<PAGE> 1
================================================================================
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMMISSION FILE NUMBER: 0-30336
FUTUREONE, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 84-1383677
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION) IDENTIFICATION NUMBER)
4250 E. CAMELBACK ROAD, SUITE K-192
PHOENIX, ARIZONA 85018-2751
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(602) 852-9725
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes No X
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form,
10-KSB or any amendment to this Form 10-KSB. X
State issuer's revenues for its most recent fiscal year: $11,132,285
The number of shares of Common Stock outstanding as of January 7, 2000
was 12,905,528. The aggregate market value of the Common Stock of the registrant
held by non-affiliates as of January 7, 2000 was approximately $19,417,544 based
on the average bid and asked prices for such Common Stock as reported on the OTC
Bulletin Board.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
PART I
<S> <C>
1. Description of Business................................................................ 2
2. Description of Property................................................................ 24
3. Legal Proceedings...................................................................... 24
4. Submission of Matters to a Vote of Security Holders.................................... 24
PART II
5. Market for Common Equity and Related Stockholder Matters............................... 24
6. Management's Discussion and Analysis or Plan of Operation.............................. 30
7. Financial Statements................................................................... 43
8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure............................................................... 43
PART III
9. Directors, Executive Officers, Promotions and Control Persons;
Compliance With Section 16(a) of the Exchange Act...................................... 44
10. Executive Compensation................................................................. 45
11. Security Ownership of Certain Beneficial Owners and Management......................... 49
12. Certain Relationships and Related Transactions......................................... 51
13. Exhibits, List and Reports on Form 8-K................................................. 52
Signatures............................................................................. 56
Financial Statements................................................................... F-1
</TABLE>
1
<PAGE> 3
PART I
FUTURE ONE & DESIGN(R), PRIMESERV(R) and NeighborComm(TM) are
trademarks and trade names of the Company. Some trademarks and trade names
included in this Report are the property of third parties and the use thereof
does not imply a direct or indirect endorsement of the Company by such third
parties.
This Annual Report on Form 10-KSB contains express or implied
forward-looking statements. Additional written or oral forward-looking
statements may be made by the Company from time to time in filings with the
Securities and Exchange Commission, in its press releases, quarterly conference
calls or otherwise. The words "believes," "expects," "anticipates," "intends,"
"forecasts," "projects," "plans," "estimates" and similar expressions identify
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and financial performance or operations and speak
only as of the date the statements are made. Such forward-looking statements
involve risks and uncertainties and readers are cautioned not to place undue
reliance on forward-looking statements. The Company's actual results may differ
materially from such statements. Factors that cause or contribute to such
differences include, but are not limited to, the Company's limited operating
history, unpredictability of operating results, intense competition in various
aspects of its business, the risks of rapid growth, the Company's dependence on
key personnel, uncertainty of product acceptance, changes in laws and
regulations, changes in economic conditions and an inability to obtain
financing, as well as those discussed elsewhere in this Form 10-KSB. Although
the Company believes that the assumptions underlying its forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded as a representation by the
Company or any other person that the future events, plans or expectations
contemplated by the Company will be achieved. The Company undertakes no
obligation to publicly update, review or revise any forward-looking statements
to reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statements is
based.
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
FutureOne, Inc. was incorporated in Nevada on March 22, 1994 as World's
Fare, Inc. World's Fare, Inc. acquired FutureOne, Inc., an Arizona corporation,
which was incorporated December 26, 1996, and the entities were combined in a
reverse merger under an Exchange Agreement dated February 20, 1998, which became
effective March 30, 1998. In August 1998, World's Fare, Inc. changed its name to
FutureOne, Inc. When used in this registration statement, unless the context
requires otherwise, the terms "Company" and "FutureOne" refer to FutureOne,
Inc., a Nevada corporation (formerly World's Fare, Inc.), and all of FutureOne's
subsidiaries. The Company's principal offices are located at 4250 E. Camelback
Rd., Suite K-192, Phoenix, Arizona 85018-2751, telephone (602) 852-9725 and web
site www.futureone.com.
FutureOne believes it offers a diverse portfolio of communications
solutions to its customers, and that by selling communications equipment and
services, including broadband convergence technology solutions, local and long
distance telephone services, Internet e-business solutions, advertising and
graphic design services, and underground cable engineering and construction
services, it is in a position to serve the many varied communications needs of
its customers. The Company intends to focus first on the development of its
convergence technology and telecommunications services, next on the expansion of
its broadband communications engineering and construction services and finally
on the expansion of its e-business division. The Company does not plan to
further expand its communications equipment sales operations. The Company's
resources will be allocated to its various lines of business according to these
business development priorities. Currently, FutureOne's business consists of the
following:
- - CONVERGENCE TECHNOLOGY AND TELECOMMUNICATIONS SERVICES.
NeighborComm(TM). FutureOne is developing broadband
convergence technology solutions for residential and commercial
applications. FutureOne intends to ultimately provide bundled
communication
2
<PAGE> 4
services that include voice, video and data services through a single
high-speed fiber-optic cable linked directly to residential
developments or business and industrial complexes. The Company also
anticipates that its NeighborComm communities will also include an
Intranet designed specifically for the community it serves. This
technology is marketed under the name NeighborComm (Neighborhood
Communications Systems).
The Company's efforts to open its first NeighborComm community
have been focused on a community known as Stetson Hills in Colorado
Springs, Colorado. The Company has installed the wiring to accommodate
NeighborComm and the vault to hold the necessary equipment in the
Stetson Hills community. In order begin fully providing NeighborComm
services, the Company must implement the following technology:
- Install and connect communications hardware. The
Company has engaged Lucent Technologies, Inc. to
supply the necessary equipment, a portion of which
has been delivered, and engineer, install and test
the required networks, which is expected to be
completed in April 2000;
- Build and install a server for each community, which
can serve approximately 10,000 customers;
- Install network internal security consisting of
firewalls for internal networks, which also prevent
outside access to customer systems;
- Establish a source for providing video feeds; and
- Install customer premise equipment and the Company's
proprietary Intranet software in each customer's home
or business.
The Company has a strategic relationship with a real estate developer
in Colorado Springs, Colorado who is developing lots for sale to large
homebuilders. The developer is committed to installing NeighborComm facilities
into projects where approximately 25,000 homes are anticipated to be built over
the next several years. The Company anticipates reaching agreements with
schools, government agencies and local businesses to link to the Company's
Intranet, but no written agreements have been obtained to date.
The Company expects to be providing telephone connections to a limited
number of customers prior to January 31, 2000, and to add high speed Internet
service in the second quarter of fiscal year 2000. The Company is currently
seeking a video source and intends to add video services at a later date,
however, no specific timeframe has been established.
The Company is also preparing to provide NeighborComm services in
metropolitan areas of other western states. The Company is considering whether
to offer NeighborComm services to additional communities in Colorado and plans
to offer NeighborComm services in Arizona in fiscal year 2000. The Company also
anticipates expanding its services into New Mexico, Nevada and Utah. The Company
has obtained the necessary PUC authority to provide telephone services in
Colorado, is presently applying for PUC authority in Arizona and expects to
apply for the necessary permits and licenses in other western states in the
future. At the present time, no licenses or permits are necessary to provide
Internet access in any state, however, the Company will be required to obtain
authority to provide cable TV in various states and local jurisdictions or to
resell the services of other providers that have such authority.
The Company estimates that the cost of equipment for the first
community, and each new major market, will be approximately $1.25 million.
Equipment that may serve approximately 1,000 customers, has been delivered and
is expected to be installed by April 2000, and will replace the temporary
equipment that will be used by the Company to provide customers with services
until the new equipment is installed. The Company plans to acquire all of its
facilities' equipment through operating leases. The engineering, set up and
testing of the equipment is projected to cost approximately $250,000 and
operations for the first year, including sales and marketing, legal fees and
licenses, and direct operating costs are estimated at $470,000. These costs are
anticipated to provide for the first community, as well as, expansion into other
markets.
3
<PAGE> 5
Telephone Services. As part of its NeighborComm services, the
Company, through its wholly-owned subsidiary AMCOM LLC, expects to
begin providing local and long distance telephone service to a small
number of customers in Colorado prior to January 31, 2000.
- - BROADBAND COMMUNICATIONS ENGINEERING AND CONSTRUCTION SERVICES.
FutureOne is an engineering and underground cable installation company
and offers horizontal drilling, boring and cable splicing services for
all types of underground construction.
- - INTERNET SERVICES. The Company will be a high speed Internet access
provider and is currently a complete e-business solutions provider.
Individual and business Internet subscribers will be supported through
the Company's network of Internet service access sites, which will be
established as part of the Company's NeighborComm network. Web site
development and business solutions are designed to include web-based
vector animation and sound and supported with on-line and off-line
advertising, including, traditional print advertising, interactive
CD-ROM design, digital video production and music and sound production.
The Company sold substantially all of its assets relating to its
Internet access business operations, including equipment and all of its
personal and business Internet access customers, on November 19, 1999.
Even though the Company has sold substantially all of its assets
relating to its Internet access business operations, the Company
expects to provide high-speed Internet access to subscribers of the
Company's NeighborComm services.
- - COMMUNICATION EQUIPMENT SALES. The Company sells communications
equipment, including complete lines of name brand communications
products. Effective June 15, 1999, the Company sold its retail computer
operations and now is only engaged in wholesale communications
equipment sales.
INDUSTRY
The Company expects to primarily compete in the convergence technology
and telecommunications services industry, but because of the unique lines of
business in which it has historically and is presently engaged, it is also
involved on a smaller scale in other industries, such as Internet services,
communication equipment sales and underground cable construction.
CONVERGENCE TECHNOLOGY AND TELECOMMUNICATIONS SERVICES
The Company believes that the trend in the communications industry is
toward supplying broadband communications to consumers. Such services are also
known as convergence technology and/or bundled communications services and are
designed to deliver voice, video and data to consumers through a single cable or
wireless connection. The Company believes that the telecommunications industry
will continue to develop and implement varied forms of broadband convergence
technology. Recently, large companies such as Microsoft Corporation, AT&T Corp.
and Sprint Corporation have announced their intentions to develop and test
practical solutions to provide voice, video and data as bundled services. The
Company anticipates that customer demand for higher speed Internet capabilities,
as well as increasing demand for video communications and teleconferencing, will
require new services. In addition, customer demand for applying the technology
of the Internet to their everyday lives on a local basis will require many new
applications. Many organizations, large and small, are attempting to develop
products and solutions to meet these customer demands and, as a result, the
industry is very competitive.
The Company also believes that local and long distance telephone
services will continue to be offered by numerous large and small companies.
Extreme competition may continue to push basic prices for telephone services to
lower levels, but the Company believes there will continue to be a market for
such services to be supplied by small providers, such as the Company, which will
be bundled with other unique services or technology to attract customers.
4
<PAGE> 6
BROADBAND COMMUNICATIONS ENGINEERING AND CONSTRUCTION SERVICES
The underground cable construction industry is also growing rapidly and
demand for qualified contractors is high. Major companies such as U S WEST
Communications, Inc. ("U S WEST"), NextLink Communications, Inc., MCI WorldCom,
Inc. and Cox Communications, Inc. have announced capital expenditure programs to
upgrade their networks to include fiber-optic cable and the National Cable
Television Association has recognized the necessity of rebuilding the nation's
cable system with fiber-optic cable.
INTERNET SERVICES
The Internet services industry is changing rapidly as the Internet
becomes more widely accepted by the public and more customers become experienced
users. Most users are still connecting via traditional telephone connections
such as those offered by America Online, Inc., EarthLink Network, Inc., MSN
Network and most major telecommunications companies. These access services are
generally cheaper than high speed connections, with monthly fees generally
ranging from free access to $20 per month, however, some users are switching to
higher speed connections that are provided by cable modems, xDSL, wireless
connections and broadband convergence technology. These high speed access
services generally are more expensive, with monthly access fees of approximately
$30 per month. In addition, set-up charges and necessary special equipment for
these high speed access services can cost hundreds of dollars.
Commercial use of the Internet is increasing and traditional web sites
created for businesses are being upgraded. There is a growing demand for web
sites that are more appealing and are effectively marketed to drive traffic to
the site. E-commerce sites are increasing in number and are gaining greater
commercial acceptance as businesses understand and utilize the Internet as a
sales tool. Businesses are now seeking web sites that can (i) distinguish
themselves from their competitors, (ii) attract customers to their site and
(iii) keep customers at their site by creatively utilizing animation, music and
video. Businesses are still experimenting with the most cost-effective way to
attract customers to their e-commerce sites, however, most businesses are still
using traditional advertising mediums such as print, billboards, radio and
television to advertise their sites. Companies with large e-commerce sites can
expect to spend approximately $300,000 in utilizing mass media to advertise
their sites.
COMMUNICATION EQUIPMENT SALES
The communication equipment sales industry is also changing rapidly.
There is constant demand for higher speed and more technologically advanced
equipment. While many smaller organizations are finding it difficult to
economically compete with larger organizations in the direct retail sales of
communication equipment, many of these smaller organizations are finding niche
markets by taking advantage of new developments in communications equipment,
software and networking and providing additional services in connection with
equipment sales. Other organizations are able to compete in the wholesale market
by providing lower prices, not offering additional services or supplying
specialty equipment not available from many large retail outlets.
Wholesale sales of communication equipment are highly competitive and
gross margins are small. National companies can traditionally offer more
products at lower prices because of their purchasing power. Smaller companies
are able to compete in this marketplace by accepting lower profit margins,
operating at reduced costs, negotiating more favorable resale and distributor
contracts and using creative marketing techniques.
HISTORY
CONVERGENCE TECHNOLOGY AND TELECOMMUNICATIONS SERVICES
The Company has been pursuing a process of providing voice, video and
data through a single connection for several years and has been assembling the
equipment and technology and working toward obtaining the necessary regulatory
approvals to allow it to provide such services. Other companies have recently
entered this market known as broadband technology, convergence technology or
bundled communications services. The Company's convergence technology services
product is being marketed under the name NeighborComm (Neighborhood
5
<PAGE> 7
Communications Systems). There are many steps that the Company must take before
revenues will be generated from this operation. See "General - Convergence
Technology and Telecommunications Services." The Company expects revenues from
its NeighborComm services, which the Company anticipates will include telephone
services, including extra services, high speed Internet connection and video
services, to average approximately $127 per residential customer per month.
In order to enhance its NeighborComm solution, make the NeighborComm
services a more complete communications package and separate the Company's
NeighborComm offering from solutions provided by many competitors, the Company
will also include a user friendly Intranet designed specifically for the
community it serves. In conjunction with the Intranet, the Company is developing
proprietary software to provide additional services to each community. The
Company believes that its Intranet, when combined with its software, will allow
a customer to use the Company's service to communicate within such customer's
neighborhood. The Company anticipates that its Intranet and software will
include features such as local chat groups; a community calendar for posting
events by clubs, churches and other groups; apartment and homeowner management
features; a local classified section; local news, weather and sports; and
eventually local security cameras. In addition, the Company believes that its
Intranet may also include links to schools, governmental agencies and local
businesses.
By January 31, 2000, the Company, through its wholly-owned subsidiary
AMCOM LLC, expects to begin providing local and long distance telephone service
in portions of the western United States. The Company is entering into this line
of business through its arm's length acquisition of AMCOM LLC, a competitive
telecommunications provider, which it acquired on August 11, 1999 in exchange
for 121,212 shares of the Company's Common Stock valued at $279,030. AMCOM is a
start-up company and currently has no revenue, facilities or customers, but
holds (i) a Certificate of Public Convenience and Necessity to provide local
exchange services and the authority to provide Emerging Competitive
Telecommunications Services in Colorado, and (ii) authority to provide resold
local exchange services in U S WEST's exchanges in Oregon. AMCOM has standard
written agreements with Qwest Communications International, Inc., ICG
Communications, Inc., Frontier Communications, Inc. and U S WEST to distribute
or resell various telecommunications products and services.
Before the Company can derive revenue from telephone services, AMCOM
LLC must provide certain facilities and operational services for its customers.
See "Products and Services - Convergence Technology and Telecommunications
Services." The Company expects local and long distance telephone services,
including extra services, to average approximately $32 per residential customer
per month, most of which will be billed to customers as part of the Company's
NeighborComm services.
AMCOM is capable of providing telephone service under a Resale
Agreement with U S WEST Communications, Inc. that covers the fourteen western
states served by U S WEST. AMCOM has recently expanded its operating
capabilities by becoming an authorized facilities-based provider in addition to
a reseller of U S WEST products in Colorado. A reseller is allowed to resell U S
WEST products using their existing cabling and typically earns a gross profit of
approximately 15%. A facilities-based provider must attach to the national
telephone backbone through an SS7 gateway and incur additional operating
expenses such as complying with the 911 Mandate, but typically earns a gross
profit of 30%.
BROADBAND COMMUNICATIONS ENGINEERING AND CONSTRUCTION SERVICES
The Company's underground cable engineering and construction operations
are conducted by OPEC CORP., a Colorado corporation that is a wholly owned
subsidiary of the Company, which was acquired by the Company in July 1998. The
Company also provides horizontal drilling and boring services through Abcon,
Inc., an Arizona corporation, which was acquired by the Company in April 1999.
The Company acquired OPEC CORP. and Abcon, Inc. in arm's length transactions
with individuals that were not related to the Company or any of its affiliates,
as described below. See "Consolidated Financial Statements."
- - On July 29, 1998, the Company acquired all of the issued and
outstanding common stock of OPEC CORP. in exchange for 2,334,000 shares
of the Company's common stock, $0.001 par value per share ("Common
Stock"), valued at $6,200,000. OPEC CORP. is engaged in underground
cable construction and has performed
6
<PAGE> 8
construction services for such companies as U S WEST and AT&T, and
installs utility cable in the western United States. OPEC CORP. had
annualized revenues of approximately $4,900,000 at the time of
acquisition. OPEC is based in Colorado Springs, Colorado.
- - On April 19, 1999, the Company acquired all of the issued and
outstanding common stock of Abcon, Inc. in exchange for 94,118 shares
of the Company's Common Stock valued at $216,660. Abcon, Inc. is an
underground construction company specializing in horizontal drilling
and boring. Abcon, Inc., which is based in Phoenix, Arizona, provides
services for large and small telecommunications companies and had
annualized revenues of approximately $1,503,000 at the time of
acquisition.
INTERNET SERVICES
The Company's Internet services included personal and business dial up
accounts, high speed frame relay, ISDN and T-1 connections, virtual telephone
services, web site design, and custom software development. These services were
provided primarily through FUTUREONE, INC., an Arizona corporation, and
Networld.com, Inc., an Arizona corporation, which was incorporated in November
1995 and is a subsidiary of FUTUREONE, INC., an Arizona corporation. The Company
expanded its product lines and geographic area of operations with respect to its
Internet services through the following arm's length acquisitions. See "Notes to
Consolidated Financial Statements." As described below, the Company sold its
Internet access operations on November 19, 1999 and its virtual telephone
service on December 6, 1999.
- - On April 1, 1998, the Company acquired all of the issued and
outstanding common stock of LAN KASTER, INC., an Arizona corporation,
which has since been dissolved, in exchange for 215,385 shares of the
Company's Common Stock valued at $269,231. LAN KASTER, INC. provided
Internet service in Prescott, Arizona and its surrounding areas, and
had annual revenues of approximately $175,000 at the time of
acquisition.
- - On May 11, 1998, the Company acquired all of the issued and outstanding
common stock of CARNET COMPUTER SERVICES, INC., in exchange for 100,000
shares of the Company's Common Stock valued at $125,000. CARNET
COMPUTER SERVICES, INC., which develops software solutions for small-
to medium-sized businesses in varying industries, had annual revenues
of approximately $21,000 at the time of acquisition. Major clients
include the Robb Report, Magazine for the Luxury Lifestyle, and
Barrett-Jackson: The World's Greatest Classic Car Auction. Its software
products, Manna-Navigator, Claims Manager, Attendee and Patient Manager
are distributed nationally.
- - On July 15, 1998, the Company acquired certain assets, including all of
the Internet customers of Interworldnet Partnership in exchange for
40,000 shares of the Company's Common Stock, valued at $50,000, and
$3,841 in cash. Interworldnet Partnership provided Internet service to
Lake Havasu City, Arizona and surrounding areas, and had annualized
revenues of approximately $129,000 at the time of acquisition.
- - On September 21, 1998, the Company acquired certain assets of PrimeServ
Corp. ("PrimeServ"), including the PRIMESERV trademark, in exchange for
33,333 shares of the Company's Common Stock, valued at $97,665, and
$50,000 in cash. In addition, the Company issued 2,666 shares of Common
Stock as commission on the transaction with an aggregate value of
$7,813. PrimeServ provided a "virtual office" telephone solution by
allowing subscribers to distribute a single telephone number, which
could be programmed to ring simultaneously on telephones in multiple
locations, including office, home and cellular telephones. The
Company's virtual office telephone solution offered a call screening
feature and included a complete messaging center that can be accessed
from any phone and a fax message center that allows subscribers to
direct faxes to any fax telephone number on demand. PrimeServ had
annual revenues of approximately $30,000 at the time of acquisition.
The Company sold substantially all of the assets relating to its
virtual telephone services business on December 6, 1999.
- - On November 12, 1998, the Company acquired the Internet services
business of Globalkey, Inc. ("Globalkey"), in exchange for 50,000
shares of the Company's Common Stock valued at $146,500. Globalkey was
a small Internet service provider in Colorado Springs, Colorado that
had annualized revenues of approximately $28,000
7
<PAGE> 9
at the time of acquisition. In January 1999, Globalkey's Internet
access supplier terminated service to the Company due to prior payment
disputes with Globalkey. Accordingly, the small number of customers
acquired from Globalkey have been lost.
- - On March 31, 1999, the Company acquired all of the outstanding limited
liability company membership interests of Ubiquity Design, LLC - dba
Rocket Science Creative ("Rocket Science"), in exchange for 100,000
shares of the Company's Common Stock valued at $230,200. Rocket Science
is a graphic design and advertising agency that had annualized revenues
of approximately $346,000 at the time of acquisition. Rocket Science
produces custom advertising for several major companies in the Phoenix
area and prior to its acquisition had been working with the Company's
Internet division on larger web sites and e-business solutions.
- - On July 16, 1999, the Company acquired all of the outstanding limited
liability company membership interests of Progressive Media LLC, an
Arizona limited liability company ("Progressive Media"), in exchange
for 67,605 shares of the Company's Common Stock valued at $155,628.
Progressive Media had annualized revenues of approximately $245,000 at
the time of acquisition. and was acquired to provide enhanced media
services, including web-based animation, interactive CD-ROM design,
digital video production and postproduction, music and sound
production, and digital and traditional commercial photography.
- - On November 19, 1999, the Company sold substantially all of its assets
relating to its Internet access business, which was operated by the
Company's subsidiary, Networld.com, Inc., including all related
equipment and personal and business Internet access customers in
Phoenix, Flagstaff, Tucson, Lake Havasu City, Prescott, Florence,
Wickenburg and Payson, Arizona to RMI.NET, INC. ("RMI.NET") pursuant to
an Asset Purchase Agreement (the "RMI Agreement"). Pursuant to the RMI
Agreement, the Company received approximately 353,000 shares (the "RMI
Shares") of RMI.NET common stock worth approximately $2.75 million on
the date of acquisition. Under the terms of the RMI Agreement, 50% of
the RMI Shares were registered and immediately available for sale while
the remaining RMI Shares are subject to a lockup agreement under which
20% of the RMI Shares will be available for sale six months from the
date of the transaction and 20% of the RMI Shares will be available for
sale one year from the date of the transaction, subject to certain
registration rights. The remaining 10% of the RMI Shares will be held
in escrow for 18 months from the date of the transaction to cover any
adverse claim that could be made against the acquired assets. The
purchase price is subject to adjustment depending on actual revenues
achieved by RMI.NET during the three months following the date of the
transaction compared to the annualized revenue base of $1.66 million.
Any adjustment to the purchase price will be adjusted from the 20% of
the RMI Shares that are restricted from sale for six months. The
original cost of equipment transferred to RMI.NET, including the cost
of equipment under operating leases, was approximately $1.5 million.
- - On December 6, 1999, the Company sold substantially all of its assets
relating to its virtual telephone service business operations,
including related equipment and approximately 110 customers, for
$47,800 with $17,800 paid in cash and the balance payable on a
short-term note. This transaction did not include the Company's rights
to its registered trademark PRIMESERV(R). The virtual telephone service
business was originally purchased by the Company for $50,000 in cash
and $97,665 in Common Stock. In addition, the Company issued 2,666
shares of Common Stock as commission on the transaction with an
aggregate value of $7,813. The Company initially acquired the assets
comprising its virtual telephone service business in order to offer an
"add-on" service for the Company's Internet access customers. However,
the Company was not successful in marketing its virtual telephone
services and when the Company determined that the switching equipment
owned by the Company to provide this service may require an additional
investment to make it Year 2000 compliant, the Company decided to sell
substantially all of the assets that comprised its virtual telephone
service business operations.
The Company has retained and will continue to operate its newly
acquired e-business and advertising businesses. The Company will continue to
operate as an e-business solutions provider, but will not participate in the
retail ISP industry other than providing high-speed Internet access as part of
its NeighborComm bundled communications solution.
8
<PAGE> 10
COMMUNICATION EQUIPMENT SALES
The Company's communication equipment sales division makes direct sales
of name brand computer and communications equipment at the wholesale level. The
Company's retail computer sales and services business line was introduced in
February 1997 by FUTUREONE, INC., an Arizona corporation. The Company
discontinued its retail computer sales operations on June 15, 1999, and expanded
its wholesale sales operation by adding personnel and facilities and entering
into a reseller agreement (the "Lucent Agreement") with Lucent Technologies
Internetworking Systems (formerly Ascend Communications, Inc.) ("Lucent
Technologies") to become a Premier Value Added Reseller (PVAR). The Reseller
Agreement is for a twelve (12) month term with automatic twelve(12) month
renewal periods until terminated by either party. Pursuant to the Lucent
Agreement, the Company is obligated to stock inventory of Lucent Technologies
equipment. The Company has not been successful in marketing the inventory
purchased from Lucent Technologies and is currently attempting to sell as much
of the inventory as possible at cost and has reduced the staff in this division
to two employees. The Company has established its product lines and geographic
area of operations through the following arm's length transactions with
individuals that were not related to the Company or any of its affiliates at the
time of such transaction. See "Consolidated Financial Statements."
- - On September 29, 1998, the Company acquired all of the issued and
outstanding common stock of Sonoran Industries, Inc., an Arizona
corporation, which included its Kachina International division in
exchange for 92,308 shares of the Company's Common Stock valued at
$270,462 and $66,759 cash. Because the Company intended only to acquire
the Kachina International division and did not intend to acquire the
remaining assets and liabilities of Sonoran Industries, Inc., the
Company immediately sold all of the stock of Sonoran back to its
original owner for a nominal amount. The Kachina International division
sells data communications equipment primarily to schools, government
agencies, Internet providers and value added resellers as a factory
direct distributor for communications equipment and had annualized
revenues of approximately $900,000 at the time of acquisition. Kachina
International has developed a sophisticated data base of
Internet-related businesses and is based in Phoenix, Arizona.
- - On September 29, 1998, the Company acquired all of the issued and
outstanding common stock of PRIORITY SYSTEMS, INC., an Arizona
corporation, based in Lake Havasu City, Arizona, in exchange for
185,306 shares of the Company's Common Stock valued at $542,947.
PRIORITY SYSTEMS, INC. has provided computer network systems nationwide
since 1988 and had annualized revenues of approximately $1,260,000 at
the time of acquisition. PRIORITY SYSTEMS, INC. is a provider of
technology products and services such as computer systems, computer
peripherals and network management solutions to business and individual
consumers.
PRIORITY SYSTEMS, INC. had established a base of customers in Lake
Havasu City, Arizona. The Company acquired PRIORITY SYSTEMS, INC. with
the intent to merge it with Kachina International and the Company's
existing retail computer operation, and to expand its customer base in
Phoenix Arizona. After several months of attempting to penetrate the
Phoenix market, it became evident that the level of competition and the
low profit margins on retail computer equipment made it difficult for
this operation to become profitable. In June 1999, the Company divested
itself from the operations by selling PRIORITY SYSTEMS, INC. back to
its founder, who had been retained by the Company to manage the
PRIORITY SYSTEMS, INC. business operations while it was a subsidiary of
the Company. The Company had acquired PRIORITY SYSTEMS, INC. for
$542,947 in its Common Stock and in turn sold it back to its original
owner for $250,573 of the Company's Common Stock and a three-year
promissory note for $50,000. During the nine months that PRIORITY
SYSTEMS, INC. was owned by the Company, it had revenues of $856,000,
however, it sustained an operating loss of approximately $262,000 and
the Company incurred a loss of approximately $317,000 on its sale. As a
result of this sale, the Company will no longer compete in the retail
market of computer sales and services.
BUSINESS STRATEGY
The Company's objective is to meet the changing communication needs of
individuals and businesses. The Company intends to accomplish this objective
through the development of comprehensive communications technology and products
that are packaged to serve its customers' total communications needs.
9
<PAGE> 11
The Company also intends to offer a broad range of communications
technology solutions for businesses. These solutions include communications
equipment, high speed Internet access, I/P Telephony, converged networks, web
site and e-commerce site development and other e-business solutions. The Company
also plans to position itself as a leading provider of fiber-optic cable
construction to leading telecommunications companies and national and regional
developers.
The Company has identified the following four major lines of business:
- convergence technology and telecommunication services
(including local and long distance telephone service and
broadband convergence technology solutions (bundled voice,
video and data));
- broadband communication engineering and construction services;
- Internet services; and
- communication equipment sales.
The Company believes that these lines of business complement each other
and allow the Company to offer its customers complete communications solutions.
In addition, the Company has developed each of its lines of business to stand
alone in order to decrease the negative effects on the Company if a particular
line of business declines as a result of market conditions or other factors.
In implementing its strategy, the Company has identified the following
areas of emphasis:
- Introduce New Products. The Company believes that it must
continue to offer its customers new products and technology to
anticipate its customers' expectations and needs. The
successful continued development of NeighborComm and the
implementation of emerging technologies such as wireless
communications are part of the Company's immediate strategy.
- Evaluate Acquisition Opportunities. The Company evaluates
acquisition opportunities on an on-going basis and at any
given time may be engaged in discussions with respect to
possible acquisitions or other business combinations. At the
present time, the Company is seeking a joint venture with or a
strategic acquisition of a video content provider and a
wireless communications provider that will complement its
NeighborComm product, however, there are currently no firm
commitments with any specific entity.
- Integrate Acquisitions. The Company believes it is
successfully integrating the remaining entities and
technologies it has acquired. Each of the remaining entities
and operations provides a product or service that:
- contributes to the development of NeighborComm,
- stands alone with its own base of customers in its
primary business and
- enhances the ability of the Company's other operating
entities to provide larger groups of products or
services.
Integrating many acquired entities into an overall operating company
has provided many challenges which the Company believes it has
successfully addressed, including:
- Human resource constraints and implementation of coordinated
employee policies and benefits. The Company has hired a
Director of Human Resources to locate qualified applicants for
the Company and its subsidiaries, and to develop and
administer Company-wide employee policies and benefits,
including group insurance programs, a 401K plan and an
incentive stock option plan.
10
<PAGE> 12
- Obtaining sufficient office and operating space. The Company
has consolidated all of its operations, other than its
broadband communications engineering and construction
business, in a single office complex in Phoenix, Arizona. The
facilities for the Company's broadband communications
engineering and construction business are now consolidated in
two facilities in Colorado Springs, Colorado and Phoenix,
Arizona.
- Overcoming the logistics of operating in multiple cities and
states. The Company has established an Internet based,
internal communication system that allows all of the Company's
operations to be in constant contact. The Company is also
implementing a broad based accounting and financial controls
system that will be applicable to all of the Company's
operations.
- - Divestiture of Uneconomical Products and Operations. The Company
constantly monitors its products and services in terms of changes in
technology and markets, overall contributions to the profitability of
the Company and the total communications solutions that can be offered
to customers. The Company has recently determined that certain of its
products and services are unprofitable and/or do not contribute to the
Company's overall business strategy, including retail computer sales
and service, virtual telephone services and traditional Internet access
provider services. Consequently, the Company has sold substantially all
of its assets relating to the business operations of such products and
services. Management believes this will allow the Company to focus on
the development of NeighborComm and other products and services that
the Company currently offers.
PRODUCTS AND SERVICES
CONVERGENCE TECHNOLOGY AND TELECOMMUNICATIONS SERVICES
The Company believes the future of communications is changing to
respond to consumer demand for high speed communications and bundled
communication services that include voice, video and data, which is known as
broadband convergence technology. Companies such as US Sprint, AT&T and
Microsoft have recently announced their intentions to expand their operations
into this new communications technology. The Company also believes a
communications vehicle similar to the Internet is needed to connect residents,
businesses and other organizations within a local community.
The Company has been developing the NeighborComm system and has
recently been working in cooperation with Lucent Technologies to install and
test the infrastructure for the system.
Construction and installation of the underground cable infrastructure
has commenced at the Stetson Hills development in Colorado Springs, Colorado.
This project is anticipated to be the first NeighborComm neighborhood
communications system in operation, however, the Company has reached tentative
verbal agreements with other developers in Colorado Springs to install the
NeighborComm system in their developments. The Company anticipates that such
agreements will provide for the developer to pay for the cable and the
installation of the cable. The Company will reimburse the developer out of
future profits from the NeighborComm system in each specific community for the
cable, which will then be owned by the Company. In certain cases, the Company
may allow the developer to participate in profits for a fixed period of time
after the developer has received reimbursement for the cable.
The NeighborComm communications system being developed by the Company
is designed to ultimately allow for applications such as video conferencing and
video monitoring for security purposes, and voice (telephone), video (cable) and
data (Internet) service to consumers via one high-speed, fiber-optic connection
directly to the home or business. When implemented, the high speed Internet
connection will also be the source used for Voice over Internet Protocol, which
allows for long distance phone and facsimile calls to be made over the Internet.
The Intranet capabilities of the Company's NeighborComm system are
based on the needs of the local community. The Company anticipates that
community-based businesses, schools and local government agencies may be
accessed through links on the NeighborComm start-up page and provisions are
being made in the proprietary
11
<PAGE> 13
software being developed by the Company to allow for neighborhood chat lines,
local want ads, community bulletin boards, landlord and homeowner association
administration and other local use features.
The Company believes it has positioned itself to supply the services
required to support its NeighborComm system and to take advantage of the
additional revenue sources that will be created by convergence technology in
general. The Company believes that its construction division will supply
services for the Company's projects and similar systems being installed by other
companies. This new technology will create the need for communications
equipment, which can be supplied by the Company's communications equipment
division. The new technology will create a need for additional web sites and
e-business services from local vendors that had no reason to attempt to reach
customers via the world wide Internet, but may want to reach their local
consumers via the Company's Intranet. The Company anticipates that these new
users of the Intranet may create opportunities for the Company's advertising and
e-business solutions division.
On August 11, 1999, the Company acquired AMCOM, LLC, a competitive
telecommunications provider capable of providing telephone service under a
Resale Agreement with U S WEST Communications, Inc. that covers the fourteen
western states served by U S WEST. AMCOM has recently expanded its operating
capabilities by becoming authorized to be a facilities-based provider in
addition to a reseller in Colorado.
AMCOM, LLC is a start-up company and currently has no facilities or
customers, but holds (i) a Certificate of Public Convenience and Necessity to
provide local exchange services and the authority to provide Emerging
Competitive Telecommunications Services in Colorado, and (ii) authority to
provide resold local exchange services in U S West's exchanges in Oregon. AMCOM
also enjoys considerations and arrangements with Qwest Communications
International, Inc., ICG Communications, Inc., Frontier Communications, Inc. and
others to distribute or resell various telecommunications products and services.
The Company, through its wholly-owned subsidiary AMCOM, LLC, intends to
enter the telecommunications service business by offering telephone services
direct to consumers and within the context of the Company's NeighborComm
business. In order to enter into the telecommunications business and provide
local and long distance telephone service, the Company (through AMCOM, LLC) will
need state regulatory approval in each state in which it intends to do business.
The Company (through AMCOM, LLC) expects to file for operating authority in
those states covered by the AMCOM-U S WEST Resale Agreement in which it
currently does not have operating authority. In order to fully enter the
telecommunications service business, the Company or a subsidiary must install
equipment-based facilities, implement billing systems and establish a call
center.
The Company may remain a reseller and is not required to install
facilities at the present time. However, when sufficient funding is available,
the Company intends to install a SS7 gateway switch, which costs approximately
$200,000. The Company believes that the installation of such switch will
increase its gross profit on revenues from approximately 15% as a reseller to
approximately 30% as a facilities-based provider.
Initially, the Company intends to use existing internal billing
software to provide customer billing. As the customer base grows and funding
becomes available, the Company intends to purchase a telecommunications software
program estimated to cost $75,000. The Company intends to outsource its call
center support to a service provider that charges on a per-call basis. The
Company believes these services are available immediately.
BROADBAND COMMUNICATIONS ENGINEERING AND CONSTRUCTION SERVICES.
The Company designs, engineers and installs copper, fiber and CATV
distribution and feeder facilities for communications and real estate
development companies in the western United States through its wholly owned
subsidiaries, OPEC CORP. and Abcon, Inc. The Company offers a full range of
underground construction services, including the installation of underground
cable in various terrains. The Company owns the equipment necessary for
trenching, plowing, drilling and directional boring and can splice copper and
fiber cable. The Company directs its construction services from Phoenix, Arizona
and Colorado Springs, Colorado. The Company generally engages in contracts
ranging from several thousand dollars to approximately $2,000,000, but recently
was awarded general construction contracts with U S WEST for all of Iowa,
Nebraska and Wyoming and parts of Arizona and Colorado.
12
<PAGE> 14
Although there is no specific amount of work authorized under the contracts,
these contracts authorize OPEC to act as a general construction and maintenance
contractor and to provide engineering and cable installation services for U S
WEST in the specified areas, during the term of the contracts.
INTERNET SERVICES
INTERNET SERVICES. Through its subsidiary, Networld.com Inc., the
Company offered a complete selection of Internet access services, in both
monthly and fixed-term packages, designed to meet the varied needs of its
customers. These services varied from competitive residential dial-up services
to high speed, continuous Internet access services for businesses, such as Frame
Relay and Point-to-Point circuits. The Company previously offered local dial-up
access from Phoenix, Flagstaff, Tucson, Lake Havasu City, Prescott, Florence and
Payson, Arizona, and provided a local dial-up access to Wickenburg, Arizona
through a franchise agreement.
On November 19, 1999, the Company sold substantially all of its assets
relating to its Internet access business, which was operated by the Company's
subsidiary, Networld.com, Inc., including equipment and its personal and
business Internet access customers in Phoenix, Flagstaff, Tucson, Lake Havasu
City, Prescott, Florence, Wickenburg and Payson, Arizona to RMI.NET, Inc.
("RMI.NET") pursuant to an Asset Purchase Agreement (the "RMI Agreement").
Pursuant to the RMI Agreement, the Company received approximately 353,000 shares
(the "RMI Shares") of RMI.NET common stock worth approximately $2.75 million on
the date of transaction. Under terms of the RMI Agreement, 50% of the RMI Shares
were registered and immediately available for sale while the remaining RMI
Shares are subject to a lockup agreement in which 20% of the RMI Shares will be
available for sale six months from the date of the transaction and 20% of the
RMI Shares will be available for sale in one year from the date of the
transaction, subject to certain registration rights. The remaining 10% of the
RMI Shares will be held in escrow for 18 months from the date of the transaction
to cover any adverse claim that could be made against the acquired assets. The
purchase price is subject to adjustment depending on actual revenues achieved by
RMI.NET during the three months following the date of the transaction compared
to the annualized revenue base of $1.66 million. Any adjustment to the purchase
price will be adjusted from the 20% of the RMI Shares that are restricted from
sale for six months. The original cost of equipment transferred to RMI.NET,
including the cost of equipment under operating leases, was approximately $1.5
million.
The Company expects to provide high-speed Internet access as part of
its NeighborComm bundled communications solution.
VIRTUAL TELEPHONE SERVICE. The Company offered a custom telephone
service, under the trade name of PrimeServ(R), which created a "virtual office"
telephone solution by allowing subscribers to use a single phone number, which
can be programmed to ring simultaneously on several telephones, including
office, home and cellular telephones. Each telephone call was screened to
announce the caller and the subscriber could decide whether to answer the call
on any of the telephones to which such call was directed. In addition, the
system had a complete messaging center that could be accessed from any phone and
a fax message center that allowed subscribers to direct faxes to any fax
telephone number on demand.
On December 6, 1999, the Company sold substantially all of its assets
relating to its virtual telephone service business operations, including the
approximately 110 customers and equipment to service these customers, for
$47,800 with $17,800 paid in cash and the balance payable on a short-term note.
Such transaction did not include the Company's rights to its registered
trademark PRIMESERVE(R). The business was originally purchased by the Company
for $50,000 in cash and $97,665 in Common Stock. In addition, the Company issued
2,666 shares of Common Stock as commission on the transaction with an aggregate
value of $7,813. The Company initially acquired the assets comprising its
virtual telephone service business in order to offer an "add-on" service for the
Company's Internet access customers. However, the Company was not successful in
marketing these services and when it was determined that the switching equipment
owned by the Company to provide this service may require an additional
investment to make it Year 2000 compliant, the Company decided to sell
substantially all of the assets that comprised its virtual telephone service
business operations.
13
<PAGE> 15
OTHER INTERNET SERVICES. After the sale of the Company's Internet
access customers and related equipment, the Company continues to offer a
complete selection of web site development, e-business development services,
customized Internet client/server applications and Internet-based applications
for a number of industries.
- WEB SITE DEVELOPMENT. The Company offers a complete series of
web site design and development services for both business and
personal customers. The Company currently offers the following
services: project management; developing requirements; design
services; and web site construction. The Company's products
include multi-media skills, such as video streaming, audio and
advanced animation capabilities, Internet search engine
registration and Internet marketing services.
- E-BUSINESS DEVELOPMENT. The Company offers several e-business
programs directed at those businesses that are selling
products or services over the Internet. The Company's
e-business offerings range from low-end, entry level
e-commerce development services to the most sophisticated
solutions required by large Internet merchants. Using
Microsoft's Site Server and advanced encryption capabilities
as the basis for its sophisticated solutions, the Company also
possesses the project management skills and technical design
capabilities to link e-business solutions with
enterprise-wide, legacy databases as required.
- CUSTOMIZED INTERNET CLIENT/SERVER APPLICATIONS. As the
business community has accepted the Internet as a major
marketplace, and has acquired more experience with
Internet-based products and services, the demand for more
complex Internet-based client/server solutions has grown. The
Company offers services to customers to create simple or
complex Internet-based client/server solutions and mainframe
architectures. These solutions are prepared on both a fixed
bid and traditional time and materials basis.
- ADVERTISING, GRAPHIC DESIGN AND OTHER. In order to enhance and
complement traditional web site and e-business solutions, the
Company also provides traditional advertising and graphic
design to assist clients in reaching customers in traditional
ways and to promote their web sites. Electronic marketing and
advertising are offered as part of the Company's interactive
promotional services. Both electronic and print media
placement services are also offered. The Company also offers
enhanced media productions including, web-based animation,
interactive CD-ROM design, digital video production and
postproduction, music and sound production and digital and
traditional commercial photography.
- INTERNET-BASED APPLICATIONS FOR VERTICAL MARKETS. The Company
has built a number of specialized Internet applications for
business customers in different industries. In some cases, the
Company has retained the ownership rights to the software,
while in other cases the Company has negotiated with customers
to obtain the ability to "re-sell" these applications in the
future.
COMMUNICATION EQUIPMENT SALES
FutureOne is a factory direct distributor of data communications
products to Internet service providers, schools, government agencies and other
value added resellers. The Company has preferred value added reseller or
distributor agreements with Lucent Technologies, Nortel Networks Corporation,
Cisco Systems, Inc. and Multi-Tech Systems, Inc., and distributes other name
brand products under various supplier agreements.
CUSTOMERS
CONVERGENCE TECHNOLOGY AND TELECOMMUNICATIONS SERVICES
The Company's convergence technology customers consist of developers in
Colorado and Arizona with whom the Company currently has verbal agreements and
commitments. The Company and these developers are currently negotiating
contracts, which the Company expects will formalize the Company's relationship
with such developers and finalize the magnitude of the projects to be undertaken
by the Company. The projects covered by the
14
<PAGE> 16
verbal commitments consist of approximately 25,000 units, which will be built
over the next several years. The Company anticipates that such agreements will
provide for the developer to pay for the installation of the cable. The Company
will reimburse the developer for the cable out of future profits from the
NeighborComm system in each specific community, which will be owned by the
Company. In certain cases, the Company may allow the developer to participate in
profits for a fixed period of time after the developer has received
reimbursement for the cable. There is no assurance that the Company will be able
to formalize these commitments or that it will recognize revenue from such
services in the amounts that it currently anticipates.
Although the Company has commitments from developers, its ultimate
customers will be the home buyers in the developments. The Company anticipates
that when it begins providing residents with a complete package of voice, video,
and data services, Company revenues may average approximately $127 per month per
household.
BROADBAND COMMUNICATIONS ENGINEERING AND CONSTRUCTION SERVICES
The Company's communications engineering and construction services
operations serve major customers such as U S WEST, Lucent Technologies, NextLink
Communications, Inc. and U.S. Home Corporation and also provide services to
small companies and developers. During 1998, approximately 15% of the Company's
revenues were derived from Century Cable, and in 1999 approximately 10% of the
Company's revenues were derived from Santa Fe Ranch POA. These revenues were
derived from construction contracts that are non-recurring.
INTERNET SERVICES
The Company markets its Internet e-business and advertising services to
a wide variety of businesses and customers including businesses such as real
estate developers, a concert promoter, and audio equipment sales and sporting
goods companies. Services are provided on a direct hourly fee, fixed fee or time
and materials basis.
COMMUNICATION EQUIPMENT SALES
The Company markets its communications equipment primarily to a variety
of local business customers and a nationwide base of resellers, Internet Service
Providers, Competitive Local Exchange Carriers, government agencies and
educational institutions.
SUPPLIERS
CONVERGENCE TECHNOLOGY AND TELECOMMUNICATIONS SERVICES
Although the Company presently has no contracts for Internet access or
video content, the Company will be dependent on third party suppliers for
Internet access and bandwidth and various other services, including video
content to be provided as part of the Company's NeighborComm product. Internet
services and bandwidth are available from many sources including, Qwest, ICG
Frontier, AT & T, U S WEST and RMI.NET. The Company is also dependent on third
party suppliers for its local and long distance telephone service which is
obtained under reseller and facilities contracts with U S WEST, Qwest and ICG
Frontier.
BROADBAND COMMUNICATIONS ENGINEERING AND CONSTRUCTION SERVICES
The Company does not rely on any material third party suppliers in
connection with its communications engineering and construction services.
INTERNET SERVICES
The Company does not rely on any material third-party suppliers in
connection with its e-business or advertising services.
15
<PAGE> 17
COMMUNICATION EQUIPMENT SALES
The Company purchases communications equipment from authorized
distributors or manufacturers of communications equipment products and software
such as Tech Data, Pinacor and Ingram Mirco. The Company does not maintain
on-going contracts with these suppliers. The Company purchases other
communications equipment directly from manufacturers such as Lucent
Technologies, Nortel Networks Corporation, Cisco Systems, Inc. and Multi-Tech
Systems, Inc. or distributors authorized to warehouse such data communication
equipment for the manufacturers under resale contracts.
SALES AND MARKETING
CONVERGENCE TECHNOLOGY AND TELECOMMUNICATIONS SERVICES
The Company's convergence technology solution, NeighborComm, is sold
directly to large regional and national residential and commercial developers.
To date it has only been sold by key management of the Company. Sales literature
has been produced for a direct mail distribution and the Company intends to
market at home builder trade shows. After the NeighborComm system is installed
in a development, the Company will provide various on-site sales materials to
encourage home buyers in the development to obtain their communications services
from FutureOne.
The Company plans to sell its telecommunications products and services
as a part of NeighborComm, which is anticipated to include regular local and
long distance telephone services. The Company also anticipates that its
telecommunications products and services will be offered to customers in all
states where the Company obtains operating authority.
BROADBAND COMMUNICATIONS ENGINEERING AND CONSTRUCTION SERVICES
The Company attempts to grow and further develop this line of business
by selling to existing customers, applying to bid lists and responding to public
notifications of potential contracts and referrals.
INTERNET SERVICES
The Company markets its Internet services through its own direct sales
force consisting of one salesperson, Company management and the Company's web
sites.
COMMUNICATION EQUIPMENT SALES
The Company markets its communication equipment through a direct sales
force, consisting of four salespersons, telemarketing, direct mail campaigns,
media advertising, catalogs, weekly fax blasts, trade shows and conventions.
COMPETITION
The markets for all of the Company's products and services are
extremely competitive and it is expected that competition will intensify in the
future. The Company's ability to compete successfully depends on a number of
factors both within and outside its control, including the pricing policies of
its competitors and suppliers, the introduction of new products and services by
others, the availability of additional financing and general economic trends in
the industry.
CONVERGENCE TECHNOLOGY AND TELECOMMUNICATIONS SERVICES
The telecommunications industry is highly competitive. The Company
believes the principal competitive factors affecting its business are customer
service, accurate billing, variety of services and, to a lesser extent, pricing
levels and clear pricing policies. The ability of the Company to compete
effectively depends upon its ability to maintain high quality, market-driven
services at prices generally equal to or below those charged by its competitors.
16
<PAGE> 18
To be competitive, the Company believes it must be in a position to reduce its
prices in order to meet reductions in rates, if any, by others. Any such
reductions could adversely affect the Company. Many of the Company's current and
potential competitors have financial, personnel and other resources, including
brand name recognition, substantially greater than those of the Company, as well
as other competitive advantages over the Company.
FutureOne is a recent entrant in the telecommunications services
industry and will not achieve and does not expect to achieve a significant
market share for any of its services in larger markets. In particular, local
telephone companies have long-standing relationships with their customers and
have financial, technical and marketing resources substantially greater than
those of the Company. Many of those companies have the potential to subsidize
competitive services with revenue from a variety of businesses and currently
benefit from some existing regulations that favor these ILECs over FutureOne in
some respects.
The Company also faces, and expects to continue to face, competition
from other current and potential market entrants, including long distance
carriers seeking to enter, reenter or expand entry into the local exchange
market such as AT&T, MCI/WorldCom, GTE and US Sprint. Competition also comes
from other CLECs, resellers of local exchange services, competitive access
providers ("CAPs"), cable television companies, electric utilities, microwave
carriers, wireless telephone system operators and private networks built by
large end users. In addition, a continuing trend toward consolidation and
strategic alliances of telecommunications companies, as well as the development
of new technologies, could give rise to significant new competitors to the
Company, putting FutureOne at a competitive disadvantage. The Telecommunications
Act includes provisions which impose certain regulatory requirements on all
LECs, including the Company, while granting the FCC expanded authority to reduce
the level of regulation applicable to any or all telecommunications carriers,
including ILECs. The manner in which these provisions of the Telecommunications
Act are implemented and enforced could have a material adverse effect on the
Company's ability to compete successfully against ILECs and other
telecommunications service providers.
The change in the Telecommunications Act radically altered the market
opportunity for traditional CAPs and CLECs. Because most existing CAPs and CLECs
initially entered the market providing dedicated access in the pre-1996 era,
these companies had to build infrastructure before offering services. Since
passage of the Telecommunications Act, many CAPs have added switches to become
CLECs to take advantage of the opening of the local market. With the
Telecommunications Act requiring unbundling of the LEC installing switches and
leasing trunk and loop capacity until traffic volume justifies building
facilities, newer CLECs, including competitors that FutureOne may encounter in
some markets, will not have to replicate existing facilities and can be more
opportunistic in designing and implementing networks.
Although the Company is presently seeking a source or ability to
provide wireless communications services, there is no assurance that the Company
will be successful in being able to provide wireless services. Many of the
Company's competitors are already offering wireless services and, as a result,
may gain a competitive advantage over the Company.
The Company believes that recent announcements by several large
telecommunications companies indicate that such companies are positioning
themselves to provide convergence technology solutions (bundled communications
solutions), to existing telephone and cable subscribers, as well as, installing
convergence technology in new developments. New telecommunications hardware
solutions are being tested and developed that may allow the Company to provide
their bundled communication services through existing infrastructure to existing
communities, however, based on the Company's existing technology, the Company
will be limited to providing its bundled communications services only to
developments currently under construction.
The Company believes it is able to compete in this market because it
intends to offer unique services such as its Intranet and proprietary software
as a value added service, which are expected to attract additional customers.
The Company also has the capability of installing its own network and
connections directly to structures so that customers will purchase services
directly from the provider. Since the Company also intends to own the
connections to the structures, competitors normally will pay the Company to use
the Company's facilities if a customer should choose a competitors services
rather than install new facilities. The Company also believes that it can offer
competitive prices for most basic services which are competitively set by
general market conditions.
17
<PAGE> 19
BROADBAND COMMUNICATIONS ENGINEERING AND CONSTRUCTION SERVICES.
The Company competes with regional firms and national companies such as
Fischel Companies, Burnup and Sims, Inc., Henkel & McCoy and numerous other
smaller contractors. The Company must obtain work through competitive bids. The
Company has acquired specialized construction equipment, such as large boring
and drilling machines, to be competitive in obtaining projects with the
requirements or portions of jobs requiring these specialties. In order to be
competitive, the Company must have access to a sufficiently mobile labor force,
equipment and financial reserves to accept jobs in various parts of the western
United States. The Company is at a disadvantage in competing against larger
companies that have more personnel, equipment and financial resources than the
Company.
The Company believes that it is able to compete in this market because
it owns certain specialty equipment, such as horizontal drilling and boring
equipment, which is in high demand. In addition, the Company is able to engineer
telephone systems for subdivisions and complete real estate developments, a
service which is not provided by most competitors, and the Company is now
recognized as a general contractor by major communications companies, such as U
S West. This general contractor status and the ability to provide unique
services gives the Company access to more projects than are usually available to
subcontractors. The Company also obtains much of its work through competitive
bids and has been able to consistently obtain jobs in successful bids against
competitors.
INTERNET SERVICES
The competition for web site development and e-business solutions is
intense and large companies such Microsoft, U S WEST and AT&T offer such
services to larger customers. In order to attract monthly hosting customers,
some companies are offering these services for free. There are also numerous
individuals and small companies that design web sites for businesses at
extremely low prices, with which the Company cannot economically compete. As a
result, the Company must attract larger customers that have more sophisticated
needs. There are many companies competing for these sophisticated customers and
the available technology is constantly changing. This requires the Company to
consistently invest in new software tools and training for its staff in order to
develop and offer leading edge technological solutions to attract customers.
The Company believes it will be able to compete in this market because
it offers cutting edge technology solutions that are currently in high demand
and are not available from most of its competitors. Since these services are
only available from limited sources, they are not as price sensitive as
traditional services in the same industry. The Company also has the ability to
combine e-commerce solutions with traditional advertising mediums such as print,
billboards, radio and television to provide a complete advertising solution for
clients which is a service most e-business providers cannot provide.
COMMUNICATION EQUIPMENT SALES
The competition for sales of communications equipment is also intense,
and the gross profit margins are often minimal. On the wholesale level, the
Company competes with large national companies that offer more products and
occasionally lower prices because of their sales volume and purchasing power. As
a result, the Company must be willing to accept lower profit margins, maintain
lower operating costs, negotiate favorable resale and distributor contracts or
find unique marketing and advertising programs to continually market products to
new customers and its existing customer base in order to achieve and maintain a
competitive position in the marketplace.
The Company believes it can compete in this market because it receives
leads directly from suppliers, maintains a large inventory to supply customers
with products and has negotiated favorable supplier contracts which allow the
Company to buy on favorable terms to be able to sell at competitive prices.
GOVERNMENT REGULATION
The Company's telecommunications facilities and services will be
subject to varying degrees of federal, state and local regulation. The 1934
Communications Act, as amended (the "Act"), and the regulations promulgated
18
<PAGE> 20
by the Federal Communications Commission ("FCC") thereunder, as well as the
applicable laws and regulations of the various states and state regulatory
commissions all govern the provision of telecommunications services. The FCC
exercises jurisdiction under Title II of the Act over all facilities of, and
services offered by, telecommunications common carriers to the extent such
services involve jurisdictionally interstate common carrier communications,
including international communications originating from or terminating in the
United States. State regulatory authorities retain jurisdiction over
jurisdictionally intrastate communications. Local governments sometimes impose
franchise or licensing requirements on local service competitors and/or
facilities companies. The government regulations described below directly impact
the Company's operations. Changes to the regulatory environment in which the
Company operates can have significant ramifications, both positive and negative,
for the Company's operations. Accordingly, the Company must continuously monitor
regulatory developments and implement internal procedures to ensure full
regulatory compliance. These monitoring and compliance activities impose direct
costs on the Company. In addition to these direct costs, the Company can incur
indirect costs arising from the need in many cases to obtain regulatory approval
prior to taking action. For example, tariff changes often must be approved by a
regulatory agency before new rates, terms and conditions of service can be
offered. Similarly, prior regulatory approval often is required before certain
changes in the ownership of the Company or the sale or acquisition of assets can
take place. Such prior approval requirements impose time delays that represent
indirect costs to the Company's operations.
The following summary of regulatory developments does not purport to
describe all present and proposed federal, state and local regulations affecting
the telecommunications industry. Other existing federal and state regulations
are currently the subject of judicial proceedings, legislative hearings and
administrative proposals which could change, in varying degrees, the manner in
which this industry operates. Neither the outcome of these proceedings, nor
their impact on the telecommunications industry or the Company, can be predicted
at this time.
FEDERAL REGULATION
The Telecommunication Act of 1996 ("Telcom Act") substantially revised
the Act and, among other things, established a dual federal-state regulatory
framework for the introduction of local competition throughout the United
States. In passing the Telecom Act, Congress sought to increase local
competition from newer competitors such as long distance carriers, cable TV
companies and public utility companies. Entities that provide local telephone
services in competition with the existing, incumbent local exchange companies
("ILECs") are known as competitive local exchange companies, or CLECs.
The FCC imposes extensive regulations on common carriers such as ILECs
that have some degree of market power. The FCC imposes less regulation on CLEC
common carriers without market power, such as the Company. The FCC permits these
non-dominant carriers to provide domestic interstate services (including long
distance services) without prior authorization; but it requires carriers to
receive an authorization to construct and operate telecommunications facilities,
and to provide or resell telecommunications services, between the United States
and international points. If the Company decides to provide international
telecommunications services, it will need to obtain prior FCC authorization. The
Company will be required to file tariffs for its interstate and international
long distance services with the FCC before providing such services.
The Telecom Act establishes several means by which a CLEC, such as the
Company, can offer local telephone services in competition with the ILECs. A
CLEC may choose to build its own local facilities, resell the local services of
the ILECs, lease unbundled network elements from ILECs, or employ a combination
of these options. The Telecom Act imposes on ILECs certain obligations to
interconnect their services and facilities with those of the CLECs. It also
specifically requires all local exchange carriers, including ILECs and CLECs,
not to prohibit or unduly restrict resale of their services, to establish number
portability, dialing parity and reciprocal compensation arrangements for the
transport and termination of telecommunications, and to provide
non-discriminatory access to telephone poles, ducts, conduits and rights-of-way.
It also makes competitive entry into other service or geographic markets more
attractive to Regional Bell Operating Companies ("RBOCs"), other ILECs, long
distance carriers and other companies and likely will increase the level of
competition the Company faces.
19
<PAGE> 21
The FCC has significant responsibility in the manner in which the
Telecom Act will be implemented. The Telecom Act contemplates that states will
apply the federal regulations and oversee the implementation of all aspects of
interconnection not subject to FCC jurisdiction. The states also are tasked with
overseeing interconnection negotiations between ILECs and their new CLEC
competitors.
On August 8, 1996, the FCC released an order which established a
framework of minimum, national rules enabling state commissions and the FCC to
begin implementing many of the local competition provisions of the Telecom Act.
Among other things, the order prescribed certain minimum points of
interconnection, adopted a minimum list of unbundled network elements that ILECs
must make available to competitors, and adopted a methodology for states to use
when setting prices for unbundled network elements and for wholesale resale
services. In July 1997, the U.S. Court of Appeals for the Eighth Circuit struck
down certain of the rules (including the provisions establishing pricing
methodologies and default rates for resold services and unbundled network
elements). The appeals court concluded that the Telecommunications Act granted
the states the authority to set the rates for interconnection, unbundled network
elements and resold services and that the FCC therefore lacked jurisdiction to
issue the pricing rules or to preempt state pricing rules. In October 1997, the
Eighth Circuit issued an order clarifying that the RBOCs were not required to
rebundle unbundled network elements that competing carriers had purchased
separately.
The FCC, numerous IXCs and various other parties filed petitions for
certiorari with the U.S. Supreme Court, expressing concern, among other things,
about the lack of uniformity in pricing that may result from the Eighth
Circuit's rejection of national pricing. On January 25, 1999, the Supreme Court
issued a decision upholding the authority of the FCC to issue regulations - both
pricing and non-pricing - in implementing the local competition provisions of
the Telecommunications Act, rather than placing pricing authority at the state
level. In its decision, the Supreme Court, however, invalidated the FCC's
current list of the network elements that ILECs must make available on an
unbundled basis. This, in turn, could affect whether the FCC requires ILECs to
provide certain other facilities used in providing broadband services to
competitors such as the Company on an unbundled basis. The FCC is expected to
issue a notice proposing a new list of network elements shortly. The Eighth
Circuit decisions and their recent reversal by the Supreme Court perpetuate
continuing uncertainty about the rules governing the pricing, terms and
conditions of interconnection agreements. Given this uncertainty, the Company
cannot guarantee that it will be able to obtain or enforce acceptable
interconnection terms or interconnection terms consistent with its business
plans.
The Telecom Act has already resulted in comprehensive changes in the
regulatory environment for the telecommunications industry as a whole, and will
have a material impact on the local exchange industry and the competitive
environment in which the Company operates. Nevertheless, the concept of
competitive local exchange services is a relatively new development in the
telecommunications industry, and the Company cannot predict how the relevant
provisions of the Telecom Act will be interpreted and implemented by the FCC,
state regulators, courts and the ILECs. Although passage of the Telecom Act has
resulted in increased opportunities for companies that are competing with the
ILECs, no assurance can be given that changes in current or future regulations
adopted by the FCC or state regulators or other legislative or judicial
initiatives relating to the telecommunications industry would not have a
material adverse effect on the Company's financial condition, results of
operations or cash flow.
To the extent that the Company expects to offer interstate long
distance services, it will be treated by the FCC as a so-called "nondominant"
carrier. The FCC subjects nondominant carriers to minimal regulation. However,
interstate carriers offering services to the public must comply with the federal
statutory and regulatory requirements of common carriage under the Act, must
file various reports and pay various fees and assessments, and remain subject to
the FCC's complaint jurisdiction. Among other things, interstate common carriers
must offer service on a non-discriminatory basis at just and reasonable rates.
Nondominant carriers need not obtain specific prior FCC approval to initiate or
expand domestic interstate services, although they must file a tariff with the
FCC containing the currently effective rates, terms and conditions of service
for its long distance services. Although the FCC has issued regulations
eliminating this tariffing requirement for all interstate non-dominant carriers,
those regulations have been stayed on appeal by third parties, and the Company
currently will be required to file tariffs with the FCC. If the FCC order
becomes effective, nondominant interexchange carriers will need to find new
means of providing notice to customers of prices, terms and conditions on which
they offer their interstate services.
20
<PAGE> 22
In 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime which established new
universal service funds to support telecommunications and information services
provided to qualifying schools, libraries and rural health care providers, and
expanded the federal subsidies for local telephone services provided to
low-income consumers. The FCC collects money to fund this expanded regime from
interstate carriers and certain other entities. To the extent that the Company
provides intrastate, interstate or international telecommunications service, it
will be required to contribute to these programs. The Company's payments for the
schools and libraries and rural health care fund will depend on estimated
quarterly intrastate, interstate and international gross end-user
telecommunications revenues. Contribution factors vary quarterly and the FCC
bills carriers on a monthly basis. Contribution factors for 1999 ranged from
3.08 to 3.19% for the high cost and low income funds (interstate and
international revenues), and 0.72 to 0.76% for the schools, libraries, and rural
health care funds (intrastate, interstate and international revenues). Because
the contribution factors vary quarterly, the Company cannot currently accurately
determine the annualized impact on its annual performance.
As a telecommunications carrier, the Company will also be required to
comply with the Federal digital wiretapping regulations administered by the U.S.
Department of Justice and the FCC. The Communications Assistance to Law
Enforcement Act ("CALEA"), enacted in 1994, requires telecommunications carriers
such as Company to make available certain telecommunications capabilities to
U.S. law enforcement officials to permit those authorities to continue to
intercept communications involving advanced technologies such as digital and
wireless transmission communications. Under CALEA, courts may impose fines of up
to $10,000 per day on telecommunications carriers that fail to meet the required
capability functions, as determined by industry standards. The FCC recently
extended the compliance date for the CALEA capability requirements to June 30,
2000 to permit manufacturers sufficient time to develop CALEA compliant
equipment. The Company cannot predict the nature and extent of the impact the
CALEA requirements will have on its operations.
The FCC may address regulatory non-compliance with a variety of
enforcement mechanisms, including monetary forfeitures, refund orders and
injunctive relief. The telecommunications industry varies substantially from
state to state and continues to change rapidly. Moreover, as deregulation at the
federal level occurs, some states are reassessing the level and scope of
regulation applicable to carriers. Regulators or third parties could raise
material issues with regard to Company's compliance or non-compliance with
applicable regulations. Future regulatory, judicial or legislative activities
could have a material adverse effect on the Company's financial condition,
results of operations or cash flow.
STATE REGULATION
The local and intrastate long distance telecommunications operations of
the Company will be subject to various state laws and regulations. Most states
regulate entry into the intrastate telecommunications markets, and states'
regulation of competitive telecommunications providers vary in their regulatory
intensity. The majority of the states mandate that companies seeking to provide
intrastate services apply for and obtain from a state public utility commission
("PUC") certificates of public convenience and necessity or file a registration
with the PUC. This authorization process generally requires the carrier to
demonstrate that it has sufficient financial, technical and managerial
capabilities and that granting the authorization will serve the public interest.
The Company, through its wholly owned subsidiary AMCOM LLC, is authorized by the
appropriate PUCs in the states of Colorado and Oregon and expects to file for
approval in other states. It cannot guarantee that it will be able to
successfully obtain such approvals.
In most states, the Company must also file and obtain prior regulatory
approval of tariffs for intrastate services. In addition, the Company must
update or amend the tariffs and, in some cases, the certificates of public
convenience and necessity, when rates are adjusted or new products are added to
the local and long distance services offered by the Company. In addition, most
states impose tariff requirements on carriers and require that common carriers
charge just and reasonable rates and not discriminate among similarly situated
customers. Some states also require the filing of periodic reports, the payment
of various regulatory fees and surcharges, and compliance with service standards
and consumer protection rules. States often require prior approvals or
notifications for certain transfers of assets (such as fiber optic cable or
other telecommunications facilities), customers or ownership. Some states also
require approval or notice for the issuance of securities or debt or for name
changes. States generally retain the right to sanction a carrier or to revoke
its operating authority if a carrier violates relevant laws and/or
21
<PAGE> 23
regulations. If any state regulatory agency concluded that the Company provided
intrastate service without the appropriate authority, or that it was not
otherwise in compliance with state PUC rules, that agency could initiate
enforcement actions, potentially including the imposition of fines, the
disgorging of revenues, or the refusal to grant the regulatory authority
necessary for the future provision of intrastate telecommunications services.
LOCAL GOVERNMENT REGULATION
The Company expects to own telecommunications facilities that may be
subject to certain local government requirements. In particular,
facilities-based companies must generally obtain street use and construction
permits and licenses and/or franchises to install and expand fiber-optic
networks using municipal rights of way. In some municipalities carriers must pay
license or franchise fees based on a percentage of gross revenues or on a per
linear foot basis, as well as post performance bonds or letters of credit. The
Company cannot guarantee that it can obtain or retain franchises or that
franchise fees will remain at their current levels. While regulation of
municipal rights of way generally remains a matter under local jurisdiction,
some states have enacted or are considering enacting measures that affect the
ability of local governments to impose certain types of restrictions on
franchisees or to require certain types of concessions from carriers seeking
franchise agreements.
INTERNET REGULATION
In so far as the Internet is a relatively new medium, the legal
obligations and First Amendment rights of service providers and participants in
the Internet are not well defined and are evolving. Currently, Internet access
and online services are not subject to direct regulation in the United States,
but changes in the regulatory environment relating to the telecommunications and
media industry could have an effect on the Company's business. For example, FCC
regulatory review and rulemaking could result in regulation of the Internet and
online services industry, which could result in increased telecommunications
costs for participants in the Internet industry, including the Company. The
Company cannot predict whether, or to what extent, any such new rulemaking will
occur, or what effect any such rulemaking would have on the Company.
Certain provisions of the 1996 Telecommunications Act relating to
indecent communication over the Internet, generally referred to as the
Communications Decency Act of 1996, were held unconstitutional by the United
States Supreme Court in June 1997. These provisions had generally made it
illegal, subject to certain defenses, for persons to knowingly use an
interactive computer service to send or display "indecent" communications to
minors. In October 1998, Congress enacted the Children's Online Protection Act
("COPA") which creates criminal penalties for content on the Internet that may
be deemed "harmful to minors" (as defined in various court decisions) and
requires that such material be restricted. This law is currently being
challenged in federal district court. On February 1, 1999, a U.S. District Court
judge issued a preliminary injunction against enforcement of portions of that
Act and the U.S. Department of Justice has appealed that decision. The Company
has not changed any of its plans or policies as a result of the enactment of
COPA, and does not believe its current plans or policies violate this statute.
The Company cannot predict whether additional federal or similar state
legislation will be enacted in the future, whether any such future legislation
would be upheld, how courts would interpret any such future legislation or what
effect, if any, such legislation would have on the Company. There also are laws
that make it illegal to traffic in obscene or child pornographic materials,
including by a computer, and accordingly the Company will subscribe to a
newsgroup service who's servers do not host certain newsgroups that it believes
traffic in child pornography. While the Company does not believe that its
activities will violate any of these laws, it cannot predict how a court would
interpret these laws in the Internet context or whether a court would hold that
the Company has a duty to monitor material being transmitted or, if notified
that illegal material is being transmitted, to attempt to stop or restrict such
transmissions.
In addition, the applicability to FutureOne of existing laws governing
issues such as intellectual property ownership, defamation and personal privacy
is uncertain. Courts have indicated that, under certain circumstances, online
service providers and Internet Service Providers could be held responsible for
the publication of defamatory material or for failure to prevent the
distribution of material that infringes copyrights owned by others. The Company
does not edit or otherwise monitor the content accessed by subscribers to its
Internet services. In addition, the Company plans to subscribe to a newsgroup
service that meets certain criteria indicating they do not carry child
22
<PAGE> 24
pornography. Future interpretations by the courts of online defamation, privacy,
copyright infringement and other legal issues is also uncertain.
It is possible that in the future laws and regulations could be adopted
which address matters such as user privacy, copyrights, pricing and the
characteristics and quality of Internet services, among other areas.
Internet-related legislation and regulatory policies are continuing to develop
and the Company could be subject to increased regulation in the future. Laws or
regulations could be adopted in the future that may decrease the growth and
expansion of the Internet's use, increase the Company's cost of doing business,
or otherwise adversely affect the Company's business.
On April 5, 1999, U S WEST filed a petition with the FCC asking the FCC
to find that Internet Protocol ("IP") telephony services are telecommunications
services, not enhanced services or information services, and therefore should be
subject to access charge and universal service obligations. The Company cannot
predict how the FCC will rule on U S WEST's petition. If the FCC does ultimately
determine that IP telephony is subject to the FCC's access charge and universal
service regimes, such a ruling would likely substantially increase the Company's
costs of providing IP telephony. U S WEST filed similar requests before the
Nebraska Public Service Commission and the Colorado PUC.
The FCC may also issue new regulations governing the treatment of calls
to ISPs for the purposes of universal service obligations. In a recent report to
Congress, the FCC clarified that carriers must consider revenues earned from the
transmission services supplied to ISPs when calculating universal service
obligations. The FCC plans to address in the future the contribution
obligations, if any, of ISPs using their own facilities and ISPs providing
phone-to-phone IP telephony. The Company cannot predict the outcome of these
proceedings or their potential effect on its operations.
TRADEMARKS
The Company has two registered trademarks, one for Future One & DESIGN
and one for PrimeServ. The Company has applied for a registered trademark with
the U.S. Patent and Trademark Office for NeighborComm. Such application is
currently pending, although there can be no assurances regarding when such
registration will be issued, if at all. The Company does not own any patents.
EMPLOYEES
As of December 15, 1999, the Company had 178 full-time employees, of
whom 37 had executive or managerial responsibilities. None of the Company's
employees are represented by a union. The Company considers its relations with
its employees to be good.
The Company's growth continues to place significant demands on its
managerial resources. The success of the Company's business is substantially
dependent on the services of its senior management team, and the services of
Earl J. Cook, Alan P. Hald, Donald D. Cannella, Bruce A. Robson and R. Tucker
Woodbury. The Company has employment agreements with all five of its senior
managers, however, the loss of their services or the services of the Company's
other officers and key technical personnel could have a material adverse effect
on the Company. To address these risks, the Company must, among other things,
continue to attract, retain and motivate qualified personnel. While the Company,
like other technology companies, has experienced some difficulty in attracting
and retaining qualified personnel, it has been successful in attracting
qualified personnel to date. There can be no assurance that the Company will be
successful in attracting or retaining qualified personnel in the future.
INSURANCE
The Company maintains general liability, automobile liability,
workmens' compensation and umbrella coverage insurance in amounts which it
believes are customary for a company of its size engaged in a comparable
industry. However, there can be no assurance that the Company will not be
subject to claims in the future that its insurance may not cover or as to which
its coverage limits may be inadequate.
23
<PAGE> 25
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal administrative offices are located in
approximately 7,400 square feet of space in Phoenix, Arizona. The Company
occupies these premises under a lease agreement expiring on January 31, 2001. In
addition, the Company also leases other office space of approximately 1,100
square feet and warehouse space of approximately 1,650 square feet in Phoenix,
and other facilities in Colorado Springs, Colorado aggregating approximately
8,500 square feet as of December 15, 1999. The Company considers its facilities
to be sufficient for its current and anticipated operations. The Company may
have to lease additional space to accommodate any of its expansion plans.
ITEM 3. LEGAL PROCEEDINGS.
All legal proceedings and actions involving the Company are of an
ordinary and routine nature incidental to the operations of the Company.
Management believes that such proceedings should not, individually or in the
aggregate, have a material adverse effect on the Company's business or financial
condition or results of operations. None of the Company's officers, directors,
or beneficial owners of 5% or more of the Company's outstanding securities is a
party adverse to the Company nor do any of the foregoing individuals have a
material interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
GENERAL
The Company's Common Stock has been quoted on the Over-the-Counter
Bulletin Board under the symbol FUTO since August 1998 and previously was quoted
under the symbol WRLF since October 14, 1997. The following sets forth the range
of high and low bid quotations for the periods indicated as reported by National
Quotation Bureau, Inc. Such quotations reflect prices between dealers, without
retail mark-up, markdown or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
<S> <C> <C> <C> <C> <C>
July 1, 1999 through September 30, 1999.............................. $5.5000 $2.5000
April 1, 1999 through June 30, 1999.................................. $8.8750 $4.0000
January 1, 1999 through March 31, 1999............................... $10.1250 $2.8750
October 1, 1998 through December 31, 1998............................ $3.7500 $1.8750
July 1, 1998 through September 30, 1998.............................. $3.4375 $2.3750
April 1, 1998 through June 30, 1998.................................. $2.7500 $1.6875
January 1, 1998 through March 31, 1998............................... $1.6250 $1.2500
December 10, 1997 through December 31, 1997.......................... $.5625 $.4375
</TABLE>
As of January 7, 2000, there were approximately 202 holders of record
of the Company's Common Stock.
24
<PAGE> 26
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay any cash dividend in the foreseeable
future.
PENNY STOCK
The Company's Common Stock will be subject to the provisions of Section
15(g) and Rule 15g-9 of the Exchange Act, commonly referred to as the "penny
stock rule." Section 15(g) sets forth certain requirements for transactions in
penny stocks and Rule 15g-9 (d) (1) incorporates the definition of penny stock
that is found in Rule 3a51-1 of the Exchange Act.
The SEC generally defines penny stock to be any equity security that
has a market price less than $5.00 per share, subject to certain exceptions. If
the Company's Common Stock is deemed to be a penny stock, trading in the shares
will be subject to additional sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors. Accredited investors are persons with assets in excess of $1,000,000
or annual income exceeding $200,000, or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of such security and must
have the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the first transaction, of a risk disclosure
document relating to the penny stock. A broker-dealer also must disclose the
commissions payable to both the broker-dealer and the registered representative,
and current quotations for the securities. Finally, monthly statements must be
sent disclosing recent price information for the penny stocks held in account
and information on the limited market in penny stocks. Consequently, these rules
may restrict the ability of broker-dealers to trade and/or maintain a market in
the Company's Common Stock and may affect the ability of stockholders to sell
their shares.
OTC Bulletin Board Eligibility Rules
In January 1999, the SEC granted approval of amendments to the NASD OTC
Bulletin Board Eligibility Rules 6530 and 6540. These amendments now require a
company listed on the OTC Bulletin Board to be a reporting company and current
in its reports filed with the SEC. As a result of this rule change, the Company
has voluntarily filed a registration statement on Form 10-SB in order to become
a fully reporting company and maintain the listing of the Company's Common Stock
on the OTC Bulletin Board. The NASD Eligibility Rule requires that the SEC come
to a position of no further comment regarding any Form 10 registration statement
before the NASD considers a company compliant. The SEC did not come to such a
position in regards to the Company's Form 10-SB registration statement prior to
the Company's phase-in date of December 2, 1999. According to the Eligibility
Rule, if the Company is not in compliance at its phase-in date the Company's
Common Stock can be removed from the OTC Bulletin Board. To date, the Company's
Common Stock has not been removed from the OTC Bulletin Board, however, a
delisting may adversely affect the market, if any, in the Company's Common
Stock.
SHARES AVAILABLE FOR FUTURE SALE
Of the 12,905,528 shares of Common Stock outstanding as of January 7,
2000, approximately 2,528,465 shares of Common Stock are freely tradable without
restriction in the public market unless the shares are held by "affiliates," as
that term is defined in Rule 144(a) under the Securities Act. For purposes of
Rule 144 under Securities Act ("Rule 144"), an "affiliate" of an issuer is a
person that, directly or indirectly through one or more intermediaries,
controls, or is controlled by or is under common control with, the issuer. The
remaining shares of Common Stock outstanding are "restricted securities" under
the Securities Act and may be sold in the public market upon the expiration of
the holding periods under Rule 144, described below, subject to the volume,
manner of sale, and other limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares for at least one year, including an "affiliate," is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
- 1% of the then outstanding shares of the Company's Common
Stock (approximately 129,055 shares); or
- the average weekly trading volume during the four calendar
weeks preceding filing of notice of the sale of shares of
Common Stock.
Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A stockholder who is deemed not to have been an
"affiliate" of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned restricted shares for at least two years, would be
entitled to sell shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, or public information requirements.
25
<PAGE> 27
In addition, as of January 7, 2000, there were outstanding warrants to
purchase 2,947,479 shares of Common Stock, all of which were fully vested. In
addition, as of January 7, 2000, there were outstanding options to purchase
1,522,700 shares of Common Stock, none of which were fully vested. As of January
7, 2000, certain outstanding notes payable had conversion rights into
approximately 1,000,000 shares depending upon amounts of accrued interest on
such notes at the time of conversion. Sales of substantial amounts of the
Company's Common Stock (including shares issued upon the exercise of outstanding
warrants and options) in the public market in the future could adversely effect
the market price of the Company's Common Stock. These sales may also make it
more difficult for the Company to sell equity or equity related securities in
the future at a time and price that the Company believes is appropriate.
RECENT SALES OF UNREGISTERED SECURITIES
The following provides information concerning all sales of securities
within the last three years that were not registered under the Securities Act.
In December 1996, the Company issued an aggregate of 100,000 shares of
Common Stock to two of its founders for $1,000 received in cash. Such shares
were issued without registration pursuant to an exemption from registration
under Section 4(2) of the Securities Act as private transactions not involving a
public distribution.
In January 1997, the Company issued a total of 10,000,000 shares to the
two former stockholders and certain noteholders of Networld.com Inc., of which
7,800,000 shares were directly attributable to the Company's acquisition of
Networld.com Inc. and 2,200,000 shares were issued to two noteholders of
Networld.com Inc. to redeem $195,000 of debt of Networld.com Inc. In November
1997, 5,000,000 of such shares of Common Stock were voluntarily tendered back to
the Company by the same four stockholders pursuant to certain capital adjustment
agreements. Such shares were issued without registration pursuant to an
exemption from registration under Section 4(2) of the Securities Act as private
transactions not involving a public distribution.
In March 1997, the Company exchanged 579,990 shares for notes and
leases issued by Networld.com Inc. in the aggregate amount of $242,703. Such
offering was made in reliance upon the exemptions from registration provided by
Sections 3(b), 4(2), and 4(6) of the Securities Act as private transactions not
involving a public distribution.
In August and November 1997, the Company issued an aggregate of 250,000
shares of Common Stock in connection with obtaining an equipment financing line
of credit. Such shares were issued at $1.00 per share and were not registered
pursuant to an exemption from registration under Section 4(2) of the Securities
Act as private transactions not involving a public distribution.
In October and November 1997, the Company issued 15,500 shares of
Common Stock to one investor at a price of $1.00 per share in connection with
the Company's purchase of certain equipment. Such shares were issued without
registration pursuant to an exemption from registration under Section 4(2) of
the Securities Act as private transactions not involving a public distribution.
In 1997, the Company sold 152,000 shares of Common Stock to 11
investors for $152,000. Such offering was made pursuant to an exemption from
registration under Section 4(2) of the Securities Act as private transactions
not involving a public distribution.
In 1998, the Company sold a total of 40 units in consideration for
$12,500 per unit to 20 investors with each unit consisting of 10,000 shares of
Common Stock and warrants to purchase 5,000 shares of Common Stock at an
exercise price of $3.00 per share. Such warrants were redeemable by the Company
and expired in May 1999 after the original expiration date of November 1998 was
extended for six months by the Company. Such offering was made pursuant to an
exemption from registration under Section 4(2) of the Securities Act and
Regulation D promulgated under the Securities Act.
26
<PAGE> 28
From March 1998 through July 1998, the Company issued an aggregate of
181,250 shares of Common Stock to a consultant for services rendered in
connection with the merger of World's Fare, Inc. with FUTUREONE INC., an Arizona
corporation. Such shares were issued without registration pursuant to an
exemption from registration under Section 4(2) of the Securities Act as private
transactions not involving a public distribution.
In April 1998, the Company issued 50,000 shares to one holder in
consideration for promotional services provided to the Company. Such issuance
was made pursuant to an exemption from registration under Section 4(2) of the
Securities Act as private transactions not involving a public distribution.
In April 1998, the Company issued a total of 215,385 shares of Common
Stock, valued at $269,231, to the eight former stockholders of LAN KASTER, INC.
in connection with the Company's acquisition of LAN KASTER, INC. Such shares
were issued without registration pursuant to an exemption from registration
under Section 4(2) of the Securities Act as private transactions not involving a
public distribution.
In May 1998, the Company issued a total of 100,000 shares of Common
Stock, valued at $125,000, to the two former stockholders of CARNET COMPUTER
SERVICES, INC. in connection with the Company's acquisition of CARNET. Such
shares were issued without registration pursuant to an exemption from
registration under Section 4(2) of the Securities Act as private transactions
not involving a public distribution.
In July 1998, the Company issued a total of (i) 40,000 shares of Common
Stock, valued at $53,841, to the two partners of InterworldNet Partnership in
connection with the Company's acquisition of InterworldNet's assets, and (ii)
2,334,000 shares, valued at $6,200,000, to the three former stockholders of OPEC
CORP. in connection with the Company's acquisition of OPEC. The Company also
issued 125,000 shares to one individual for consulting services provided in
connection with the Company's acquisition of OPEC. Such shares were issued
without registration pursuant to an exemption from registration under Section
4(2) of the Securities Act as private transactions not involving a public
distribution.
In July 1998, the Company entered into a Stock Purchase Agreement with
Blackwater Capital Partners, L.P. and Blackwater Capital Group, L.L.C. Under the
Stock Purchase Agreement, Blackwater Capital agreed to purchase, or cause to be
purchased, up to 3,211,000 shares of the Company's Common Stock from the Company
and up to an aggregate of 200,000 shares from Messrs. Northern and Cook at a
minimum price of $2.93 per share. In connection with the Stock Purchase
Agreement, Blackwater Capital has been issued warrants to purchase 1,700,000
shares of the Company's Common Stock at $1.00 per share expiring in July 2005.
Such warrants vest upon Blackwater Capital's performance under the Stock
Purchase Agreement. As of December 15, 1999, 1,387,605 shares of Common Stock
have been sold under the Stock Purchase Agreement, including an aggregate of
50,000 shares sold by Messrs. Northern and Cook, and 650,000 warrants have
vested in connection therewith which include certain shares and warrants sold in
January 1999 as described below. Shares and warrants issued pursuant to the
Stock Purchase Agreement are issued without registration pursuant to an
exemption from registration under Section 4(2) of the Securities Act. In
addition, under the Agreement, the Company sold to Blackwater Capital a total
300,000 shares of Common Stock and warrants to purchase 150,000 shares of Common
Stock at an exercise price of $3.00 per share in consideration for $375,000.
Such warrants were redeemable by the Company and expired in May of 1999, after
the original expiration date was extended for six months by the Company.
In September 1998, the Company issued a total of (i) 33,333 shares of
Common Stock, valued at $97,665, to the sole stockholder of PrimeServ, Corp. and
two other related parties in connection with the Company's acquisition of the
assets of PrimeServ, Corp., (ii) 92,308 shares of Common Stock, valued at
$270,462, to the former sole stockholder of Sonoran Industries, Inc. in
connection with the Company's acquisition of Kachina and (iii) 185,306 shares of
Common Stock, valued at $542,947, to the four former stockholders of PRIORITY
SYSTEMS, INC. in connection with the Company's acquisition of PRIORITY SYSTEMS,
INC. The Company also issued an aggregate of 2,666 shares of Common Stock to two
individuals as commission for services rendered in connection with the
acquisition of PrimeServ's assets. Such shares were issued without registration
pursuant to an exemption from registration under Section 4(2) of the Securities
Act. In addition, in September 1998, as part of the Blackwater Capital Stock
Purchase Agreement, Blackwater Capital acquired 177,605 shares of Common Stock
at $2.93 per
27
<PAGE> 29
share. Such shares were issued without registration pursuant to an exemption
from registration under Section 4(2) of the Securities Act as private
transactions not involving a public distribution.
Effective September 30, 1998, the Company issued warrants to purchase
an aggregate of 410,812 shares of Common Stock to two executive officers of the
Company as compensation for services rendered to the Company. Such warrants and
the underlying shares of Common Stock were issued without registration pursuant
to an exemption from registration under Section 4(2) of the Securities Act as a
private transaction not involving a public distribution.
In November 1998, the Company issued a total of 50,000 shares of Common
Stock, valued at $146,500, to four individuals in connection with the Company's
acquisition of certain assets of Globalkey. Such shares were issued without
registration pursuant to an exemption from registration under Section 4(2) of
the Securities Act as private transactions not involving a public distribution.
The Company issued a total of 222,500 shares of Common Stock to
employees in calendar 1998 pursuant to employment contacts or as employment
bonuses. Certain stock awards were made with specific vesting restrictions over
two to three years. In addition, the Company issued a total of 5,000 shares in
June 1998 to a consultant for services provided in connection with some of the
Company's corporate acquisitions. Such shares were issued without registration
pursuant to an exemption from registration under Section 4(2) of the Securities
Act.
In January 1999, as part of the Blackwater Capital Stock Purchase
Agreement, Messrs. Northern and Cook sold 40,000 shares and the Company sold (i)
960,000 shares of Common Stock and (ii) warrants to purchase 400,000 shares of
Common Stock at an exercise price of $1.00 per share, for an aggregate purchase
price of $2,300,000. In connection with this transaction, Blackwater assigned
400,000 of its previously vested warrants to the investor, Muluha Limited, and
100,000 to the broker that facilitated the transaction. The offering of such
shares and warrants by the Company was made pursuant to an exemption from
registration under Section 4(2) of the Securities Act and Regulation D
promulgated under the Securities Act as private transactions not involving a
public distribution.
In February 1999, the holder of a convertible promissory note for
$25,000 elected to convert the note to 41,750 shares of Common Stock. Such
shares were issued without registration pursuant to an exception from
registration under Section 4(2) of the Securities Act as private transactions
not involving a public distribution.
In March 1999, the Company issued a total of 100,000 shares of Common
Stock, valued at $230,200, to the four former members of Ubiquity Design, LLC
(dba Rocket Science Creative) in connection with the Company's acquisition of
Ubiquity Design. Such shares were issued without registration pursuant to an
exemption from registration under Section 4(2) of the Securities Act as private
transactions not involving a public distribution.
In April 1999, the Company issued a total of 94,118 shares of Common
Stock, valued at $216,600, to the two former stockholders of Abcon, Inc. in
connection with the Company's acquisition of Abcon. Such shares were issued
without registration pursuant to an exemption from registration under Section
4(2) of the Securities Act. In addition, the Company issued 100,000 shares to
the key employee of Abcon pursuant to an employment contract. This award was
made with 25,000 shares vesting immediately and specific vesting restrictions on
the balance over two years. Such shares were issued without registration
pursuant to an exemption from registration under Section 4(2) of the Securities
Act as private transactions not involving a public distribution.
In May 1999, two holders exercised warrants that were granted under the
Company's Private Placement Memorandum of November 26, 1997 and purchased a
total of 10,000 shares at $3 per share. Such shares were issued without
registration pursuant to an exemption from registration under Section 4(2) of
the Securities Act as private transactions not involving a public distribution.
In July 1999, the Company issued a total of 67,605 shares of Common
Stock, valued at $155,628, to the two former members of Progressive Media LLC in
connection with the Company's acquisition of Progressive Media. Such shares were
issued without registration pursuant to an exemption from registration under
Section 4(2) of the Securities Act as private transactions not involving a
public distribution.
28
<PAGE> 30
In August 1999, the Company issued a total of 121,212 shares of Common
Stock, valued at $279,030, to the sole member of AMCOM LLC in connection with
the Company's acquisition of AMCOM. In addition, the Company issued 50,000
shares to the key employee of AMCOM pursuant to an employment contract. This
award was made with 12,500 shares vesting immediately upon approval of the
transfer by the Colorado PUC, which has been completed, and specific vesting
restrictions on the balance over two years. Such shares were issued without
registration pursuant to an exemption from registration under Section 4(2) of
the Securities Act as private transactions not involving a public distribution.
In August 1999, as part of the Blackwater Capital Stock Purchase
Agreement the Company sold 200,000 shares of Common Stock for an aggregate
purchase price of $250,000. The offering of such shares by the Company was made
pursuant to an exemption from registration under Section 4(2) of the Securities
Act as private transactions not involving a public distribution.
In 1999, the Company has issued a total of 87,000 shares of Common
Stock to employees pursuant to employment contracts or as employment bonuses.
These awards were made with specific vesting restrictions of up to three years.
In addition, the Company issued a total of 2,500 shares in March 1999 to a
consultant for services provided in connection with employment agency services
and 20,000 shares as a partial commission on the sale of substantially all of
the assets relating to the Company's Internet access business. Such shares were
issued without registration pursuant to an exemption from registration under
Section 4(2) of the Securities Act as private transactions not involving a
public distribution.
In October 1999, the Company issued a warrant to purchase 250,000
shares of Common Stock and a promissory note in consideration for $250,000. The
offering of such warrants, promissory note and underlying shares of Common Stock
was made pursuant to an exemption from registration under Section 4(2) of the
Securities Act as private transactions not involving a public distribution.
Effective as of October 22, 1999, the Company issued a warrant to
purchase 500,000 shares of Common Stock and a promissory note convertible into
500,000 shares of Common Stock in consideration for $500,000. The offering of
such warrants, promissory note and underlying shares of Common Stock was made
pursuant to an exemption from registration under Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act as private
transactions not involving a public distribution.
Effective as of December 28, 1999, the Company issued a warrant to
purchase 16,667 shares of Common Stock and a promissory note convertible into
50,000 shares of Common Stock in consideration for $50,000. The offering of such
warrants, promissory note and underlying shares of Common Stock was made
pursuant to an exemption from registration under Section 4(2) of the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act as private
transactions not involving a public distribution.
Effective January 1, 2000, the Company issued a warrant to purchase
70,000 shares to a member of the Company's Board of Directors for such
director's service to the Company. Such warrants and the underlying shares of
Common Stock were issued without registration pursuant to an exemption from
registration under Section 4(2) of the Securities Act as a private transaction
not involving a public distribution.
In each of the private transactions above, the Company believes that
each purchaser (i) had access to or was provided information regarding the
Company; (ii) was aware that the securities had not been registered under
federal securities laws; (iii) acquired the securities for his/her/its own
account for investment purposes; (iv) understood that the securities would need
to be indefinitely held unless registered or an exemption from registration
applied to a proposed disposition; and (v) was aware that the certificate
representing the securities would bear a legend restricting its transfer. The
Company believes that, in light of the foregoing, the sale of the Company's
securities to the respective acquirers did not constitute a sale of an
unregistered security in violation of the federal securities laws and
regulations by reason of the exemptions provided under Section 4(2) of the
Securities Act, and the rules and regulations promulgated thereunder.
29
<PAGE> 31
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and the Company's plans and expectations. The
Company's actual results could differ materially from those discussed herein.
Readers are cautioned not to place undue reliance on the forward-looking
statements that relate to the Company's future performance.
OVERVIEW
The Company was incorporated in Nevada on March 22, 1994 as World's
Fare, Inc. World's Fare, Inc.'s original business purpose was to engage in the
business of providing real time language translation services, however, no
operations commenced prior to the reverse merger of the Company and FUTUREONE,
INC., an Arizona corporation which became effective March 30, 1998. In August
1998, World's Fare, Inc. changed its name to FutureOne, Inc.
The Company believes that it is a full service communications provider
by (i) entering the convergence technology and telecommunications markets; (ii)
providing high speed Internet access instead of traditional dial-up access;
(iii) concentrating on communications products sales instead of retail computer
equipment sales and service and (iv) entering the e-business solutions market.
The Company was formed as an Internet Service Provider and began providing
Internet services including personal and business dial up accounts, high speed
frame relay connections and web site design in November 1995. In February 1997,
the Company entered into the retail computer sales and services market. In 1998
and 1999, the Company expanded its product lines and geographic area of
operations through several strategic acquisitions. Since that time the Company
has divested its retail computer sales and services operations, its virtual
telephone service and its Internet access business. The Company is currently
engaged in convergence technology and telecommunications, broadband
communications engineering and construction services, e-business development,
advertising and graphic design and wholesale communication equipment sales.
The Company's ISP operations began facing the traditional problems of
the industry, including intense competition for customers which causes high
customer turnover rates and the demand for higher speed services, which requires
additional capital expenditures in the face of lower prices. Most of the
Company's growth in personal ISP customers came through acquisitions as this was
determined to be the most economical way of obtaining additional customers. The
Company recently concluded that it should concentrate its efforts on developing
new Internet access technology through its NeighborComm product and divest
itself of the older dial-up technology that was incurring operating losses. In
order to concentrate on NeighborComm's high speed access and to provide
additional funds for development of it's NeighborComm product the Company made
the decision to sell its Internet access operations.
On November 19, 1999, the Company sold substantially all of the assets
relating to its Internet access business, including equipment and all of its
approximately 7,300 personal and business Internet access customers in Phoenix,
Flagstaff, Tucson, Lake Havasu City, Prescott, Florence, Wickenburg and Payson,
Arizona to RMI.NET, Inc. for approximately $2.75 million in RMI.NET, Inc. common
stock. The Company will no longer participate in the retail ISP industry,
however, it will be providing high-speed Internet access as part of its
NeighborComm bundled communications services.
On December 6, 1999, the Company sold substantially all of the assets
relating to its virtual telephone service business operations, including
equipment and approximately 110 customers for $47,800 of which $17,800 was paid
in cash and the balance is payable on a short-term note. The business was
originally purchased by the Company in September 1998 in order to offer an
"add-on" service for the Company's Internet access customers. The Company was
not successful in marketing its virtual telephone service business. The Company
decided to divest itself of its virtual telephone service business operations
upon determining that the switching equipment necessary for providing the
virtual telephone service may require additional investment to be made Year 2000
compliant.
30
<PAGE> 32
The Company has retained and will continue to operate its newly
acquired e-business and advertising businesses where the demand for Internet
services is continuing to expand as more businesses are learning to use the
Internet to reach more customers. As a result, businesses are requiring more
sophisticated e-commerce sites and e-business applications. See "History -
Internet Services."
Since the Company entered the retail computer market in 1997, intense
competition with large retail chains and manufacturers selling direct to
customers lowered profit margins and absorbed a large portion of the computer
equipment market. As a result, the Company changed its focus and, in June 1999,
divested itself of its retail computer sales and service operations by selling
PRIORITY SYSTEMS, INC., a wholly owned subsidiary of the Company, whose sole
area of operation was retail computer sales and services, back to the original
owner of PRIORITY SYSTEMS, INC. for $250,573 of the Company's Common Stock, or
108,850 shares, and a three-year promissory note in the amount of $50,000. As a
result of its sale of PRIORITY SYSTEMS, INC., the Company will no longer compete
in the retail computer sales and services market.
The sale of PRIORITY SYSTEMS, INC. allowed the Company to expand its
wholesale communications equipment division, which sells to resellers, Internet
Service Providers, Competitive Local Exchange Carriers, schools, government
agencies and resellers. The expansion of the Company's wholesale products
division has come primarily through an acquisition and expansion of its product
lines. See "History - Communication Equipment Sales."
The Company entered the broadband communications engineering and
construction services market to provide new and advanced fiber, copper and CATV
systems for existing and emerging communications companies and for its own use
to facilitate its entrance into the convergence technology market. The Company
entered the broadband communications engineering and construction services
market primarily through strategic acquisitions. See "History - Broadband
Communications Engineering and Construction Services."
Because of the acquisitions made by the Company, intangible assets
associated with these acquisitions comprise a significant portion of the assets
of the Company. Net intangible assets made up 58.0% and 36.7% of the Company's
total assets as of September 30, 1998 and 1999, respectively. Amortization of
these intangible assets will adversely impact earnings for the next five to ten
years and possible writedowns or adjustments in any period could significantly
adversely impact operating results in that period.
The Company's discontinued operations had the following impact on
future operations of the Company, in terms of revenues and losses, that are no
longer included in historic operating results and will no longer be realized by
the Company, as indicated in the chart below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Operation Revenues for the Operating Loss for
Year ended September year ended September
30, 1999 30, 1999
---------------------------------------------------------------------------
<S> <C> <C>
Discontinued Operations
---------------------------------------------------------------------------
Virtual telephone service $ 45,000 $ 42,000
---------------------------------------------------------------------------
Internet access 1,555,000 1,091,000
---------------------------------------------------------------------------
</TABLE>
The Company also had $856,000 of revenues from retail computer sales
during the year ended September 30, 1999 that will not recur due to the sale of
its PRIORITY SYSTEMS, INC. subsidiary.
The Company has taken steps to reduce its operating losses through
divestiture of certain non-performing or underperforming business operations. In
addition, the Company believes that both the e-business and broadband
construction divisions are in a position to operate at break even or profitable
levels beginning fiscal year 2000, excluding the amortization of intangible
assets that affects both divisions. The Company anticipates that the
communications products sales division will continue to operate at a loss next
year, because it is a new distributor of certain products and the Company has
been unsuccessful in developing profitable markets for these products. The
Company has taken steps to reduce staff and facilities costs in this division to
reduce losses. The convergence
31
<PAGE> 33
technology and telecommunications service division is anticipated to have losses
for at least the next three years as it currently has no revenues and
expenditures must be made to obtain regulatory approvals in new market areas,
sales and marketing expenses will be incurred in existing and planned market
areas and certain fixed operating costs must be incurred to support even a
minimal customer base. The Company plans to spend approximately $720,000 on such
expenses in fiscal year 2000. Corporate overhead, which includes executive and
management salaries, facilities cost, legal, accounting and audit and other
non-allocated expenses is expected to remain at approximately $1,500,000 during
fiscal year 2000. The Company anticipates that these expenses will be paid from
the proceeds of the sale of the Internet access operations and equity and debt
financing.
In general the Company's revenues and results of operations are not
subject to seasonal fluctuations, except for broadband construction operations
that can be affected by adverse weather conditions primarily in Colorado.
RESULTS OF OPERATIONS
The following table sets forth the percentage of total revenues
represented by specific expense and income items for continuing operations, for
the years indicated. The prior year revenues and related items have been
adjusted for the effects of reclassifying the revenues and associated costs of
the Internet access operations and virtual telephone services that have now been
recorded as discontinued operations in 1998 and 1999. See Footnote 3 to the
"Financial Statements," which indicates the amounts from each category that were
reclassified to discontinued operations.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
-----------------------
1998 1999
----- -----
<S> <C> <C>
REVENUES:
Internet Services......................................... 3.2% 3.7%
Communication Equipment Sales............................. 12.5 18.5
Broadband Communications Engineering and
Construction Services................................... 84.3 77.8
----- -----
TOTAL REVENUES................................... 100.0 100.0
----- -----
COSTS OF SALES AND OPERATING EXPENSES:
Internet Services......................................... 5.8 3.9
Communication Equipment Sales............................. 10.9 19.4
Broadband Communications Engineering and
Construction Services................................... 68.5 63.6
General and Administrative................................ 30.2 36.5
Depreciation and Amortization............................. 7.5 8.5
Unusual Items............................................. - 2.9
----- -----
TOTAL OPERATING EXPENSES......................... 122.9 134.8
----- -----
LOSS FROM OPERATIONS............................. (22.9) (34.8)
OTHER INCOME (LOSS), NET................................... (1.6) (1.8)
DISCONTINUED OPERATIONS.................................... (35.3) (10.8)
----- -----
LOSS BEFORE INCOME TAXES................................... (59.8) (47.4)
PROVISION FOR INCOME TAXES................................. -- --
----- -----
NET LOSS......................................... (59.8)% (47.4)%
===== =====
</TABLE>
32
<PAGE> 34
The Company's operating loss was $460,000 and $3,873,000 and its net
loss was $1,202,000 and $5,275,000 for the years ended September 30, 1998 and
1999, respectively.
The following table sets forth comparative cash flows of the Company
for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
----------------------------------------
1998 1999
----------------- -------------------
<S> <C> <C>
Net Cash Used in Operating Activities ............. $ (533,000) $(3,048,000)
Net Cash Provided by (Used) in Investing Activities 54,000 (2,091,000)
Net Cash Provided by Financing Activities ......... 1,030,000 4,729,000
Ending Cash Balance ............................... 571,000 160,000
Working Capital Deficit ........................... (342,000) (1,984,000)
</TABLE>
YEAR ENDED SEPTEMBER 30, 1999 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1998
REVENUES
Total revenues, excluding revenues attributable to discontinued
operations, were $11,132,000 for the year ended September 30, 1999, an increase
of 454% from 2,010,000 for the year ended September 30, 1998.
Internet services revenues increased $348,000, or 552%, from $63,000 in
the year ended September 30, 1998 to $411,000 in the year ended September 30,
1999. This increase is primarily attributable to additional web service revenues
resulting from the acquisition of an advertising and e-commerce company in March
and July 1999. See "History - Internet Services."
Communications equipment sales and services revenues increased
$1,807,000, or 720%, from $251,000 in the year ended September 30, 1998 to
$2,058,000 in the year ended September 30, 1999. The Company's acquisitions of a
retail computer sales and service company and a wholesale communications
equipment company at the end of fiscal 1998 are directly responsible for this
increase in revenues. The wholesale division added revenues of $1,202,000 and
the retail computer division revenues were $856,000. The retail computer
division was sold effective June 15, 1999. See "History - Communication
Equipment Sales."
The Company's broadband communications engineering and construction
services revenue was $8,663,000 in the year ended September 30, 1999 compared to
$1,695,000 for the year ended September 30, 1998. The 1998 revenues represented
two months of operating results subsequent to the acquisition of the related
business. Including the ten months prior to being acquired by the Company, these
operations had pro forma revenues of $4,984,000 during the twelve months ending
September 30, 1998. The Company believes that the increase in broadband
communications engineering and construction services revenue is primarily
attributable to the Company obtaining additional large contracts to provide
underground construction services and the Company's expansion of its underground
construction services into Arizona. See "History - Broadband Communications
Engineering and Construction Services."
COSTS OF REVENUES
Cost of sales in the Internet services division includes the direct
cost of labor for programmers, supplies and contract services. Cost of sales
increased $317,000, or 271%, from $117,000 in the year ended September 30, 1998
to $434,000 in the year ended September 30, 1999. This increase is attributable
to acquisitions of an advertising and e-commerce company in March and July 1999,
which resulted in increased revenues.
Cost of sales in the communication equipment sales, which includes cost
of parts and direct labor to assemble parts and provide service labor, increased
by $1,943,000, or 887%, from $219,000 in the year ended September 30, 1998 to
$2,162,000 in the year ended September 30, 1999. This increase is directly
attributable to
33
<PAGE> 35
increase in revenues from this division. Gross margins decreased from 13% in the
year ended September 30, 1998 to a negative 5% (a positive 10% when, excluding
the provision for loss on disposal of inventory discussed below) in the year
ended September 30, 1999. The Company believes that this decline is primarily
attributable to increased competition from large retailers and manufacturers and
increased sales at the wholesale level. The Company believes that gross margins
will further decline and that in order to sell its remaining inventory of Lucent
Technologies products that it will be required to sell inventory at or below
cost, accordingly a provision of $304,000 for losses that may be incurred in
liquidating the inventory has been made at September 30, 1999 and is included in
cost of sales.
Cost of sales for the Company's underground construction operations,
which includes materials, direct labor costs and depreciation, was $7,083,000
during the year ended September 30, 1999 compared to $1,376,000 for the year
ended September 30, 1998. The 1998 costs represented two months of operating
results subsequent to the acquisition of the related business. Including the ten
months prior to being acquired by the Company these operations had pro forma
cost of sales of approximately $3,370,000 for the twelve months ended September
30, 1998. The increase is attributable to additional revenues being earned by
this division. Gross margins have declined for this division, from 32% for the
year prior to the acquisition to 18% for the year ended September 30, 1999, as a
result of the Company focusing its resources on larger projects and the
requirements for additional equipment, equipment rentals and subcontractors on
larger projects. The Company anticipates that this division will continue to
operate at these lower gross profit levels for the foreseeable future.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased $3,452,000, or 569%, from
$607,000 in the year ended September 30, 1998 to $4,059,000 in the year ended
September 30, 1999. Approximately $2,030,000 is directly related to acquisitions
that were made in 1998, $342,000 to Internet services, $626,000 to the
communication products sales division and $1,062,000 to the broadband
communications engineering and construction services operations. Other increased
expenses are the result of additional professional fees, which totaled $408,000,
management personnel, which totaled $463,000, and facilities, which totaled
$103,000, all due to increased growth.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $151,000 in the year ended
September 30, 1998 to $951,000 in the year ended September 30, 1999. This
increase is attributable to acquisitions made by the Company and reflects
additional depreciation from fixed assets and amortization of the intangible
assets resulting from the acquisitions.
UNUSUAL ITEMS
In June 1999, management of the Company determined that it was no
longer economically feasible to remain in the retail computer equipment sales
and service industry. As a result, the Company sold PRIORITY SYSTEMS, INC. back
to its former owner effective June 15, 1999. The result of this transaction was
a loss to the Company of $317,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net cash used in operating activities of $3,048,000 for
the year ended September 30, 1999 compared to $533,000 for the year ended
September 30, 1998. Net cash used in operating activities was less than the net
loss by $2,227,000 during the year ended September 30, 1999 primarily due to
$1,400,000 of non-cash charges for depreciation and amortization and an
additional $410,000 for stock compensation arrangements. The Company's
investment activities required $2,091,000 and provided $54,000 during 1999 and
1998, respectively. The primary reason for the cash used from investing
activities in 1999 was the purchase of equipment, which aggregated to
$2,109,000. Financing activities provided $4,729,000 in 1999 and $1,030,000 in
1998. Approximately $2,250,000 in 1999 and $1,151,000 in 1998 related to the
sale of the Company's Common Stock and $2,475,000 in 1999 and $(122,000) in 1998
was attributable to net debt proceeds (payments).
34
<PAGE> 36
The Company has commitments for equipment and expenses related to its
convergence technology and telecommunications operations of approximately
$250,000 to engineer, install and test equipment. The Company has a further
commitment for an additional $100,000 of equipment in addition to the
approximately $1,250,000 of equipment that is expected to be obtained by the
Company under operating leases. The Company believes that expenditures not
covered by operating leases will be obtained from the proceeds of certain equity
or debt financings and the sale of the RMI.NET, Inc. common stock obtained by
the Company in consideration for substantially all of the Company's assets
relating to its Internet access business.
The Company believed that cash on hand at September 30, 1999 was not
sufficient to meet the Company's working capital demands for the next six months
and accordingly the Company obtained cash through the sale of its ISP and
other loans, some of which has been obtained and others which are anticipated to
be obtained, all as described below, which the Company anticipates will provide
sufficient working capital through March 31, 2000. The Company also plans to
continue to expand its business operations in fiscal 2000, which will require
more resources than are currently available to the Company. In the event the
Company is unable to obtain additional financing, the Company will not be able
to fully undertake its business expansion and will attempt to reduce costs to
permit existing sources of capital to finance the operations of the Company
until such time additional sources become available.
The Company has an existing line of credit with a bank that was in
place prior to the Company's acquisition of OPEC CORP. in July 1998. The amount
available under this line of credit is $480,000, which has been fully drawn by
the Company as of September 30, 1999. This line of credit extends until February
15, 2000, however, the Company is currently seeking to renew and raise this line
of credit. There is no assurance that the Company will be successful in
extending or raising this credit line.
The Company's business plan includes pursuing additional debt and
equity financing with financial institutions or strategic partners. In August
1999, OPEC obtained a loan for $1,000,000, which bears interest at the rate of
15% per annum and is due September 17, 2001. The note evidencing the loan is
convertible into shares of the Company's Common Stock at $2.25 per share at the
option of the holder. Proceeds from the loan have been used for working capital
for OPEC to further expand its underground construction business. OPEC has also
refinanced a substantial amount of their equipment debt with a loan from a bank
in the amount of $848,000, which bears interest at the rate of 8.73% per annum
and is payable in monthly installments through August 2002 and has replaced
higher interest rate loans and capital leases of an equal amount.
In October 1999, the Company obtained a bridge loan in the amount of
$250,000. Such loan bears interest at a rate of 15% per annum and the principal
and interest due thereunder is payable February 8, 2000. The Company also
obtained a second bridge loan in October 1999 in the amount of $500,000. Such
loan bears interest at a rate of 12% per annum and the principal and interest
are due and payable on April 22, 2000. The note is convertible into shares of
the Company's Common Stock at $1.00 per share at the option of the holder. The
Company anticipates obtaining further bridge loans in the aggregate amount of
$1,000,000 by January 31, 2000. There is no assurance that the Company will
receive all or any additional portion of the funds in a timely manner if at all.
The Company also plans to sell the registered shares of RMI.NET, Inc.
common stock received in consideration of substantially all of the Company's
assets relating to its Internet access business. As of December 15, 1999, the
Company had sold approximately 152,000 of the 176,000 shares available. This is
expected to provide the Company with funds in the amount of approximately
$1,500,000, which will be used for working capital and payment of $518,000
related to leases for a portion of the equipment that was sold in the
transaction with RMI.NET, Inc.
The Company also has a stock purchase agreement with Blackwater Capital
Partners, L.P. Under the terms of this agreement, Blackwater must purchase
shares of the Company's Common Stock in sufficient amounts to provide funding to
the Company in equal traunches of $2,500,000, as requested by the Board of
Directors of the Company. Alternatively, Blackwater has the right to provide
funding for the remaining $7,000,000 through a public offering of the Company's
Common Stock. There is no assurance that Blackwater will provide additional
funding beyond the approximately $3,000,000 that has been received prior to
September 30, 1999. See "Certain Relationships And Related Transactions."
35
<PAGE> 37
Although the Company has obtained additional funds from the sale of
substantially all of the assets of its internet access business and certain
bridge and working capital loans, FutureOne is still dependent upon additional
capital resources to enable it to carry out its business plan and obtain
profitability. This lack of profitable operations and the need for additional
capital have resulted in the report of independent auditors for the years ended
September 30, 1998 and 1999, containing an uncertainties paragraph with respect
to the ability of FutureOne to continue as a going concern.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
digit calendar year is commonly referred to as the "Year 2000 Compliance" issue.
Prior to December 31, 1999, the Company had installed all updates and
patches to software currently used by the Company and completed testing of its
internal operating systems.
The Company had also evaluated the year 2000 readiness of its material
vendors and facilities with respect to IT, as well as non-IT, assets because the
Company is dependent on outside vendors for basic necessities such as power,
communications and processing financial transactions. The Company had received
year 2000 compliance statements from its material vendors, which indicate that
all are year 2000 compliant.
The Company's development of products and services is accomplished
through in-house development, and acquisition or license from third parties. The
Company has assessed all of its internally developed and third-party developed
products and services for year 2000 readiness, and believes that all of such
products have been designed to satisfy the Company's year 2000 specifications.
In the event that any of the Company's developed or acquired products or
technology are not year 2000 compliant in a timely manner, the Company's sales
may decline materially, customers and those with whom they do business may
assert product liability and other claims, and the Company's business, results
of operations and financial condition would be materially and adversely
affected.
As of January 1, 2000, after the rollover of time, all of the Company's
internal systems are functioning properly, all services from vendors upon which
the Company depends are being supplied without interruption. In addition, the
Company has yet to be notified by any of its customers that the Company's
software is not functioning properly as a result of the Year 2000 date change.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Form 10-KSB contains "forward-looking statements" relating to,
without limitation, future economic performance, plans and objectives of the
Company for future operations and projections of revenue and other financial
items, that are based on the beliefs or, assumptions made by and information
currently available to the Company. The words "expect," "estimate,"
"anticipate," "believe," "intend," "plan," and similar expressions and
variations thereof are intended to identify forward-looking statements. The
cautionary statements in this "Factors that May Affect Future Operating Results"
section and elsewhere in this Form 10-KSB identify important factors with
respect to such forward-looking statements, including risks and uncertainties,
that could cause actual result to differ materially from those expressed in or
implied by such forward-looking statements.
THE COMPANY HAS A SHORT OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO PREDICT
ITS SUCCESS.
The Company was incorporated on March 22, 1994, as World's Fare, Inc.,
but did not begin to generate meaningful revenue until October 1996 and has not
generated an operating profit to date. Although the Company has experienced
revenue growth in recent periods, in view of the Company's short operating
history and the rapidly changing nature of the telecommunications market and the
related construction industry, such growth may not be sustainable and should not
be considered indicative of future operating results. The Company's results of
operations may become increasingly unpredictable from quarter to quarter as a
result of numerous factors, including market acceptance of the Company's current
or future products, fluctuations in the development and growth of the
36
<PAGE> 38
NeighborComm, the award and completion of construction contracts, the timing of
orders and shipments of products, the Company's ability to introduce new
products, or the introduction or the announcement of competitive products. The
Company's current expense levels are based in part on its expectations of future
revenue and, as a result, net income (loss) for a given period could be
disproportionately affected by any reduction in revenue. There can be no
assurance that the Company will be able to achieve significant revenue from
sales of products in the future.
THE COMPANY HAS A HISTORY OF NET OPERATING LOSSES AND EXPECTS TO INCUR
ADDITIONAL NET OPERATING LOSSES.
The Company has incurred substantial and increasing net operating
losses and experienced negative cash flow since our inception. The Company lost
approximately $5,275,000 in 1999 and $1,202,000 in 1998, which includes
discontinued operations. As of September 30, 1999, the Company had an
accumulated deficit of approximately $6.84 million. The Company intends to
increase its capital expenditures and operating expenses in order to expand its
communications services to expected end-users in existing and future markets and
to market and provide its services to a growing number of potential end-users in
current and additional geographic regions. As a result, the Company expects to
incur substantial additional net operating losses and substantial negative cash
flow for at least the next two years.
Although the Company has obtained additional funds from the sale of
substantially all of the assets relating to its Internet access business and
certain bridge and working capital loans, FutureOne is dependent upon additional
capital resources to enable it to carryout its business plan and attain
profitability. This lack of profitable operations and the need for additional
capital have resulted in the report of independent auditors for the years ended
September 30, 1998 and 1999 containing an uncertainties paragraph with respect
to the ability of FutureOne to continue as a going concern.
FUTUREONE'S BUSINESS MAY SUFFER IF THE COMPANY IS UNABLE TO EFFECTIVELY MANAGE
ITS GROWTH.
The Company recently has experienced growth, primarily through
acquisitions, in both revenue and employees. This growth has resulted in an
increase in the responsibilities of the Company's management and has placed
added pressures on the Company's operating and financial systems. During fiscal
1998 and 1999, the Company hired directly, or retained through strategic
acquisitions, approximately 125 new employees, including certain key members of
management, to help the Company manage its growth. The Company's ability to
assimilate new personnel will be critical to its performance, and there can be
no assurance that the management and systems currently in place will be adequate
if its operations continue to expand or that the Company will be able to
implement additional systems successfully and in a timely manner as required.
BECAUSE THE CONVERGENCE TECHNOLOGY MARKET IS NEW AND EVOLVING, THE COMPANY
CANNOT PREDICT ITS FUTURE GROWTH OR ULTIMATE SIZE, AND THE COMPANY MAY BE UNABLE
TO COMPETE EFFECTIVELY.
The market for bundled communication services using a single connection
is in the early stages of development. Since this market is new and evolving and
because the Company's current and future competitors are likely to introduce
competing services, the Company cannot accurately predict the rate at which this
market will grow, if at all, or whether new or increased competition will result
in market saturation. Certain critical issues concerning bundled communications
services, including reliability, ease and cost of access and quality of service,
remain unresolved and may impact the growth of these services. If the markets
for the Company's services fail to develop, grow more slowly than anticipated or
become saturated with competitors, these events could materially and adversely
affect its business, prospects, operating results and financial condition.
The Company's success will depend on the development of this new and
rapidly evolving market and its ability to compete effectively in this market.
To address these risks, the Company must, among other things:
- rapidly expand the geographic coverage of FutureOne's
convergence technology services;
- raise additional capital;
37
<PAGE> 39
- enter into interconnection agreements, resale agreements and
working arrangements with additional incumbent carriers,
substantially all of which the Company expects to be our
competitors;
- enter into and maintain high speed Internet and video
arrangements to provide Internet access and video in
FutureOne's bundled communications services;
- build and deploy an effective network infrastructure;
- attract and retain customers;
- continue to attract, retain and motivate qualified personnel;
- accurately assess potential markets and effectively respond to
competitive developments;
- successfully develop relationships and activities with
residential developers;
- continue to develop and integrate operational support system
and other back office systems;
- obtain any required governmental authorizations;
- comply with evolving governmental regulatory requirements;
- increase awareness of the Company's services;
- continue to upgrade the Company's technologies; and
- effectively manage the Company's expanding operations.
The Company may not be successful in addressing the risks of the
convergence technology market, and the Company's failure to address risks would
materially and adversely affect the Company's business, prospects, operating
results and financial condition.
THE COMPANY CANNOT PREDICT ITS SUCCESS BECAUSE ITS BUSINESS MODEL IS UNPROVEN.
The Company has not validated its business model and strategy in the
market. The Company believes that the combination of its unproven business model
and the highly competitive and fast changing market in which it competes makes
it impossible to predict the extent to which the Company's convergence
technology and communications services will achieve market acceptance and its
overall success. To be successful, FutureOne must develop and market bundled
communications services that are widely accepted by developers, residents and
businesses at profitable prices, as well as compete favorably in the markets of
underground engineering and cable construction and Internet advertising and
marketing, wholesale communications sales. The Company may never be able to
deploy its network as planned or achieve significant market acceptance and
favorable operating results.
THE COMPANY'S OPERATING RESULTS ARE LIKELY TO FLUCTUATE IN FUTURE PERIODS, WHICH
MIGHT LEAD TO REDUCED PRICES FOR ITS STOCK.
The Company's annual or quarterly operating results are difficult to
predict and are likely to fluctuate significantly in the future as a result of
numerous factors, many of which are outside of FutureOne's control. If the
Company's annual or quarterly operating results do not meet the expectations of
securities analysts and investors, the trading price of its stock could
significantly decline. Factors that could impact our operating results include:
- market acceptance of the Company's current and future products
and services;
- fluctuations in the development and growth of NeighborComm;
38
<PAGE> 40
- decreases in the Company's selling prices due to competition;
- the award and completion of broadband communications
engineering and construction contracts;
- the Company's ability to develop new web site designs and
e-business solutions;
- the timing of orders of the Company's products and services;
- the Company's ability to introduce new products and services;
- delays in the commencement of the Company's operations in new
market segments and geographic regions due to regulatory
requirements and other factors; and
- costs relating to possible acquisitions and integration of new
businesses.
THE MARKET FOR THE COMPANY'S NEIGHBORCOMM SERVICES IS ONLY BEGINNING SO IT IS
DIFFICULT TO ASSESS ITS SIZE, PRODUCT, FEATURES AND PRICES, THE OPTIMAL
DISTRIBUTION STRATEGY AND THE COMPETITIVE ENVIRONMENT THAT WILL DEVELOP.
The market for the Company's NeighborComm system is in an early stage
of development. Because this market is only beginning to develop, it is
difficult to assess the size of this market and the product features and prices,
the optimal distribution strategy and the competitive environment that will
develop in this market. There is no assurance that the anticipated services that
comprise NeighborComm will be provided in a timely manner or at all. There is no
assurance that the NeighborComm product will be accepted by consumers or that
consumer acceptance will endure. The failure of the Company's NeighborComm to
achieve market acceptance or maintains acceptance, if achieved, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
THE COMPANY MAY NOT BE ABLE TO FULLY DEPLOY NEIGHBORCOMM SERVICES IF IT DOES NOT
OBTAIN GOVERNMENTAL APPROVALS OR LICENSES.
In order to provide voice and video services to consumers, the Company
must obtain its own operating authorities and/or resell other providers'
services. The Company must therefore have operating authorities to provide
telephone services in each state that it intends to offer such service and/or
obtain operating authority to provide video services in various localities.
There is no guarantee that the Company will be granted such authorities in a
timely manner or at all. The Company is currently taking steps to obtain
telephone operating authorities by filing applications in Arizona, Nevada, New
Mexico and Utah, but to date the Company has not applied for any video
authority. See "Description of Business - General - Convergence Technology and
Telecommunications." If the Company is not granted direct authority to provide
telephone or video services in some or all locations, it may acquire such
services from other providers or resell the services of the providers, but such
services may not be available if and when needed or at rates that will allow the
Company to provide such services to its customers on a profitable basis.
FAILURE OF THE COMPANY'S NEIGHBORCOMM TECHNOLOGY TO ACHIEVE MARKET ACCEPTANCE
COULD HARM THE COMPANY'S RESULTS OF OPERATIONS.
The Company's NeighborComm system is a new product for the Company and
still under development. Although the Company is in the process of implementing
its first NeighborComm system, there can be no assurance that the Company will
be able to continue to develop the NeighborComm system or that it will achieve
market acceptance. See "Description of Business - General - Convergence
Technology and Telecommunications." The failure of the NeighborComm system to
achieve such market acceptance, or maintain such acceptance, if achieved, as a
result of competition, technological change or other factors, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
39
<PAGE> 41
THE COMPANY'S BUSINESS MAY SUFFER IF IT DOES NOT EFFECTIVELY COMPETE IN THE
MARKET FOR BROADBAND CONVERGENCE TECHNOLOGY.
The market for broadband convergence technology and services is new,
intensely competitive, rapidly evolving and subject to rapid technological
change. The Company expects competition to intensify in the future. The Company
believes that the principal competitive factors affecting the market include
scope of product offerings, technical features, ease of use, reliability,
customer service and support and price. Although the Company believes that its
products currently compete favorably with respect to such factors, there can be
no assurance that the Company will maintain its competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other competitive
resources.
The Company's principal current competitors include AT&T, MCI/WorldCom,
Sprint and other major telecommunications companies. There can be no assurance
that the Company will not in the future face increased competition from such
companies in the bundled communication services market and therefore suffer loss
of market share to such companies in the future. Moreover, due to the rapid
expansion of the bundled communication services market, the Company may face
competition from new entrants in the telecommunications industry. There can be
no assurance that the Company's current and potential competitors will not
develop products that may be more effective than the Company's current or future
products or that the Company's technologies and products would not be rendered
obsolete by such developments. Many of the Company's current and potential
competitors have longer operating histories, greater name recognition, larger
installed customer bases and significantly greater financial, technical and
marketing resources than the Company. As a result, they may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of their
products than the Company. An increase in competition could result in price
reductions and loss of market share. Such competition could have a material
adverse effect on the Company's business, financial condition and results of
operations.
THE COMPANY MAY FAIL TO REACT IN A TIMELY MANNER OR AT ALL TO CHANGES IN
TECHNOLOGY AND INDUSTRY STANDARDS, WHICH COULD NEGATIVELY IMPACT ITS BUSINESS.
The communications industry is characterized by rapid changes,
including evolving industry standards, frequent new product introductions,
continuing advances in technology and changes in customer requirements and
preferences. The introduction of new technologies could render the Company's
existing products obsolete or unmarketable. There can be no assurance that the
Company will be able to counter challenges to its current products, that the
Company's future product offerings will keep pace with technological changes
implemented by competitors or persons seeking to provide communications
services, that its products will satisfy evolving consumer preferences or that
the Company will be successful in developing and marketing products for any
future technology. Failure to develop and introduce new products and product
enhancements in a timely fashion could have a material adverse effect on the
Company's business, financial condition and results of operations.
THE COMPANY MAY FAIL TO CONTINUE TO ATTRACT, DEVELOP AND RETAIN MANAGEMENT AND
OTHER KEY PERSONNEL WHICH COULD NEGATIVELY IMPACT ITS OPERATING RESULTS.
The Company's future success depends to a significant extent on its
senior management and other key employees, including key technical personnel.
The Company has employment agreements with its five senior management personnel,
Earl J. Cook, Alan P. Hald, Donald D. Cannella, Bruce A. Robson and Robert T.
Woodbury. The Company also believes that its future success will depend in large
part on its ability to attract and retain additional key employees. Competition
for such personnel is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel. The Company's
inability to attract and retain additional key employees or the loss of one or
more of its current key employees could have a material adverse effect on the
Company's business, financial condition and results of operations.
THE COMPANY'S BUSINESS MAY SUFFER IF THE COMPANY DOES NOT OBTAIN
TELECOMMUNICATIONS ACCESS.
The Company must rely on other companies to provide data communications
capacity via leased telecommunications lines. If one or more of these companies
is unable or unwilling to provide or expand its current
40
<PAGE> 42
levels of service to the Company in the future or substantially increases the
cost of its service, the Company's operations could be materially and adversely
affected. Although telecommunications lines are available from several sources,
there can be no assurance that the Company could obtain substitute services from
other providers at reasonable or comparable prices or in a timely fashion.
THE COMPANY ANTICIPATES THAT IT WILL HAVE A LONG SALES CYCLE AND UP-FRONT
EXPENSES FOR NEIGHBORCOMM.
The Company's NeighborComm services have not historically been
available to residential developments or small- and medium-sized businesses. As
a result, making a sale may often require a significant amount of time and
up-front expense to educate real estate developers and end users regarding the
benefits of NeighborComm Real Estate developers and end users may also tend to
engage in extensive internal reviews before deciding to engage the Company. Even
after real estate developers decide to include NeighborComm in their
developments, the build out of the development and sales of homes or commercial
buildings normally extends over several years. Due to these long sales and
development cycles, the Company's revenues may fluctuate substantially and any
given period may include substantial selling expenses without related revenue.
These risks could have a material adverse effect on the Company's business,
financial condition and results of operations.
THE COMPANY'S BUSINESS MAY SUFFER IF IT IS UNABLE TO DELIVER UNINTERRUPTED
VOICE, VIDEO AND DATA COMMUNICATIONS SERVICES.
The success of the Company depends upon its ability to deliver high
quality, uninterrupted voice, video and data communication services. Any system
failure that causes interruptions in the Company's planned infrastructure could
have a material adverse effect on the Company. As the Company expands its
network and data transmission grows, increased stress will be placed upon
network hardware and data transmission systems. Although the Company's system
will include safety measures to protect its network, there can be no assurance
that the Company will not experience failures relating to individual sites, or
even catastrophic failure of the entire network. The Company's operations will
also depend upon its ability to successfully expand the network and to integrate
new and emerging technologies and equipment into the network, which is likely to
increase the risk of system failure and cause unforeseen strains on its network.
The Company's network will also be vulnerable to damage from fire, floods,
earthquakes, power loss, telecommunications failures and similar events. The
Company carries property insurance, which may not be adequate to compensate the
Company for all losses that may occur. In any event, significant or prolonged
system failures could damage the reputation of the Company and result in the
loss of subscribers.
AMORTIZATION OF GOODWILL COULD SIGNIFICANTLY IMPACT EARNINGS FOR THE NEXT FIVE
TO TEN YEARS.
Because the Company has made a number of strategic acquisitions,
Goodwill associated with the acquisitions comprise 39% of the Company's total
assets as of September 30, 1999. Goodwill is an intangible asset that represents
the difference between the aggregate purchase price for the net assets acquired
and the amount of such purchase price allocated to such net assets. The Company
is required to amortize the goodwill from acquisitions accounted for as
purchases over a period of time, with the amount amortized in a particular
period constituting an expense that reduces the Company's net income for that
period. The Company anticipates that amortization of goodwill will adversely
impact earnings for the next five to ten years and possible writedowns or
adjustments in any period could significantly adversely impact earnings in such
period.
THE COMPANY'S OPERATIONS MAY SUFFER IF THE COMPANY EXPERIENCES NETWORK SECURITY
PROBLEMS.
Despite the implementation of network security measures, the Company's
infrastructures remain vulnerable to computer viruses, break-ins and similar
disruptive problems. Alleviating problems caused by computer viruses, break-ins,
or other problems caused by third parties may require significant expenditures
of capital and resources by the Company, which could have a material adverse
effect on the Company.
41
<PAGE> 43
THE COMPANY MAY LOSE SUPPLIERS OF EQUIPMENT AND BANDWIDTH, WHICH COULD
NEGATIVELY IMPACT THE COMPANY'S OPERATING RESULTS.
The Company has no long-term contracts with its suppliers, but the
Company has many dealer contracts with communications equipment suppliers, which
allows it to purchase components and equipment at favorable prices and on
favorable credit terms. If any of these suppliers cancel, materially alter or
change the credit terms of their dealer contracts, such actions could adversely
affect the Company's communications equipment sales activities, profitability
and results of operation.
The Company will depend on third-party suppliers for its leased line
connections and/or bandwidth. Most of these suppliers are competitors of the
Company. To the extent that these suppliers change their pricing structures, the
Company may be adversely affected. Moreover, the Company depends on third-party
suppliers of hardware components. Some components used by the Company in
providing its networking services are currently acquired or available from
limited sources.
THE COMPANY'S BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, AND CHANGES IN
CURRENT OR FUTURE LAWS OR REGULATIONS COULD RESTRICT THE WAY THE COMPANY
OPERATES.
A significant portion of the services that the Company offers are
subject to regulation at the federal, state and/or local levels. Future federal
or state regulations and legislation may be less favorable to the Company than
current regulation and legislation and therefore have an adverse impact on the
Company's business, results of operations and financial condition. In addition,
the Company may expend significant financial and managerial resources to
participate in rule-setting proceedings at either the federal or state level,
without achieving a favorable result. The Federal Communications Commission
prescribes rules applicable to interstate communications, including rules
implementing the 1996 Telecommunications Act, a responsibility it shares with
the state regulatory commissions. Incumbent carriers may work aggressively to
modify or restrict the operation of many provisions of the 1996
Telecommunications Act. Incumbent carries may pursue litigation in courts,
institute administrative proceedings with the Federal Communications Commission
and other regulatory agencies and lobby the United States Congress, all in an
effort to affect the laws and regulations in a manner favorable to the incumbent
carriers and against the interest of competitive carriers such as the Company.
If the incumbent carriers succeed in any of their efforts, if these laws and
regulations change or if the administrative implementation of laws develops in
an adverse manner, these events could have a material and adverse effect on the
Company's business, results of operations and financial condition and on the
price of its common stock. See "Business - Government Regulations."
UNCERTAIN FEDERAL AND STATE TAX AND OTHER SURCHARGES ON THE COMPANY'S SERVICES
MAY INCREASE THE COMPANY'S PAYMENT OBLIGATIONS.
Telecommunications providers pay a variety of surcharges and fees on
their gross revenues from interstate and intrastate services. The division of
the Company's services between interstate and intrastate services is a matter of
interpretation, and in the future the Federal Communications Commission or
relevant state commission authorities may contest this division. A change in the
characterization of the jurisdiction of the Company's services could cause the
Company's payment obligations to increase. In addition, pursuant to periodic
revisions by state and federal regulators of the applicable surcharges, the
Company may be subject to increases in the surcharges and fees currently paid.
A POTENTIAL ECONOMIC DOWNTURN MAY NEGATIVELY AFFECT THE COMPANY'S RESULTS OF
OPERATIONS.
In the last several years, the general health of the economy has been
relatively strong and growing, a consequence of which has been increasing
capital spending by individuals and growing companies to keep pace with rapid
technological advances. To the extent the general economic health of the United
States declines from recent historically high levels, or to the extent
individuals or companies fear such a decline is imminent, such individuals and
companies may reduce, in the near term, expenditures such as those for new
housing or commercial developments and the services the Company offers. Any such
decline or concern about an imminent decline could delay decisions amongst the
Company's customers or prospective customers to purchase new housing or
commercial
42
<PAGE> 44
facilities. Such delays could have a material adverse effect on the Company's
business, results of operations and financial condition.
PROVISIONS IN THE COMPANY'S INCORPORATION DOCUMENTS MIGHT DEFER ACQUISITION BIDS
FOR THE COMPANY.
The Company's Certificate of Incorporation authorizes the Board of
Directors to issue, without stockholder approval, one or more series of
preferred stock having such preferences, powers and relative, participating,
optional and other rights (including preferences over the Common Stock
respecting dividends and distributions and voting rights) as the Board of
Directors may determine. The issuance of this "blank-check" preferred stock
could render more difficult or discourage an attempt to obtain control of the
Company by means of a tender offer, merger, proxy contest, or otherwise.
IF THE COMPANY ISSUES ADDITIONAL SECURITIES, STOCKHOLDERS COULD SUFFER DILUTION
OF THEIR EXISTING INVESTMENT IN THE COMPANY.
The Company will have authority to offer shares of preferred stock,
additional shares of Common Stock or other equity or debt securities for cash,
in exchange for property or otherwise. Stockholders will have no preemptive
right to acquire any such securities, and any such issuance of equity securities
could result in dilution of an existing stockholder's investment in the Company.
In addition, the Board of Directors has the authority to issue shares of
preferred stock having preferences and other rights superior to Common Stock.
THE COMPANY'S COMMON STOCK IS SUBJECT TO CERTAIN LIMITATIONS AS A PENNY STOCK,
WHICH COULD AFFECT THE ABILITY OF STOCKHOLDERS TO SELL THEIR COMMON STOCK.
The Company's common stock is covered by Securities and Exchange
Commission rules that impose additional sales practice requirements on
broker-dealers who sell securities priced at under $5.00 (so-called "penny
stocks") to persons other than established customers and accredited investors
(generally institutions with assets in excess of $5 million or individuals with
net worth in excess of $1 million or annual income exceeding $200,000 or
$300,000 jointly with their spouse). For transactions covered by such rules, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Moreover, such rules also require that brokers engaged in secondary sales
of penny stocks provide customers written disclosure documents, monthly
statements of the market value of penny stocks, disclosure of the bid and ask
prices, disclosure of the compensation to the broker-dealer, and disclosure of
the salesperson working for the broker-dealer. Consequently, the rules may
affect the ability of broker-dealers to sell the Company's Common Stock and also
may affect the ability of persons receiving such Common Stock to sell their
Common Stock in the secondary market. These trading limitations tend to reduce
broker-dealer and investor interest in "penny stocks" and could operate to
inhibit the ability of the Company's Common Stock to reach a $3.00 or $4.00 per
share trading price that would make it eligible for quotation on NASDAQ, even if
the Company otherwise qualifies for quotation on NASDAQ.
ITEM 7. FINANCIAL STATEMENTS.
Reference is made to the Consolidated Financial Statements, the Notes
thereto and Report of Independent Auditors thereon commencing at Page F-1 of
this Report, which Consolidated Financial Statements, Notes and Report are
included herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company changed its independent auditor from Alvin H. Bender,
C.P.A. to Ernst & Young, LLP on December 8, 1998. Ernst & Young LLP has audited
the Company's financial statements for the years ended September 30, 1998 and
1999. This change was by mutual consent due to the need for the Company's
auditor to be familiar with the requirements of financial statements for
corporations becoming reporting companies under the Securities Exchange Act of
1934. The change was approved by the Company's Board of Directors. None of the
former accountant's reports on the Company's financial statements for the year
ended September 30, 1997 contained
43
<PAGE> 45
an adverse opinion or disclaimer of opinion or was modified as to uncertainty,
audit scope or accounting principles. There were no disagreements with the
former accountant on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure or any reportable events
during the Company's 1998 and 1999 fiscal years.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16 (A) OF THE EXCHANGE ACT.
The following table sets forth information concerning the Company's
executive officers and directors. Except as otherwise noted, none of the
executive officers are directors or officers of any publicly owned corporation
or entity.
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- ---- -----------------------------------------------
<S> <C> <C>
Earl J. Cook 57 Director, President and Chief Executive Officer
Alan P. Hald 53 Chairman of the Board
Donald D. Cannella 30 Director
Steven R. Green 41 Director
Bruce A. Robson 43 Vice President - NeighborComm
Robert T. Woodbury 41 Vice President - Rocket Science Creative
</TABLE>
The term of office of each director of the Company is for one year and
until his or her successor is elected at the annual shareholder's meeting and is
qualified, subject to removal by the shareholders. All officers serve at the
pleasure of the Company's Board of Directors and until his or her successor is
elected at the annual meeting of the Board of Directors and is qualified.
EARL J. COOK is a founder of FUTUREONE, INC, an Arizona corporation,
and served as its Executive Vice President and a Director since December 26,
1996. He has served as Director, Executive Vice President, Treasurer and Chief
Operating Officer of the Company since March 30, 1998. Mr. Cook is a Certified
Public Accountant and a graduate of Wayne State University with a degree in
accounting. Mr. Cook is the former Chief Financial Officer, Executive Vice
President and Director of McCulloch Properties, Inc., a major developer of
cities such as Lake Havasu City and Fountain Hills, Arizona. Mr. Cook has owned
and operated a variety of businesses including a public accounting firm,
financial consulting firms, asset management entities and real estate
partnerships. He has also served in a variety of senior management positions for
public and private companies for the past thirty years.
ALAN P. HALD has served as Chairman of the Company's Board of Directors
since January 1, 2000. Mr. Hald co-founded MicroAge, Inc. in 1976 and has served
in various executive officer and consulting positions with MicroAge from 1976
through present. Mr. Hald received his undergraduate degree from Rensselaer
Polytechnic Institute and his masters in business administration from Harvard
University. Mr. Hald also serves as a director for Jotter Technology, Inc.,
Integrated Information Systems, Inc., Relink, Inc., 3iNet, Inc. and Essential
Wisdom, Inc.
STEVEN R. GREEN has served as a Director of the Company since August
1998. Mr. Green is the managing partner of Blackwater Capital Partners, L.P. Mr.
Green has held senior positions with Jefferies & Co. and Bear Sterns & Co., Inc.
as an institutional equity block trader assisting risk arbitrageurs, corporate
and financial takeover specialists, leveraged buyout groups, pension funds,
money managers and major corporations announcing large stock repurchase
programs. In 1990, Mr. Green formed Arcadian Capital, Inc., a boutique
investment banking firm specializing in coordinating mergers and acquisitions,
initial public offerings, recapitalizations and reorganizations. Mr. Green also
serves as a director for Duraswitch Industries, Inc., OneSource Technologies,
Inc. and CJM Team Corporation.
44
<PAGE> 46
DONALD D. CANNELLA has served as a Director of the Company since August
1998. Mr. Cannella has been the President of OPEC Corp., a wholly owned
subsidiary of the Company, since November 1995. Prior to joining OPEC Corp., Mr.
Cannella served in various positions in the telecommunications industry since
1989.
BRUCE A. ROBSON has served as a Vice President in charge of
NeighborComm Development since October 1999. Since 1998, Mr. Robson has been
Director of Sales and Marketing for the Company. Prior to his employment with
the Company, Mr. Robson was President of a wholesale distributor of data
communications equipment, which the Company acquired in 1998. Previously, Mr.
Robson was a National Director of Sales for Gabriel Ride Control Products, Inc.,
a world-wide leader in automotive ride control and exhaust systems. Mr. Robson
also served as Executive Vice President of TL Industries, Inc., a company that
was involved in automotive parts and repair facilities. Mr. Robson has over 20
years experience in positions of operations, sales and marketing management.
ROBERT TUCKER WOODBURY has served as Vice President of Rocket Science
Creative since October 1999. Prior to his employment with the Company, Mr.
Woodbury served as Manager of Ubiquity Design LLC, a full service graphic design
and advertising agency, which the Company acquired in March 1999. Mr. Woodbury
received his Bachelor of Arts degree from Colorado State University in 1981
where he studied marketing, advertising and public relations. He worked as the
Director of Advertising and Marketing for the American Wool Council in New York
City from 1982 until 1991 where he was responsible for the promotion of wool
fiber to the fashion and textile industry both nationally and internationally.
Mr. Woodbury also owned and operated the Rockin' Horse concert venue, where he
acted as the booking agent and promoter of over 400 national touring acts.
INVOLVEMENT IN LEGAL PROCEEDINGS
To the best of management's knowledge, during the past five years, none
of the following occurred with respect to a present or former director or
executive officer of the Company:
(1) Any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
(2) Any conviction in a criminal proceeding or being subject to a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) Being subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of any competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; and
(4) Being found by a court of competent jurisdiction (in a civil
action), the commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment has
not been reversed, suspended or vacated.
ITEM 10. EXECUTIVE COMPENSATION.
The following tables set forth the compensation received for services
rendered to the Company or its subsidiaries in all capacities during the fiscal
years ended September 30, 1999 and 1998 by the Company's Chief Executive Officer
and each of the Company's other executive officers who received compensation in
excess of $100,000 (the "Named Executive Officers"), which includes salary and
bonus earned during the fiscal year ended September 30, 1999.
45
<PAGE> 47
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($) OPTIONS (#)
- --------------------------------------- ---- ---------- ----------- ---------------------
<S> <C> <C> <C> <C>
Earl J. Cook(1) 1999 $83,078 -- 245,000(2)
President and Chief Executive Officer 1998 $12,308 (8) --
Kendall Q. Northern(3) 1999 $98,461 -- 304,000 (4)
Former President and 1998 $40,615 (8) --
Chief Executive Officer
Donald D. Cannella(5) 1999 $129,043 $252,263(6) 217,000 (7)
President of OPEC Corp. 1998 $20,769 -- --
</TABLE>
- -------------------
(1) Mr. Cook was elected President and Chief Executive Officer of the Company
effective November 23, 1999.
(2) Mr. Cook was granted options to purchase 245,000 shares of Common Stock for
$4.95 per share under the Company's 1999 Key Employee Stock Option Plan,
which was approved on November 23, 1999 at the Company's 1999 Annual
Meeting of Stockholders.
(3) Mr. Northern resigned as President and Chief Executive Officer of the
Company effective November 23, 1999. Pursuant to the terms of his Severance
Agreement, Mr. Northern received (i) a separation payment of $100,000
payable in 12 equal monthly payments, (ii) a lump sum payment of $50,000
and (iii) certain other consideration. See "Certain Relationships And
Related Transactions."
(4) Mr. Northern was granted options to purchase 304,000 shares of Common Stock
for $4.95 per share under the Company's 1999 Key Employee Stock Option
Plan, which was approved on November 23, 1999 at the Company's 1999 Annual
Meeting of Stockholders.
(5) Mr. Cannella is a Director of the Company and the President of OPEC CORP.,
a wholly owned subsidiary of the Company that the Company acquired on July
29, 1998.
(6) Represents a one-time bonus for past performance paid in fiscal 1999 but
accrued for services provided prior to the Company's acquisition of OPEC on
July 29, 1998.
(7) Mr. Cannella was granted options to purchase 217,000 shares of Common Stock
for $4.95 per share under the Company's 1999 Key Employee Stock Option
Plan, which was approved on November 23, 1999 at the Company's 1999 Annual
Meeting of Stockholders.
(8) On September 30, 1998, Mr. Northern and Mr. Cook were each granted warrants
to purchase 205,406 shares of Common Stock at $2.93 per share, as bonuses
under their employment contracts.
OPTION GRANTS
The following table sets forth certain information regarding option
grants to Named Executive Officers during the fiscal year ended September 30,
1999.
46
<PAGE> 48
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS
UNDERLYING GRANTED TO EMPLOYEES IN EXERCISE
NAME OPTIONS GRANTED FISCAL YEAR PRICE EXPIRATION DATE
- ------------------------ -------------------- ------------------------ -------- ---------------
<S> <C> <C> <C> <C>
Earl J. Cook 245,000 (1) 13.60% $4.95 July 18, 2004
Kendall Q. Northern 304,000 (2) 16.88% $4.95 July 18, 2004
Donald D. Cannella 217,000 (3) 12.05% $4.95 July 18, 2004
</TABLE>
- -----------------------
(1) Mr. Cook was granted options to purchase 245,000 shares of Common Stock
under the Company's 1999 Key Employee Stock Option Plan, which was approved
on November 23, 1999 at the Company's 1999 Annual Meeting of Stockholders.
(2) Mr. Northern was granted options to purchase 304,000 shares of Common Stock
under the Company's 1999 Key Employee Stock Option Plan, which was approved
on November 23, 1999 at the Company's 1999 Annual Meeting of Stockholders.
(3) Mr. Cannella was granted options to purchase 217,000 shares of Common Stock
under the Company's 1999 Key Employee Stock Option Plan, which was approved
on November 23, 1999 at the Company's 1999 Annual Meeting of Stockholders.
1999 KEY EMPLOYEE STOCK OPTION PLAN
The Company's 1999 Key Employee Stock Option Plan (the "1999 Stock
Option Plan") was approved by the Company's Board of Directors and became
effective on April 30, 1999. On July 18, 1999, the Company awarded options to
purchase 1,039,051 shares to employees at an exercise price of $4.50 per share
and 766,000 shares to executive officers at an exercise price of $4.95 per
share. All grants were made subject to the approval of the 1999 Stock Option
Plan by the Company's stockholders, which was received at the Company's 1999
Annual Meeting of Stockholders held on November 23, 1999. The following is a
summary of certain terms and provisions of the 1999 Stock Option Plan. This
summary does not propose to be a complete description of the 1999 Stock Option
Plan and is subject to the detailed provisions of, and is qualified in its
entirety by reference to the 1999 Stock Option Plan.
The Company's 1999 Stock Option Plan is administered by the Company's
Board of Directors, or a committee of the Board. The Board selects the employees
to whom stock options are granted ("Optionees") and determines the number of
shares subject to each option and the type of option to be granted. Shares of
Common Stock issued pursuant to options awarded under the 1999 Stock Option Plan
shall be made available from authorized but unissued or reacquired shares of the
Company's Common Stock. The aggregate number of shares of Common Stock that may
be issued under the 1999 Stock Option Plan is 2,500,000, provided, however, that
the number of shares reserved for issuance pursuant to the 1999 Stock Option
Plan shall be adjusted to reflect stock dividends, stock splits and other
changes in capitalization.
Under the 1999 Stock Option Plan, the Company may grant options that
are intended to qualify as Incentive Stock Options ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or options not intended to qualify as Incentive Stock
Options ("Non-Statutory Stock
47
<PAGE> 49
Options"). The Incentive Stock Options are not transferable except by will or
the laws of descent and distribution. Non-Statutory Stock Options may be
transferred pursuant to terms and conditions established by the Board. Incentive
Stock Options shall not be exercisable after the expiration of ten years from
the date of grant or upon an earlier expiration date as a result of the
retirement or the death of the Optionee. Options held by an Optionee who ceases
to be employed by the Company for any reason other than retirement or death
shall not be exercisable after the date employment terminates. Also, in
consideration of the Company granting the option, an Optionee agrees that he
will remain in the employ of the Company for a period of not less than one year
from the date of grant of the option, unless his employment shall be terminated
on the account of incapacity or with the consent of the Company.
The exercise prices of options shall be set by the Board and, in the
case of Incentive Stock Options, shall not be less than the per share fair
market value of the outstanding shares of the Company on the date the option is
granted. If an Incentive Stock Option is granted to an employee who is, at the
time the option is granted, deemed for the purposes of Section 422 of the Code,
or any successor provisions, to own shares of the Company possessing more than
ten percent (10%) of the total combined voting power of all classes of shares of
the Company or of a parent or subsidiary of the Company, the Option Price shall
be at least one hundred and ten percent (110%) of the fair market value of the
Common Stock, and shall not be exercisable after the expiration of five years
from the date of grant. Options may be granted under the 1999 Stock Option Plan
at any time prior to ten years from adoption by the Board, on which date the
plan shall expire but without affecting any options then outstanding.
The Board may amend, modify or terminate at any time the 1999 Stock
Option Plan, except that the Board may not, without further shareholder
approval, increase the total number of shares as to which options may be granted
under the 1999 Stock Option Plan, change the employees or class of employees
eligible to receive options or materially increase the benefits accruing to
participants under the 1999 Stock Option Plan. In addition, the Board may not
take any action that would impair the validity of any outstanding option or
would prevent the incentive stock options issued or to be issued under the 1999
Stock Option Plan from being incentive stock options under Section 422 of the
Code, or any successor provision.
COMPENSATION OF DIRECTORS
All directors of the Company receive a director's fee of $2,500 per
month for serving on the Company's Board of Directors. In addition, directors
are reimbursed for actual out-of-pocket travel expenses to attend meetings of
the Company's Board of Directors.
In addition to the standard director's fee paid to the Company's
directors, Mr. Hald receives additional consideration for his service to the
Company as Chairman of the Board of Directors pursuant to an agreement with the
Company. Such consideration includes an additional $7,500 per month, a one-time
bonus of $10,000 and warrants to purchase 70,000 shares of the Company's Common
Stock for each of the first six months of Mr. Hald's service to the Company. In
addition, Mr. Hald shall receive transaction bonuses upon the occurrence of
certain events.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Earl J. Cook is currently employed by the Company under an employment
contract that became effective July 26, 1998. At that time, the Company entered
into an employment agreement with Mr. Cook that set forth the basic terms of
employment, including salary, performance bonuses, and employment duties. In
addition, Mr. Cook's employment agreement provides that it is immediately
terminable if there is a substantial change in the management or ownership of
the Company under which Mr. Cook has a diminished role in ownership or
management control so that in the sole opinion of Mr. Cook, it is no longer in
his best interests to remain an employee of the Company. Mr. Cook must provide
notice of termination within 30 days of receipt of notice of a Change of Control
and the Company shall be obligated to pay him (i) his annual salary, a pro-rated
stock performance bonus, and all other benefits due him, and (ii) the greater of
(a) ten percent (10%) of the Company's net equity as reported on the Company's
Balance Sheet at the end of the month immediately preceding such termination,
(b) ten percent (10%) of the acquisition price of the Company pursuant to the
Change in Control as calculated in accordance with the terms of the employment
agreement, or (c) $1,000,000.
48
<PAGE> 50
The Company entered into a Severance Agreement with Kendall Q. Northern
effective as of November 23, 1999 (the "Northern Severance Agreement"). Under
the terms of the Northern Severance Agreement, Mr. Northern agreed to resign as
President and Chief Executive Officer and a Director of the Company in exchange
for (i) a separation payment in the amount of $100,000 payable in 12 equal
monthly installments, (ii) a lump sum cash payment in the amount of $50,000 and
(iii) certain other considerations. Under the Severance Agreement, Mr. Northern
agreed to certain restrictive covenants, including, without limitation,
refraining from engaging in business in Arizona or Colorado that is directly or
indirectly competitive to the Company until November 23, 2000.
Donald D. Cannella is currently employed by OPEC CORP., a wholly owned
subsidiary of the Company, under an employment agreement that became effective
August 1, 1998. The employment agreement sets forth the basic terms of Mr.
Cannella's employment as president of OPEC CORP., including salary, bonus,
employment duties and employee benefits. The agreement has a term of five years
with automatic one year renewal periods and is terminable by either party at the
beginning of each renewal period with 30 days prior notice to the other party.
Pursuant to the terms of the Company's 1999 Key Employee Stock Option
Plan and the stock option agreements relating thereto, the Company has agreed,
that all outstanding options granted under the 1999 Key Employee Stock Option
Plan vest automatically in the event of a change of control of the Company. For
purposes of the Company's 1999 Key Employee Stock Option Plan, the term "change
in control" means the first to occur of the following events:
(i) The acquisition by any unrelated person of beneficial
ownership (as that term is used for purposes of the Securities
Exchange Act of 1934 (the "Act") of 20% or more of the then
outstanding shares of common stock of the Company or the
combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the
election of directors. The term "unrelated person" means any
person other than (x) the Company and any subsidiary, (y) an
employee benefit plan or trust of the Company or any
subsidiary, and (z) a person who acquires stock of the Company
pursuant to an agreement with the Company that is approved by
the Board in advance of the acquisition, unless the
acquisition results in a Change of Control pursuant to section
(ii) below.
(ii) Any tender or exchange offer, merger or other business
combination, sale of assets or contested election, or any
combination of the foregoing transactions, if the result of
such transaction is that the persons who were directors of the
Company before such transaction shall cease to constitute a
majority of the Board of the Company or any successor to the
Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the numbers of shares and percentage of
all shares of the Company's Common Stock outstanding as of January 7, 2000, held
by (i) any person known to the Company to be the beneficial owner of 5% or more
of the Company's outstanding Common Stock, (ii) each director and executive
officer of the Company, and (iii) all directors and executive officers as a
group.
49
<PAGE> 51
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT & NATURE OF
OF BENEFICIAL OWNER (1) BENEFICIAL OWNER PERCENT OF CLASS (2)
- ----------------------------------- ------------------- --------------------
<S> <C> <C>
5% STOCKHOLDERS
Muluha Limited (3) 1,400,000 (4) 10.5%
Daniel J. Romano 692,552 (5) 5.4%
Kendall Q. Northern (6) 2,105,406 (7) 16.1%
12 Squared Partners, LLC 1,000,000 (8) 7.2%
DIRECTORS AND OFFICERS
Earl J. Cook 1,880,406 (9) 14.3%
Alan P. Hald 70,000 (10) *
Donald D. Cannella 1,414,151 (11) 11.0%
Steven R. Green 157,605 (12) 1.2%
Bruce A. Robson 117,308 (13) *
Robert T. Woodbury 45,400 *
All Executive Officers and Directors as 3,614,870 (14) 27.9%
a Group (5 Persons)
</TABLE>
- ----------------------
* Represents beneficial ownership of less than 1%.
(1) Except as otherwise indicated, each holder may be reached through the
Company at 4250 East Camelback Road, Suite K-192, Phoenix, Arizona
85018.
(2) The percentages shown are calculated based upon 12,905,528 shares of
Common Stock outstanding on January 7, 2000. The numbers and
percentages shown include the shares of Common Stock actually owned as
of January 7, 2000 and the shares of Common Stock that the identified
person or group had the right to acquire within 60 days of such date.
In calculating the percentage of ownership, all shares of Common Stock
that the identified person or group had the right to acquire within 60
days of January 7, 2000 upon the exercise of options or warrants are
deemed to be outstanding for the purpose of computing the percentage of
the shares of Common Stock owned by such person or group, but are not
deemed to be outstanding for the purpose of computing the percentage of
the shares of Common Stock owned by any other person.
(3) Muluha Limited's address is c/o Stephanie Phillips, Weatherly
Securities, 2 World Trade Center, Suite 2946, New York, NY 10048. Linda
Stackhouse, President of Maluha Limited, has investment power with
respect to the shares held in the name of Muluha Limited.
(4) Includes 400,000 shares of Common Stock that Muluha Limited may acquire
upon the exercise of warrants exercisable within 60 days of January 7,
2000.
(5) Includes 5,000 shares of Common Stock held by Mr. Romano as Custodian
for his minor children.
(6) Kendall Q. Northern's address is 5146 East Tamblo Drive, Phoenix,
Arizona 85044.
(7) Includes 300,000 shares of Common Stock held by Mr. Northern as
Custodian for his minor children and 205,406 shares of Common Stock
that Mr. Northern may acquire upon the exercise of warrants exercisable
within 60 days of January 7, 2000. Mr. Northern resigned as President
and Chief Executive Officer effective November 23, 1999.
(8) Includes 500,000 shares of Common Stock that 12 Squared Partners, LLC
may acquire upon the exercise of warrants exercisable within 60 days of
January 7, 2000 and 500,000 shares of Common Stock that 12 Squared
50
<PAGE> 52
Partners, LLC may acquire upon the conversion of a promissory note
convertible within 60 days of January 7, 2000. 12 Squared Partners
LLC's address is 1717 E. Morten, Suite 220, Phoenix, Arizona 85020.
(9) Includes 205,406 shares of Common Stock that Mr. Cook may acquire upon
the exercise of warrants exercisable within 60 days of January 7, 2000.
(10) Includes 70,000 shares of Common Stock that Mr. Hald may acquire upon
the exercise of warrants exerciseable within 60 days of January 7,
2000.
(11) Includes 20,000 shares of Common Stock held by Mr. Cannella as
Custodian for his minor children.
(12) Includes 107,605 shares of Common Stock held by Blackwater Capital
Partners, L.P. and 50,000 shares of Common Stock that Blackwater
Capital Partners, L.P., may acquire upon the exercise of warrants
exercisable within 60 days of January 7, 2000. As the managing partner
of Blackwater Capital Partners, L.P., Mr. Green has investment power
with respect to such shares.
(13) Includes 25,000 shares that vested January 1, 2000 under an employment
agreement. Under the employment agreement an additional 50,000 shares
have been issued which will vest equally on January 1, 2001 and January
1, 2002, which are not included herein.
(14) Includes 325,406 shares of Common Stock that such executive officers
and directors may acquire upon the exercise of warrants exercisable
within 60 days of January 7, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In July 1998, the Company entered into a Stock Purchase Agreement with
Blackwater Capital Partners, L.P. and Blackwater Capital Group, L.L.C.
(collectively, "Blackwater"). Steven R. Green, a director of the Company, is the
managing partner of Blackwater Capital Partners, L.P. Pursuant to the Stock
Purchase Agreement, Blackwater Capital agreed to immediately purchase for
$375,000 certain units of the Company consisting of an aggregate of 300,000
shares of Common Stock for $1.25 per share and 150,000 warrants with an exercise
price of $3.00 per share, which expired in May, 1999 after the original
expiration date was extended for six months by the Company. In addition,
Blackwater Capital agreed to purchase, or cause to be purchased, up to 3,211,000
shares of Common Stock from the Company and 100,000 shares of Common Stock from
each of Kendall Q. Northern and Earl J. Cook, the Company's President and Chief
Operating Officer, respectively, at a minimum price of $2.93 per share for a
total investment of approximately $10,000,000 and a total sale of up to
3,411,000 shares of Common Stock. In connection with the transactions
contemplated by the Stock Purchase Agreement, Blackwater Capital has been issued
warrants to purchase 1,700,000 shares of the Company's Common Stock exercisable
at any time after vesting at a price of $1.00 per share. The warrants are
non-callable and vest from time to time as Blackwater Capital completes the
purchase of shares of Common Stock under the Stock Purchase Agreement. Any
shares issuable upon exercise of the warrants shall be transferred to a voting
trust established under a Voting Trust Agreement among FutureOne (formerly
World's Fare, Inc.), Blackwater Capital Group, L.L.C., certain shareholders of
the Company and Messrs. Northern and Cook, as co-trustees. Blackwater Capital
shall have certain registration rights with respect to all shares of Common
Stock and warrants held by Blackwater Capital pursuant to the Stock Purchase
Agreement however, no plans have been made with respect to such registration
rights to date. Blackwater may or may not purchase the entire 3,411,000 prior to
the Company filing a registration statement to resale all or a portion of such
shares. The Stock Purchase Agreement also provides that Blackwater Capital may
receive fees and commissions to be determined by the Company's Board of
Directors in the event that Blackwater Capital assists the Company in completing
certain strategic acquisitions.
The Stock Purchase Agreement provides that Blackwater shall purchase or
cause to be purchased by third party investors up to 3,411,000 shares of the
Company's common stock. After the first $2,500,000 is received from Blackwater,
the Company may refuse further funding, in which case all of the non-vested
warrants would immediately vest. In addition, Blackwater has the right to raise
the remaining $7,500,000 through a public offering of the shares of Common Stock
that it is committed to buy. Blackwater has purchased 177,605 shares from the
Company for its own account at a purchase price of $2.93 per share, but was
unable to sell shares to third party investors for that price, consequently, the
Company approved the sale of certain shares to third parties at prices less than
$2.93 per share. The Company approved the sale of 1,000,000 shares at $2.30 per
share and 200,000 shares at $1.25 per share. In connection with the sale of the
1,000,000 shares, Blackwater also assigned 400,000 of their
51
<PAGE> 53
vested warrants to the investor and 100,000 warrants to the broker. Under the
Stock Purchase Agreement, Blackwater is entitled to certain piggyback
registration rights on the 107,605 shares currently held by Blackwater.
There is no assurance that Blackwater will provide additional funding
beyond the amounts that were received prior to September 30, 1999. The Company
and Blackwater are currently discussing certain modifications to their current
arrangement, however, no definitive agreement has been reached to date.
In connection with the Company's acquisition of OPEC Corp., the Company
assumed a lease for office space which is owned by a partnership controlled by
Donald D. Cannella, a director of the Company and President of OPEC Corp.
Payments under the lease are $3,000 per month. Although the lease expires in
December 2000, it automatically renews for successive one-year periods unless
terminated by one of its parties.
In August 1999, OPEC obtained a two-year loan for $1,000,000 for its
working capital needs. The loan was personally guaranteed by Donald D. Cannella,
a director of the Company and President of OPEC CORP.
On November 23, 1999, the Company entered into a Severance Agreement
with Kendall Q. Northern under which the Company's employment contract with Mr.
Northern was terminated by mutual consent and Mr. Northern resigned as an
officer and director of the Company, and all of its affiliates, and agreed not
to compete with the Company in Arizona and Colorado for a period of one year. In
consideration for execution of the Severance Agreement, the Company agreed to
immediately pay a one-time sum of $50,000 and a one year separation payment of
$100,000 to be paid in equal monthly installments. In addition, the Company is
further obligated to pay for Mr. Northern's auto rental, auto insurance and
medical insurance for one year. The Company also allowed Mr. Northern to (i)
retain certain Company property already in his possession valued at
approximately $17,500 and (ii) exchange 200,000 shares of the Company's Common
Stock owned by Mr. Northern for 47,031 shares of RMI NET, Inc. common stock
obtained by the Company from the sale of substantially all of its assets
relating to its Internet access business.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit No. Description
-------------- ---------------------------------------------------------
3.1 Articles of Incorporation of the Company, including all
amendments and articles of exchanges thereto*
3.2 By-Laws of the Company*
3.3 First Amendment to By-Laws of the Company*
3.4 Second Amendment to By-Laws of the Company*
3.5 Amended and Restated Articles of Incorporation of the
Company**
9.1 Voting Trust Agreement among the Company, Blackwater
Capital Group, L.L.C., Certain Stockholders and Kendall Q.
Northern and Earl J. Cook, dated July 25, 1998*
10.1 Executive Employment Agreement between the Company and
Kendall Q. Northern, dated as of July 27, 1998*
10.2 First Amendment to the Executive Employment Agreement
between the Company and Kendall Q. Northern, dated May 14,
1999*
52
<PAGE> 54
Exhibit No. Description
-------------- ---------------------------------------------------------
10.3 Executive Employment Agreement between the Company and
Earl J. Cook, dated as of July 27, 1998*
10.4 First Amendment to the Executive Employment Agreement
between the Company and Earl J. Cook, dated May 14, 1999*
10.5 Employment Agreement between OPEC Corp. and Donald D.
Cannella, dated as of August 1, 1998*
10.6 Stock Purchase Agreement by and among World's Fare, Inc.,
dba FutureOne, a Nevada corporation, and Blackwater
Capital Partners, L.P., and Blackwater Capital Group,
L.L.C., dated as of July 25, 1998*
10.7 Form of Warrant for the Purchase of 1,700,000 Shares of
Common Stock of World's Fare, Inc. dba FutureOne*
10.8 FutureOne, Inc. 1999 Key Employee Stock Option Plan*
10.9 Form of FutureOne, Inc. Incentive Stock Option Agreement*
10.10 Form of Warrant to Purchase 205,406 shares of Common Stock
in the name of Earl J. Cook**
10.11(a) Lease by and between First Gracie, Limited Liability
Company and Networld.com Inc., dated November 28, 1995, as
amended**
10.11(b) First Amendment to Lease**
10.11(c) Second Amendment to Lease**
10.11(d) Third Amendment to Lease**
10.11(e) Fourth Amendment to Lease**
10.11(f) Fifth Amendment to Lease**
10.14 Loan Agreement by and among Norwest Bank Colorado,
National Association, Trustee of the James C. Berger
Rollover IRA, John Ventiniglia and Robin L. Morley & Mark
E. Morley; OPEC Corp. and Donald D. Cannella dated August
27, 1999*
10.15 Collateralized Convertible Commercial Promissory Note by
OPEC Corp. to the order of Norwest Bank Colorado, National
Association, John Ventiniglia, and Robin L. Morley & Mark
E. Morley in the amount of $1,000,000 dated August 27,
1999*
10.16 Guaranty by Donald D. Cannella to and for the benefit of
Norwest Bank Colorado, National Association, Trustee of
the James C. Berger Rollover IRA dated August 27, 1999*
10.17 State of Colorado Uniform Commercial Code-Security
Agreement dated August 27, 1999*
53
<PAGE> 55
Exhibit No. Description
-------------- ---------------------------------------------------------
10.18 Addendum to Uniform Commercial Code-Security Agreement*
10.19 Purchase and Sale Agreement by and among FutureOne, Inc.
and the Members of Progressive Media LLC, dated as of July
16, 1999*
10.20 Purchase and Sale Agreement by and between the Company and
Mandalay Incorporated dated December 6, 1999**
10.21 Asset Purchase Agreement by and among RMI.NET, Inc. and
Networld.com, Inc., FutureOne, Inc., an Arizona
corporation and FutureOne, Inc., a Nevada corporation
dated November 19, 1999**
10.22 Severance Agreement by and between the Company and Kendall
Q. Northern dated as of November 23, 1999**
10.23 12% Secured Convertible Promissory Note made by the
Company to the order of 12 Squared Partners, LLC, dated as
of October 22, 1999**
10.24 Warrant to Purchase 500,000 shares of Common Stock in the
name of 12 Squared Partners, LLC**
10.25 Security and Pledge Agreement by and between the Company
and 12 Squared Partners, LLC, dated as of October 22,
1999**
10.26 12% Convertible Promissory Note made by the Company to the
order of Hare & Co., as Trustees for Financial
Institutions Retirement Fund, dated as of December 28,
1999**
10.27 Warrant to Purchase 16,667 shares of Common Stock in the
name of Hare & Co., as Trustees for Financial Institutions
Retirement Fund**
10.28 Reseller Agreement by and between Ascend Communication
Inc. and Priority Systems effective as of December 15,
1998**
10.29 Employment Agreement between the Company and Bruce A.
Robson dated as of January 11, 1999**
10.30 Employment Agreement between the Company and R. Tucker
Woodbury dated as of March 31, 1999**
10.31 Employment Agreement between the Company and Alan Hald
dated January 1, 2000**
10.32 15% Promissory Note payable to the order of Richard B.
McCulloch dated October 8, 1999**
10.33 Form of Warrant to Purchase 250,000 shares of Common Stock
in the name of Richard B. McCulloch**
16 Letter on Change in Certifying Accountant**
21 Subsidiaries of the Registrant*
54
<PAGE> 56
Exhibit No. Description
-------------- ---------------------------------------------------------
23 Consent of Ernst & Young LLP Independent Auditors
27 Financial Data Schedule
* Incorporated by reference from the Company's Form 10-SB Registration
Statement filed with the Commission on October 7, 1999.
** Incorporated by reference to the Company's Amendment No. 1 to Form 10-SB
filed with the Commission on January 13, 2000.
(b) Reports on Form 8-K:
None.
55
<PAGE> 57
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FUTUREONE, INC.
Date: January 13, 2000 By: /s/ Earl J. Cook
-------------------
Name: Earl J. Cook
Title: President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Dated: January 13, 2000 By: /s/ Earl J. Cook
-----------------------------
EARL J. COOK, PRESIDENT,
CHIEF EXECUTIVE OFFICER,
DIRECTOR
(Principal Executive Officer)
Dated: January 13, 2000 By: /s/ Ralph Zanck
-----------------------------
RALPH R. ZANCK, VICE
PRESIDENT OF FINANCE
(Principal Financial Officer)
Dated: January 13, 2000 By: /s/ Alan P. Hald
-----------------------------
ALAN P. HALD, CHAIRMAN OF
THE BOARD OF DIRECTORS
Dated: January 13, 2000 By: /s/ Steven R. Green
-----------------------------
STEVEN R. GREEN, DIRECTOR
Dated: January 13, 2000 By: /s/ Donald D. Cannella
-----------------------------
DONALD D. CANNELLA, DIRECTOR
56
<PAGE> 58
Report of Independent Auditors
The Board of Directors and Stockholders
FutureOne, Inc.
We have audited the accompanying consolidated balance sheets of FutureOne, Inc.
and subsidiaries (the Company) as of September 30, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
FutureOne, Inc. and subsidiaries at September 30, 1999 and 1998, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming FutureOne,
Inc. and subsidiaries will continue as a going concern. As more fully described
in Note 1, the Company has recurring losses, and negative working capital. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern (management's plans in regard to those matters are also described
in Note 1). The financial statements do not include any adjustments to reflect
the possible future effect on the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the outcome
of this uncertainty.
ERNST & YOUNG LLP
Phoenix, Arizona
December 29, 1999
F-1
<PAGE> 59
Futureone, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 160,032 $ 570,979
Trading securities -- 151,621
Trade accounts receivable, net of allowance for doubtful accounts of approximately
$140,000 and $65,000 at September 30, 1999 and 1998, respectively 2,671,164 1,473,807
Cost and estimated earnings in excess of billings on uncompleted contracts 717,548 411,877
Inventory 2,701,096 49,861
Prepaid expenses and other assets 147,286 7,567
Net current assets of discontinued operations 26,631 52,462
------------ ------------
Total current assets 6,423,757 2,718,174
Property and equipment, net 3,672,716 1,455,164
Notes receivable 62,906 --
Intangible assets, net 6,513,049 7,135,236
Other assets 191,028 40,649
Net long-term assets of discontinued operations 898,979 961,207
------------ ------------
$ 17,762,435 $ 12,310,430
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Credit lines payable $ 480,000 $ 294,011
Notes payable to stockholders 171,450 7,450
Trade accounts payable 5,556,062 953,347
Accrued expenses 382,627 251,058
Accrued bonus -- 500,000
Accrual for loss contract -- 100,000
Taxes payable 294,973 297,198
Billings in excess of cost and estimated earnings on uncompleted contract 66,861 72,005
Current portion of long term debt and capital leases 1,429,799 474,245
Other liabilities 25,970 110,591
------------ ------------
Total current liabilities 8,407,742 3,059,905
Notes payable, less current portion 2,603,848 701,387
Capital lease payable, less current portion 67,786 53,301
Stockholders' equity:
Common stock, $.001 par value, 50,000,000 shares authorized and 12,891,028 and
11,055,344 shares issued at September 30, 1999 and 1998, respectively 12,891 11,055
Additional paid-in capital 14,050,433 10,202,771
Unearned compensation (290,159) (153,207)
Treasury stock, 108,850 shares (250,573) --
Accumulated deficit (6,839,533) (1,564,782)
------------ ------------
Total stockholders' equity 6,683,059 8,495,837
------------ ------------
$ 17,762,435 $ 12,310,430
============ ============
See accompanying notes.
</TABLE>
F-2
<PAGE> 60
FutureOne, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Internet services business $ 410,843 $ 63,399
Communication equipment sales 2,058,341 251,194
Broadband communications engineering and construction services 8,663,101 1,695,111
------------ ------------
11,132,285 2,009,704
Costs of sales:
Internet services business 433,976 117,461
Communication equipment sales 2,161,646 218,508
Broadband communications engineering and construction services
(including $448,976 and $43,724 of depreciation and amortization in
1999 and 1998, respectively) 7,082,954 1,376,002
------------ ------------
9,678,576 1,711,971
------------ ------------
Gross profit 1,453,709 297,733
Operating expenses:
General and administrative 4,058,577 607,026
Depreciation and amortization 951,021 150,602
Unusual Items 316,720 --
------------ ------------
Loss from operations (3,872,609) (459,895)
Other income (expense):
Interest expense (247,155) (22,596)
Other 44,907 (8,966)
------------ ------------
Net loss from continuing operations (4,074,857) (491,457)
Discontinued operations:
Loss from operations (1,133,279) (710,195)
Loss on disposal (66,615) --
------------ ------------
Net loss $ (5,274,751) $ (1,201,652)
============ ============
Basic and diluted net loss per common share:
Loss from continuing operations $ (.34) $ (.07)
Loss from discontinued operations (.10) (.09)
------------ ------------
Net loss per common share $ (.44) $ (.16)
============ ============
Basic and diluted weighted average shares: 12,031,412 7,677,566
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 61
FutureOne, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN UNEARNED
SHARES AMOUNT CAPITAL COMPENSATION
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at September 30, 1997 6,049,490 $ 6,049 $ 784,431 $ --
Issuance of common stock:
World's Fare, Inc. reverse merger 500,000 500 1,315 --
Private Placement Series 1 40,000 40 39,960 --
Private Placement Series 2, net of offering costs 700,000 700 588,420 --
Commission on Series 2 Private Placement 181,250 181 181,069 --
Equipment acquisition 15,500 16 15,484 --
Services 2,000 2 1,998 --
Compensation to employees 210,001 210 284,690 (162,370)
Lan Kaster Inc. acquisition 215,385 215 269,016 --
Consultants for services 180,000 180 224,820 --
Carnet Computer Services, Inc. acquisition 100,000 100 124,900 --
Interworldnet Partnership acquisition 40,000 40 49,960 --
OPEC Corp acquisition 2,334,000 2,334 6,197,666 --
Priority Systems, Inc. acquisition 185,306 185 542,762 --
Purchase Agreement with accredited investor 177,605 178 520,505 --
PrimeServ and Amore Trust acquisition 35,999 36 105,442 --
Kachina International acquisition 92,308 92 270,370 --
Purchase of common stock from terminated employees (2,500) (2) (28) --
Amortization of unearned compensation -- -- -- 9,163
Repurchase of employee shares (1,000) (1) (9) --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance - September 30, 1998 11,055,344 11,055 10,202,771 (153,207)
Issuance of common stock
Compensation to employees 244,999 245 616,062 (349,485)
Private Placements 1,160,000 1,160 2,458,840 --
Exercise of warrants from Private Placement 10,000 10 29,990 --
Conversion of promissory note 41,750 42 24,958 --
Consultants for services 2,500 3 5,753 --
Abcon, Inc. acquisition 94,118 94 216,566 --
AMCOM LLC acquisition 121,212 121 278,909 --
GlobalKey acquisition 50,000 50 146,450 --
Progressive Media LLC acquisition 67,605 68 155,560 --
Ubiquity Design LLC acquisition 100,000 100 230,100 --
Expenses of Private Placement -- -- (240,750) --
Amortization of unearned compensation -- -- -- 137,700
Cancellation of nonvested employee stock (56,500) (57) (74,776) 74,833
Treasury stock from sale of Priority Systems, Inc. -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
Balance - September 30, 1999 12,891,028 $ 12,891 $ 14,050,433 $ (290,159)
============ ============ ============ ============
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
ACCUMULATED TREASURY
DEFICIT STOCK TOTAL
-------------- -------------- -------------
<S> <C> <C> <C>
Balance at September 30, 1997 $ (363,130) $ -- $ 427,350
Issuance of common stock:
World's Fare, Inc. reverse merger -- -- 1,815
Private Placement Series 1 -- -- 40,000
Private Placement Series 2, net of offering costs -- -- 589,120
Commission on Series 2 Private Placement -- -- 181,250
Equipment acquisition -- -- 15,500
Services -- -- 2,000
Compensation to employees -- -- 122,530
Lan Kaster Inc. acquisition -- -- 269,231
Consultants for services -- -- 225,000
Carnet Computer Services, Inc. acquisition -- -- 125,000
Interworldnet Partnership acquisition -- -- 50,000
OPEC Corp acquisition -- -- 6,200,000
Priority Systems, Inc. acquisition -- -- 542,947
Purchase Agreement with accredited investor -- -- 520,683
PrimeServ and Amore Trust acquisition -- -- 105,478
Kachina International acquisition -- -- 270,462
Purchase of common stock from terminated employees -- -- (30)
Amortization of unearned compensation -- -- 9,163
Repurchase of employee shares -- -- (10)
Net loss (1,201,652) -- (1,201,652)
----------- ----------- -----------
Balance - September 30, 1998 (1,564,782) -- 8,495,837
Issuance of common stock
Compensation to employees -- -- 266,822
Private Placements -- -- 2,460,000
Exercise of warrants from Private Placement -- -- 30,000
Conversion of promissory note -- -- 25,000
Consultants for services -- -- 5,756
Abcon, Inc. acquisition -- -- 216,660
AMCOM LLC acquisition -- -- 279,030
GlobalKey acquisition -- -- 146,500
Progressive Media LLC acquisition -- -- 155,628
Ubiquity Design LLC acquisition -- -- 230,200
Expenses of Private Placement -- -- (240,750)
Amortization of unearned compensation -- -- 137,700
Cancellation of nonvested employee stock -- -- --
Treasury stock from sale of Priority Systems, Inc. -- (250,573) (250,573)
Net loss (5,274,751) -- (5,274,751)
----------- ----------- -----------
Balance - September 30, 1999 $(6,839,533) $ (250,573) $ 6,683,059
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 62
FutureOne, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(5,274,751) $(1,201,652)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,399,997 194,326
Provision for doubtful accounts 96,997 48,301
Amortization of unearned compensation 137,700 9,163
Provision for inventory valuation 292,146 11,854
Stock compensation 272,578 530,780
Realized and unrealized (gain) loss on investments -- 38,301
Loss (gain) on sale of assets 113,952 (3,543)
Loss on Global Key amortization write-off 120,175 --
Loss on Priority Systems sale 316,720 --
Changes in operating assets and liabilities:
Trading securities 151,621 145,978
Trade accounts receivable (1,107,644) (652,552)
Costs and estimated earnings in excess of billings on uncompleted
contracts (289,251) (245,028)
Inventory (2,943,381) (16,619)
Prepaid expenses and other assets (140,419) 8,896
Trade accounts payable 4,326,346 570,779
Accrued expenses 171,067 50,159
Accrued bonus (500,000) --
Accrual for loss contract (100,000) 100,000
Taxes payable (2,225) (27,577)
Billings in excess of cost and estimated earnings on uncompleted contracts (5,144) (199,265)
Other liabilities (84,621) 104,499
----------- -----------
Net cash used in operating activities (3,048,137) (533,200)
INVESTING ACTIVITIES
Purchases of property and equipment (2,108,591) (198,915)
Proceeds from sale of property and equipment -- 18,799
Acquisitions of businesses, net of cash received 25,851 122,691
Purchase of trademark (1,856) --
Purchase of subscriber list -- --
Change in other assets (94,902) (22,887)
Change in net assets of discontinued operations 88,059 133,856
----------- -----------
Net cash (used in) provided by investing activities (2,091,439) 53,544
FINANCING ACTIVITIES
Net proceeds (repayments) under credit lines 185,989 --
Proceeds (repayments) from notes payable to shareholders -- (36,326)
Principal payments under capital lease obligations (106,852) (42,036)
Proceeds from issuance of common stock 2,249,250 1,151,619
Repurchase of common stock -- (40)
Debt issuance costs (75,000) --
Proceeds from borrowings 3,765,014 25,000
Proceeds from notes payable, officers 164,000 --
Principle payments of notes payable (1,453,772) (68,645)
----------- -----------
Net cash provided by financing activities 4,728,629 1,029,572
----------- -----------
Increase (decrease) in cash and cash equivalents (410,947) 549,916
Cash and cash equivalents at beginning of period 570,979 21,063
----------- -----------
Cash and cash equivalents at end of period $ 160,032 $ 570,979
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Assets acquired under capital lease obligation $ 362,019 $ 530,523
=========== ===========
Conversion of debt into common stock $ 25,000 $ --
=========== ===========
Common stock issued for equipment $ -- $ 3,000
=========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 63
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business
FutureOne, Inc. (f/k/a World's Fare, Inc.) (the "Company") is a successor by
reverse merger to FUTUREONE, INC., an Arizona corporation ("FutureOne AZ").
World's Fare, Inc. was incorporated March 22, 1994 and 1,000 shares were issued
to the founders in exchange for services. In May 1997, World's Fare, Inc.
approved a 500:1 stock split which increased the outstanding shares to 500,000
and the authorized shares to 50,000,000 with a par value of $.001. On March 30,
1998, World's Fare, Inc. issued 6,049,490 shares of its common stock for all of
the outstanding shares of FutureOne AZ to consummate the reverse merger. On
August 6, 1998, World's Fare, Inc. changed its name to FutureOne, Inc.
FutureOne AZ is a successor by reverse merger to Networld.com Inc. FutureOne AZ
was incorporated December 26, 1996 and, 100,000 shares were purchased by some of
the Founders to establish the business. In January 1997, FutureOne AZ issued
7,800,000 shares of its common stock for all of the outstanding shares of
Networld.com Inc. Networld.com Inc. was incorporated November 25, 1995.
Networld.com Inc. had $437,703 in debt and loans at the time of the reverse
merger that were converted into 2,779,990 common shares of FutureOne AZ common
stock. The financial statements present Networld.com as the predecessor business
and the financial statements include its operations beginning October 1, 1996.
The Company and its subsidiaries are primarily a communications business, in
four related, but distinct, industry segments: i) Internet services, including
personal and business dial up accounts, high speed frame relay connections,
virtual telephone services, web site design and custom software development (the
Company sold the Internet access business on November 19, 1999, as further
described in Note 18 Subsequent Events, and sold the virtual telephone service
on December 6, 1999); ii) communication equipment sales, including direct sales
of name brand communications equipment (the Company formerly sold computer
products and services on a retail basis, but discontinued its retail computer
sales and services on June 15, 1999 and now only sells communications products
at the wholesale level); iii) broadband communications engineering and
construction services; and iv) telecommunications and convergence technology,
which will include local and long distance phone service and the Company's
networked community concept known as "NeighborComm(TM)", which, if successful,
will provide residents of NeighborComm communities with an easy to use software
solution that creates a virtual community (Intranet) within the development and
community it serves bundled with integrated communications products that
include, voice, video and high-speed Internet, through a single source, directly
to homes and businesses.
F-6
<PAGE> 64
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Basis of Presentation
The accompanying financial statements have been prepared on a going concern
basis, which assumes continuity of operations and realization of assets and
liquidation of liabilities in the ordinary course of business. As shown in the
accompanying statement of operations, the Company incurred an aggregate net loss
of $6.5 million over the past two years and has negative working capital of $2.0
million at September 30, 1999. To meet its immediate cash needs, the Company has
obtained bridge loans of $750,000 in October 1999 and anticipates it will obtain
additional bridge loans of approximately $1.0 million and immediately will
realize approximately $1.5 million in cash from the sale of securities obtained
in the sale of its Internet access operations (see Note 18). The Company is also
seeking additional financial resources through planned additional equity
offerings.
The Company's ability to improve its financial position will be influenced by,
among other things, operating results and customer response to the Company's
enhanced business model. The Company's ability to continue operations as a going
concern is dependent upon its ability to generate sufficient cash flow and
earnings to meet its obligations on a timely basis and to obtain additional
financing as may be required in the future.
Management of the Company has plans to expand business operations during 2000
which will require more capital resources than are currently available to the
Company. The Company's business plans include pursuing additional debt and or
equity financing with financial institutions or strategic partner(s). The
Company currently has a stock purchase commitment from an entity for an
additional round of financing. Under terms of the agreement, the entity can
provide funding through a public offering. A representative of that entity is
also a member of the board of directors.
In the event the Company is unable to obtain additional financing, the Company
will scale back the scope of the planned roll out and reduce costs to permit
existing sources of capital to finance the operations of the Company until such
time additional sources become available.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, FutureOne AZ, Networld.com Inc. (see
Note 3), OPEC CORP., Abcon, Inc., Ubiquity Design LLC, Progressive Media LLC,
and AMCOM LLC. The accompanying consolidated financial statements also include
the accounts of CARNET COMPUTER SERVICES, INC. and LAN KASTER, INC until they
were dissolved in November 1998 and PRIORITY SYSTEMS, INC. until it was sold in
June 1999. All significant intercompany accounts and transactions have been
eliminated.
F-7
<PAGE> 65
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The accompanying consolidated statement of operations includes the revenues and
expenses of the acquired entities from their actual date of acquisition, all of
which occurred at various dates during the years ended September 30, 1999 and
1998.
Revenue and Cost Recognition
The Company generates revenue from Internet services, communication equipment
sales and construction contracts. Internet access revenues are recognized on a
monthly basis beginning in the period in which service is made available to a
customer. Customer payments collected in advance related to future service are
deferred and recognized as revenue in the period service is provided. Other
Internet and programming services are billed as the work is completed. The
Internet access services segment was sold subsequent to September 30, 1999 (see
Note 18).
Communication equipment sales revenue is recognized as products are delivered,
services are completed or monthly fees have been earned for service contracts.
Revenue from firm-fixed-price contracts is recognized using the percentage of
completion method. Under this method, revenues recognized on firm-fixed-price
contracts are measured by the percentage of costs incurred to date to total
estimated costs for each contract. Provision for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions in costs and
income and are recognized in the period in which the revisions are determined.
Costs and estimated earnings in excess of billings represent revenues
recognized, using the percentage of completion method under firm-fixed-price
contracts, in excess of billings on those contracts. Company billing amounts to
a customer on firm-fixed-price contracts are usually specified in the contract
terms and conditions and usually consider passage of time, achievement of
certain project milestones or completion of the project.
Cash and Cash Equivalents
The Company considers all money market funds with a maturity of three months or
less at the date acquired to be cash equivalents.
F-8
<PAGE> 66
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Significant Customers
For the years ended September 30, 1999 and 1998, the Company had revenues from
one large customer as a percent of total revenues as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1999 1998
---- ----
<S> <C> <C>
Customer A - % 15%
Customer B 10 --
</TABLE>
Trading Securities
Trading securities are valued at fair market value in accordance with generally
accepted accounting principles. Realized and unrealized gains and losses are
charged to earnings when identified.
Accounts Receivable
The Company sold its Internet dial up accounts and other internet services to
personal and business accounts principally in Arizona. Communication equipment
sales are made to business accounts nationwide. Construction services provided
by the Company are performed primarily for utility companies and land developers
in the Western United States.
Accounts receivable are typically unsecured. The Company performs on going
credit evaluations of its retail customers and maintains reserves for potential
credit losses.
Inventories
Inventories consist primarily of communication equipment held for sale.
Inventories are carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
Property and Equipment
Property and equipment is stated at cost. Depreciation of property and equipment
is calculated using the straight-line method over the estimated useful lives of
the assets, generally three years for software and web site costs and five to
seven years for computer related equipment, construction equipment and vehicles.
F-9
<PAGE> 67
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Intangible Assets
Intangible assets consist of trademarks, goodwill, debt issue costs and licenses
and are capitalized and amortized on a straight-line basis over their expected
useful lives, which range from three to ten years.
Income Taxes
The Company accounts for income taxes under the liability method pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method, deferred tax assets and liabilities are
determined from the expected future tax consequences of temporary differences
between the reported amounts of assets and liabilities and their tax bases.
Loss Per Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards Board ("SFAS") No. 128, "Earnings per Share."
Earnings per common share amounts are based on the weighted average common
shares outstanding during the respective periods and earnings per common share,
assuming dilution, amounts are based on the weighted average common and dilutive
common equivalent shares outstanding during the respective periods. As of
September 30, 1999, 1,613,551 nonvested options and 2,110,812 warrants of which
1,050,000 are nonvested are outstanding which do not have a dilutive effect on
loss per share given that they would be antidilutive to such loss and have been
excluded from the loss per share computation. The Company also has certain debt
securities which are convertible into 462,753 shares of common stock.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
approximately $16,000 and $20,000 for the years ended September 30, 1999 and
1998, respectively.
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation," and
accordingly, recognizes no compensation expense for employee stock option grants
made at fair value. Stock option grants to nonemployees are charged to expense
based upon the fair value of the options granted.
F-10
<PAGE> 68
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Comprehensive Loss
As of October 1, 1997, the Company adopted the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130). Statement 130 establishes new rules for
reporting and display of comprehensive income and its components. Comprehensive
loss is the same as net loss for all periods presented.
Segment Information
Effective October 1, 1997, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS No. 131 superseded FASB No. 14, "Financial Reporting of Segments of a
Business Enterprise." SFAS No. 131 establishes standards for the way that
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the immediate or short-term maturity of these
financial instruments. The fair value of long-term debt is determined using
current applicable interest rates as of the balance sheet date and approximates
the carrying value of such debt because the underlying instruments are at
variable rates which are repriced frequently.
Reclassification
Certain reclassifications have been made to the 1998 financial statements to
conform with the 1999 presentation.
F-11
<PAGE> 69
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS
Fiscal Year 1998 Acquisitions
On April 1, 1998, the Company acquired 100 percent of the issued and outstanding
common stock of LAN KASTER, INC. (Internet service provider serving Prescott,
Arizona and surrounding areas) for consideration of 215,385 shares of the
Company's common stock with a fair value at date of issuance of $1.25 per share
or $269,231 in the aggregate. The acquisition was accounted for as a purchase
transaction.
On May 11, 1998, the Company acquired 100 percent of the issued and outstanding
common stock of CARNET COMPUTER SERVICES, INC. (computer software programmers)
for consideration of 100,000 shares of the Company's common stock with a fair
value at date of issuance of $1.25 per share or $125,000 in the aggregate. The
acquisition was accounted for as a purchase transaction.
On July 15, 1998, the Company acquired certain assets and assumed certain
liabilities of Interworldnet Partnership (Internet service provider serving Lake
Havasu City, Arizona and surrounding areas) for consideration or $3,841 in cash
and 40,000 shares of the Company's common stock with a fair value at date of
issuance of $1.25 per share and total value of $50,000 which aggregates to
$53,841 in total consideration. The acquisition was accounted for as a purchase
transaction.
On July 29, 1998, the Company acquired 100 percent of the issued and outstanding
common stock of OPEC CORP. (engaged in the business of underground cable
construction in the Western United States) for consideration of 2,334,000 shares
of the Company's common stock with a fair value at date of issuance of $2.66 per
share or $6,200,000 in the aggregate. The acquisition was accounted for as a
purchase transaction.
On September 21, 1998, the Company acquired certain assets of PrimeServ
Corporation (in the business of providing a virtual office telephone service to
customers) for consideration of $50,000 and 33,333 shares of the Company's
common stock with a fair value at date of issuance of $2.93 a share and total
value of $97,665 which aggregates to $147,665 in total consideration. The
acquisition was accounted for as a purchase transaction. In addition, the
Company issued 2,666 shares of common stock as commission on the transaction
with an aggregate value of $7,813.
On September 29, 1998, the Company acquired 100 percent of the issued and
outstanding shares of Sonoran Industries, Inc. retained the assets of its
Kachina International operation (a factory direct distributor for communications
and computer components located in Phoenix, Arizona), and then resold the
Sonoran stock to the original owner for $10. Consideration given
F-12
<PAGE> 70
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
in the transaction was $66,759 in cash and 92,308 shares of the Company's common
stock with a fair value at date of issuance of $2.93 per share and total value
of $270,462 which aggregates to $337,221 in total consideration.
The acquisition was accounted for as a purchase transaction.
On September 29, 1998, the Company acquired 100 percent of the issued and
outstanding common stock of PRIORITY SYSTEMS, INC. (a provider of computer
network systems nationwide) for consideration of 185,306 shares of the Company's
common stock with a fair value of $2.93 per share and total value of $542,947.
The acquisition was accounted for as a purchase transaction. Effective June 15,
1999 the Company sold PRIORITY SYSTEMS, INC. back to the former owner of the
company in exchange for 108,850 shares of the Company's common stock with a fair
value of $2.302 per share and a note for $50,000.
Fiscal Year 1999 Acquisitions
On November 12, 1998, the Company acquired the Internet services business of
GlobalKey, Inc. in a purchase business combination for consideration of 50,000
shares of the Company's common stock with a fair value at date of issuance of
$2.93 per share for a total consideration of $146,500. In January 1999, the
Internet access supplier terminated service to the Company because of prior
payment disputes with GlobalKey. The small number of customers acquired from
GlobalKey have been lost and the value of the customers and associated goodwill
have been written off.
On March 31, 1999, the Company acquired Ubiquity Design LLC - dba Rocket Science
Creative (full service graphic design and advertising agency) in a purchase
business combination for consideration of 100,000 shares of the Company's common
stock with a fair value at date of issuance of $2.302 per share or $230,200 in
the aggregate.
The acquisition was accounted for as a purchase transaction.
On April 19, 1999, the Company acquired Abcon, Inc. (horizontal drilling and
boring company) in a purchase business combination for consideration of 94,118
shares of the Company's common stock with a fair value at date of issuance of
$2.302 per share or $216,660 in the aggregate. The acquisition was accounted for
as a purchase transaction.
F-13
<PAGE> 71
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
On July 16, 1999, the Company acquired Progressive Media LLC (which provides
web-based animation interactive CD-ROM design, digital video production and
postproduction, music and sound production, and commercial photography) in a
purchase business combination for consideration of 67,605 shares of the
Company's common stock with a fair value date of issuance of $2.302 per share or
$155,628 in the aggregate. The acquisition was accounted for as a purchase
transaction.
On August 11, 1999, the Company acquired AMCOM LLC (Competitive Local Exchange
Carrier or "CLEC") in a purchase business combination for consideration of
121,212 shares of the Company's common stock with a fair value at date of
issuance of $2.302 per share or $279,030 in the aggregate. The acquisition was
accounted for as a purchase transaction.
For all acquisitions discussed above, the acquired tangible and identified
intangible assets have been recorded at their estimated fair values at the date
of acquisition with any excess purchase price reflected as goodwill. Fair values
are determined based upon the consideration paid which consists typically of
common stock and/or cash. The fair value of the Company's common stock is
typically based upon recent third party transaction sales for cash. Purchase
accounting values for all acquisitions are assigned on a preliminary basis and
are subject to adjustment when final information as to the fair values of the
net assets acquired is available. The operations of the acquired businesses are
included in the statement of operations from the date of acquisition. Certain of
the acquired businesses have been merged into the Company and as such are no
longer subsidiaries.
F-14
<PAGE> 72
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. ACQUISITIONS (CONTINUED)
A summary of the purchase price allocations for these acquisitions is as
follows:
<TABLE>
<CAPTION>
TANGIBLE LESS: LESS: NET CASH
ASSETS CUSTOMER CLEC LIABILITIES COMMON PAID
ACQUIRED GOODWILL LISTS CERTIFICATION ASSUMED STOCK ISSUED (RECEIVED)
------------- -------------- ------------- ---------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fiscal year 1998
acquisitions
LAN KASTER $ 38,007 $ 180,005 $100,000 $ - $ (44,857) $ (269,231) $ 3,924
CARNET 25,775 99,474 - - (527) (125,000) (278)
Interworldnet 67,176 - 36,783 - (50,118) (50,000) 3,841
OPEC 2,108,872 6,138,125 - - (2,293,934) (6,200,000) (246,937)
PrimeServ 133,000 - 22,478 - - (105,478) 50,000
Kachina 16,759 320,462 - - - (270,462) 66,759
PRIORITY 169,899 715,888 - - (342,840) (542,947) -
------------- -------------- ------------- ---------------- --------------- --------------- -------------
2,559,488 7,453,954 159,261 - (2,732,276) (7,563,118) (122,691)
Fiscal year 1999
acquisitions
GlobalKey 20,000 126,500 - - - (146,500) -
Ubiquity 3,000 227,698 - - - (230,200) 498
Abcon 723,931 101,140 - - (634,311) (216,660) (25,900)
Progressive Media 42,247 146,561 - - (33,629) (155,628) (449)
AMCOM - - - 279,030 - (279,030) -
------------- -------------- ------------- ---------------- --------------- --------------- -------------
789,178 601,899 - 279,030 (667,940) (1,028,018) (25,851)
</TABLE>
The following table sets forth the unaudited pro forma results of operations for
each year in which acquisitions occurred and for the immediately preceding year
as if the acquisitions were consummated at the beginning of the immediately
preceding year:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenues $ 12,270,531 $ 7,492,766
Loss before discontinued operations (3,626,461) (563,805)
Net loss (4,759,740) (1,274,000)
Loss per common share before discontinued operations,
basic and diluted (0.30) (0.06)
Net loss per common share, basic and diluted (0.40) (0.13)
</TABLE>
F-15
<PAGE> 73
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. DISCONTINUED OPERATIONS
Networld.com Inc. - Internet access business
On November 19, 1999, the Company completed a plan to sell and sold the Internet
access business of its wholly owned subsidiary Networld.com for equity
securities of the publicly traded buyer valued at approximately $2.75 million.
Accordingly, the Internet access business was accounted for as a discontinued
operation in the accompanying consolidated financial statements. A gain on the
sale of approximately $1.0 million is expected to be realized by the Company
subsequent to September 30, 1999 and accordingly no provision for loss on sale
has been made. The gain will be recognized in fiscal year 2000, the period the
sale was completed.
On November 12, 1998, the Company acquired the Internet services business of
GlobalKey, Inc. in a purchase business combination for consideration of 50,000
shares of the Company's common stock with a fair value at date of issuance of
$2.93 per share for a total consideration of $146,500. The business was then
transferred to the Company's Networld.com Inc. subsidiary. In January 1999, the
Internet access supplier terminated service to the Company because of prior
payment disputes with GlobalKey. The customers acquired from GlobalKey have been
lost and the unamortized value of the customer list and goodwill acquired from
GlobalKey has been charged as an expense totaling $120,175 which is included in
operations as an unusual item prior to the discontinuance of the internet access
business.
Networld.com Inc. - PrimeServ Virtual Telephone Service
On August 10, 1999, the Company adopted a plan to sell and signed a letter of
intent to sell the assets and customer list of its PrimeServ operating division.
On December 6, 1999, the Company closed the sale for consideration of $17,800
cash and a $30,000 note receivable which resulted in a net loss of $66,615 which
is included as a loss on disposal under discontinued operations.
The following represents the combined results of operations of the Company's
discontinued operations:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30
1999 1998
------------------ -------------------
<S> <C> <C>
Revenues $ 1,599,891 $ 1,011,542
Cost of sales (1,588,779) (724,319)
General and administrative expense (701,834) (825,030)
Depreciation and amortization expense (299,030) (167,542)
Interest expense (23,352) (4,846)
Unusual item (120,175) -
Net loss (1,133,279) (710,195)
</TABLE>
F-16
<PAGE> 74
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. DISCONTINUED OPERATIONS (CONTINUED)
Costs and expenses, including interest, have been allocated to discontinued
operations for all applicable periods based on management's estimates of those
costs directly related to the discontinued operations.
4. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
----------- -----------
<S> <C> <C>
Finished goods $ 3,005,096 $ 61,715
Valuation allowance (304,000) (11,854)
----------- -----------
Total inventory $ 2,701,096 $ 49,861
=========== ===========
</TABLE>
The Company's inventory held for sale was acquired through a preferred vendor
relationship with Lucent Technologies Internet Working Systems (formally Ascend
Communications, Inc.). Under the terms of the arrangement the Company received
favorable pricing terms and has the right to return inventory in exchange for
future purchases. Certain of the inventory may also be usable in its
construction activities. Valuation allowances have been established for the
portion of such inventory that management expects will be sold at lower prices
as part of its plans to accelerate the liquidation of certain of its inventory
items to better manage its net assets.
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings on uncompleted contracts consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts $ 2,337,185 $ 774,336
Estimated earnings 1,107,910 325,869
----------- -----------
3,445,095 1,100,205
Less billings to date (2,794,408) (760,333)
----------- -----------
$ 650,687 $ 339,872
=========== ===========
</TABLE>
F-17
<PAGE> 75
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (CONTINUED)
Included in the accompanying balance sheet under the following captions:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
--------- ---------
<S> <C> <C>
Costs and estimated earnings in excess of billings on uncompleted
contracts $ 717,548 $ 411,877
Billings in excess of costs and estimated earnings on uncompleted
contracts (66,861) (72,005)
--------- ---------
$ 650,687 $ 339,872
========= =========
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
----------- -----------
<S> <C> <C>
Furniture and fixtures $ 148,328 $ 117,655
Computers and other equipment 157,008 126,845
Construction equipment 2,708,636 825,541
Software 168,183 47,368
Vehicles 1,046,432 415,394
Leasehold improvements 59,092 27,057
----------- -----------
4,287,679 1,559,860
Less accumulated depreciation and amortization (614,963) (104,696)
----------- -----------
$ 3,672,716 $ 1,455,164
=========== ===========
</TABLE>
7. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
----------- -----------
<S> <C> <C>
Goodwill $ 6,933,986 $ 7,174,475
Trademarks 2,021 998
Debt issuance costs 158,333 82,500
CLEC certification 279,030 --
----------- -----------
7,373,370 7,257,973
Less amortization (860,321) (122,737)
----------- -----------
$ 6,513,049 $ 7,135,236
=========== ===========
</TABLE>
F-18
<PAGE> 76
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE AND LONG TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
-------- --------
<S> <C> <C>
Various notes payable to an auto manufacturer's credit corporation bearing
interest at rates ranging from 8.25 percent to 9.99 percent and having
maturities ranging from 48 to 60 months. Each note is collateralized by a
specific vehicle $410,667 $161,465
Various notes payable to an equipment manufacturer's credit corporation
bearing interest at rates ranging from 8.89 percent to 10.54 percent and
having maturities ranging from 24 to 48 months. Each note is
collateralized by specific equipment 679,807 207,681
Various notes payable to a finance company bearing interest at rates ranging
from 7.88 percent to 9.0 percent and having maturities ranging from 32 to 57
months. Each loan is collateralized by one or more vehicles and/or pieces of
equipment 212,918 643,971
Various notes payable to an equipment manufacturer's credit corporation bearing
interest at rates ranging 10.75 percent to 12.50 percent and having
maturities ranging from 36 to 42 months. Each note is collateralized by a
specific piece of equipment 226,476 --
8.0 percent, convertible note payable, unsecured, converted in 1999 -- 25,000
8.73 percent, note payable to a bank, collateralized, by a specific list of
equipment, principal and interest payable monthly until August 2002, when all
principal and interest is due and payable 848,185 --
9.0 percent, notes payable to former stockholders of Lan Kaster, Inc.,
unsecured, interest payable April 2001 when all principal and interest is due
and payable. Principal and accrued interest is convertible to common shares
at option of holder at rate of $1.625 per share 29,752 29,752
Various notes payable, assumed by Priority sale in June 1999 -- 70,337
9.3 percent, note payable to a bank, collateralized by a specific piece of
equipment, principal and interest payable monthly until May 2001 when all
remaining principal and interest is due and payable 11,846 18,086
</TABLE>
F-19
<PAGE> 77
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE AND LONG TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
----------- -----------
<S> <C> <C>
15 percent, note payable, unsecured, with interest only payable monthly until
September 2001, when principal and unpaid interest are due. Principal and
accrued interest is convertible to common shares at option of holder at rate
of $2.25 per share $ 1,000,000 $ --
17.5 percent, note payable, unsecured, with interest only payable monthly
4,656 --
Note payable to an equipment manufacturer's credit corporation bearing interest
at the rate of 23.18 percent and maturing in 24 months. The note is secured
by a specific piece of equipment 52,000 --
Note payable to an equipment manufacturer's credit corporation bearing interest
at the rate of 1.50 percent per month on the unpaid balance and having a
maturity of 16 months. The note is secured by a specific list of equipment 138,157 --
Note payable, unsecured, noninterest-bearing note due on demand 150,000 --
----------- -----------
3,764,464 1,156,292
Less current portion (1,160,616) (454,905)
----------- -----------
$ 2,603,848 $ 701,387
=========== ===========
</TABLE>
Annual maturities of notes payable and long-term debt for the five years
succeeding September 30, 1999 are $1,160,616 in 2000, $1,964,863 in 2001,
$507,594 in 2002, $97,470 in 2003 and $33,921 in 2004. Interest payments were
$270,507 and $53,550 for the years ended September 30, 1999 and 1998,
respectively.
The Company has a $480,000 revolving line of credit agreement with a financial
institution dated August 3, 1998, and expiring on February 15, 2000. Interest is
payable monthly and accrues at 1.25 percent over prime per annum, 9.5 percent at
September 30, 1999. The line is collateralized by all business assets of the
Company's OPEC CORP subsidiary including, but not limited to, cash, accounts
receivable, property and equipment, and general intangibles. At September 30,
1999, assets collateralized under the line of credit included cash of $202,916,
accounts receivable of $2,500,145, and property and equipment of $3,313,661. The
terms of the note require that the Company pay regular monthly payments of
accrued interest, with payment of all outstanding principal plus all unpaid
accrued interest due at maturity. The balance on the line-of-credit as of
September 30, 1999, totaled $480,000.
F-20
<PAGE> 78
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. NOTES PAYABLE AND LONG TERM DEBT (CONTINUED)
The Company's communication equipment sales division had a $95,000 revolving
line of credit with a bank, which, as of September 30, 1999, was closed and paid
in full.
9. LEASES
The Company has equipment under capital leases. The Company also leases office
facilities under noncancelable operating leases that expire in various years
through December 2001.
Future minimum payments under capital leases and noncancelable operating leases
with initial terms of one year or more consisted of the following at September
30, 1999:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------------------------------- -------------------------------------
CONTINUING DISCONTINUED CONTINUING DISCONTINUED
OPERATIONS OPERATIONS OPERATIONS OPERATIONS
------------------ ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
2000 $ 62,305 $ 228,618 $ 392,704 $ 265,318
2001 57,480 -- 145,129 --
2002 27,322 -- 55,233 --
2003 -- -- -- --
2004 -- -- -- --
Thereafter -- -- -- --
--------- --------- --------- ---------
Total minimum lease payments 147,107 228,618 $ 593,066 $ 265,318
========= =========
Less amounts representing interest
(24,603) (14,153)
--------- ---------
Present value of net minimum lease
payments 122,504 214,465
Less current portion (54,718) (214,465)
--------- ---------
$ 67,786 $ --
========= =========
</TABLE>
In connection with the sale of Network.com, Inc.'s Internet access business,
certain leased assets will be sold and the Company is required to pay within 60
days of the sale the remaining obligations under the capital and operating
leases. The related payment obligations are reflected in the lease payment
schedule above. Total rental expense for all operating leases was approximately
$523,000 and $84,000 for the years ended September 30, 1999 and 1998,
respectively.
In June 1997, the Company entered into the first of three leasing arrangement
with El Camino Resources, Ltd. Under the terms of the first lease, El Camino
provided $150,000 of available credit. This lease for the equipment requires
payments of $5,690 per month, for a term of 30 months, and includes a buyout
provision equal to the fair market value of the leased equipment at
F-21
<PAGE> 79
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. LEASES (CONTINUED)
the end of the lease, but not to exceed 20 percent of original cost. In
conjunction with the lease arrangement, the Company issued 250,000 shares of the
Company's common stock to El Camino. This lease agreement will be closed and
paid in connection with the sale of the Internet access business (see Note 18).
During the year ended September 30, 1999, the Company has entered into a second
lease with El Camino for $150,000. The lease requires payments of $5,406 per
month for a term of 30 months, and includes a buyout provision equal to the fair
market value of the leased equipment at the end of the lease, but not to exceed
20 percent of the original cost. This lease agreement will be closed and paid in
connection with the sale of the Internet access business (see Note 18). During
the year ended September 30, 1999, the Company has entered into a third lease
with El Camino for $250,000 of which $163,000 was funded at September 30, 1999.
The lease will require payments of $9,483 per month once the lease is fully
funded, for a term of 30 months, and includes a buyout provision equal to the
fair market value of the leased equipment at the end of the lease, but not to
exceed 20 percent of original cost.
In January and February 1999, the Company entered into two capital leases with
Ascend Corporation for Internet communications equipment. The original lease
liabilities aggregate $280,735. The leases require monthly payments of $4,671
and $5,509 for 30 months and have a buyout option equal to the fair market value
of the equipment. These leases will be repaid in connection with the sale of the
Internet access business (see Note 18).
Property and equipment includes the following amounts for leases that have been
capitalized:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
--------- ---------
<S> <C> <C>
Equipment $ 437,599 $ 80,710
Less accumulated amortization (84,133) (6,176)
--------- ---------
$ 353,466 $ 74,534
========= =========
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
F-22
<PAGE> 80
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. INCOME TAXES
Deferred tax assets reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax asset and liabilities are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1999 1998
----------- -----------
DEFERRED TAX ASSETS:
<S> <C> <C>
Accrued expenses $ 32,900 $ 25,200
Allowance for doubtful accounts 56,000 25,900
Inventory allowance 121,600 4,800
Costs in excess of billings 16,700 23,200
Startup costs 4,500 7,300
Unrealized loss on investment -- 27,600
Net operating loss carryforwards 1,930,000 447,000
Deductible goodwill amortization 94,300 --
Other 38,400 29,600
----------- -----------
Deferred tax assets 2,294,400 590,600
Valuation allowance (2,131,600) (544,000)
----------- -----------
Net deferred tax assets 162,800 46,600
Deferred tax liabilities:
Fixed asset basis differences (130,100) (15,100)
Customer lists (12,000) (31,300)
Other (20,700) (200)
----------- -----------
Net deferred tax asset/(liability) $ -- $ --
=========== ===========
</TABLE>
At September 30, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $4.8 million that expire
in the years 2011 through 2019 for federal taxes purposes and will begin to
expire in 2001 for state tax purposes. As a result of common stock issued in
connection with private placements and prior year acquisitions, the utilization
of the net operating loss carryforwards is subject to annual limitations in
accordance with Internal Revenue Code Section 382. The ultimate utilization of
the net operating loss carryforwards is also subject to future profitability of
the Company.
The valuation allowance increased $1,587,600 for the year ended September 30,
1999. The increase in 1999 is principally due to increases in deferred tax
assets related to net operating loss carryforwards.
F-23
<PAGE> 81
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY
In October 1997, FutureOne AZ sold 40,000 shares of FutureOne AZ common stock to
close a private placement offering to accredited investors at $1.00 per share
for net proceeds of $40,000.
In November 1997, the Company issued 17,500 shares of the Company's common stock
in exchange for goods and services. The shares were recorded at their fair value
of $1.00 per share for an aggregate value of $17,500. Amounts were recorded in
equity with a related charge to expense or asset recognition based upon the
consideration received.
In November 1997 through August 1998, FutureOne AZ sold 700,000 shares in a
second private placement offering at $1.25 per share to investors with net
proceeds of $770,370. In May and September 1998, FutureOne Inc. issued 143,750
and 37,500 shares, respectively, of the Company's common stock to advisors who
assisted the Company with its private placement as part of the related issuance
costs. In connection with the private placement offering, 350,000 warrants to
purchase one share of FutureOne AZ common stock for each warrant at $3.00 per
share were issued. The warrants expired May 27, 1999 and 10,000 warrants were
exercised as of September 30, 1999.
In December 1997, the Company repurchased 2,500 common shares from former
employees for $30.
On April 1, 1998, the Company issued 215,385 common shares in connection with
the acquisition of LAN KASTER, INC. The shares were determined to have a fair
value of $1.25 per share at date of issuance and an aggregate value of $269,231.
On May 11, 1998, the Company issued 100,000 common shares in connection with the
acquisition of CARNET COMPUTER SERVICES, INC. The shares were determined to have
a fair value of $1.25 per share at date of issuance and an aggregate value of
$125,000.
On May 18, 1998, the Company repurchased 1,000 common shares from a former
employee for $10.
On July 15, 1998, the Company issued 40,000 shares of common stock in connection
with the acquisition of certain net assets of Interworldnet. The shares were
determined to have a fair value of $1.25 per share at the date of issuance and
an aggregate value of $50,000.
In July 1998, the Company entered into a Stock Purchase Agreement with
Blackwater Capital Partners LP ("Blackwater") under which Blackwater must
arrange for the purchase of 3,211,000 shares of the Company's common stock for
an average price of $2.93 per share and make an initial purchase of 300,000
shares at a price of $1.25 per share. As of September 30, 1998,
F-24
<PAGE> 82
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
Blackwater and its capital sources had purchased 300,000 shares of common stock
at $1.25 per shares for net proceeds of $337,500 and 177,605 shares of common
stock at a price of $2.93 for net proceeds of $520,683. In connection with the
Stock Purchase Agreement, Blackwater has been issued detachable warrants to
purchase 1,700,000 shares of the Company's common stock for $1.00 per share
expiring July 2005. The warrants vest upon Blackwater completing the purchase of
shares under the Stock Purchase Agreement. As of September 30, 1998, related to
Blackwater's purchase of the initial 300,000 shares in accordance with purchase
agreement, 300,000 warrants have vested and are unexercised as of September 30,
1999.
On July 29, 1998, the Company issued 2,334,000 shares of common stock in
connection with the acquisition of OPEC CORP. The shares were determined to have
a fair value of $2.66 per share at date of issuance and an aggregate value of
$6,200,000.
On September 21, 1998, the Company issued 35,999 shares of common stock in
connection with the acquisition of PrimeServ assets. The shares were determined
to have a fair value of $2.93 per share at the date of issuance and an aggregate
value of $105,478.
On September 29, 1998, the Company issued 92,308 shares of common stock in
connection with the acquisition of Kachina International. The shares were
determined to have a fair value of $2.93 per share at the date of issuance and
an aggregate value of $270,462.
On September 29, 1998, the Company issued 185,306 shares of common stock in
connection with the acquisition of PRIORITY SYSTEMS INC. The shares were
determined to have a fair value of $2.93 per share at the date of issuance and
an aggregate value of $542,947.
During the year ended September 30, 1998, the Company issued 210,001 shares of
the Company's common stock to employees as compensation. Share values at dates
of issuance ranged from $1.25 to $2.93 and had a total value of $284,900.
Compensation expense is being recognized based on the applicable vesting periods
of the stock issued.
During the year ended September 30, 1998, the Company issued 180,000 shares of
the Company's common stock to consultants for services. Share values at dates of
issuance were $1.25 and had a total value of $225,000. Amounts were recorded as
consulting expense as service was performed.
For the period ended September 30, 1998, the Company awarded total warrants to
purchase 410,812 shares of the Company's common stock for $2.93 per share as a
bonus to two officers of the Company. The warrants expire October 1, 2005 and
none of the warrants have been exercised as of September 30, 1999. Given that
the warrants issued to these employees were at not less than the fair value of
the common stock, there was no compensation expense recorded for the grants.
F-25
<PAGE> 83
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
On November 16, 1998, the Company issued a total of 50,000 shares of Common
Stock in connection with the Company's acquisition of certain assets of Global
Key, Inc. The shares were determined to have a fair value of $2.93 per share at
the date of issuance and an aggregate value of $146,500.
On January 15, 1999, the Company sold 960,000 shares of the Company's common
stock in a private placement transaction to an accredited investor at $2.302 per
share which resulted in gross proceeds of $2,210,000. The Company incurred
$240,750 of offering expenses relating to commissions and expenses. The
transaction was consummated as part of the Blackwater Stock Purchase Agreement
and as part of the transaction Blackwater Capital assigned 400,000 of their
warrants earned under the Agreement to the Investor and 100,000 warrants to the
Broker. The warrants are at $1 per share and expire January 2005. As of
September 30, 1999 none of the warrants have been exercised.
On February 28, 1999 the holder of a convertible promissory note for $25,000
elected to convert the note to 41,750 shares of common stock.
On March 31, 1999, the Company issued a total of 100,000 shares of common stock
in connection with the Company's acquisition of Ubiquity Design LLC (dba Rocket
Science Creative). The shares were determined to have a fair value of $2.302 per
share at the date of issuance and an aggregate value of $230,200.
On April 19, 1999, the Company issued a total of 94,118 shares of common stock
in connection with the Company's acquisition of Abcon, Inc. The shares were
determined to have a fair value of $2.302 per share at the date of issuance and
an aggregate value of $216,660.
In May 1999, two individuals exercised warrants that were granted under the
Company's Private Placement Memorandum of November 26, 1997 and purchased a
total of 10,000 shares at $3 per share.
Effective June 15, 1999 the Company sold PRIORITY SYSTEMS, INC., which was
acquired by the Company on September 29, 1998, back to the original owner. The
consideration paid was to return 108,850 shares of the Company's common stock
valued at $ 2.302 and a note for $50,000. The Company considers the returned
stock to be treasury stock and has recorded the loss on the transaction as an
unusual item.
On July 16, 1999, the Company issued a total of 67,605 shares of common stock in
connection with the Company's acquisition of Progressive Media LLC. The shares
were determined to have a fair value of $2.302 per share at the date of issuance
and an aggregate value of $155,628.
F-26
<PAGE> 84
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. STOCKHOLDERS' EQUITY (CONTINUED)
On August 11, 1999, the Company issued a total of 121,212 shares of common stock
in connection with the Company's acquisition of AMCOM LLC. The shares were
determined to have a fair value of $2.302 per share at the date of issuance and
an aggregate value of $279,030.
On August 23, 1999, the Company sold 200,000 shares of the Company's common
stock in a private placement transaction to an accredited investor at $1.25 per
share which resulted in net proceeds of $250,000. The transaction was
consummated as part of the Blackwater Stock Purchase Agreement.
During the year ended September 30, 1999, the Company issued 244,999 shares of
common stock to employees pursuant to employment contracts or as employment
bonuses. Share values at dates of issuance ranged from $1.25 to $2.93 and had a
total value of $616,307. Compensation expense is being recognized based on the
vesting periods of the stock issued. During the period, 56,500 non-vested
shares, previously issued to employees, were canceled when they terminated.
Share value at the date of issuance ranged from $1.25 to $2.302 and the canceled
shares had an unamortized value of $74,833.
During the year ended September 30, 1999, the Company issued 2,500 shares of the
Company's common stock to an employment agency for services. Share value at
dates of issuance was $2.302, a total value of $5,756. Amounts were recorded as
consulting expense as service was performed.
12. STOCK OPTION PLAN
On April 30, 1999, the Board of Directors of the Company adopted the FutureOne,
Inc. 1999 Key Employee Stock Option Plan ("the Plan") which authorizes options
which may be issued to employees to purchase up to 2,500,000 shares of the
Company's common stock. Options granted under the Plan may be incentive stock
options or nonstatutory stock options. Options vest over a three-year period
with one-third becoming vested annually one year from the date of the grant. All
options expire ten years after the date of grant. Under the terms of the Plan,
Incentive Stock Options granted to executives owning more than 10 percent of the
Company's stock shall not be exercisable after the expiration of five years from
the date of grant and must be issued at 110 percent of the price granted to
other employees.
Under the 1999 Stock Option Plan, the Company may grant options that are
intended to qualify as Incentive Stock Options within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended or options not intended to
qualify as Incentive Stock Options. The Incentive Stock Options are not
transferable except by will or the laws of descent and distribution.
Non-Statutory Stock Options may be transferred pursuant to terms and conditions
established by the Board.
F-27
<PAGE> 85
12. STOCK OPTION PLAN (CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options. As discussed below, the alternative
fair value accounting provided for under FASB Statement No. 123, Accounting for
Stock-Based Compensation Statement 123, requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
for options issued with an exercise price which equal the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
Statement No. 123, which also requires that the information be determined as if
the Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for those options was estimated at the date of grant using a minimum value
pricing model with the following weighted-average assumptions for the period
ending September 30, 1999:
Expected life of the award 2.5 - 5 years
Dividend yield 0 percent
Risk-free interest rate 6 percent
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The pro forma effect
of SFAS No. 123 was not material for the year ended September 30, 1999 in that
it was less than $0.01 per share.
Option activity under the 1999 Plan during the year ended September 30, 1999 is
as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------
SHARES
AVAILABLE PRICE
UNDER OPTION SHARES RANGE
------ ------ -----
<S> <C> <C> <C>
Available at April 30, 1999 2,500,000 -- $ --
Granted (1,805,051) 1,805,051 4.50 - 4.95
Forfeited 191,500 (191,500) 4.50
----------- ----------- ------------
Balance at September 30, 1999 886,449 1,613,551 $4.50 - 4.95
=========== ========== ============
Exercisable at September 30, 1999 -- $ --
=========== ============
</TABLE>
The weighted-average fair value of options granted during the year ended
September 30, 1999 was $4.69.
F-28
<PAGE> 86
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options under the 1999
Plan outstanding at September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------
OPTIONS EXERCISABLE NUMBER
NUMBER OUTSTANDING AT REMAINING CONTRACTUAL LIFE OUTSTANDING AT SEPTEMBER
EXERCISE PRICE SEPTEMBER 30, 1999 (YEARS) 30, 1999
--------------------- --------------------- -------------------------- ------------------------
<S> <C> <C> <C>
$4.50 847,551 9.98 -
$4.95 766,000 4.75 -
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
In June of 1999, the Company entered into an agreement with Lucent Technologies
Internet Working Systems (formerly Ascend Communications, Inc.) to become a
stocking distributor. Under the agreement the Company was required to place an
initial product order of approximately $3,000,000. As of September 30, 1999, the
product was received in full and is included in the accompanying financial
statements. Under terms of the agreement the Company is to pay for the inventory
as the inventory is sold.
The Company is subject to legal proceedings which arise out of the ordinary
course of business. Based upon advice from outside legal counsel, management is
of the opinion that these matters will have no material effect on the Company's
consolidated financial statements taken as a whole.
14. RELATED PARTY TRANSACTIONS
As of September 30, 1998 and 1999, the stockholders of the Company have made
loans to the Company as follows:
<TABLE>
<CAPTION>
September 30
1999 1998
----------------------------
<S> <C> <C>
Notes payable that bears no interest $ 7,450 $ 7,450
Two notes payable that bear interest at the rate of 8 percent. With
interest payable annually and principal payable based on payments received by
the Company on a loan to OPEC CORP., due March 12, 2001
164,000 --
-------- --------
$171,450 $ 7,450
======== ========
</TABLE>
F-29
<PAGE> 87
14. RELATED PARTY TRANSACTIONS (CONTINUED)
As of September 30, 1999 and 1998, interest in the amount of $7,265 and $-0-,
respectively, was accrued and unpaid. Interest expense for the years ended
September 30, 1999 and 1998 was $7,265 and $6,021, respectively.
The Company sells computer equipment, services, and Internet access and services
to various officers, employees and stockholders. All such sales are considered
to be in the normal course of business and at prices similar to prices that are
charged to nonrelated parties.
The Company assumed a lease for office space and a construction yard from a
partnership controlled by an individual, who became a major stockholder in the
Company when his corporation was acquired by the Company. The lease requires
payments of $3,000 per month and expires December 2000, but automatically renews
for annual periods unless terminated by either party. As of September 30, 1999
and 1998, $36,000 and $6,000, respectively, of rental expense is included in the
consolidated statement of operations from this lease.
In August 1999, OPEC CORP. obtained a two-year loan for $1,000,000 for its
working capital needs. The loan was personally guaranteed by Donald D. Cannella,
a Director of the Company and President of OPEC CORP..
15. 401(k) PLAN
On January 1, 1999, the Company adopted the FutureOne, Inc. 401(k) Plan ("the
Plan"). All employees of the Company are eligible to participate in the Plan
when they have met certain eligibility requirements. Employees are eligible to
participate in the Plan after one year of service and after having attained the
age of 21. After the initial enrollment date, all subsequent enrollments for
eligible employees will occur on January 1 and July 1 of each year. Employees
may defer up to 15 percent of their annual salary up to a maximum of $10,000.
The Company's matching percentage is equal to 20 percent of the employees
contribution on employee contributions of up to 5 percent. For the year ended
September 30, 1999, the Company's matching contribution due is $8,677.
F-30
<PAGE> 88
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Segment Information
The Company operates its business under Internet services, communication
equipment sales services and broadband communications engineering and
construction services. Management evaluates the performance of the segments
based upon revenues, gross margin, pre-tax income and long-lived assets. For
the years ended September 30, 1999 and 1998, this information has been
provided by segment. The Companies sales are primarily in the Western United
States with no international sales.
<TABLE>
<CAPTION>
Years Ended September 30
1999 1998
-----------------------------
<S> <C> <C>
Revenues from external customers:
Internet services business $ 410,843 $ 63,399
Communication equipment sales 2,058,341 251,194
Broadband communications engineering
and construction services 8,663,101 1,695,111
------------------------------
$ 11,132,285 $ 2,009,704
==============================
Gross profit (loss):
Internet services business $ (23,133) $ (54,062)
Communication equipment sales (103,305) 32,686
Broadband communications engineering
and construction services 1,580,147 319,109
------------------------------
$ 1,453,709 $ 297,733
==============================
Depreciation and amortization expense:
Internet services business $ 28,784 $ --
Communication equipment sales 192,189 2,021
Broadband communications engineering
and construction services 590,208 84,627
Unallocated corporate 139,840 63,954
------------------------------
$ 951,021 $ 150,602
==============================
Unusual Items:
Communication equipment sales $ 316,720 $ --
------------------------------
$ 316,720 $ --
==============================
</TABLE>
F-31
<PAGE> 89
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Segment Information (continued)
<TABLE>
<CAPTION>
Years Ended September 30
1999 1998
--------------------------------
<S> <C> <C>
Net income (loss) from continuing
operations:
Internet services business $ (250,221) $ (54,062)
Communication equipment sales (1,213,948) (56,726)
Broadband communications engineering
and construction services (629,779) 7,065
Convergence technology and
telecommunications (86,744) --
Unallocated corporate (1,894,165) (387,734)
------------------------------
$ (4,074,857) $ (491,457)
==============================
Long-lived assets:
Discontinued operations $ 898,979 $ 961,207
Internet services business 381,085 --
Communication equipment sales 258,218 1,116,852
Broadband communications engineering
and construction services 8,899,734 7,244,657
Convergence technology and
telecommunications 279,030 --
Unallocated corporate 621,632 269,540
------------------------------
$ 11,338,678 $ 9,592,256
==============================
</TABLE>
17. Unusual Items
On September 29, 1998, the Company acquired 100 percent of the issued and
outstanding common stock of PRIORITY SYSTEMS, INC. (a provider of computer
network systems nationwide) for consideration of 185,306 shares of the
Company's common stock with a fair value of $2.93 per share and total value
of $542,947. The acquisition was accounted for as a purchase transaction. In
June of 1999, management of the Company determined that it was no longer
economically feasible to remain in the retail computer equipment sales and
service industry. Therefore, effective June 15, 1999 the Company sold
PRIORITY SYSTEMS, INC. back to the former owner of the company in exchange
for 108,850 shares of the Company's common stock with a fair value of
$250,573 and a note for $50,000. The difference between the value of the
consideration received and the net assets and liabilities of PRIORITY
SYSTEMS, INC. which were sold of $316,720 is included in the accompanying
consolidated statement of operations as an unusual item. Revenues from
PRIORITY SYSTEMS, INC. for the fiscal year ended September 30, 1999 were
$856,000.
F-32
<PAGE> 90
FutureOne, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Subsequent Events
On October 8, 1999, the Company obtained a bridge loan in the amount of
$250,000. The note is due and payable February 8, 2000 and bears interest at
the rate of 15 percent. Additional consideration given was 250,000 warrants
at $1 per share. The warrants expire October 7, 2006.
On October 22, 1999, the Company obtained a bridge loan in the amount of
$500,000. The note is due and payable April 22, 2000 and bears interest at
the rate of 12 percent. The note also contains a conversion privilege
whereby the holder can convert the note to shares of common stock of the
Company, at any time prior to maturity, for the $1 per share. Additional
consideration given was 500,000 warrants at $0.75 per share. The warrants
expire October 21, 2004. The note is secured by 795,000 shares of the
Company's common stock. Default provisions allow the lender the option to
accept the pledged company stock as payment or to convert the note to stock
of RMI.NET, Inc. at 125 percent of the outstanding note balance plus accrued
interest at date of default.
On November 19, 1999, the Company sold its Internet access business,
including all of its personal and business Internet access customers in
Phoenix, Flagstaff, Tucson, Lake Havasu City, Prescott, Florence, Wickenburg
and Payson, Arizona and all of the equipment related to providing Internet
access to the Company's current Internet subscribers to RMI.NET, Inc. for
approximately $2.75 million in RMI.NET common stock which is publicly
traded. Under terms of the agreement 50 percent of the stock is immediately
available for sale, 20 percent will be available for sale in six months, 20
percent will be available for sale in one year and 10 percent will be held in
escrow for 18 months to cover any adverse claim that may be made against the
acquired assets. The purchase price is subject to adjustment upward or
downward depending on actual revenues achieved by the buyer during the next
three months. Any adjustment to the purchase price will be adjusted from the
20 percent portion of the stock that is restricted from sale for six months.
Subsequent to the transaction the Company sold approximately 50 percent of
the RMI.NET common stock for approximately $1.5 million.
On November 23, 1999, the Company entered into a severance agreement with
Kendall Q. Northern, the Company's then chief executive officer, under which
the employment contract with Mr. Northern was terminated by mutual consent
and Mr. Northern resigned as an officer and director of the Company and all
of its affiliates and agreed not to compete with the Company for a period of
one year. In consideration for executing the severance agreement, the
Company agreed to immediately pay a one time sum of $50,000 and a one year
separation payment of $100,000 to be paid in equal monthly installments. In
addition, the Company is further obligated to pay for Mr. Northern's auto
rental, auto insurance and medical insurance for one year. The Company also
allowed Mr. Northern to retain certain Company property, already in his
possession, valued at approximately $17,500 and to exchange 200,000 shares of
the Company's common stock owned by Mr. Northern for 47,031 shares of
RMI.NET, Inc. stock obtained by the Company from the sale of its Internet
access business.
F-33
<PAGE> 91
EXHIBIT INDEX
Exhibit No. Description
-------------- ---------------------------------------------------------
3.1 Articles of Incorporation of the Company, including all
amendments and articles of exchanges thereto*
3.2 By-Laws of the Company*
3.3 First Amendment to By-Laws of the Company*
3.4 Second Amendment to By-Laws of the Company*
3.5 Amended and Restated Articles of Incorporation of the
Company**
9.1 Voting Trust Agreement among the Company, Blackwater
Capital Group, L.L.C., Certain Stockholders and Kendall Q.
Northern and Earl J. Cook, dated July 25, 1998*
10.1 Executive Employment Agreement between the Company and
Kendall Q. Northern, dated as of July 27, 1998*
10.2 First Amendment to the Executive Employment Agreement
between the Company and Kendall Q. Northern, dated May 14,
1999*
<PAGE> 92
Exhibit No. Description
-------------- ---------------------------------------------------------
10.3 Executive Employment Agreement between the Company and
Earl J. Cook, dated as of July 27, 1998*
10.4 First Amendment to the Executive Employment Agreement
between the Company and Earl J. Cook, dated May 14, 1999*
10.5 Employment Agreement between OPEC Corp. and Donald D.
Cannella, dated as of August 1, 1998*
10.6 Stock Purchase Agreement by and among World's Fare, Inc.,
dba FutureOne, a Nevada corporation, and Blackwater
Capital Partners, L.P., and Blackwater Capital Group,
L.L.C., dated as of July 25, 1998*
10.7 Warrant for the Purchase of 1,700,000 Shares of Common
Stock of World's Fare, Inc. dba FutureOne*
10.8 FutureOne, Inc. 1999 Key Employee Stock Option Plan*
10.9 Form of FutureOne, Inc. Incentive Stock Option Agreement*
10.10 Form of Warrant to Purchase 205,406 shares of Common
Stock in the name of Earl J. Cook**
10.11(a) Lease by and between First Gracie, Limited Liability
Company and Networld.com Inc., dated November 28, 1995, as
amended**
10.11(b) First Amendment to Lease**
10.11(c) Second Amendment to Lease**
10.11(d) Third Amendment to Lease**
10.11(e) Fourth Amendment to Lease**
10.11(f) Fifth Amendment to Lease**
10.14 Loan Agreement by and among Norwest Bank Colorado,
National Association, Trustee of the James C. Berger
Rollover IRA, John Ventiniglia and Robin L. Morley & Mark
E. Morley; OPEC Corp. and Donald D. Cannella dated August
27, 1999*
10.15 Collateralized Convertible Commercial Promissory Note by
OPEC Corp. to the order of Norwest Bank Colorado, National
Association, John Ventiniglia, and Robin L. Morley & Mark
E. Morley in the amount of $1,000,000 dated August 27,
1999*
10.16 Guaranty by Donald D. Cannella to and for the benefit of
Norwest Bank Colorado, National Association, Trustee of
the James C. Berger Rollover IRA dated August 27, 1999*
10.17 State of Colorado Uniform Commercial Code-Security
Agreement dated August 27, 1999*
<PAGE> 93
Exhibit No. Description
-------------- ---------------------------------------------------------
10.18 Addendum to Uniform Commercial Code-Security Agreement*
10.19 Purchase and Sale Agreement by and among FutureOne, Inc.
and the Members of Progressive Media LLC, dated as of July
16, 1999*
10.20 Purchase and Sale Agreement by and between the Company and
Mandalay Incorporated dated December 6, 1999**
10.21 Asset Purchase Agreement by and among RMI.NET, Inc. and
Networld.com, Inc., FutureOne, Inc., an Arizona
corporation and FutureOne, Inc., a Nevada corporation
dated November 19, 1999**
10.22 Severance Agreement by and between the Company and Kendall
Q. Northern dated as of November 23, 1999**
10.23 12% Secured Convertible Promissory Note made by the
Company to the order of 12 Squared Partners, LLC, dated as
of October 22, 1999**
10.24 Warrant to Purchase 500,000 shares of Common Stock in the
name of 12 Squared Partners, LLC**
10.25 Security and Pledge Agreement by and between the Company
and 12 Squared Partners, LLC, dated as of October 22,
1999**
10.26 12% Convertible Promissory Note made by the Company to the
order of Hare & Co., as Trustees for Financial
Institutions Retirement Fund, dated as of December 28,
1999**
10.27 Warrant to Purchase 16,667 shares of Common Stock in the
name of Hare & Co., as Trustees for Financial Institutions
Retirement Fund**
10.28 Reseller Agreement by and between Ascend Communication
Inc. and Priority Systems effective as of December 15,
1998**
10.29 Employment Agreement between the Company and Bruce A.
Robson dated as of January 11, 1999**
10.30 Employment Agreement between the Company and R. Tucker
Woodbury dated as of March 31, 1999**
10.31 Employment Agreement between the Company and Alan Hald
dated January 1, 2000**
10.32 15% Promissory Note payable to the order of Richard B.
McCulloch dated October 8, 1999**
10.33 Form of Warrant to Purchase 250,000 shares of Common Stock
in the name of Richard B. McCulloch**
16 Letter on Change in Certifying Accountant**
21 Subsidiaries of the Registrant*
<PAGE> 94
Exhibit No. Description
-------------- ---------------------------------------------------------
23 Consent of Ernst & Young LLP Independent Auditors
27 Financial Data Schedule
* Incorporated by reference from the Company's Form 10-SB Registration
Statement filed with the Commission on October 7, 1999.
** Incorporated by reference to the Company's Amendment No. 1 to Form 10-SB
filed with the Commission on January 13, 2000.
<PAGE> 1
Exhibit 23
CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
We consent to the use of our report on the financial statements of FutureOne,
Inc. dated December 29, 1999 in this Form 10-KSB of FutureOne, Inc.
/s/ ERNST & YOUNG LLP
Phoenix, Arizona
January 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 160,032
<SECURITIES> 0
<RECEIVABLES> 2,811,164
<ALLOWANCES> 140,000
<INVENTORY> 2,701,096
<CURRENT-ASSETS> 6,423,757
<PP&E> 4,287,679
<DEPRECIATION> 614,963
<TOTAL-ASSETS> 17,762,435
<CURRENT-LIABILITIES> 8,407,742
<BONDS> 0
0
0
<COMMON> 12,891
<OTHER-SE> 6,670,168
<TOTAL-LIABILITY-AND-EQUITY> 17,762,435
<SALES> 2,058,341
<TOTAL-REVENUES> 11,132,285
<CGS> 2,161,646
<TOTAL-COSTS> 9,678,576
<OTHER-EXPENSES> 5,274,228
<LOSS-PROVISION> 96,997
<INTEREST-EXPENSE> 247,155
<INCOME-PRETAX> (4,074,857)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,074,857)
<DISCONTINUED> (1,199,894)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,274,751)
<EPS-BASIC> (.44)
<EPS-DILUTED> (.44)
</TABLE>
