Form 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
[ X ] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to .
Commission File No. 1-15383
USURF America, Inc.
(Exact Name of Small Business Issuer
as Specified in its Charter)
NEVADA 72-1346591
(State or Other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8748 Quarters Lake Road, Baton Rouge, Louisiana 70809
(Address of Principal Executive Offices,
including Zip Code)
(225) 922-7744
(Issuer's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
Registrant as required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date:
Class Outstanding as of 5-19-00
Common Stock,
$.0001 par value 13,355,845
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
USURF America, Inc.
Consolidated Balance Sheets as of March 31,
2000 (unaudited), and December 31, 1999
Consolidated Statements of Operations for
the Three Months Ended March 31, 2000 and
1999 (unaudited)
Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 2000 and
1999 (unaudited)
Notes to Consolidated Financial Statements
USURF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
12/31/99 3/31/00
(audited) (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash
equivalents $ 75,313 $ 59,023
Accounts receivable
- net 59,098 58,465
Inventory 21,207 14,906
Prepaid expenses and
other current assets 5,500 8,881
---------- ----------
Total current
assets 161,118 141,275
---------- ----------
PROPERTY AND EQUIPMENT,
Cost 1,501,233 1,641,097
Less: accumulated
depreciation (421,786) (477,210)
---------- ----------
1,079,447 1,163,887
---------- ----------
INVESTMENTS 68,029 68,029
OTHER ASSETS
Acquired customer
base - net 11,764,650 10,647,398
Goodwill - net 5,681,992 5,238,330
Other intangibles
- net 782,580 1,120,859
Other assets 7,353 7,853
---------- ----------
18,236,575 17,014,440
---------- ----------
Total assets $19,545,169 $18,387,631
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable -
current portion 5,910 0
Accounts payable 363,665 413,129
Accrued payroll 118,157 153,678
Other current liabilities 216,650 199,827
Property dividends
payable 43,750 43,750
Accrued interest to
stockholder 29,741 39,497
Notes payable to
stockholder 356,239 631,545
Deferred revenue 87,538 155,589
---------- ----------
Total current
liabilities 1,221,650 1,637,015
---------- ----------
LONG-TERM LIABILITIES
Deferred income tax 3,883,210 3,655,402
---------- ----------
Total
liabilities 5,104,860 5,292,417
STOCKHOLDERS' EQUITY
Common stock, $.0001
par value; Authorized:
100,000,000; Issued
and Outstanding:
12,786,116 shares at
December 31, 1999,
and 13,101,179 shares
at March 31, 2000 1,279 1,310
Additional paid-in
capital 28,918,638 30,304,358
Accumulated deficit (12,616,830) (15,174,426)
Subscriptions
receivable (860) (5,860)
Deferred consulting (1,861,918) (2,030,168)
---------- ----------
14,440,309 13,095,214
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $19,545,169 $18,387,631
USURF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
2000 1999
(unaudited) (unaudited)
REVENUES
Internet access
revenues $ 597,392 $ 536,054
Internet access
costs and cost
of goods sold (269,136) (201,600)
---------- ----------
Gross profit 328,256 334,454
---------- ----------
OPERATING EXPENSES
Depreciation
and amortization 2,238,544 1,324,028
Professional fees 390,038 400,839
Rent 61,570 18,523
Salary and
commissions 399,358 233,299
Contract services 0 20,696
Advertising 15,179 16,312
Other 249,530 77,562
---------- ----------
Total
Operating
Expenses 3,354,219 2,091,259
---------- ----------
LOSS FROM OPERATIONS (3,025,963) (1,756,805)
OTHER INCOME(EXPENSE)
Other income 6,618 0
Interest expense (9,770) (528)
---------- ----------
LOSS BEFORE INCOME TAX (3,029,115) (1,757,333)
INCOME TAX BENEFIT 471,519 292,261
---------- ----------
NET LOSS (2,557,596) (1,465,072)
Net loss per
common share (0.20) (0.14)
Weighted average
number of
shares
outstanding 12,937,499 10,160,259
USURF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Three Months Ended
3/31/00 3/31/99
(unaudited) (unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss $(2,557,596) $(1,465,072)
Adjustment to
reconcile net loss
to net cash used
in operating
activities
Depreciation and
amortization 2,238,544 1,324,028
Consulting fees
recognized 311,750 378,646
Compensation expense 24,000 0
Deferred income
taxes (471,519) (292,261)
Due from affiliate 0 (1,614)
Accounts receivable 633 (67,561)
Inventory 6,301 6,224
Other current
liabilities (16,823) 0
Other assets and
liabilities 9,276 (10,825)
Deferred revenue 68,051 2,917
Accounts payable 49,464 (87,695)
Prepaid expenses and
other current assets (3,381) (6,539)
Accrued payroll 35,521 0
Accrued expenses 0 33,738
Deposits 0 (4,995)
Customer deposits 0 7,127
Taxes payable 0 22,454
---------- ----------
Net cash used
in operating
activities (305,779) (161,428)
---------- ----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Cash acquired in
acquisitions 7,704 177,270
Capital expenditures (102,612) (234,081)
---------- ----------
Net cash used
in investing
activities (94,908) (56,811)
---------- ----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Payments on notes
payable and capital
lease obligations (5,910) (381)
Proceeds from sub-
scriptions receivable 115,000 0
Proceeds from note
payable to stockholder 286,400 0
Issuance of common
stock for cash 0 290,000
Payment on note
payable to stockholder (11,093) 0
---------- ----------
Net cash provided
by financing
activities 384,397 289,619
---------- ----------
Net increase
(decrease)
in cash and
cash equivalents (16,290) 71,380
Cash and cash equi-
valents, beginning
of period 75,313 7,232
Cash and cash equi-
valents, end of period 59,023 78,612
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND OTHER CASH FLOW INFORMATION
Three Months March 31, 2000:
- In January 2000, the Company entered into a one-year
legal and business consulting services agreement, by
issuing 100,000 shares of stock valued at $300,000.
- In January 2000, the Company entered into a one-year
business and communications consulting services
agreement, by issuing 60,000 shares of stock valued at
$180,000.
- In February 2000, the Company acquired all of the stock
of The Spinning Wheel, Inc., by issuing 81,063 shares
of stock valued at $324,252. This acquisition was
accounted for as a purchase business combination.
- In February 2000, the Company acquired all of the
ownership interests of Internet Innovations, L.L.C.,
by issuing 50,000 shares of stock valued at $437,500.
This acquisition was accounted for as a purchase
business combination.
- During the three months ended March 31, 2000, the
Company became obligated to issue a total of 160,000,
pursuant to three separate consulting agreements. All
of these shares were issued subsequent to March 31,
2000. Please see Note 7 to these financial statements.
Three Months Ended March 31, 1999:
- Cash paid for interest $528
- In January 1999, the Company acquired all of the stock
of CyberHighway, Inc. by issuing 2,000,000 shares of
stock valued at approximately $16,000,000. In
addition, 325,000 shares were issued in payment of a
finder's fee arising out of this acquisition, which
shares were valued at approximately $2,600,000. This
acquisition was accounted for as a purchase business
combination.
USURF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2000
(Unaudited)
Note 1. Nature of Business, Organization and
Basis of Presentation
Basis of Presentation
USURF America, Inc. (USURF), formerly Internet Media Corporation, was
incorporated as Media Entertainment, Inc. in the State of Nevada on
November 1, 1996. USURF currently operates as an internet service provider
(ISP), in the inter-mountain west region of the United States, with primary
operations in Boise, Idaho. USURF's original purpose was to operate as a
holding company in the wireless cable television and community (low power)
television industries, as well as other segments of the communications
industry. Until January 1999, USURF was in the development stage. In 1998,
USURF changed its focus to concentrate in the wireless Internet
communications industry. USURF later ceased efforts to develop the
wireless cable and low power television business areas and assigned all of
its assets from the low power television activities to New Wave Media Corp.
in exchange for a 15% ownership interest in New Wave Media Corp.
Effective December 31, 1996, USURF acquired all of the outstanding common
stock of Winter Entertainment, Inc., a Delaware corporation incorporated on
December 28, 1995 (WEI), and Missouri Cable TV Corp., a Louisiana
corporation incorporated on October 9, 1996 (MCTV). WEI operates a
community television station in Baton Rouge, Louisiana; MCTV owns wireless
cable television channels in Poplar Bluff, Missouri, which system has been
constructed and is ready for operation, and Lebanon, Missouri. Effective
October 8, 1998, USURF formed Santa Fe Wireless Internet, Inc. (Santa Fe),
a New Mexico corporation, to hold the assets acquired from Desert Rain
Internet Services. Santa Fe was organized to provide wireless Internet
access. The acquisition of WEI and MCTV by USURF was accounted for as a
reorganization of companies under common control. The assets and
liabilities acquired were recorded at historical cost in a manner similar
to a pooling of interests. The acquisition of Santa Fe was accounted for
as a purchase whereby cost is allocated to the assets acquired.
On January 29, 1999, USURF acquired all the stock of CyberHighway, Inc., a
Boise, Idaho-based ISP, by issuing 2,000,000 shares of stock valued at
approximately $15,940,000. In addition, 325,000 shares of common stock
were issued in payment of a finder's fee arising out of this acquisition.
This acquisition fundamentally altered USURF's outlook, providing USURF
with an extensive dial-up customer base, as well as
technologically-advanced operations facilities and immediate access to
customers in internet services markets dominated by CyberHighway-owned or
affiliate Internet service providers. This acquisition was accounted for
as a purchase business combination
In June 1999, USURF acquired all the stock of Santa Fe Trail Internet Plus,
Inc. ("Trail"), a Santa Fe, New Mexico-based ISP, by issuing 100,000 shares
of stock valued at approximately $400,000. This acquisition was accounted
for as a purchase business combination.
In July 1999, USURF acquired all of the stock of Premier Internet Services,
Inc. ("PISI"), an Idaho-based ISP, by issuing 127,000 shares of stock
valued at approximately $508,000. This acquisition was accounted for as a
purchase business combination.
In August 1999, USURF acquired the www.usurf.com domain by issuing 150,000
shares of stock valued at approximately $863,000. This acquisition was
accounted for as a purchase business combination.
In November 1999, USURF acquired the customer base of Cyber Mountain, Inc.
("CMI"), a Denver, Colorado-based ISP, by issuing 25,000 shares of stock
valued at approximately $100,000. This acquisition was accounted for as a
purchase business combination.
In December 1999, USURF acquired a portion of the ISP-related equipment and
customer base of Cyber Highway of North Georgia, Inc. ("CHGA"), a Demorest,
Georgia-based ISP, by issuing 53,000 shares of stock valued at
approximately $212,000. This acquisition was accounted for as a purchase
business combination.
In February 2000, USURF acquired all of the stock of The Spinning Wheel,
Inc. ("Wheel"), an Idaho-based ISP, by issuing 81,63 shares of stock valued
at approximately $324,252. This acquisition was accounted for as a
purchase business combination.
In February 2000, USURF acquired all of the ownership interests of Internet
Innovations, L.L.C. ("IILLC"), a Louisiana-based Internet design firm, by
issuing 50,000 shares of stock valued at approximately $437,500. This
acquisition was accounted for as a purchase business combination.
Principles of Consolidation
The accompanying consolidated financial statements include all the accounts
of USURF and all wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in the consolidation.
Loss Per Common Share
Basic loss per common share has been computed by dividing the net loss by
the weighted average number of shares of common stock outstanding
throughout the period.
Goodwill and Other Intangible Assets
Goodwill and other intangible assets, primarily acquired customer bases,
are stated on the basis of cost and are amortized, principally on a
straight-line basis, over the estimated future periods to be benefited
(generally 3 years). Goodwill and other intangible assets are periodically
reviewed for impairment to ensure they are appropriately valued. Conditions
which may indicate an impairment issue exists include a negative economic
downturn or a change in the assessment of future operations. In the event
that a condition is identified which may indicate an impairment issue
exists, an assessment is performed using a variety of methodologies,
including cash flow analysis, estimates of sales proceeds and independent
appraisals. Where applicable, an appropriate interest rate is utilized,
based on location specific economic factors.
Note 2. Interim Consolidated Financial Statements
In the opinion of management, the accompanying consolidated financial
statements for the three months ended March 31, 2000 and 1999, reflect all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial condition, results of operations and cash
flows of USURF, including subsidiaries, and include the accounts of USURF
and all of its subsidiaries. All material inter-company transactions and
balances are eliminated.
The financial statements included herein have been prepared by USURF,
without audit, pursuant to the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these unaudited financial statements be
read in conjunction with the financial statements and notes thereto
included in USURF's Annual Report on Form 10-KSB for the year ended
December 31, 1999, as filed with the SEC. Certain reclassifications and
adjustments may have been made to the financial statements for the
comparative period of the prior fiscal year to conform with the 2000
presentation. The results of operations for the interim periods are not
necessarily indicative of the results to be obtained for the entire year.
Note 3. Net 1, Inc. Acquisition
On August 23, 1999, the Company acquired Net 1, Inc. (Net 1) in a business
combination accounted for as a purchase. Net 1 is primarily engaged as an
ISP in Alabama. In September, 1999 the Company tendered the shares of
capital stock obtained in the acquisition of Net 1 for rescission of the
transaction (see Note 7). However, legally, USURF is still the owner of the
outstanding shares of Net 1 and is required by generally accepted
accounting principles to record Net 1 as a wholly-owned subsidiary from the
date of acquisition.
The financial statements of Net 1 have not been available to USURF from
September 1, 1999, through March 31, 2000; therefore, the revenues and
expenses of Net 1 are not included in the accompanying statement of
operations for the three months ended March 31, 2000, nor were they
included in USURF's statement of operations for the year ended December 31,
1999. This is considered a departure from generally accepted accounting
principals, of which the effects on USURF have not been determined.
The total cost of the acquisition was $1,164,561, which exceeded fair value
of the net assets of Net 1 by $1,164,561. The excess was deemed to be
impaired at March 31, 2000, and at December 31, 1999, due to the change in
the operating environment and was recorded in the accompanying financial
statements as an impairment loss.
Note 4. Acquisitions
Effective December 31, 1996, USURF acquired WEI and MCTV by issuing
2,157,239 shares of common stock in exchange for all the common stock of
each company. The majority shareholder of USURF was also the sole
shareholder of WEI and the majority shareholder of MCTV. Therefore, the
acquisitions have been accounted for at historical cost in a manner similar
to a pooling of interests. The consolidated statement of operations
includes USURF and its predecessors WEI and MCTV from inception of WEI.
Effective January 29, 1999, USURF acquired CyberHighway, which acquisition
has been accounted for as a purchase and not as a pooling of interests.
Effective June 2, 1999, USURF acquired Trail, which acquisition has been
accounted for as a purchase and not as a pooling of interests.
Effective August 14, 1999, USURF acquired usurf.com, which acquisition has
been accounted for as a purchase and not as a pooling of interests.
Effective August 20, 1999, USURF acquired Net 1. Because USURF has
tendered the stock of Net 1 for rescission of the acquisition transaction,
none of the operating data or balance sheet data associated with Net 1 is
presented. USURF is involved in arbitration of its demand for rescission.
(See Notes 2 and 7).
Effective August 30, 1999, USURF acquired PISI, which acquisition has been
accounted for as a purchase and not as a pooling of interests.
Effective November 2, 1999, the Company acquired the customer base of CMI,
which acquisition has been accounted for as a purchase and not as a pooling
of interests.
Effective December 20, 1999, USURF acquired a portion of the ISP-related
equipment and customer base of CHGA, which acquisition has been accounted
for as a purchase and not as a pooling of interests.
Effective February 1, 2000, USURF acquired all of the stock of Wheel, which
acquisition has been accounted for as a purchase and not as a pooling of
interests.
Effective February 16, 2000, USURF acquired all of the ownership interests
of IILLC, which acquisition has been accounted for as a purchase and not as
a pooling of interests.
Note 5. Notes Payable to Shareholder
March 31, 2000
(unaudited)
Notes payable to majority
stockholder, interest
accrues at 8%, due on
demand and unsecured $631,545
Note 6. Stock Issuances
During the three months ended March 31, 2000, USURF issued shares of common
stock, as follows:
A. In February 2000, 100,000 shares were issued pursuant to a Legal and
Consulting Services Agreement, which shares were valued at a price of $3.00
per share, or $300,000 in the aggregate.
B. In February 2000, 60,000 shares were issued pursuant to a Business and
Communications Consulting Agreement, which shares were valued at $3.00 per
share, or $180,000 in the aggregate.
C. In February 2000, 81,063 shares were issued in the acquisition of
Wheel, which shares were valued at $4.00 per share, or $324,252, in the
aggregate.
D. In February 2000, 50,000 shares were issued in the acquisition of
IILLC, which shares were valued at $8.75 per share, or $437,500, in the
aggregate.
Note 7. Commitments and Contingencies
In September l999, USURF tendered the shares of capital stock obtained in
the acquisition of Net 1 (see Note 2) for rescission of the transaction.
USURF had intended to commence arbitration to pursue its rescission claim.
However, one of the former owners of Net 1, has instituted arbitration,
through the American Arbitration Association, and is seeking to enforce
certain registration rights associated with a portion of the shares of
USURF's common stock received by him in the acquisition transaction.
USURF has asserted the rescission claim as a counterclaim in the pending
arbitration proceeding. The counterclaim was made against Net 1 and its
former owners, wherein USURF seeks to rescind the acquisition transaction
that occurred in August 1999, and recover the 250,000 shares of common
stock issued. Although USURF believes it will be successful in this
arbitration proceeding, no prediction in this regard can be made.
Note 8. Subsequent Events
A. In March 2000, the Company became obligated to issue a total of 160,000
shares under three separate consulting agreements. 60,000 of these shares
were valued at $3.50 per share, or $210,000, in the aggregate, while
100,000 of these shares were valued at $3.00 per share, or $300,000, in the
aggregate. These shares were issued in April 2000.
B. In March 2000, the Company completed a private offering of units of its
securities, each unit consisting of one share of common stock and one
warrant. In March 2000, the Company received subscriptions for 65,000
shares, which shares were sold for $5.00 per share, a total of $325,000.
Funds in payment of these subscriptions were received by the Company during
March and April 2000. 65,000 warrants, exercisable at $7.50 per share,
were issued to the purchasers of these shares. These securities were
issued in April 2000.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Present Business Focus
In October 1999, our management determined to commit, for the foreseeable
future, all available capital to the commercial exploitation of our
Quick-Cell wireless Internet access products. We intend to continue to
pursue acquisitions of businesses complimentary to our core Internet access
business.
The results of operations discussed below reflect, on the whole, our
operating results based on our old business model. Because our Quick-Cell
wireless Internet access business permits us to operate on significantly
improved margins, as compared to operating margins in the dial-up Internet
access business, we expect our operating results, beginning with the third
quarter of Fiscal 2000, to show significant improvement. The level of
improved operating results cannot be predicted, however. We remain in need
of expansion capital to achieve our aggressive growth strategy.
Background
In July 1999, we changed our name to "USURF America, Inc.", from "Internet
Media Corporation". We were incorporated on November 1, 1996, under the
name "Media Entertainment, Inc.", to act as a holding company in the
wireless cable and community (low power) television industries. Our
initial capitalization transaction included the purchase of Winter
Entertainment, Inc. and Missouri Cable TV Corp. Because USURF America,
Winter Entertainment and Missouri Cable TV were combined in a
reorganization of entities under common control, the presentation contained
in our consolidated financial statements, as they relate to Winter
Entertainment and Missouri Cable TV, have been prepared in a manner similar
to the pooling-of-interests method.
Due to current market conditions in the wireless cable industry, we have
abandoned our efforts to develop these wireless cable properties.
Nevertheless, in the opinion of our management, the licenses relating to
the various wireless cable frequencies continue to be of substantial future
value for use in our wireless Internet access business. We will be able to
utilize these frequencies at such time as the FCC approves two-way
communication on the wireless cable frequencies. Our management believes
this FCC approval of two-way communication to be imminent. However, our
wireless cable assets will become impaired, should the expected FCC
approval not be forthcoming. We can make no prediction with respect to the
FCC's actions in this regard.
In furtherance of our plan to focus on the exploitation of our Quick-Cell
wireless Internet access products and expansion of our other Internet
services, effective July 1, 1999, we assigned all of our community (low
power) television properties to New Wave Media Corp., in exchange for a 15%
ownership interest in New Wave common stock. Our board of directors has
declared a dividend with respect to all of the New Wave shares. These
shares of New Wave will be distributed to our shareholders, upon New Wave's
completion of a Securities Act registration of the distribution
transaction. This discussion includes the operations of our community
television segment for the first quarter of 1999.
Since our initial capitalization transactions, we have made the
acquisitions described below. Each of these acquisitions has been
accounted for as a purchase, not as a pooling of interests, with their
respective operating results being included in this discussion from the
various dates of acquisition:
- September 1998: we acquired the assets and going business of Desert
Rain Internet Services, a Santa Fe, New Mexico-based ISP, for $25,000 in cash.
- January 1999: we acquired CyberHighway, Inc., a Boise, Idaho-based
ISP for 2,000,000 shares of our common stock.
- June 1999: we acquired Santa Fe Trail Internet Plus, Inc., another
Santa Fe, New Mexico-based ISP, for 100,000 shares of our common stock.
- August 1999: we acquired the going business known as www.usurf.com,
for 150,000 shares of our common stock.
- August 1999: we acquired Premier Internet Services, Inc., an
Idaho-based ISP, for 127,000 shares of our common stock.
- August 1999: we acquired Net 1, Inc., an Alabama-based ISP, for
250,000 shares of our common stock. In September 1999, we tendered the
stock of Net 1 for rescission of the acquisition transaction. The
financial statements of Net 1 have not been available to us since September
1, 1999; therefore, the revenues and expenses of Net 1 are not included in
this discussion, nor are they included in our statement of operations for
the three months ended March 31, 2000. Please refer to Notes 3 and 7 to
our financial statements appearing elsewhere in this Quarterly Report.
Also, please see the discussion below under "Item 1. Legal Proceedings" of
"Part II - Other Information".
- November 1999: we acquired the customer base of Cyber Mountain,
Inc., a Denver, Colorado-based ISP, for 25,000 shares of our common stock.
- December 1999: we acquired a portion of the ISP-related equipment
and customer base of CyberHighway of North Georgia, Inc., a Demorest,
Georgia-based ISP, for 53,000 shares of our common stock.
- February 2000: we acquired The Spinning Wheel, Inc., an Idaho-based
ISP, for 81,063 shares of our common stock.
- February 2000: we acquired Internet Innovations, L.L.C., a Baton
Rouge, Louisiana-based web design firm, for 50,000 shares of our common stock.
The acquisition of CyberHighway fundamentally altered our outlook. With
the acquisition of CyberHighway, not only did we acquire approximately
27,000 dial-up customers and a state-of-the-art network operations center,
we also gained immediate visibility as a large regional ISP.
Shareholder Loans
Since our inception, our president, David M. Loflin, has made numerous
loans to us. At December 31, 1999, we owed Mr. Loflin a total of $356,239.
During 1Q 2000, Mr. Loflin loaned us an additional approximately $286,000.
Since the end of 1Q 2000, Mr. Loflin has made further loans to us totaling
$120,000. All of the loans from Mr. Loflin are payable on demand and bear
interest at 8% per annum. The funds loaned to us during 2000 have been
used primarily for operating expenses, as well as for the purchase of
network equipment. Unless we secure substantial capital from an outside
source, it is probable that Mr. Loflin will loan us additional funds during
2Q 2000, although the amount and timing of any such loans cannot be
predicted. Without Mr. Loflin's loans, we would have become substantially
insolvent.
Mr. Loflin has advised us that he does not intend to demand payment of his
loans, until their repayment would not adversely affect our financial
position.
Restructuring
In July 1999, sweeping changes were made to the management of CyberHighway.
These changes included completely replacing the board of directors and
officers of CyberHighway, as well as a significant workforce reduction.
Additional personnel reductions have been made. Certain business
functions, including customer support services, have been moved from the
Boise network operations center to our Santa Fe, New Mexico,
point-of-presence. The changes in the management of CyberHighway were made
due to differing managerial philosophies. Under the prior management,
CyberHighway had, during May 1999, begun to sustain operating losses,
primarily due to the addition of numerous salaried salespersons, who failed
to produce sales revenues. The new management of CyberHighway instituted
the restructuring and personnel reductions as the only means by which it
could return CyberHighway to a positive cash flow position. While
CyberHighway's cash flow returned, for a brief time, to a positive status,
in line with its 1998 cash flow results, CyberHighway has begun to operate
a loss of approximately $40,000 per month. We are attempting to reduce
operating expenses at CyberHighway so the operating losses will be
eliminated, or at least substantially eliminated. In this regard, we
anticipate that extensive personnel reductions will be made at
CyberHighway, during 2Q 2000. We have not determined the level or timing
of these personnel reductions.
Settlement Agreement
On November 30, 1999, we entered into a settlement agreement and mutual
release, which settled certain legal proceedings in which USURF America and
CyberHighway had been involved. The parties to the settlement agreement
were: USURF America, CyberHighway, Julius W. Basham, II, our former chief
operating officer and a current director, William Kim Stimpson and David W.
Brown. Messrs. Stimpson and Brown are former owner-employees of CyberHighway.
Pursuant to this settlement agreement, certain legal proceedings were
settled in full and we delivered to Messrs. Basham, Stimpson and Brown a
total of 340,000 shares of our common stock. During 1Q 2000, we finished
paying a total sum of $43,325 for reimbursement of attorneys' fees paid by
Messrs. Basham, Stimpson and Brown. However, these attorneys' fees, as
well as the value of the shares issued in the settlement ($913,750), were
charged against our 1999 earnings.
Results of Operations
General. Prior to 1999, substantially all of our revenues were generated
by our now-defunct community television segment. During 1Q 1999 and 1Q
2000, all of our revenues were generated by our Internet segment. Our
revenues are derived primarily from monthly customer payments for dial-up
access, which average approximately $18.00 per customer. Also, we derive
revenue from per-customer royalty payments from our CyberHighway
affiliate-ISPs, which average approximately $1.75 per customer. Minimal
revenues are derived from web hosting and other Internet-related
valued-added services.
Beginning toward the end of 1Q 2000, we began generating revenues from
our Quick-Cell wireless Internet access operations. These initial
operations are occurring in Santa Fe, New Mexico. As of the date of this
report, we had approximately 100 Quick-Cell customers. The growth of our
wireless Internet access business will continue at a slow rate, unless and
until we obtain significant - at least $1,000,000. With the development of
our wireless Internet access business, in our future periodic reports, we
expect to provide dial-up and wireless Internet access segment information.
Three Months Ended March 31, 2000, versus Three Months Ended March 31,
1999. Our operating results for 1Q 2000 and 1Q 1999 are summarized in the
following table:
1Q 2000 1Q 1999
Revenues $ 597,392 $ 536,054
Internet access costs
and cost of goods sold 269,136 201,600
Gross Profit 328,256 334,454
Operating Expenses 3,354,219 2,091,259
Loss from Operations 3,025,963 1,756,805
Net Loss 2,557,596 1,465,072
Our net loss for 1Q 2000 ($2,557,596) nearly doubled from our net loss
for 1Q 1999 ($1,465,072). The greater net loss of 1Q 2000 is primarily
attributable to a $915,000 increase in depreciation and amortization of
acquired customer bases, goodwill and other intangibles, from $1,324,028 to
$2,238,544. A 71% increase in salary and commissions and a 220% increase
in "other" operating expenses contributed to the increased net loss for 1Q
2000 compared to that of 1Q 1999. Also, our rent increased $43,047 from 1Q
1999 to 1Q 2000, due to our ISP acquisitions and larger operations in Santa
Fe, New Mexico.
We expect that our operating results for 2Q 2000 will be similar to those
of 1Q 2000.
During 1Q 2000, we issued 160,000 shares of common stock under two
separate consulting agreements; these shares have been valued for financial
accounting purposes at $480,000, in the aggregate. This amount will be
expensed in equal monthly amounts during 2000. Subsequent to 1Q 2000, we
issued an additional 160,000 shares under three separate consulting
agreements; these shares have been valued for financial accounting purposes
at $625,000, in the aggregate, and will be expenses in monthly amounts over
the respective terms of the agreements pursuant to which they were issued -
two are four-month agreements and one is a six-month agreement.
For 1Q 2000 and 1Q 1999, our statements of operations reflect an income
tax benefit of $471,519 and $292,261, respectively, resulting from the
difference in the bases of our acquired customer bases for book versus tax
purposes.
Internet Segment. Our Internet segment generated all of our revenues
during 1Q 2000 and 1Q 1999. During 1Q 1999, this segment operated at a
modest loss, while during 1Q 2000, this segment suffered a loss of
approximately $240,000. This segment's increased operating loss is due to
higher operating costs, particularly telephone line charges and other
network related costs.
To stem our ongoing losses, we expect to reduce drastically the personnel
at CyberHighway. We cannot predict the extent or the timing of these
anticipated personnel reductions. Receipt of outside funding, if any, will
be a significant factor in determining the extent and timing of any such
personnel reduction.
Community Television Segment. During 1Q 1999, this segment had no
revenues and suffered a nominal loss from operations. As discussed above,
effective July 1, 1999, we assigned all of our community television
properties to New Wave Media Corp. Thus, our 1Q 2000 operations did not
include this segment.
Wireless Cable Segment. As described above, we have ceased, for the
foreseeable future, our wireless cable activities.
Liquidity and Capital Resources
March 31, 2000. Historically, we have had a significant working capital
deficit. At March 31, 2000, our working capital deficit was $1,495,740,
which is a larger deficit than our $1,060,532 deficit at December 31, 1999.
The increase in our deficit arose due to increases in our accounts
payable, accrued payroll and notes payable to a shareholder, our president.
The following table sets forth our current assets and current liabilities
at March 31, 2000, and December 31, 1999:
3/31/00 12/31/99
Current Assets Cash $ 59,023 $ 75,313
Accounts Receivable 58,465 59,098
Inventory 14,906 21,207
Prepaids 8,881 5,500
Current Liabilities
Notes payable
- current portion $ 0 $ 5,910
Accounts payable 413,129 363,665
Accrued payroll 153,678 118,157
Other current
liabilities 199,827 216,650
Property dividends
payable 43,750 43,750
Accrued interest
to stockholder 39,497 29,741
Notes payable to
stockholder 631,545 356,239
Deferred revenue 155,589 87,538
The increase in our accounts payable is attributable to our increasing
operating costs, primarily network-related expenses, coupled with our
determination to defer payment of a small portion of our accounts payable
for a short period of time, due our lack of working capital. We have not
suffered, and do not expect to suffer, any adverse consequences from our
vendors.
Our accrued payroll at March 31, 2000, as well as at December 31, 1999,
is attributable to accrued salary of our president and two of our vice
presidents.
The increase in notes payable to stockholder, from $356,239 at December
31, 1999, to $631,545 at March 31, 2000, represents loans made to us by our
president, David M. Loflin. All of this indebtedness is due on demand and
bears interest at 8% per annum. In addition, since the end of 1Q 2000, Mr.
Loflin loaned us an additional $120,000 on the same terms. The funds
loaned during 1Q 2000 were used primarily for operating expenses and the
roll-out of our Quick-Cell wireless Internet access products, particularly
in Santa Fe, New Mexico. Mr. Loflin has advised us that he does not intend
to demand payment of his loans, until their repayment would not adversely
affect our financial position. Without outside funding, it is probable
that Mr. Loflin will loan us additional funds, though no assurance or
prediction can be made in this regard.
In addition to Mr. Loflin's loans, during 1Q 2000, we obtained funds from
private sales of our securities. In March 2000, we received cash of
$115,000 and subscriptions for an additional $210,000, all of which was
received in April 2000.
We remain in need of more capital to provide full funding of our
aggressive growth plan. We cannot assure you that we will obtain this
level of capital. Our failure to do so would, more likely than not,
prevent us from improving our future operating results.
We expect that, during the last half of 2000, certain common stock
purchase warrants, representing an additional approximately $1,800,000,
will be exercised. However, we cannot assure you that these warrants will
be exercised or, if exercised, that the timing of their exercise would
significantly improve our financial position.
Without substantial additional investment, we will continue to experience
a working capital deficit and be unable to implement our aggressive growth
plan. We are seeking additional investments for this purpose, but we
cannot assure you that we will be successful in our efforts.
Commitment to Wireless Internet Business. In October 1999, our
management determined to apply, for the foreseeable future, all available
capital to the exploitation of our Quick-Cell wireless Internet access
products. However, we cannot assure you that we will obtain sufficient
capital with which to implement fully our growth plan.
Growth Strategy; Proposed Acquisitions. During the past year, as we
refined our growth strategy, we have determined that, as a purveyor of
Internet access, for us to achieve the greatest growth and economies of
scale, it is necessary for us to offer traditional dial-up Internet access
and our Quick-Cell wireless Internet access products. Thus, to reach more
Internet users, we will continue to provide high quality dial-up Internet
access service as we continue to deploy our Quick-Cell wireless Internet
access products.
We will also seek acquisitions of businesses that complement our core
business. We have not agreed to any acquisition of this nature, and we
cannot assure you that we will ever acquire another business.
Quick-Cell Wireless Internet Strategy. We are attempting to implement a
plan designed to establish our Quick-Cell wireless Internet access products
in 110 U.S. cities by the end of 2000. We have reached an tentative
agreement with US West that would provide us with an extremely
cost-effective connection to the Internet in our chosen markets, into which
our Quick-Cell wireless Internet access systems would connect. We lack the
capital needed to implement completely our growth plan and we cannot assure
you that we will be successful in obtaining any capital.
USURF America National Reseller Program. With recently secured local
dial-up Internet access agreements with national backbone providers, we
have launched our "USURF America" high-quality dial-up Internet access
service. The marketing of its dial-up access service is being accomplished
by resellers, through our national reseller program. The resellers of our
dial-up Internet access services receive continuing commissions for
customers obtained through their efforts. Because we have not had capital
available to implement this reseller plan, the program has not yet begun to
yield meaningful subscriber growth and we cannot assure you that our
efforts in this regard will be successful.
Community Television Stations. In furtherance of our plan to focus on the
exploitation of our Quick-Cell wireless Internet access products, we
assigned all of our community (low power) television properties to New Wave
Media Corp., in exchange for 1,500,000 shares of New Wave common stock.
Our board of directors declared a dividend with respect to all 1,500,000
New Wave shares.
Cash Flows from Operating Activities. During 1Q 2000, our operations
used $305,779 in cash compared to cash used of $161,428 during 1Q 1999. In
both periods, the use of cash in operations was a direct result of the lack
of revenues compared to our operating expenses, particularly salary and
commissions. We believe our expected personnel reductions will be
sufficient to bring our operations to a break-even level, for cash flow
purposes. The effects of any such action would not be realized until the
third quarter of 2000. However, we cannot predict the actual results of
any such personnel reductions.
Cash Flows from Investing Activities. During 1Q 2000, our investing
activities used cash of $102,612 compared to $56,811 in 1Q 1999. During 1Q
2000, in our investing activities, purchases of equipment used cash;
however, in 1Q 1999, our equipment purchases were offset, to some degree,
by cash acquired in acquisitions of $177,270. Because we lack working
capital, we cannot predict our cash flows from investing activities for the
remainder of 2000.
Cash Flows from Financing Activities. For 1Q 2000, our financing
activities provided $384,397 in cash. Of this amount, $286,400 is
attributable to loans from our president and $115,000 is attributable to
private sales of securities. For 1Q 1999, our financing activities
provided $289,619 in cash, all of which is attributable to private sales of
our securities. We continue to seek capital and cannot, therefore, predict
future levels of cash flows from financing activities.
In March 2000, we received $115,000, and another $210,000 in April 2000,
in private sales of our securities. 65,000 units of securities consisting
of one share of our common stock and one common stock purchase warrant
[exercisable at $7.50 per share] were sold for $5.00 per unit.
Non-Cash Investing and Financing Activities. During 1Q 2000, we issued
160,000 shares of common stock under consulting agreements; these shares
have been valued at $480,000, in the aggregate. Also during 1Q 2000, we
issued a total of 131,063 shares of common stock in acquisitions, which
shares were valued at $767,751, in the aggregate.
Since 1Q 2000, we have issued an additional 160,000 shares of common
stock under three separate consulting agreements; these shares were valued
at $625,000, in the aggregate.
During 1Q 1999, non-cash investing and financing activities included the
issuance of 2,350,000 shares of our common stock issued in the acquisition
of CyberHighway.
Management's Plans Relating to Future Liquidity
We continue to seek additional capital with which to operate and
implement our aggressive growth plan. In March and April 2000, we obtained
a total of $325,000 in a private offering of our securities. Even with
this capital, we remain substantially illiquid. We require approximately
$1,000,000 to become relatively liquid and to pursue aggressively the
installation and marketing of our Quick-Cell wireless Internet access systems.
We expect that, during the second half of 2000, warrants representing an
additional approximately $1,800,000 will be exercised. We cannot assure
you that any of these warrants will ever be exercised.
Our current operations will not be sufficient, on their own, to provide
operating capital and to provide capital with which to pursue our growth
strategy. We continue to seek capital with which to implement our growth
strategy. We cannot assure you that we will ever secure capital necessary
for our growth strategy to be implemented.
Capital Expenditures
During 1Q 2000, we made $102,612 in equipment purchases, approximately
25% for wireless Internet equipment and approximately 75% for needed
equipment in our network operations center. Currently, we lack capital to
make any significant capital expenditures. However, during the remainder
of 2000, we expect to apply substantially all of our available capital, if
any, to (1) the purchase of Quick-Cell wireless Internet equipment and the
construction of local Quick-Cell wireless Internet access systems and/or
(2) the acquisition of one or more businesses that compliment our core
business. We continue our aggressive pursuit of capital with which to
implement our growth strategy.
We have filed a registration statement on Form S-1, with respect to
2,000,000 shares of our common stock. These shares are designated for use
in as-yet unidentified acquisitions. We cannot predict if and when any of
these shares would be used in any acquisition. In completing any such
acquisition, we expect that little or no cash would be used by us.
Year 2000 Issues
We experienced no problems related to Year 2000 issues. During our
efforts to become completely Year 2000 compliant, we incurred expenses of
approximately $75,000.
CERTAIN STATEMENTS CONTAINED IN THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 AND ARE, THUS, PROSPECTIVE. THESE FORWARD-LOOKING STATEMENTS
ARE SUBJECT TO RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM FUTURE RESULTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE MOST SIGNIFICANT OF SUCH
RISKS, UNCERTAINTIES AND OTHER FACTORS IS OUR ABILITY TO OBTAIN CAPITAL IN
AMOUNTS NECESSARY FOR US TO ACCOMPLISH OUR PLAN FOR THE EXPLOITATION OF OUR
QUICK-CELL WIRELESS INTERNET ACCESS PRODUCTS, AS WELL AS CONSUMER
ACCEPTANCE OF THESE PRODUCTS.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In September 1999, we tendered the acquired shares of capital stock of Net
1, Inc. for rescission. We made this tender of rescission, due to numerous
and material misrepresentations made by Net 1 and its principals. We had
intended to commence arbitration to pursue its rescission claim. However,
one of the former owners of Net 1, Knud Nielsen, III, has instituted
arbitration, through the American Arbitration Association, and is seeking
to enforce certain registration rights associated with a portion of the
shares of our common stock received by him in the acquisition transaction.
Now, we have presented the rescission claim as a counterclaim in the
pending arbitration proceeding. The counterclaim will be made against Net
1 and its former owners, including Mr. Nielsen, wherein we seek to rescind
the acquisition transaction that occurred in August 1999, and recover the
250,000 shares of common stock issued in connection with the acquisition.
We have alleged fraud and the failure to make statements necessary to make
statements made not misleading. Although we believe we will be successful
in this arbitration proceeding, no prediction in this regard can be made.
Item 2. Changes in Securities.
During the three months ended March 31, 2000, we issued securities as follows:
1.(a) Securities Sold. In January 2000, we issued 100,000 shares of
Common Stock.
(b) Underwriters and Other Purchasers. Such shares were issued to
Newlan & Newlan, Attorneys at Law.
(c) Consideration. Such shares were issued pursuant to a Legal and
Business Consulting Services Agreement and were valued at $3.00 per share.
(d) Exemption from Registration Claimed. These securities are
exempt from registration under the Securities Act of 1933, as amended,
pursuant to the provision of Section 4(2) thereof, as a transaction not
involving a public offering.
(e) Terms of Conversion or Exercise. Not applicable.
2.(a) Securities Sold. In January 2000, we issued 60,000 shares of
Common Stock.
(b) Underwriters and Other Purchasers. Such shares were issued to
The Humbolt Corporation.
(c) Consideration. Such shares were issued pursuant to a Business
and Communications Consulting Services Agreement and were valued at $3.00
per share.
(d) Exemption from Registration Claimed. These securities are
exempt from registration under the Securities Act of 1933, as amended,
pursuant to the provision of Section 4(2) thereof, as a transaction not
involving a public offering.
(e) Terms of Conversion or Exercise. Not applicable.
3.(a) Securities Sold. In February 2000, we issued 81,063 shares of
Common Stock.
(b) Underwriters and Other Purchasers. Such shares were issued to
the shareholders of The Spinning Wheel, Inc.
(c) Consideration. Such shares were issued under a reorganization
agreement.
(d) Exemption from Registration Claimed. These securities are
exempt from registration under the Securities Act of 1933, as amended,
pursuant to the provision of Section 4(2) thereof, as a transaction not
involving a public offering.
(e) Terms of Conversion or Exercise. Not applicable.
4.(a) Securities Sold. In February 2000, we issued 50,000 shares of
Common Stock.
(b) Underwriters and Other Purchasers. Such shares were issued to
the interest owners of Internet Innovations, L.L.C.
(c) Consideration. Such shares were issued under a reorganization
agreement.
(d) Exemption from Registration Claimed. These securities are
exempt from registration under the Securities Act of 1933, as amended,
pursuant to the provision of Section 4(2) thereof, as a transaction not
involving a public offering.
(e) Terms of Conversion or Exercise. Not applicable.
Subsequent to March 31, 2000, the Company has issued unregistered
securities, as follows:
1.(a) Securities Sold. In April 2000, we issued 65,000 shares of
Common Stock and 65,000 warrants to purchase shares of Common Stock.
(b) Underwriters and Other Purchasers. Such shares were issued to
nine separate investors.
(c) Consideration. Such shares were sold for cash in the amount of
$5.00 per share.
(d) Exemption from Registration Claimed. These securities are
exempt from registration under the Securities Act of 1933, as amended,
pursuant to the provision of Section 4(2) thereof, as a transaction not
involving a public offering.
(e) Terms of Conversion or Exercise. The warrants may be exercised
for a period of two years from their date of issue at an exercise price of
$7.50 per share. Such warrants are redeemable by the Company at any time
that the price for the Company's Common Stock has closed at a price in
excess of $10.00 for five consecutive trading days.
2.(a) Securities Sold. In April 2000, we issued 30,000 shares of
Common Stock.
(b) Underwriters and Other Purchasers. Such shares were issued to
Peter Rochow.
(c) Consideration. Such shares were issued under a consulting
agreement, and were valued at $3.00 per share.
(d) Exemption from Registration Claimed. These securities are
exempt from registration under the Securities Act of 1933, as amended,
pursuant to the provision of Section 4(2) thereof, as a transaction not
involving a public offering.
(e) Terms of Conversion or Exercise. Not applicable.
3.(a) Securities Sold. In April 2000, we issued 30,000 shares of
Common Stock.
(b) Underwriters and Other Purchasers. Such shares were issued to
N/F Partners.
(c) Consideration. Such shares were issued under a consulting
agreement, and were valued at $3.75 per share.
(d) Exemption from Registration Claimed. These securities are
exempt from registration under the Securities Act of 1933, as amended,
pursuant to the provision of Section 4(2) thereof, as a transaction not
involving a public offering.
(e) Terms of Conversion or Exercise. Not applicable.
4.(a) Securities Sold. In April 2000, we issued 100,000 shares of
Common Stock.
(b) Underwriters and Other Purchasers. Such shares were issued to
Fair Market, Inc.
(c) Consideration. Such shares were issued under a consulting
agreement, and were valued at $4.00 per share pursuant to the terms of such
agreement.
(d) Exemption from Registration Claimed. These securities are
exempt from registration under the Securities Act of 1933, as amended,
pursuant to the provision of Section 4(2) thereof, as a transaction not
involving a public offering.
(e) Terms of Conversion or Exercise. Not applicable.
5.(a) Securities Sold. In May 2000, we issued 10,000 shares of Common
Stock.
(b) Underwriters and Other Purchasers. Such shares were issued to
Marcus, Merrick & Montgomery, Attorneys at Law.
(c) Consideration. Such shares were issued in payment of legal
services rendered and were valued at $2.00 per share.
(d) Exemption from Registration Claimed. These securities are
exempt from registration under the Securities Act of 1933, as amended,
pursuant to the provision of Section 4(2) thereof, as a transaction not
involving a public offering.
(e) Terms of Conversion or Exercise. Not applicable.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote
of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on From 8-K.
During the three months ended March 31, 2000, on
or about January 24, 2000, we filed a Current
Report on Form 8-K in which we reported a change
of our independent auditor.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: May 22, 2000.
USURF AMERICA, INC.
By: /s/ Christopher L. Wiebelt
Christopher L. Wiebelt
Chief Financial Officer