509,297
----------- ----------- ------------
Convertible redeemable
preferred stock (Note
5):
$.001 par value;
1,200,140 shares
designated Series A in
1997, 1,211,140 shares
designated Series A in
1998 and 1999, and 0
shares designated
Series A in pro forma
1999; 1,200,140,
1,211,140, 1,211,140,
and 0 shares issued and
outstanding in 1997,
1998, 1999, and pro
forma 1999,
respectively; entitled
to redemption value of
$5 per share........... 5,977,480 6,036,670 6,039,809 $ 0
$.001 par value; 0,
1,912,813, 1,919,188,
and 0 shares designated
Series B in 1997, 1998,
1999, and pro forma
1999, respectively; 0,
1,333,200, 1,339,575,
and 0 shares issued and
outstanding in 1997,
1998, 1999, and pro
forma 1999,
respectively; entitled
to redemption value of
$8 per share........... 0 10,650,328 10,704,559 0
$.001 par value; 0,
579,613, 579,613, and 0
shares designated
Series B-1 in 1997,
1998, 1999, and pro
forma 1999,
respectively; 0,
579,613, 579,613, and 0
shares issued and
outstanding in 1997,
1998, 1999, and pro
forma 1999,
respectively; entitled
to redemption value of
$8 per share........... 0 4,630,265 4,631,669 0
----------- ----------- ------------ ------------
Total preferred stock.. 5,977,480 21,317,263 21,376,037 0
----------- ----------- ------------ ------------
Commitments and
contingencies (Note 7)
Stockholders' equity
(deficit):
Common stock, $.001 par
value; 1,116,326 shares
authorized in 1997,
4,576,464 shares
authorized in 1998,
1999, and pro forma
1999; 585,979 shares
issued and outstanding
in 1997, 1998, and
1999, 3,716,307 shares
issued and outstanding
in pro forma 1999...... 586 586 586 3,716
Additional paid-in
capital................ 1,767,350 1,767,350 1,767,350 23,173,424
Accumulated deficit..... (1,195,020) (4,882,887) (12,456,649) (12,489,816)
----------- ----------- ------------ ------------
Total stockholders'
equity (deficit)...... 572,916 (3,114,951) (10,688,713) $ 10,687,324
----------- ----------- ------------ ------------
Total liabilities and
stockholders' equity
(deficit)............. $ 7,145,205 $20,571,247 $ 15,196,621
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CYPRESS COMMUNICATIONS, INC.
(Successor Company)
AND
CYPRESS COMMUNICATIONS, L.L.C.
(Predecessor Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Predecessor Company Successor Company
---------------------- ----------------------------------------------------
6 1/2
Months 5 1/2 Months Nine Months Ended
Year Ended Ended Ended Year Ended September 30,
December 31, July 15, December 31, December 31, ------------------------
1996 1997 1997 1998 1998 1999
------------ --------- ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues....................................... $ 83,556 $ 248,235 $ 461,167 $ 2,417,816 $ 1,428,497 $ 5,227,727
Operating expenses:
Cost of services.............................. 131,771 221,596 381,518 1,539,846 944,760 3,248,377
Sales and marketing........................... 12,189 122,055 326,861 1,470,107 1,075,039 2,466,844
General and administrative.................... 640,704 255,175 567,748 2,436,221 1,597,974 5,604,135
Depreciation and amortization................. 53,808 66,217 288,737 891,788 587,800 1,650,253
--------- --------- ----------- ----------- ----------- -----------
Total operating expenses...................... 838,472 665,043 1,564,864 6,337,962 4,205,573 12,969,609
--------- --------- ----------- ----------- ----------- -----------
Operating loss................................. (754,916) (416,808) (1,103,697) (3,920,146) (2,777,076) (7,741,882)
Interest income, net........................... 13,939 6,253 107,669 232,279 66,911 168,120
--------- --------- ----------- ----------- ----------- -----------
Loss before income taxes....................... (740,977) (410,555) (996,028) (3,687,867) (2,710,165) (7,573,762)
Income tax benefit............................. 0 0 59,252 0 0 0
--------- --------- ----------- ----------- ----------- -----------
Net loss....................................... $(740,977) $(410,555) $ (936,776) $(3,687,867) $(2,710,165) $(7,573,762)
========= ========= =========== =========== =========== ===========
Net loss per common share (Note 10):
Basic and diluted............................. $ (1.60) $ (6.29) $ (4.63) $ (12.92)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding:
Basic and diluted............................. 585,979 585,979 585,979 585,979
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CYPRESS COMMUNICATIONS, INC.
(Successor Company)
AND
CYPRESS COMMUNICATIONS, L.L.C.
(Predecessor Company)
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE 6 1/2 MONTHS ENDED JULY 15, 1997
AND
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE 5 1/2 MONTHS ENDED DECEMBER 31, 1997 AND
THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Members'
Shares Contributed
or Common or
Stock Treasury Shares Additional
-------------- --------------- Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
------- ------ ------ -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance, December 31,
1995................... 100,000 $ 0 0 $ 0 $ 94,400 $ (117,780) $ (23,380)
Capital contributions.. 291,290 0 0 0 1,582,569 0 1,582,569
Issuance of shares for
employee services..... 9,141 0 0 0 54,847 0 54,847
Forgiveness of debt by
related party......... 0 0 0 0 155,697 0 155,697
Net loss............... 0 0 0 0 0 (740,977) (740,977)
------- ---- ------ -------- ---------- ----------- -----------
Balance, December 31,
1996................... 400,431 0 0 0 1,887,513 (858,757) 1,028,756
Issuance of member
shares................ 41,667 0 0 0 250,000 0 250,000
Repurchase of member
shares................ 0 0 11,904 (71,421) 0 0 (71,421)
Net loss............... 0 0 0 0 0 (410,555) (410,555)
------- ---- ------ -------- ---------- ----------- -----------
Balance, July 15, 1997.. 442,098 $ 0 11,904 $(71,421) $2,137,513 $(1,269,312) $ 796,780
======= ==== ====== ======== ========== =========== ===========
- --------------------------------------------------------------------------------
SUCCESSOR COMPANY:
Acquisition of
Predecessor
Company (Note 1)...... 585,979 $586 0 $ 0 $1,767,350 $ (258,244) $ 1,509,692
Net loss............... 0 0 0 0 0 (936,776) (936,776)
------- ---- ------ -------- ---------- ----------- -----------
Balance, December 31,
1997................... 585,979 586 0 0 1,767,350 (1,195,020) 572,916
Net loss............... 0 0 0 0 0 (3,687,867) (3,687,867)
------- ---- ------ -------- ---------- ----------- -----------
Balance, December 31,
1998................... 585,979 $586 0 $ 0 $1,767,350 $(4,882,887) $(3,114,951)
======= ==== ====== ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CYPRESS COMMUNICATIONS, INC.
(Successor Company)
AND
CYPRESS COMMUNICATIONS, L.L.C.
(Predecessor Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Predecessor
Company Successor Company
---------------------- -----------------------------------------------------
6 1/2
Months 5 1/2 Months Nine Months Ended
Year Ended Ended Ended Year Ended September 30,
December 31, July 15, December 31, December 31, -------------------------
1996 1997 1997 1998 1998 1999
------------ --------- ------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss.............. $ (740,977) $(410,555) $ (936,776) $(3,687,867) $(2,710,165) $ (7,573,762)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization......... 53,808 66,217 288,737 891,788 587,800 1,650,253
Deferred income
taxes................ 0 0 (59,252) 0 0 0
Other................. 0 0 1,920 5,737 3,141 7,774
Changes in operating
assets and
liabilities:
Accounts receivable,
net.................. (34,249) (97,997) (70,922) (916,616) (445,909) (698,699)
Prepaid expenses and
other current
assets............... (6,776) (6,186) (25,960) 18,185 21,344 (148,756)
Other assets.......... 0 0 0 (89,777) (81,251) (60,737)
Accounts payable and
accrued expenses..... 89,487 211,996 224,931 863,645 653,667 1,048,801
---------- --------- ----------- ----------- ----------- ------------
Net cash used in
operating
activities......... (638,707) (236,525) (577,322) (2,914,905) (1,971,373) (5,775,126)
---------- --------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchases of property
and equipment........ (518,638) (352,359) (838,364) (2,887,243) (1,691,993) (5,392,075)
Purchase of assets of
MTS Communications... 0 0 0 (1,904,398) 0 0
(Advance to) repayment
from MTS
Communications....... 0 0 0 (200,000) 0 200,000
(Purchase) sale of
investment, net...... (120,000) 0 0 0 0 19,400
Purchase of
Predecessor Company.. 0 0 (900,902) 0 0 0
---------- --------- ----------- ----------- ----------- ------------
Net cash used in
investing
activities......... (638,638) (352,359) (1,739,266) (4,991,641) (1,691,993) (5,172,675)
---------- --------- ----------- ----------- ----------- ------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance
of Series A preferred
stock, net of
offering expenses.... 0 0 5,975,560 55,000 55,000 0
Proceeds from issuance
of Series B and B-1
preferred stock, net
of offering
expenses............. 0 0 0 15,279,046 15,000,000 51,000
Principal payments on
capital lease
obligations.......... (16,291) (12,600) (12,728) (40,869) (19,724) (157,517)
Proceeds from sale of
member shares........ 0 250,000 0 0 0 0
Repurchase of member
shares............... 0 (71,421) 0 0 0 0
Borrowings under line
of credit............ 0 0 0 500,000 500,000 0
Repayments of line of
credit............... 0 0 0 (500,000) 0 0
Proceeds from capital
contributions........ 1,582,569 0 0 0 0 0
Proceeds from related
party borrowing...... 155,697 0 0 0 0 0
---------- --------- ----------- ----------- ----------- ------------
Net cash provided by
financing
activities......... 1,721,975 165,979 5,962,832 15,293,177 15,535,276 (106,517)
---------- --------- ----------- ----------- ----------- ------------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS........... 444,630 (422,905) 3,646,244 7,386,631 11,871,910 (11,054,318)
CASH AND CASH
EQUIVALENTS, beginning
of period............. 3,096 447,726 24,821 3,671,065 3,671,065 11,057,696
---------- --------- ----------- ----------- ----------- ------------
CASH AND CASH
EQUIVALENTS, end of
period................ $ 447,726 $ 24,821 $ 3,671,065 $11,057,696 $15,542,975 $ 3,378
---------- --------- ----------- ----------- ----------- ------------
SUPPLEMENTAL
DISCLOSURES:
Cash paid for
interest............. $ 3,669 $ 2,581 $ 2,031 $ 12,563 $ 5,710 $ 11,924
========== ========= =========== =========== =========== ============
Conversion of related
party borrowing to
equity............... $ 155,697 $ 0 $ 0 $ 0 $ 0 $ 0
========== ========= =========== =========== =========== ============
Common stock issued in
connection with
predecessor company
acquisition.......... $ 0 $ 0 $ 1,257,936 $ 0 $ 0 $ 0
========== ========= =========== =========== =========== ============
Assets acquired under
capital leases....... $ 127,256 $ 0 $ 0 $ 670,450 $ 0 $ 0
========== ========= =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CYPRESS COMMUNICATIONS, INC.
(Successor Company)
AND
CYPRESS COMMUNICATIONS, L.L.C.
(Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, JULY 15, 1997, DECEMBER 31, 1997 AND 1998
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
1. ORGANIZATION AND NATURE OF BUSINESS
Cypress Communications, Inc. (the "Company" or "Successor Company") was
incorporated July 15, 1997 under the laws of Delaware. The Company was
formed to affect the acquisition of Cypress Communications, L.L.C. (the
"Predecessor Company"). The Company provides building-centric
communications services and equipment to tenants of office buildings. The
Company currently serves tenants in Georgia, Massachusetts, Illinois,
Texas, Colorado, Washington, D.C., Florida, Louisiana, and California.
Cypress Communications, L.L.C. was incorporated August 16, 1995 as a
limited liability company under the laws of Georgia. Prior to 1996, the
Predecessor Company was a development-stage enterprise.
As part of an agreement with an investor in the Predecessor Company (Note
4), the Predecessor Company was required to change its legal entity status
from a limited liability company to a C corporation in order to obtain
additional financing from the investor. To effect this change in legal
entity status, on July 15, 1997, Cypress Communications, L.L.C. was merged
into Cypress Communications, Inc. and ceased to exist as a legal entity
(the "Acquisition").
The Acquisition was completed concurrent with investments in the Successor
Company that resulted in a change in control. Immediately prior to the
acquisition, one stockholder of the Successor Company owned 19.37% of the
Predecessor Company and, concurrently, had voting control of the Successor
Company. The portion of the Predecessor Company owned by the controlling
stockholder of the Successor Company at the time of the Acquisition was
recorded at that stockholder's historical cost ("Predecessor Basis"); the
remaining 80.63% interest in the Predecessor Company was recorded at
estimated fair value.
The Company purchased the 80.63% interest of Cypress Communications, L.L.C.
as follows: exchanged 419,312 shares of the Company's common stock for
292,989 member shares of the Predecessor Company, purchased 137,205 member
shares of the Predecessor Company for $823,230 in cash and incurred $77,672
in other cash transaction costs. Management estimated the fair value of the
common shares of the Successor Company using a market-based approach that
considered private transactions in the Company's stock. The value per
common share at July 15, 1997, as determined by management, was $3.
The following table summarizes the net assets purchased by the Company in
connection with its acquisition of the 80.63% of Cypress Communications,
L.L.C. and the amount attributable to cost in excess of net assets
acquired:
<TABLE>
<CAPTION>
<S> <C>
Purchase price................................................... $2,158,838
Net assets....................................................... 583,194
----------
Cost in excess of net assets acquired............................ $1,575,644
==========
</TABLE>
The common stock portion of the acquisition of these assets has been
accounted for as a noncash transaction in the statements of cash flows.
F-7
<PAGE>
The Company has experienced operating losses since its inception. The
Company expects to continue to focus on increasing its customer base and
expanding its operations. Accordingly, the Company expects that its
operating expenses and capital expenditures will continue to increase
significantly, all of which will have a negative impact on short-term
operating results and will require significant capital. Accordingly, the
Company may be required to raise additional funds through public or private
financing or other arrangements, or it may have to slow its rate of
expansion. There can be no assurance that any required additional funding,
if needed, will be available on terms attractive to the Company or at all,
which could have a material adverse effect on the Company's business,
financial condition, cash flows and results of operations.
Other Risk Factors
The Company faces certain other risk factors including the
following: growth and expansion may strain the Company's resources,
dependence on key personnel, dependence on third-party suppliers of
equipment and communications services, dependence on relationships with
certain building owners and managers, competition from other providers of
communications services, and potential disruption of services due to system
failures.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements are presented on the accrual basis of
accounting. As a result of the Acquisition, the capital structure of, and
the basis of accounting for, the Company differs from those of the
Predecessor Company prior to the Acquisition. Financial data of the Company
with respect to all reporting periods subsequent to July 15, 1997 (the
"Successor Period") reflect the Acquisition under the purchase method of
accounting. Therefore, financial data with respect to the Predecessor
Company prior to the Acquisition (the "Predecessor Period") generally will
not be comparable to that of the Company with respect to the items
described below. Except as it relates to the Acquisition, the accounting
policies of the Company are unchanged from those of the Predecessor
Company.
The Successor Period includes amortization of cost in excess of net assets
acquired. Also, as a result of purchase accounting, the net book values of
the property and equipment at the date of their acquisition approximated
their fair values and became their new cost bases with respect to the
Company. Accordingly, the depreciation of property and equipment for the
Successor Period is based on the newly established cost bases of these
assets. Additionally, because the Predecessor Company was not separately
taxable for federal or state income tax purposes, the deferred tax
consequences of temporary differences in reporting items for financial
statement and income tax purposes were recognized as part of the
acquisition.
The statement of operations, stockholders' equity, and cash flows for 1997
are divided between the 6 1/2 months ended July 15, 1997 when the
Predecessor Company held the controlling interest and the 5 1/2 months
ended December 31, 1997 when the Successor Company held the controlling
interest following the transfer of ownership discussed in Note 1.
Interim Information
The balance sheet as of September 30, 1999 and the statements of operations
and cash flows for the nine months ended September 30, 1998 and 1999 are
unaudited and have been prepared by management in accordance with rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the balance sheet and statements of operations and cash flows
contain all necessary adjustments (consisting of only normal recurring
adjustments) necessary for the fair presentation of the financial position
and results of operations for the interim periods. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the entire year.
F-8
<PAGE>
Accounting 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 dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual amounts could differ from these
estimates and such differences could be material.
Revenue Recognition
The Company's revenues include recurring charges for local access, long-
distance, equipment rental, Internet, voicemail and inbound 800 charges as
well as non-recurring revenues for installations and moves, adds, and
changes charges, all of which are recognized as services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the
assets (generally three to seven years). Leasehold improvements are
depreciated over the lesser of the average lease term (or the term of the
related license agreement) or the assets' useful lives. Depreciation
expense was $53,808, $66,217, $112,431, and $546,521 for the year ended
December 31, 1996, the 6 1/2 months ended July 15, 1997, the 5 1/2 months
ended December 31, 1997, and the year ended December 31, 1998,
respectively. Maintenance and repairs are charged to expense as incurred.
Gains or losses on disposal of property and equipment are recognized in
operations in the year of disposition. There were no significant gains or
losses in any periods presented.
Income Taxes
The Predecessor Company was a limited liability company for federal and
state income tax purposes. The Internal Revenue Code and applicable state
statutes provide that income and expenses are not separately taxable to the
limited liability company but rather accrue directly to the members.
Accordingly, no provision for income taxes has been made in the statements
of operations of the Predecessor Company. For the Successor Company, income
taxes have been provided for using the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes."
Intangibles
The cost over the fair values of net assets acquired was recorded in
connection with the Company's purchase of Cypress Communications, L.L.C.,
as discussed in Note 1, and the purchase of substantially all of the assets
of MTS Communications Company, Inc. ("MTS Communications") (Note 9). These
costs are being amortized using the straight-line method over five years
and ten years, respectively. Tenant contracts were acquired in the MTS
Communications acquisition and are being amortized using the straight-line
method over three years.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment
and intangibles, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset should be assessed. An
impairment will be recognized when the future net cash flows estimated to
be generated by the asset are insufficient to recover the current carrying
value of the asset. Estimates of future cash flows are based on many
factors, including current operating results, expected market trends, and
competitive influences. Management believes that the long-lived assets in
the accompanying financial statements are appropriately valued.
F-9
<PAGE>
Long-Term Investment
The Company maintains a certificate of deposit, which is pledged under a
letter of credit with a communications equipment supplier. The investment
is classified as held to maturity in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet approximate the fair
values for cash and capital lease obligations.
In accordance with SFAS No. 107, "Disclosures about Fair Values of
Financial Instruments," the Company has estimated the fair value of the
Series A preferred stock as approximately $3.6 million and $5.8 million at
December 31, 1997 and 1998, respectively. The Company has estimated the
fair value of the Series B and Series B-1 preferred stock as $6.4 million
and $2.8 million, respectively, at December 31, 1998. The fair value of the
preferred stock is based on the estimated fair value of the Company's
common stock and the number of shares of common stock into which the
preferred stock converts.
Accrued Expenses
Accrued expenses includes the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Property and equipment additions........................ $ 62,965 $ 280,900
Compensation............................................ 96,675 257,838
Taxes................................................... 26,833 171,118
Recurring network costs................................. 3,182 221,912
Contracted support...................................... 44,562 53,286
Other................................................... 19,943 287,631
-------- ----------
$254,160 $1,272,685
======== ==========
</TABLE>
Net Loss Per Common Share
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 98, for the periods prior to the Company's anticipated initial public
offering (Note 10), basic net loss per share is computed using the weighted
average number of shares of common stock outstanding during the period.
Diluted net loss per share is computed using the weighted average number of
shares of common stock outstanding during the period and nominal issuances
of common stock and common stock equivalents, regardless of whether they
are antidilutive, as well as the potential dilution of common stock
equivalents, if dilutive.
The Company has not issued common stock or common stock equivalents for
consideration that management considers nominal. Additionally, potential
common stock equivalents are excluded from the calculation of diluted net
loss per share, as their effect is antidilutive. As such, diluted net loss
per share is the same as basic net loss per share for all periods
presented. Convertible redeemable preferred stock was outstanding at
December 31, 1997 and 1998 and September 30, 1998 and 1999. These
securities were not considered in the computation of net loss per share as
the conversion is dependent upon a qualifying public offering, as defined
in the preferred stock sale agreements. Net loss per share is not shown for
the Predecessor Company, as it is not comparable.
F-10
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
System infrastructure................................ $1,067,573 $4,650,955
System equipment..................................... 414,634 1,583,018
Computer and office equipment........................ 144,405 495,737
Leasehold improvements............................... 95,610 220,655
---------- ----------
1,722,222 6,950,365
Less accumulated depreciation and amortization....... (112,431) (658,952)
---------- ----------
$1,609,791 $6,291,413
========== ==========
</TABLE>
4. CAPITAL TRANSACTIONS
Predecessor Company Amendments to Operating Agreements
The Predecessor Company amended its operating agreements on four occasions
between February 1996 and February 1997. The primary purpose of these
amendments was to adjust the Predecessor Company's ownership to reflect
additional capital investments. Significant changes to the original
operating agreements included the authorization for issuance of 5,000,000
shares of the Predecessor Company's shares and the redefining of initial
ownership. Ownership had initially been defined as a percentage of interest
in the Predecessor Company; the second amendment to the operating
agreements required the issuance of 100,000 shares that were allocated to
the initial owners in proportion to their ownership. All references to
shares of the Predecessor Company have been restated to give effect to the
amendments of the operating agreements.
Predecessor Company Capital Contributions
In 1996, the Predecessor Company issued a total of 300,431 shares for
capital contributions totaling $1,793,113, including cash investments of
$1,582,569, debt forgiveness of $155,697, and employee services valued at
$54,847. The fair value of the shares issued for employee services were
recorded as compensation expense at the date of issuance.
Of the cash investments made during 1996, the Predecessor Company issued
83,333 shares to an investment company for $500,000. Under the terms of
this investment agreement, the Predecessor Company was required to first
offer any additional capital financing terms to this investor until total
capital contributions by this investor exceeded $3.5 million. In the event
the investor exercised its rights to purchase additional shares as offered
by the Predecessor Company, the Predecessor Company was required to change
its legal organization to a C corporation.
In anticipation of the above mentioned investors' participation in the
financing represented by the issuance of the Successor Company's Series A
preferred stock (Note 5), the Acquisition described in Note 1 was effected
to satisfy the requirement to change to a C corporation.
In February 1997, the Predecessor Company issued 41,667 shares to an
investment company for $250,000.
Predecessor Company Treasury Stock Transactions
In February 1997, the Predecessor Company repurchased 11,904 shares
outstanding for $71,421 in cash.
Stock Option Plans
In February 1996, the Predecessor Company adopted the 1996 Share Incentive
Plan (the "Predecessor Plan"). The Predecessor Plan was intended to provide
incentives to officers and key employees of the
F-11
<PAGE>
Predecessor Company. At July 15, 1997, the Predecessor Company had options
for 20,000 shares outstanding with exercise prices of $5 to $6 per share
based on the estimated fair market value at dates of grant. These options
were converted pro rata into options, with identical terms, on the
Company's common stock.
In July 1997, the 1997 Management Option Plan (the "1997 Option Plan") was
adopted by the Company. The 1997 Option Plan provides for the granting of
either incentive stock options or nonqualified stock options to purchase
shares of the Company's common stock to officers, directors, and key
employees responsible for the direction and management of the Company. The
options expire ten years after the date of grant and vest 20% upon the
first anniversary of the date of grant and 5% each subsequent quarter
measured from the first anniversary of the date of grant. At December 31,
1997 and 1998, 223,265 and 866,530 shares, respectively, of common stock
were reserved for issuance under the 1997 Option Plan.
Statement of Financial Accounting Standards No. 123
A summary of the changes in the option plans is as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Average Exercise
Shares Price
-------- --------
<S> <C> <C>
Balance at inception, February 1996....................... -- $ --
Granted................................................. 25,000 5.40
-------
Balance at December 31, 1996.............................. 25,000 5.40
Forfeited............................................... (5,000) 5.00
-------
Balance at July 15, 1997.................................. 20,000 5.50
=======
------------------------------------------------------------------------
Conversion of Predecessor Company options................. 40,000 2.75
Granted................................................. 341,410 3.00
-------
Balance at December 31, 1997.............................. 381,410 2.97
Granted................................................. 241,750 4.49
Forfeited............................................... (17,000) 4.80
-------
Balance at December 31, 1998.............................. 606,160 3.52
=======
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Number of Weighted
Options Average Weighted Exercisable
Outstanding at Remaining Average As of
Exercise December 31, Contractual Exercise December
Price 1998 Life Price 1998
------------- -------------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$2.50 20,000 7.25 years $2.50 10,871
3.00 403,410 8.63 years 3.00 103,382
4.80 182,750 9.81 years 4.80 0
------- -------
$2.50 to 4.80 606,160 8.95 years $3.51 114,253
======= =======
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its option plans. Had compensation cost
for the Company's stock-based compensation plans been determined consistent
with SFAS No. 123, the Company's net loss would have been the pro forma
amount indicated below. The pro forma net loss is calculated using the
Black-Scholes option pricing model, with the following assumptions: risk-
free interest rates of 5.28% for 1998, from 5.82% to 6.19% for 1997 and
6.09% to 6.19% for 1996, expected life of six years, dividend yield of 0%,
and expected volatility of 0%. The weighted average fair value of options
granted during the year ended December 31, 1996, the 5 1/2 months ended
December 31, 1997, and the year ended December 31, 1998 was $1.47, $.79 and
$1.17 per option, respectively. No options were granted during the 6 1/2
months ended July 15, 1997.
F-12
<PAGE>
<TABLE>
<CAPTION>
6 5
Year Ended 1/2 Months Ended 1/2 Months Ended Year Ended
December 31, July 15, December 31, December 31,
1996 1997 1997 1998
------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Net loss, as
reported............. $(740,977) $(410,555) $(936,776) $(3,687,867)
Net loss, pro forma... $(745,477) $(416,175) $(986,499) $(3,736,369)
Net loss per common
share, as reported... $ (1.60) $ (6.29)
Net loss per common
share, pro forma..... $ (1.68) $ (6.38)
</TABLE>
Amendment to Certificate of Incorporation
In September 1998, the Company filed an amended and restated certificate of
incorporation (the "Certificate") which, among other things, increased the
total number of authorized common stock and preferred stock to 4,576,464
and 3,703,566, respectively. Additionally, the Certificate amended the
terms of the existing Series A preferred stock (Note 5) and increased the
number of shares of preferred stock designated as Series A to 1,211,140.
See Note 10 where further changes to the Company's capital structure
subsequent to December 31, 1998 are discussed.
Stock Split
In May 1998, the Company's board of directors and the majority stockholders
approved a 2-for-1 stock split (the "Split") with respect to each
outstanding share of common stock and Series A preferred stock. The Split
was effected in the form of a stock dividend that was paid in September
1998. All references to share amounts for the Successor Company have been
restated to reflect the Split on a retroactive basis.
5.CONVERTIBLE REDEEMABLE PREFERRED STOCK
On July 15, 1997, the Company authorized and issued 1,200,140 shares of
convertible and mandatorily redeemable preferred stock, designated as
Series A, for $5 per share. On September 30, 1998, the Company issued
1,333,200 and 579,613 shares of convertible and mandatorily redeemable
preferred stock, designated as Series B and Series B-1, respectively, for
$8 per share. These shares are entitled to one vote per share on all
matters upon which common stockholders are entitled to vote, except for the
Series B-1 shares which do not have any voting rights. In October 1999, in
connection with the second amended and restated stockholders' agreement,
certain terms of the Series A, Series B, and Series B-1 preferred stock
(the "Preferred Stock") were changed.
The Series A and Series B and B-1 preferred stock has a redemption price of
$5 and $8 per share, respectively, together with accrued and unpaid
dividends thereon. Redemption is mandatory beginning October 8, 2005, at
which time up to one-third of the outstanding shares may be redeemed on
October 8, 2005, October 8, 2006, and October 8, 2007. In the event of any
liquidation, dissolution, or winding up of the affairs of the Company,
holders of Series B and Series B-1 preferred stock shall be paid the
redemption price, plus all accrued dividends, before any payment to other
stockholders. In the event of any liquidation, dissolution, or winding up
of the affairs of the Company, holders of Series A preferred stock shall be
paid the redemption price, plus all accrued dividends, before any payment
to other stockholders, exclusive of any payments to be made to holders of
Series B and Series B-1 preferred stock. The Preferred Stock is convertible
into common stock at the discretion of the holder and automatically
converts into common stock upon the completion of an initial public
offering of the Company's common stock with proceeds in excess of
$50,000,000 and an adjusted per share price of at least $38. Under these
conversion terms, the Preferred Stock converts one for one into common
stock. The holders of the Preferred Stock are entitled to receive
dividends, out of the unreserved and unrestricted surplus or net profits of
the Company, as declared by the board of directors. No such dividends have
been declared as of December 31, 1998.
The Company is accreting the issuance costs of the Preferred Stock, which
is the difference between the redemption price and the face value of the
shares, over the period from the date of sale to the initial redemption
date. Such amount was $1,920 and $5,737 for the 5 1/2 months ended December
31, 1997 and the year ended December 31, 1998, respectively, and is
included in interest expense in the accompanying statements of operations.
F-13
<PAGE>
6.RELATED-PARTY TRANSACTIONS
The Predecessor Company received advances totaling $155,697 during 1996
from a company which had the same ownership as the Predecessor Company. In
March of 1996, the Predecessor Company was relieved of its obligation to
repay these amounts and these advances were recorded as capital
contributions.
A portion of the proceeds from the Predecessor Company's sale of member
shares was received from officers, directors, or other parties related to
the Predecessor Company. A portion of the cost of the Predecessor Company's
purchase of member shares was paid to officers, directors, or other parties
related to the Predecessor Company. In management's opinion, the
Predecessor Company's transactions with these affiliated entities are
generally representative of arm's-length transactions.
A portion of the proceeds from the Company's sale of Series A, Series B,
and Series B-1 preferred stock (Note 5) was received from officers,
directors, or other parties related to the Company. The sales were
conducted concurrently with and on the same terms as those entered into
with unrelated parties.
7.COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under several operating and capital lease
agreements, primarily for office space and equipment. Future annual minimum
rental payments under these leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
---------- --------
<S> <C> <C>
1999................................................... $ 385,178 $283,923
2000................................................... 396,197 261,784
2001................................................... 411,123 181,345
2002................................................... 411,123 109,003
2003................................................... 404,939 28,186
Thereafter............................................. 558,058 0
---------- --------
$2,566,618 $864,241
==========
Less amount representing interest and taxes............ $149,023
--------
Present value of future minimum capital lease
payments.............................................. 715,218
Less current portion................................... 192,635
--------
Long-term portion...................................... $522,583
========
</TABLE>
Rental expense was $35,270 for the year ended December 31, 1996, $22,219
for the 6 1/2 months ended July 15, 1997, $32,685 for the 5 1/2 months
ended December 31, 1997, and $159,236 for the year ended December 31, 1998.
In November 1999, the Company entered into an agreement to lease additional
office space for seven years at a minimum of $250,000 (unaudited) per year.
Commission Obligation
The Company has entered into license agreements with the owners and/or
management companies of several office buildings whereby the Company has
the right to provide enhanced, integrated communications services using
intelligent communications platforms in the building. Under the terms of
the agreements, the Company is obligated to pay a commission based on the
greater of a base fee or a percentage of revenue earned in the related
building or development. At December 31, 1998 and September 30, 1999, the
Company's minimum obligation under these agreements is $62,500 and $125,000
(unaudited), respectively, per year for the next seven years.
F-14
<PAGE>
Purchase Obligation
At December 31, 1998, the Company has contracted with a communications
service provider to purchase a minimum of $50,000 of service per month
through September 2000.
At December 31, 1998, the Company has contracted with a communications
service provider to purchase a minimum of $12,000 of service per month
through July 15, 2000 and $11,000 per month through August 31, 2002.
During November 1999, the Company entered into an agreement with a
communications service provider to purchase a minimum of $50,000
(unaudited) of service per month for the next two years.
Line of Credit
The Company entered into an agreement with Silicon Valley Bank ("Silicon")
on September 1, 1998 for a credit line totaling $500,000 bearing interest
at Silicon's prime rate plus 1.25%. The total amount was borrowed and
subsequently repaid prior to December 31, 1998. The agreement expired on
April 22, 1999. Borrowings were secured by a security interest in certain
of the Company's assets.
Employee Benefit Plan
In 1997, the Company adopted a 401(k) defined contribution plan.
Participants may elect to defer 15% of compensation up to a maximum amount
determined annually pursuant to Internal Revenue Service regulations.
Legal Proceedings
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. There are no pending legal proceedings to
which the Company is a party that management believes will have a material
adverse effect on the financial position, results of operations, or cash
flows of the Company.
8. INCOME TAXES
On July 15, 1997, the Company recorded a deferred tax liability in the
amount of $73,487 which represents the Predecessor Company's tax
consequences of temporary differences in reporting items for financial
statement and income tax purposes at the time of the Acquisition (Note 1).
In accordance with SFAS No. 109, the portion of this deferred tax liability
attributable to the ownership interest carried at Predecessor Basis was
recognized as income tax expense; the remainder was treated as having been
assumed and was included in the net assets acquired.
The income tax effects of temporary differences between the carrying amount
of assets and liabilities in the financial statements and their respective
income tax bases, which give rise to deferred tax assets and liabilities,
as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
-------- ----------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards....................... $448,025 $1,737,863
Allowance for doubtful accounts........................ 3,779 30,218
Other.................................................. 3,800 14,358
-------- ----------
Total deferred income tax assets...................... 455,604 1,782,439
Deferred income tax liabilities:
Depreciation........................................... (144,838) (191,419)
Valuation allowance..................................... (310,766) (1,591,020)
-------- ----------
Net deferred income taxes.............................. $ -- $ --
======== ==========
</TABLE>
F-15
<PAGE>
The Company has provided a valuation allowance against its net deferred tax
assets, as management has concluded that it is not more likely than not
that such assets will be realized. The Company had approximately $4.6
million of federal and state net operating loss carryforwards at December
31, 1998. The net operating loss carryforwards begin to expire in the year
2017 if not previously utilized. Utilization of existing net operating loss
carryforwards may be limited in future years if significant ownership
changes were to occur.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
5
1/2 Months Ended Year Ended
December 31, December
1997 31, 1998
---------------- -----------
<S> <C> <C>
Current......................................... $ -- $ --
Deferred........................................ (370,018) (1,280,254)
Increase in valuation allowance................. 310,766 1,280,254
--------- -----------
Total income tax benefit....................... $ (59,252) $ --
========= ===========
</TABLE>
The differences between the federal statutory income tax rate and the
Company's effective rate are as follows:
<TABLE>
<CAPTION>
5 1/2 Months Ended Year Ended
December 31, December 31,
1997 1998
------------------- ------------
<S> <C> <C>
Federal statutory rate........................ (34)% (34)%
State income taxes, net of federal benefit.... (3) (4)
Permanent differences......................... 5 3
Acquisition of predecessor interest........... 1 --
Increase in valuation allowance............... 31 35
--- ---
Effective rate................................ -- % -- %
=== ===
</TABLE>
9.ACQUISITIONS
On December 8, 1998, the Company acquired certain assets of MTS
Communications, a provider of building-centric communications services in
California, for total consideration of $2,574,848 consisting of $1,904,398
in cash and the assumption of certain capital lease obligations with a fair
value of $670,450 (the "MTS Acquisition"). The acquisition was accounted
for as a purchase and the results of operations of MTS Communications have
been included since the date of acquisition in the accompanying statements
of operations. The purchase price was allocated as follows:
<TABLE>
<S> <C>
Property and equipment........................................... $2,060,000
Tenant contracts................................................. 430,000
Cost in excess of net assets acquired............................ 84,848
----------
$2,574,848
==========
</TABLE>
Prior to the MTS Acquisition, the Company advanced $200,000 to MTS
Communications in the form of a secured 8% promissory note to fund working
capital requirements of MTS Communications. The note was due March 8, 1999
and was repaid in full.
As discussed in Note 1, the Company acquired the Predecessor Company on
July 15, 1997. The following unaudited pro forma results of operations for
the year ended December 31, 1997 and 1998 assumes that the acquisition of
the Predecessor Company and the MTS Acquisition occurred on January 1,
1997. The
F-16
<PAGE>
pro forma information is presented for informational purposes only and may
not be indicative of the actual results had the acquisition occurred on the
assumed date, nor is the information necessarily indicative of future
results of operations.
<TABLE>
<CAPTION>
1997 1998
----------- -----------
(unaudited)
<S> <C> <C>
Revenues........................................... $ 2,325,428 $ 4,485,236
=========== ===========
Net loss........................................... $(2,040,315) $(4,072,161)
=========== ===========
Net loss per share................................. $ (3.48) $ (6.95)
=========== ===========
</TABLE>
10.EVENTS SUBSEQUENT TO YEAR-END (UNAUDITED)
Changes in Capital Structure
In October 1999, the Company increased the authorized number of shares of
its common stock and preferred stock to 10,894,072 and 7,687,704,
respectively. In October 1999, the Company designated an additional
6,375 shares as Series B preferred stock and designated 3,977,763 shares as
Series C preferred stock. In December 1999, the Company increased the
authorized number of its common stock and preferred stock to 13,026,835 and
7,920,467, respectively. Additionally, in December 1999, the Company
designated an additional 232,763 shares as Series C preferred stock.
The Series C preferred stock has a redemption price of $19 per share,
together with accrued and unpaid dividends thereon. Redemption of the
Series C preferred stock is mandatory beginning October 8, 2005, at which
time up to one-third of the outstanding shares are to be redeemed on each
of the sixth, seventh, and eighth anniversaries of October 8, 1999. In the
event of any liquidation, dissolution, or winding up of the affairs of the
Company, holders of Series C preferred stock shall be paid the redemption
price, plus all accrued dividends, before any payment to other
stockholders. The Series C preferred stock is convertible into common stock
at the discretion of the holder. The Series C preferred stock automatically
converts into common stock upon the completion of an initial public
offering of the Company's common stock with proceeds in excess of
$50,000,000 and an adjusted per share price of at least $38. Under these
conversion terms, the Series C preferred stock converts one for one into
common stock.
Sale of Preferred Stock
In February 1999, the Company sold 6,375 shares of its Series B preferred
stock to two employees of the Company for $8 per share for total proceeds
of $51,000.
In October 1999, the Company completed the sale of 2,819,868 shares of its
Series C preferred stock for $19 per share for total proceeds of
approximately $53.6 million.
In November 1999 and December 1999, the Company completed the sale of
1,157,895 and 184,211 shares, respectively, of its Series C preferred stock
for $19 per share for total proceeds of $25.5 million.
Stock Option Grants
For the period from January 1, 1999 through October 7, 1999, the Company
granted 360,000 common stock options with an exercise price of $4.80 per
share. For the period from October 8, 1999 through November 20, 1999, the
Company granted 51,500 common stock options to employees with an exercise
price of $11.40. Subsequent to November 20, 1999, the Company granted
336,000 common stock options to employees with an exercise price of $11.40.
In November 1999, the Company engaged an independent third party to perform
a valuation of the Company's common stock. The valuation indicated a common
stock value of $4.80 per share as of January 1, 1999, $13.30 per share as
of October 8, 1999, and $14.25 per share as of November 20, 1999.
F-17
<PAGE>
The Company plans to record deferred compensation expense of approximately
$100,000 for grants made between October 8, 1999 and November 20, 1999 for
the difference between the exercise price of options granted to employees
and fair market value based on the appraisals. This amount will be
amortized over the applicable vesting period, which is generally five
years.
The Company is in the process of filing for an initial public offering of
its common stock. Based on the ultimate valuation of the Company determined
by this offering and business activities and transactions which have
occurred prior to the completion of the offering, the Company will be
required to record compensation expense and deferred compensation to the
extent the Company cannot reconcile the value determined in the offering to
the exercise prices of options granted. Such amounts could be material.
Warrants
In November and December 1999, the Company entered into stock warrant
agreements and master license agreements with several property owners and
operators whereby the Company agreed to issue warrants to acquire shares of
the Company's common stock at an exercise price of $19 per share. The
number of shares of common stock these property owners and operators will
be entitled to purchase will be determined in accordance with the
provisions of these agreements, up to a maximum of 2,476,592 shares. The
warrants will be issued upon the execution of property-specific license
agreements covering buildings referred to in the master license agreements.
The measurement date for valuing the warrants will be the date(s) on which
the property owners or operators effectively complete their performance
requirements. Based upon the current structure of the agreements governing
the warrants, the fair value of the warrants will be capitalized and
amortized over the terms of the related license agreements.
Investment in SiteConnect, Inc.
In November 1999, the Company signed a binding letter of intent (the
"Agreement") to acquire 254,125 shares of common stock, representing less
than 20%, of SiteConnect, Inc. ("SiteConnect"), a Seattle-based provider of
building-centric services, for consideration of 62,500 shares of the
Company's common stock. The Agreement contains an option to purchase the
remaining outstanding common stock of SiteConnect for approximately $5
million. The option is exercisable at any time prior to the first
anniversary of the closing date of the investment. The option is payable in
common stock of the Company valued at the per share price as sold in our
initial public offering.
Proposed Initial Public Offering
The Company is in the process of registering shares of its common stock
with the Securities and Exchange Commission. There can be no assurance that
this offering with be completed.
Pro Forma Stockholders' Equity and Loss Per Share
Simultaneous with the Company's initial public offering and pursuant to the
contractual agreements with the preferred stockholders, all shares of the
Company's Series A, Series B, Series B-1, and Series C preferred stock will
be converted into 3,130,328 shares of common stock. Pro forma stockholders'
equity at September 30, 1999 after giving effect to the conversion of the
Series A, Series B and Series B-1 preferred stock would be $10,762,324.
Series C preferred stock was not outstanding at September 30, 1999. Had
this conversion occurred at the beginning of the period, net loss per share
would have been $(1.01) for the year ended December 31, 1998 and
$(2.05) for the nine months ended September 30, 1999.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MTS Communications Company, Inc.:
We have audited the accompanying statements of operations of MTS
COMMUNICATIONS COMPANY, INC. (a California S Corporation) for the year ended
December 31, 1997 and for the period from January 1, 1998 to December 7, 1998
and the related statements of stockholders' equity (deficit) and cash flows.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of MTS
Communications Company, Inc. for the year ended December 31, 1997 and for the
period from January 1, 1998 to December 7, 1998 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 29, 1999
F-19
<PAGE>
MTS COMMUNICATIONS COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
January 1,
Year Ended 1998 to
December 31, December 7,
1997 1998
------------ ----------
<S> <C> <C>
OPERATING REVENUES.................................... $1,616,026 $1,933,794
---------- ----------
OPERATING EXPENSES:
Cost of services.................................... 690,631 756,646
Selling and marketing............................... 108,703 103,422
General and administrative.......................... 1,127,314 940,769
Depreciation and amortization....................... 154,187 193,271
---------- ----------
Total operating expenses.......................... 2,080,835 1,994,108
---------- ----------
Operating loss.................................... (464,809) (60,314)
INTEREST EXPENSE, net................................. (63,785) (184,813)
---------- ----------
NET LOSS.............................................. $ (528,594) $ (245,127)
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
MTS COMMUNICATIONS COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Common Stock Stockholders'
-------------- Accumulated Equity
Shares Amount Deficit (Deficit)
------- -------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996......... 200,000 $450,000 $ (355,841) $ 94,159
Transfer of equity interests
(Note 5)........................ 0 264,000 0 264,000
Net loss......................... 0 0 (528,594) (528,594)
------- -------- ----------- ----------
BALANCE, December 31, 1997......... 200,000 714,000 (884,435) (170,435)
Net loss......................... 0 0 (245,127) (245,127)
------- -------- ----------- ----------
BALANCE, December 7, 1998.......... 200,000 $714,000 $(1,129,562) $ (415,562)
======= ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
MTS COMMUNICATIONS COMPANY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended January 1, 1998
December 31, to December 7,
1997 1998
------------ ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................ $(528,594) $(245,127)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 154,187 193,271
Amortization of debt discount................. 8,000 88,000
Noncash compensation expense.................. 168,000 0
Changes in operating assets and liabilities:
Accounts receivable......................... (13,682) (212,440)
Interest receivable......................... (16,511) (17,160)
Other assets................................ (14,096) (6,340)
Accounts payable............................ (27,241) 58,911
Accrued interest............................ 14,383 14,582
Unearned revenue............................ 11,147 (18,089)
Accrued expenses............................ 302,488 49,010
--------- ---------
Total adjustments......................... 586,675 149,745
--------- ---------
Net cash provided by (used in) operating
activities............................... 58,081 (95,382)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............. (93,161) (50,266)
Loans to employees.............................. (44,151) (20,000)
Collection on employee loans receivable......... 0 12,000
--------- ---------
Net cash used in investing activities..... (137,312) (58,266)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and short-term
borrowings..................................... (185,959) (277,206)
Proceeds from the issuance of debt and short-
term borrowings................................ 395,147 549,228
Principal payments on capital lease
obligations.................................... (110,279) (138,345)
--------- ---------
Net cash provided by financing
activities............................... 98,909 133,677
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 19,678 (19,971)
CASH AND CASH EQUIVALENTS, beginning of period.... 293 19,971
--------- ---------
CASH AND CASH EQUIVALENTS, end of period.......... $ 19,971 $ 0
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.......... $ 51,914 $ 59,852
========= =========
Property and equipment acquired under capital
lease.......................................... $ 200,031 $ 365,180
========= =========
Property and equipment acquired under issuance
of note payable................................ $ 0 $ 85,000
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
MTS COMMUNICATIONS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
For the Year Ended December 31, 1997 and
for the Period from January 1, 1998 to December 7, 1998
1. NATURE OF BUSINESS
MTS Communications Company, Inc. ("MTS Communications," or the "Company")
provides building-centric communications services in the greater Los
Angeles, California, area. The Company was incorporated as an S corporation
in California on April 20, 1992. On December 8, 1998, Cypress
Communications, Inc. acquired certain assets of the Company (Note 6).
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements are prepared on the accrual basis of
accounting.
Accounting 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 dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual amounts could differ from these
estimates.
Revenue recognition
Revenues are recognized in the month in which services are provided.
Recurring charges for future access services are billed one month in
advance and are recorded as unearned revenue until the month the service is
provided.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Depreciation expense
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets (three to seven years). Leasehold improvements
are depreciated over the lesser of the lease term or the assets' useful
lives. Maintenance and repairs are charged to expense as incurred. Gains or
losses on disposal of property and equipment are recognized in operations
in the year of disposition.
Income Taxes
The Company is an S corporation and is treated as a partnership for federal
and state income tax purposes. The taxable income or loss of the Company is
attributed directly to its shareholders. Accordingly, no provision for any
federal or state income taxes has been made in the accompanying statements
of operations.
Sources of Supply
All of the Company's network components are manufactured by large,
recognized telecommunications manufacturers who distribute their products
through multiple distribution channels. The Company
F-23
<PAGE>
MTS COMMUNICATIONS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
currently uses only one supplier for many components of its
telecommunication systems in order to receive more favorable terms and
conditions. If the supplier is unable to meet the Company's needs as it
expands its systems infrastructure, then delays and increased costs in the
expansion could result while the Company arranged alternative suppliers,
which would adversely affect operating results.
3.RELATED-PARTY TRANSACTIONS
For the year ended December 31, 1997 and the period from January 1, 1998 to
December 7, 1998, the Company received advances of $171,147 and $214,228
from several employees and affiliates of the Company to fund working
capital requirements. Of these amounts, $118,239 and $212,026 were repaid
during the year ended December 31, 1997 and the period from January 1, 1998
to December 7, 1998.
For the year ended December 31, 1997 and the period from January 1, 1998 to
December 7, 1998, the Company made loans of $44,151 and $20,000 to two of
the Company's officers. Of these amounts, $12,000 was repaid during the
period from January 1, 1998 to December 7, 1998.
4.COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under several operating and capital lease
agreements, primarily for network equipment and office space. Future annual
minimum rental payments under these leases as of December 7, 1998 are as
follows:
<TABLE>
<CAPTION>
Operating Capital
---------- --------
<S> <C> <C>
1999.................................................. $ 162,881 $228,261
2000.................................................. 169,396 196,549
2001.................................................. 176,172 135,233
2002.................................................. 183,219 94,921
2003.................................................. 190,547 32,976
Thereafter............................................ 147,155 0
---------- --------
$1,029,370 $687,940
========== ========
</TABLE>
Rent expense was $148,633 for the year ended December 31, 1997 and $145,037
for the period from January 1, 1998 to December 7, 1998.
Legal Proceedings
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. In the opinion of management, the
amount or ultimate liability with respect to these actions will not
materially affect the Company's financial position, cash flows or results
of operations.
5. CAPITAL TRANSACTIONS
On December 15, 1997, the principal stockholder of the Company transferred
an aggregate 45,833 shares of the Company's common stock to the Company's
other two stockholders in consideration for services provided to MTS
Communications. These transactions were accounted for in the accompanying
financial statements in accordance with the Securities and Exchange
Commission Staff Accounting Bulletin No. 79. The first stockholder received
16,666 shares (or 8% additional equity interest) in consideration for
guaranteeing a line of credit on behalf of MTS Communications. The fair
value of these shares was
F-24
<PAGE>
MTS COMMUNICATIONS COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
recorded as debt issuance costs in the amount of $96,000 related to the
line of credit based on the estimated fair value of these shares at the
date of issuance. The discount was amortized to interest expense over the
term of the line of credit, which was one year. The second stockholder
received 29,167 shares (or 14% additional equity interest) in consideration
for services to the Company. The estimated fair value of these shares at
the date of issuance was recorded as compensation expense in the amount of
$168,000 in the accompanying statements of operations for the year ended
December 31, 1997.
6.ACQUISITION OF THE COMPANY
On December 8, 1998, certain assets of the Company were acquired by Cypress
Communications, Inc. ("Cypress"), a provider of building-centric
communications services, for total consideration of $2,574,848.
7.SUBSEQUENT EVENTS
In September 1999, an arbitrator ordered MTS Communications to pay
approximately $100,000 to a third party for disputed services received by
the Company in connection with its acquisition by Cypress. The Company
intends to petition the California Superior Court to vacate the arbitration
award. The Company has not accrued any liability related to this claim.
F-25
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
As discussed in Note 9 to the financial statements of Cypress
Communications, Inc. (the "Company"), on December 8, 1998, the Company
purchased substantially all of the assets of MTS Communications for total
consideration valued at $2,574,848.
The pro forma adjustments to the statements of operations for the year ended
December 31, 1998 reflect the acquisition of MTS Communications as if the
acquisition occurred on January 1, 1998.
The pro forma financial information does not purport to represent what the
Company's results of operations would have been if this acquisition would have
occurred on January 1, 1998, nor does it purport to indicate the future results
of operations of the Company. The pro forma adjustments are based on currently
available information and certain assumptions that management believes to be
reasonable.
F-26
<PAGE>
CYPRESS COMMUNICATIONS, INC.
PRO FORMA STATEMENT OF OPERATIONS
For the Year ended December 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Cypress MTS Adjustments(a) Pro Forma
----------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues $ 2,417,816 $2,067,420 $ -- $ 4,485,236
Operating Expenses:
Cost of services....... 1,539,846 890,272 -- 2,430,118
Sales and marketing.... 1,470,107 103,422 -- 1,573,529
General and
administrative........ 2,436,221 940,769 -- 3,376,990
Depreciation and
amortization.......... 891,788 193,271 139,167 1,224,226
----------- ---------- --------- -----------
Total operating
expenses............ 6,337,962 2,127,734 139,167 8,604,863
----------- ---------- --------- -----------
Operating loss........... (3,920,146) (60,314) (139,167) (4,119,627)
Interest income
(expense), net.......... 232,279 (184,813) 47,466
----------- ---------- --------- -----------
Loss before income
taxes................... (3,687,867) (245,127) (139,167) (4,072,161)
Income tax benefit....... -- -- -- --
----------- ---------- --------- -----------
Net loss................. $(3,687,867) $(4,072,161)
=========== ===========
Net loss per common
share:
Basic and diluted...... $ (6.29) $ (6.95)
=========== ===========
Weighted average number
of common
shares outstanding:
Basic and diluted...... 585,979 585,979
=========== ===========
</TABLE>
- --------
(a) Reflects additional amortization of intangibles related to goodwill of
$84,848 and tenant contracts valued at $430,000 recorded in connection with
the acquisition of MTS Communications and being amortized over ten years
and three years, respectively.
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited, in accordance with generally accepted auditing standards,
the financial statements of CYPRESS COMMUNICATIONS, INC. and CYPRESS
COMMUNICATIONS, L.L.C. included in this Form S-1 and have issued our report
thereon dated November 24, 1999. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedules listed in the index are the responsibility of the Companies'
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly state in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
November 24, 1999
S-1
<PAGE>
CYPRESS COMMUNICATIONS, INC.
AND
CYPRESS COMMUNICATIONS, L.L.C
SCHEDULES
Allowance for Doubtful Accounts:
<TABLE>
<CAPTION>
Beg. Charged to Writeoffs/ Ending
Balance expense Recoveries Balance
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
For the Year Ended December 31,
1996............................ $ 0 $ 0 $ 0 $ 0
For the 6 1/2 months ended July
15, 1997........................ $ 0 $ 0 $ 0 $ 0
For the 5 1/2 ended December 31,
1997............................ $ 0 $ 9,945 $ 0 $ 9,945
For the Year Ended December 31,
1998............................ $ 9,945 $ 69,575 $ 0 $ 79,520
Deferred Tax Asset Valuation Allowance:
<CAPTION>
Beg. Charged to Ending
Balance expense Reversals Balance
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
For the 5 1/2 ended December 31,
1997............................ $ 0 $ 310,766 $0 $ 310,766
For the Year Ended December 31,
1998............................ $310,766 $1,280,254 $0 $1,591,020
</TABLE>
S-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this pro-
spectus. Neither Cypress Communications, Inc. nor any underwriter has autho-
rized anyone to provide prospective investors with different or additional in-
formation. This prospectus is not an offer to sell nor is it seeking an offer
to buy these securities in any jurisdiction where such offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of delivery of this pro-
spectus or any sale of these securities.
--------------------
TABLE OF CONTENTS
--------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 27
Management............................................................... 43
Principal Stockholders................................................... 51
Certain Relationships and Related Transactions........................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 62
Legal Matters............................................................ 63
Experts.................................................................. 63
Where You Can Find Additional Information................................ 63
Index to Financial Statements............................................ 64
</TABLE>
----------------
Until , 2000 (25 days after the date of this prospectus), all dealers that
effect transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOGO
Shares
Common Stock
--------------
PROSPECTUS
--------------
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
J.C. Bradford & Co.
, 2000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses payable by us in
connection with the offering (excluding underwriting discounts and
commissions):
<TABLE>
<CAPTION>
Nature of Expense Amount
----------------- -------
<S> <C>
SEC Registration Fee................................................ $
NASD Filing Fee.....................................................
Nasdaq National Market Listing Fee..................................
Accounting Fees and Expenses........................................
Legal Fees and Expenses.............................................
Printing Expenses...................................................
Blue Sky Qualification Fees and Expenses............................ $ 7,500
Transfer Agent's Fee................................................
Miscellaneous.......................................................
TOTAL............................................................. $
=======
</TABLE>
- --------
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq
National Market fees, are in each case estimated.
Item 14. Indemnification of Directors and Officers
In accordance with Section 145 of the Delaware General Corporation Law,
Article VII of our second amended and restated certificate of incorporation
provides that no director of Cypress be personally liable to Cypress or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (1) for any breach of the director's duty of loyalty to
Cypress or its stockholders, (2) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (3) in
respect of unlawful dividend payments or stock redemptions or repurchases, or
(4) for any transaction from which the director derived an improper personal
benefit. In addition, our second amended and restated certificate of
incorporation provides that if the Delaware General Corporation Law is amended
to authorize the further elimination or limitation of the liability of
directors, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Article V of our amended and restated by-laws provides for indemnification
by Cypress of its officers and certain non-officer employees under certain
circumstances against expenses, including attorneys fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with the defense
or settlement of any threatened, pending or completed legal proceeding in which
any such person is involved by reason of the fact that such person is or was an
officer or employee of Cypress if such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of Cypress, and, with respect to criminal actions or proceedings, if
such person had no reasonable cause to believe his or her conduct was unlawful.
We have also entered into indemnification agreements with each of our
directors. These agreements provide that we indemnify each of our directors to
the fullest extent permitted under law and our by-laws, and provide for the
advancement of expenses to each director. We have also obtained directors and
officers insurance against certain liabilities.
II-1
<PAGE>
** Confidential treatment requested as to these exhibits.
Item 15. Recent Sales of Unregistered Securities
Since its formation on July 15, 1997, Cypress Communications, Inc. has sold
or issued the following securities that were not registered under the
Securities Act of 1933, as amended (the "Securities Act"). No underwriters were
used in connection with these sales and issuances. The sales and issuances of
these securities were exempt from registration under the Securities Act
pursuant to either (1) Rule 701 promulgated thereunder on the basis that these
options were offered and sold pursuant to a written compensatory benefit plan,
or (2) Sections 4(2) thereof, on the basis that the transactions did not
involve a public offering.
(1) On July 15, 1997, Cypress issued 585,979 shares of common stock in
connection with a reorganization in consideration for the membership
interests of the predecessor company.
(2) On July 15, 1997, Cypress issued 1,200,140 shares of Series A
preferred stock to a group of private investors for an aggregate
consideration of $6,000,700.
(3) On March 9, 1998, Cypress issued 11,000 shares of Series A preferred
stock to an executive officer of the company for an aggregate
consideration of $55,000.
(4) On September 30, 1998, Cypress issued 1,333,200 shares of Series B
preferred stock to a group of private investors for an aggregate
consideration of $10,665,600.
(5) On September 30, 1998, Cypress issued 579,613 shares of Series B-1
preferred stock to a private investor for an aggregate consideration
of $4,636,904.
(6) On February 1, 1999, Cypress issued 6,375 shares of Series B preferred
stock to an executive officer and an employee of the company for an
aggregate consideration of $51,000.
(7) On October 8, 1999, Cypress issued 2,819,868 shares of Series C
preferred stock to a group of private investors for an aggregate
consideration of $53,577,492.
(8) On November 24, 1999, Cypress issued 1,157,895 shares of Series C
preferred stock to a group of private investors for an aggregate
consideration of $22,000,000.
(9) In December 1999, Cypress issued 184,211 shares of Series C preferred
stock to a private investor for an aggregate consideration of
$3,500,000.
(10) From July 15, 1997 to November 30, 1999, Cypress issued stock options
to purchase an aggregate of 10,000 shares of common stock to employees
with an exercise price of $2.00 per share pursuant to stock options
plans.
(11) From July 15, 1997 to November 30, 1999, Cypress issued stock options
to purchase an aggregate of 20,000 shares of common stock to employees
with an exercise price of $2.50 per share pursuant to stock options
plans.
(12) From July 15, 1997 to November 30, 1999, Cypress issued stock options
to purchase an aggregate of 393,410 shares of common stock to
employees with an exercise price of $3.00 per share pursuant to stock
options plans.
(13) From July 15, 1997 to November 30, 1999, Cypress issued stock options
to purchase an aggregate of 559,750 shares of common stock to
employees with an exercise price of $4.80 per share pursuant to stock
options plans.
(14) From July 15, 1997 to November 30, 1999, Cypress issued stock options
to purchase an aggregate of 387,500 shares of common stock to
employees with an exercise price of $11.40 per share pursuant to stock
option plans.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
* 1.1 Form of Underwriting Agreement.
* 3.1 Second Amended and Restated Certificate of Incorporation.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
* 3.2 Third Amended and Restated Certificate of Incorporation.
* 3.3 Amended and Restated Bylaws.
* 4.1 Specimen certificate for shares of common stock, $.01 par value per share.
* 4.2 Speciman certificate for warrants to purchase shares of common stock, $.01 par value per share.
* 4.3 Third Amended and Restated Stockholders Agreement.
* 4.4 Form of Stockholders Rights Plan.
* 5.1 Opinion of Goodwin, Procter & Hoar LLP as to the legality of the securities being offered.
*10.1 Cypress Communications, Inc. 1997 Management Option Plan.
*10.2 Cypress Communications, Inc. 2000 Stock Option and Grant Plan.
*10.3 Cypress Communications, Inc. Employee Stock Purchase Plan.
*23.1 Consent of Goodwin, Procter & Hoar LLP (included in Exhibit 5.1 hereto).
23.2 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (contained on the signature page to this registration statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment to this registration statement.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, Georgia, on
December 2, 1999.
CYPRESS COMMUNICATIONS, INC.
By: /s/ R. Stanley Allen
---------------------------------
R. Stanley Allen
Chief Executive Officer
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints each of R. Stanley Allen, Mark A. Graves and
Barry L. Boniface such person's true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
(or to any other registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act), and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that any said attorney-in-fact
and agent, or any substitute or substitutes of any of them, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ R. Stanley Allen Chief Executive December 2, 1999
- ------------------------------------- Officer and
R. Stanley Allen Director (Principal
Executive Officer)
/s/ Mark A. Graves President, Chief December 2, 1999
- ------------------------------------- Operating Officer
Mark A. Graves and Secretary
/s/ Ward C. Bourdeaux, Jr. Executive Vice December 2, 1999
- ------------------------------------- President and
Ward C. Bourdeaux, Jr. Director
/s/ Barry L. Boniface Chief Financial December 2, 1999
- ------------------------------------- Officer (Principal
Barry L. Boniface Financial and
Accounting Officer)
/s/ William P. Egan Director December 2, 1999
- -------------------------------------
William P. Egan
/s/ Laurence Grafstein Director December 2, 1999
- -------------------------------------
Laurence Grafstein
/s/ Randall A. Hack Director December 2, 1999
- -------------------------------------
Randall A. Hack
/s/ John C. Halsted Director December 2, 1999
- -------------------------------------
John C. Halsted
/s/ Jeffrey H. Schutz Director December 2, 1999
- -------------------------------------
Jeffrey H. Schutz
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 2, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 11,057,696 3,378
<SECURITIES> 0 0
<RECEIVABLES> 1,399,304 2,031,468
<ALLOWANCES> (79,520) (212,985)
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,403,178 1,996,855
<PP&E> 6,950,365 13,525,747
<DEPRECIATION> (658,952) (1,880,107)
<TOTAL-ASSETS> 20,571,247 15,196,621
<CURRENT-LIABILITIES> 1,846,352 4,174,597
<BONDS> 0 0
21,317,263 21,376,037
0 0
<COMMON> 586 586
<OTHER-SE> 1,767,350 1,767,350
<TOTAL-LIABILITY-AND-EQUITY> 20,571,247 15,196,621
<SALES> 2,417,816 5,227,727
<TOTAL-REVENUES> 2,417,816 5,227,727
<CGS> 0 0
<TOTAL-COSTS> 6,337,962 12,969,609
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (3,920,146) (7,741,882)
<INTEREST-EXPENSE> 238,016 176,438
<INCOME-PRETAX> (3,682,130) (7,565,988)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,682,130) (7,565,988)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (5,737) (7,774)
<NET-INCOME> 0 0
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>