Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) 170 940K
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, 58 300K
Liquidation or Succession
3: EX-2.2 Plan of Acquisition, Reorganization, Arrangement, 83 370K
Liquidation or Succession
4: EX-2.3 Plan of Acquisition, Reorganization, Arrangement, 80 377K
Liquidation or Succession
5: EX-3.1 Articles of Incorporation/Organization or By-Laws 21 95K
6: EX-3.2 Articles of Incorporation/Organization or By-Laws 17 75K
7: EX-3.3 Articles of Incorporation/Organization or By-Laws 14 70K
8: EX-4.5 Instrument Defining the Rights of Security Holders 12 56K
9: EX-4.6 Instrument Defining the Rights of Security Holders 9 48K
10: EX-4.7 Instrument Defining the Rights of Security Holders 10 51K
11: EX-4.8 Instrument Defining the Rights of Security Holders 14 58K
12: EX-4.9 Instrument Defining the Rights of Security Holders 10 56K
13: EX-4.10 Instrument Defining the Rights of Security Holders 12 63K
14: EX-4.12 Instrument Defining the Rights of Security Holders 19 74K
15: EX-4.13 Instrument Defining the Rights of Security Holders 11 59K
16: EX-4.14 Instrument Defining the Rights of Security Holders 6 24K
17: EX-10.1 Material Contract 37 176K
18: EX-10.3 Material Contract 12 69K
19: EX-10.4 Material Contract 12 67K
20: EX-10.5 Material Contract 12 69K
21: EX-10.6 Material Contract 12 69K
22: EX-10.7 Material Contract 12 71K
23: EX-10.8 Material Contract 12 70K
24: EX-10.9 Material Contract 14 71K
25: EX-10.10 Material Contract 8 41K
26: EX-10.11 Material Contract 7 37K
27: EX-23.1 Consent of Experts or Counsel 1 10K
28: EX-23.2 Consent of Experts or Counsel 1 10K
29: EX-23.3 Consent of Experts or Counsel 1 10K
30: EX-23.4 Consent of Experts or Counsel 1 10K
31: EX-23.6 Consent of Experts or Counsel 1 10K
32: EX-23.7 Consent of Experts or Counsel 1 10K
33: EX-23.8 Consent of Experts or Counsel 1 10K
34: EX-23.9 Consent of Experts or Counsel 1 10K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1999
REGISTRATION NUMBER 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
OMNILYNX COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in Charter)
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DELAWARE 4813 76-0530551
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
1770 MOTOR PARKWAY, SUITE 300
HAUPPAUGE, NEW YORK 11788
(516) 582-2222
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------------
JOSEPH A. GREGORI
CHIEF EXECUTIVE OFFICER
OMNILYNX COMMUNICATIONS CORPORATION
1770 MOTOR PARKWAY, SUITE 300
HAUPPAUGE, NEW YORK 11788
(516) 582-2222
(Name, address, including zip code, and telephone number, including area code,
of registrant's agent for service)
------------------------------
COPIES TO:
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ROBERT G. REEDY MICHAEL L. FALTISCHEK
PORTER & HEDGES, L.L.P. PAUL RUBELL
700 LOUISIANA RUSKIN, MOSCOU, EVANS & FALTISCHEK, P.C.
HOUSTON, TEXAS 77002-2764 170 OLD COUNTRY ROAD
(713) 226-0674 MINEOLA, NEW YORK 11501
(516) 663-6600
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED SHARE PRICE REGISTRATION FEE
Common Stock, par value $.0001 per share.... (1) (1) $ 20,240,000 $5,627
TOTAL....................................... -- -- $ 20,240,000 $5,627
(1) In accordance with Rule 457(o) under the Securities Act, the number of
shares being registered and the proposed maximum offering price per share
are not included in this table.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES EXCHANGE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(A), MAY DETERMINE.
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SUBJECT TO COMPLETION, DATED , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
1,600,000 SHARES
[LOGO]
OMNILYNX COMMUNICATIONS CORPORATION
COMMON STOCK
This is OmniLynx Communications Corporation's initial public offering of
common stock. OmniLynx has recently acquired one company in the
telecommunications industry. We will also acquire two additional companies in
the same industry simultaneously with and as a condition of the closing of this
offering. OmniLynx has not conducted any operations to date except in connection
with this offering and the acquisitions of these companies.
We expect that the initial public offering price will be between $9.00 and
$11.00 per share. Prior to the offering, no public market for our common stock
existed. After the offering, we expect that the common stock will trade on the
American Stock Exchange under the symbol " ."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN "RISK
FACTORS" BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
---------------------
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PER SHARE TOTAL
Public Offering Price................................................... $ $
Underwriting Discount................................................... $ $
Proceeds, before expenses, to OmniLynx Communications Corporation....... $ $
The underwriters may also purchase up to an additional 240,000 shares at the
public offering price, less the underwriting discount, within 45 days from the
date of this prospectus to cover over-allotments.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
WESTPORT RESOURCES INVESTMENT SERVICES, INC.
WEATHERLY SECURITIES CORPORATION
, 1999
[NATIONAL COVERAGE GRAPHIC]
HEADER: NATIONAL COVERAGE.
DESCRIPTION: Graphic illustration of the United States territory marked with
symbols identifying the cities in which our services are available and the
cities in which our services are planned to be made available. The name of the
city is identified beside each symbol.
CAPTION: When complete, our networks in these regions will enable us to provide
service to commercial buildings, multiple dwelling units and residential
consumers throughout our targeted regions.
TABLE OF CONTENTS
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Prospectus Summary.................................................................... 3
Risk Factors.......................................................................... 8
The Company........................................................................... 20
Use of Proceeds....................................................................... 21
Dividend Policy....................................................................... 21
Capitalization........................................................................ 22
Dilution.............................................................................. 24
Selected Financial Data............................................................... 25
Management's Discussion and Analysis of Pro Forma Financial Condition and Results of
Operations.......................................................................... 28
Management's Discussion and Analysis Of Financial Condition and Results of Operations
Combined and Founding Companies..................................................... 34
Business.............................................................................. 44
Management............................................................................ 61
Certain Relationships and Related Transactions........................................ 68
Principal Stockholders................................................................ 73
Description of Capital Stock.......................................................... 76
Shares Eligible for Future Sale....................................................... 80
Underwriting.......................................................................... 83
Legal Matters......................................................................... 85
Experts............................................................................... 85
Where You Can Find More Information................................................... 86
Index to Financial Statements......................................................... F-1
------------------------
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. These forward-looking statements are subject to risks,
uncertainties and assumptions about us, including, among other things:
- The successful implementation of our anticipated growth strategies;
- Our ability to integrate our founding companies and future acquisitions;
- Continual changes in the telecommunications industry and technology;
- The actions of our competitors;
- Market acceptance of our services;
- Economic and demographic trends affecting our business; and
- Future expenditures for capital projects.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
------------------------
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS AND MAY
NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ
THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND RELATED NOTES, BEFORE
MAKING AN INVESTMENT DECISION. OMNILYNX COMMUNICATIONS CORPORATION HAS RECENTLY
ACQUIRED ONE COMPANY IN THE TELECOMMUNICATIONS INDUSTRY. WE WILL ALSO ACQUIRE
TWO ADDITIONAL COMPANIES IN THE SAME INDUSTRY SIMULTANEOUSLY WITH AND AS A
CONDITION OF THE CLOSING OF THIS OFFERING. THESE THREE COMPANIES ARE REFERRED TO
AS THE FOUNDING COMPANIES. EXCEPT AS OTHERWISE NOTED, THE INFORMATION IN THIS
PROSPECTUS (1) ASSUMES THAT OMNILYNX HAS ACQUIRED ALL OF THE FOUNDING COMPANIES,
(2) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED, (3)
ASSUMES AN INITIAL PUBLIC OFFERING PRICE OF $10.00 PER SHARE (THE MIDPOINT OF
THE RANGE OF ESTIMATED PUBLIC OFFERING PRICES SET FORTH ON THE COVER PAGE OF
THIS PROSPECTUS), AND (4) GIVES EFFECT TO A 1.922704 TO 1 REVERSE SPLIT OF
OMNILYNX'S COMMON STOCK IN JUNE 1999.
THE COMPANY
OmniLynx acquired ARC Networks, Inc. in June 1999. We will acquire
InfoHighway International, Inc. and AXCES, Inc. simultaneously with and as a
condition of the closing of this offering. Through these companies, we intend to
offer an extensive array of Internet and telecommunications services to
businesses and consumers. These services will initially include a combination of
high-speed Internet access and local and long distance telephone service. In the
future, we intend to offer cable television, video conferencing, secure online
shopping, online data backup, virtual private networks and other advanced data
services. We currently operate principally in New York, New Jersey, Florida,
Illinois, Texas and California.
The combination of these three companies creates an extensive product mix,
and produces efficiencies by combining sales and marketing efforts, back office
operations and customer service. Our complementary product lines will enable us
to become a full service telecommunications company. We will offer both bundled
services for customer convenience and a wide array of unbundled services for
specific applications. We intend to service both residential and commercial
end-users.
With our DirectConnect service, we presently provide or have agreed to
provide high-speed Internet service to 30 multi-story buildings. This service is
significantly faster than dial up modem connections, yet sells for less than the
cost of a dedicated high-speed connection. We also provide Internet and
telephone services to over 10,000 access lines, and serve more than 160,000
residential customers with long distance service. We believe significant
opportunities exist to expand revenues by cross selling various products to
current customers. In addition, we intend to continue to grow in all of our
markets through the acquisition of complementary technologies or companies. We
intend to use these acquisitions to increase our Internet service provider and
competitive local exchange carrier revenues in our target markets.
Each of the founding companies has at least five years of experience in its
respective industry and a seasoned management team. Mr. Joseph A. Gregori is our
Chief Executive Officer, and has over 13 years in the telecommunications
industry. Prior to becoming ARC's Executive Vice President in 1998, he served as
Chief Operating Officer of PriCellular Corporation, a publicly traded wireless
telephone provider, and President of Nationwide Cellular Service Inc. and its
successor company, MCI Wireless. Mr. Peter F. Parrinello, our Chairman of the
Board and President, has over 25 years of experience in the telecommunications
industry. Mr. Tony Howlett, our Chief Technology Officer, founded InfoHighway
and has served as Chief Executive Officer since 1994.
3
THE OFFERING
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Common stock offered by
OmniLynx................... 1,600,000 shares
Common stock outstanding
after this offering(1)..... 4,587,242 shares
Use of proceeds.............. We expect that the net proceeds from this offering (after
all costs and underwriting discounts and commissions, but
without exercise of the over-allotment option) will be
approximately $13.3 million. We intend to use these proceeds
for:
- repayment of certain indebtedness of OmniLynx and the
founding companies;
- capital expenditures for hardware to enable us to
serve additional buildings;
- general working capital purposes; and
- future acquisitions of telecommunications companies.
American Stock Exchange
Symbol.....................
------------------------
(1) The calculation of the number of shares of common stock outstanding after
the offering consists of:
- 1,600,000 shares to be sold in the public offering;
- 939,000 shares issued to the founders of OmniLynx and other investors; and
- 2,048,242 shares to be issued to the shareholders of the founding
companies.
The number of shares of common stock outstanding after the offering in the table
above does not include 3,585,459 shares which are issuable pursuant to
contingent common stock issue rights and various warrants, options, convertible
notes and convertible preferred stock. For a detailed description of these
additional shares, see "Capitalization."
------------------------
RISK FACTORS
Investing in the common stock involves risks which are described in "Risk
Factors" beginning on page 8 of this prospectus.
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"OmniLynx-TM-," "DirectConnect-TM-," "ARC Networks-TM-," "InfoHighway-TM-,"
"AXCES, Inc.-TM-" and the OmniLynx logo names and marks are our trademarks. This
prospectus contains our other product names, trade names and trademarks and
those of other organizations.
4
SUMMARY PRO FORMA COMBINED FINANCIAL DATA INFORMATION
OmniLynx acquired ARC in June 1999. We will acquire InfoHighway and AXCES
simultaneously with and as a condition of the closing of this offering. For
financial statement presentation purposes, AXCES has been identified as the
accounting acquiror. The following table presents summary unaudited pro forma
combined financial information for OmniLynx, as adjusted for:
- the effects of the acquisition of the founding companies on a historical
basis;
- the effects of certain pro forma adjustments to the historical financial
statements;
- the consummation of the offering and our use of the estimated net
proceeds; and
- the reverse stock split.
The pro forma combined financial data does not purport to represent what our
results of operations or financial position actually would have been had these
events, in fact, occurred on the date or at the beginning of the period
indicated, nor are they intended to project our results of operations or
financial position for any future date or period. See "Selected Financial Data"
and the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this prospectus.
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PRO FORMA COMBINED
------------------------------------
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, 1998 1999
----------------- -----------------
(IN THOUSANDS)
STATEMENT OF OPERATIONS DATA(1):
Revenues................................................................. $ 46,373 $ 9,947
Cost of services......................................................... 22,719 5,490
----------------- -----------------
Gross profit............................................................. 23,654 4,457
Selling, general and administrative expenses(2).......................... 21,536 4,578
Depreciation and amortization(3)......................................... 3,818 977
----------------- -----------------
Loss from operations..................................................... (1,700) (1,098)
Interest expense, net(4)................................................. (459) (72)
----------------- -----------------
Loss before income taxes................................................. (2,159) (1,170)
Provision (benefit) for income taxes(5).................................. 245 (172)
----------------- -----------------
Net loss before dividends on preferred stock............................. (2,404) (998)
Dividends on preferred stock............................................. 842 210
----------------- -----------------
Net loss applicable to common stockholders............................... $ (3,246) $ (1,208)
----------------- -----------------
----------------- -----------------
Net loss per share - basic and diluted................................... $ (0.71) $ (0.26)
----------------- -----------------
----------------- -----------------
Shares used in computing pro forma net loss per share(6)................. 4,587,242 4,587,242
----------------- -----------------
----------------- -----------------
OTHER DATA:
EBITDA(7)................................................................ $ 2,118 $ (121)
EBITDA margin(7)......................................................... 4.6% (1.2)%
Gross margin............................................................. 51.0% 44.8%
5
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AS OF MARCH 31, 1999
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PRO FORMA
COMBINED AS ADJUSTED(9)
----------------- -----------------
(IN THOUSANDS)
BALANCE SHEET DATA(8):
Working capital (deficit)................................................ $ (8,379) $ 6,114
Total assets............................................................. 41,210 47,680
Total debt, including current portion.................................... 9,398 2,575
Stockholders' equity..................................................... 21,787 35,080
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(1) The pro forma combined statement of operations data assume that the
acquisition of the founding companies and the offering were closed on
January 1, 1998.
(2) Reflects adjustments to salaries, bonuses and benefit amounts to reflect
those established in contractual agreements with key management personnel of
the founding companies.
(3) Reflects the amortization of excess purchase price relating to the
acquisitions which has been preliminarily allocated to an undifferentiated
pool of intangible assets to be amortized over an average period of 10 years
for pro forma purposes. Also reflects annual amortization of the customer
list acquired in connection with InfoHighway's acquisition of Eden Matrix,
an Austin, Texas-based Internet service provider operated by AMICI Online
Investments, L.L.C., in January 1999 over the estimated useful life of three
years and annual depreciation on property and equipment also acquired in the
acquisition of Eden Matrix over the estimated useful life of five years.
(4) Reflects the reduction in interest expense due to the planned repayment and
planned conversion of certain debt in connection with the acquisitions.
(5) Assumes all income is subject to a federal corporate tax rate of 34%.
(6) Includes (a) the 939,000 shares outstanding immediately prior to the
offering, (b) 2,048,242 shares to be issued to the owners of the founding
companies as consideration for the acquisitions, and (c) 1,600,000 shares to
be sold in the offering. Does not include contingent common stock or shares
issuable pursuant to warrants, options, convertible notes and convertible
preferred stock, since their effect would be antidilutive.
(7) EBITDA as used in this prospectus consists of earnings before interest,
income taxes, depreciation and amortization. Based on our experience in the
industry, we believe that EBITDA is an important tool for measuring the
performance of companies in the industry (including potential acquisition
targets) in several areas such as liquidity, operating performance and
leverage. In addition, lenders use EBITDA as a criterion in evaluating
companies in the industry. EBITDA is not a measure of financial performance
determined under generally accepted accounting principles, should not be
considered as an alternative to net income as a measure of performance or to
cash flows as a measure of liquidity, and is not necessarily comparable to
similarly titled measures of other companies. EBITDA margin is calculated by
dividing EBITDA into the total revenues generated during the indicated
period.
(8) The pro forma combined balance sheet data assume that the acquisitions of
the founding companies occurred on March 31, 1999.
(9) Adjusted for the sale of the 1,600,000 shares of common stock included in
the offering and the application of the net proceeds therefrom. See "Use of
Proceeds."
6
SUMMARY HISTORICAL FINANCIAL INFORMATION FOR THE FOUNDING COMPANIES
The following table presents certain summary historical statement of
operations data for each of the founding companies for the years ended December
31, 1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999.
This information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Combined and Founding
Companies" and the financial statements and notes thereto included in this
prospectus.
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THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
AXCES, INC.
Revenues................................................... $ 8,468 $ 19,474 $ 30,280 $ 10,387 $ 5,411
Gross profit............................................... 4,508 11,471 20,391 7,523 3,558
Operating income........................................... 773 2,426 2,253 3,916 993
EBITDA..................................................... 835 2,561 2,456 3,960 1,051
INFOHIGHWAY INTERNATIONAL, INC.
Revenues................................................... 426 915 1,385 302 535
Gross profit............................................... 208 267 389 76 199
Operating loss............................................. (483) (1,389) (1,211) (326) (267)
EBITDA..................................................... (431) (1,214) (950) (257) (136)
ARC NETWORKS, INC.
Revenues................................................... 5,583 9,648 13,931 3,462 4,001
Gross profit............................................... 509 753 2,280 433 700
Operating loss............................................. (947) (2,378) (1,592) (245) (365)
EBITDA..................................................... (929) (1,942) (1,185) (90) (269)
7
RISK FACTORS
You should carefully consider the following factors as well as the other
information contained in this prospectus. This prospectus contains certain
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including the risk factors set forth below and elsewhere in this prospectus.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED COMBINED
OPERATING HISTORY.
OmniLynx was incorporated in December 1996 and acquired ARC in June 1999. We
will acquire InfoHighway and AXCES simultaneously with and as a condition of the
closing of the offering. The pro forma combined financial results presented in
this prospectus are not necessarily indicative of actual results which might
have occurred if our operations and management teams had been combined during
the periods presented, nor are they representative of future results that will
be reported on a consolidated basis. Our prospects must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
an early stage of development, particularly those in new and rapidly evolving
markets. To address these risks, we must, among other things, rapidly expand the
geographic coverage of our services; attract and retain customers within our
existing and in new regions; increase awareness of our services; respond to
competitive developments; continue to attract, retain and motivate qualified
persons; continue to upgrade our technologies; commercialize our network
services incorporating such technologies; integrate the founding companies' back
office operations and deliver the bundled telecommunications product and
effectively manage our expanding operations. We may not be successful in
addressing such risks, and any failure on our part to do so could have a
material adverse effect on our business, prospects, operating results and
financial condition.
THERE ARE RISKS ASSOCIATED WITH THE INTEGRATION OF THE FOUNDING COMPANIES WHICH
COULD ADVERSELY AFFECT OUR BUSINESS.
The acquisition of the founding companies involves a number of risks,
including:
- the assimilation of new operations and personnel;
- integration of each founding company's respective equipment, service
offerings, networks and technologies, financial and information systems
and brand names;
- coordination of geographically separated facilities and work forces;
- coordination of their respective sales, marketing and service development
efforts; and
- maintenance of standards, controls, procedures and policies.
The process of integrating the operations of the founding companies,
including their personnel, could cause interruption of, or loss in momentum of
our business and operations activities, including those of the businesses
acquired. Further, employees of the founding companies who may be key to the
integration effort or our ongoing operations may choose not to continue to work
for us following the closing of the acquisitions.
We will incur certain expenses in connection with the integration of the
founding companies, which are not expected to be significant. However, the
actual amount of these expenses could be higher than anticipated. Factors that
could increase such costs include any unexpected employee turnover, unforeseen
delays in addressing duplicate facilities once the acquisitions have been
completed and the associated costs of hiring temporary employees, and any
additional fees and charges to obtain consents, regulatory approvals or permits.
We may not achieve the benefits and strategic objectives sought through the
acquisitions. Costs associated with the acquisitions, or liabilities and
expenses associated with the operations of the founding companies, that exceed
our expectations, could have a material adverse effect on our business,
prospects, operating results and financial condition. See "Management's
8
Discussion and Analysis of Pro Forma Financial Condition and Results of
Operations--Pro Forma Liquidity and Capital Resources."
WE HAVE AND MAY CONTINUE TO EXPERIENCE NET OPERATING LOSSES IN THE IMMEDIATE
FUTURE.
Two of the three founding companies have incurred substantial historical net
operating losses and experienced negative cash flow during recent periods. As of
March 31, 1999, we had a historical combined deficit of approximately $4.2
million. The independent auditors' reports of ARC and InfoHighway contained
explanatory paragraphs describing the uncertainty as to the ability of each of
those companies to continue as a going concern. We currently intend to increase
our capital expenditures and operating expenses significantly in order to:
- integrate the founding companies;
- expand our networks to support additional expected end-users in existing
and future markets; and
- market and provide our services to a growing number of potential
end-users.
In addition, we intend to record intangible assets of $27.6 million
associated with the acquisitions. Such amounts will result in an annual
amortization charge of approximately $2.7 million for each of the next 10 years.
If the 10-day average closing price of the common stock exceeds $16.00 and
$21.00 per share, we will be required to record significant additional
intangible assets related to the contingent common stock issue rights based upon
the market value of the common stock at that time. As a result, our net income
and earnings per share will be adversely affected each of those years. See
"Management's Discussion and Analysis of Pro Forma Financial Condition and
Results of Operations-- Operations."
DUE TO VARIOUS MARKET AND ECONOMIC FACTORS, OUR FUTURE QUARTERLY OPERATING
RESULTS MAY VARY SIGNIFICANTLY. THIS MAY ADVERSELY IMPACT OUR STOCK PRICE.
Our annual and quarterly operating results may fluctuate significantly in
the future as a result of numerous factors. Factors that may affect our
operating results include:
- our ability to complete the integration of the founding companies and
achieve the expected operating efficiencies;
- our ability to successfully provide a bundled telecommunication package of
services;
- the rate at which customers subscribe to our services;
- the prices the customers pay for such services;
- customer turnover; and
- the timing and ability of incumbent local exchange carriers to provide and
construct the required central office collocation facilities should we
deploy telephone switches.
Our operating results are sensitive to the rates that we charge our end user
customers for our services and the volume commitments of those customers and the
rates we pay the underlying carriers who supply telecommunications services
directly to us. We believe our financial performance depends to a great extent
upon retaining customers and on levels of subscriber turnover, which can vary
due to a variety of factors, including price, customer service, relocation of
end-user customers and employee turnover within these customers. Additionally,
we have a limited number of long-term contracts with our customers, and we may
experience substantial customer turnover because customers may easily
9
discontinue the use of our services and switch to an alternative service
provider. Furthermore, our operating results may fluctuate depending on, among
other things:
- the success of our relationships with Bell Atlantic, MCI WorldCom,
Frontier Communications, Inc., ATT/Teleport and other potential third
parties who deliver carrier services to us;
- our ability to deploy our services on a timely basis to adequately satisfy
subscriber demand;
- our ability to maintain targeted subscriber levels; and
- the mix of line orders between consumer end-users and business end-users
(which typically have higher revenues and margins).
Factors that may add to volatility in our annual or quarterly operating
results include, among others, the amount and timing of capital expenditures and
other costs relating to the expansion of our network, the introduction of new
services by us or our competitors, technical difficulties or network downtime,
general economic conditions and economic conditions specific to the
telecommunications industry. There may be delays in the commencement and
recognition of revenue because the installation of telecommunication lines to
implement certain services has lead times that are controlled by third parties.
In addition, we plan to increase operating expenses to fund operations, sales,
marketing, general and administrative activities and infrastructure, including
increased expenses associated with our relationships with Bell Atlantic, MCI
WorldCom, Frontier Communications, Inc., ATT/Teleport and other carriers. To the
extent that these expenses are not accompanied by increases in revenues, we
could experience a material adverse effect on our business, prospects, operating
results and financial condition. As a result of all of the foregoing factors, it
is likely that in some future quarter our operating results will be below the
expectations of securities analysts and investors. Such events would likely
materially adversely affect the price of our common stock. Fluctuations in
operating results may also result in volatility in the price of our common
stock.
OUR BUSINESS MODEL IS UNPROVEN AND WE MAY NOT BE SUCCESSFUL IN IMPLEMENTING OUR
BUSINESS STRATEGY. IN ADDITION, OUR PRODUCTS AND SERVICES MAY NOT ACHIEVE
SIGNIFICANT MARKET ACCEPTANCE.
We believe that we are one of the first competitive local exchange carriers
to provide high-speed digital communications services bundled with traditional
telephony services using emerging technology to commercial buildings and
multiple dwelling units. As such, our business strategy is unproven. To be
successful, we must, among other things, develop and market services that are
widely accepted by small to medium size businesses and consumers. Our
DirectConnect services have only been launched in the New York City, New York;
Houston, Dallas, Austin, Texas; Jacksonville, Florida; and Parsippany, New
Jersey metropolitan areas, and may not achieve broad commercial acceptance. The
prices we charge for certain services are in some cases higher than those
charged by our competitors for the same services. A sufficient number of
end-users may not be willing to pay the prices we charge for our services.
Additionally, prices for digital communications services have fallen
historically, and prices in the industry in general, and for the services we
offer, and plan to offer, are expected to continue to fall. We have provided,
and expect in the future to provide, price discounts to customers that commit to
multiple services. In addition, we may be required to reduce prices periodically
to respond to competition and to generate increased sales volume. Accordingly,
our business model may not be successful. The failure of our business model
would result in a material adverse effect on our business, prospects, operating
results and financial condition. See "Management's Discussion and Analysis of
Pro Forma Financial Condition and Results of Operations" and "Business--Business
Strategy."
10
OUR LENGTHY SALES CYCLE FOR COMMERCIAL BUILDINGS AND MULTIPLE DWELLING UNITS
REQUIRES US TO INCUR SIGNIFICANT EXPENSES IN ADVANCE OF THE RECEIPT OF REVENUES.
Our practice of marketing to commercial buildings either through real estate
management companies or landlords has taken significant effort to date and the
sales cycle is lengthy. Further, we have targeted new construction as one of our
principal markets. This market is subject to construction delays and other
conditions beyond our control. During this lengthy sales cycle, we incur
significant expenses in advance of the receipt of revenues. Therefore, any
long-term failure to roll out our services could have a material adverse effect
on our business, prospects, operating results and financial condition. See
"Business--Customers."
WE DEPEND UPON ENTERING INTO AGREEMENTS WITH THIRD-PARTIES IN ORDER TO HOUSE AND
OPERATE CERTAIN COMPONENTS OF OUR NETWORKS WHICH ARE SUBJECT TO VARIOUS
GOVERNMENTAL REGULATIONS.
We depend upon our ability to secure certain network elements from the
various incumbent and competitive local exchange carriers to deliver our
services to our customers. Additionally, as we deploy telephone switching
equipment, we are required to physically or virtually collocate our equipment in
the incumbent local exchange carriers' central offices. However, collocation
space may not be available in the central offices requested and we may
experience initial rejections of our applications to obtain collocation space
from the incumbent local exchange carriers. The rejection of our applications
for collocation space could result in delays in and increased expenses
associated with, the roll out of our services in our target markets, which could
result in a material adverse effect on our business, prospects, operating
results and financial condition.
In order to collocate our equipment in the incumbent local exchange
carriers' central offices we will be required to enter into and implement
interconnection agreements in each of our target markets with the appropriate
incumbent local exchange carriers. These interconnection agreements govern the
relationship between us and the incumbent local exchange carriers. Since
interconnection agreements are subject to interpretation by both parties,
differences in interpretation may arise that cannot be resolved on favorable
terms to us. Also, the interconnection agreements are subject to state
commission, FCC and judicial oversight. Future modification to the terms,
conditions or prices of our future interconnection agreements by these
governmental bodies, or disputes with incumbent local exchange carriers over the
terms of the interconnection agreements generally, may have a material adverse
effect on our business, prospects, operating results and financial condition.
See "Business--Telecommunications Services--Long Distance Services."
The 1996 Telecommunications Act requires incumbent local exchange carriers
to interconnect with other carriers and to provide competitive local exchange
carriers access to their unbundled network elements. The 1996 Telecommunications
Act generally requires that interconnection charges as well as charges for
unbundled network elements be cost-based and nondiscriminatory. Our nonrecurring
and recurring monthly charges for lines may vary greatly. These rates are
subject to the approval of the appropriate state regulatory commission. The
approval process typically involves a lengthy review of the incumbent local
exchange carrier-proposed rates in each state. The ultimate rates approved
typically depend greatly on the incumbent local exchange carrier's initial rate
proposals and such factors as the geographic deaveraging/averaging policy of the
state public utility commission. These proceedings are time-consuming and will
absorb scarce resources including legal personnel and cost experts as well as
participation by our management. Consequently, we are subject to the risk that
the non-recurring and recurring charges for lines and other unbundled network
elements will increase from time to time based on new rates proposed by the
incumbent local exchange carriers and approved by state regulatory commissions.
Any of the foregoing matters could result in a material adverse effect on our
business, prospects, operating results and financial condition. See
"Business--Network Architecture and Technology," "--Government Regulation" and
"--Legal Proceedings."
11
THE QUALITY OF OUR SERVICES IS DEPENDENT UPON THE QUALITY OF THE WIRING AND
EQUIPMENT USED BY THE INCUMBENT LOCAL EXCHANGE CARRIERS.
Our strategy requires us to interconnect with and use an incumbent local
exchange carrier's copper telecommunications lines to service our customers. As
such, we are dependent upon the technology and capabilities of the incumbent
local exchange carriers to meet certain telecommunications needs of our
customers and maintain our service standards. We are highly dependent on the
quality and availability of the incumbent local exchange carriers' copper lines
and the incumbent local exchange carriers' maintenance of such lines. We may not
be able to obtain the copper lines and the services we require from the
incumbent local exchange carriers or obtain such lines at quality levels, rates,
terms and conditions satisfactory to us. The failure to obtain such services or
obtain such lines at satisfactory quality levels, rates, terms and conditions
would have a material adverse effect on our business, prospects, operating
results and financial condition.
THE TELECOMMUNICATIONS SERVICES INDUSTRY IS HIGHLY COMPETITIVE AND SUBJECT TO
RAPID TECHNOLOGICAL CHANGE.
The telecommunications services industry is highly competitive, rapidly
evolving and subject to constant technological change. Our future success will
depend, in part, on our ability to effectively use leading technologies, to
continue to develop our technical expertise, to enhance our current services, to
develop new products and services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes. In addition, numerous companies offer Internet, local and long distance
telephone and other telecommunication services, and we expect competition to
increase in the future. We believe that existing competitors will likely
continue to expand their service offerings to appeal to our existing or
potential customers. Many of our existing competitors have greater financial,
personnel, brand and name recognition and other resources. Moreover, we expect
that new competitors will enter the telecommunications market, and that some of
these new competitors may offer similar services to those offered by us. In
addition, the regulatory environment in which we operate is undergoing
significant change. As this regulatory environment evolves, changes may occur
that could create greater or unique competitive advantages for our current or
potential competitors, or could make it easier for other new entrants to provide
services. See "Business-- Competition."
WE MAY REQUIRE SIGNIFICANT ADDITIONAL CAPITAL FOR FUTURE ACQUISITIONS.
We cannot predict with certainty what our capital needs will be to finance
future acquisitions. We currently intend to use our common stock to fund a
portion of the purchase price of future acquisitions. If our common stock does
not maintain an acceptable price in the public markets or if potential
acquisition candidates are unwilling to accept our common stock as part of the
consideration for the sale of their businesses, we may have to use more cash to
finance our acquisition program. If we do not have enough cash resources, our
ability to make acquisitions could be limited unless we are able to obtain
additional cash through future debt or equity financings. Incurring debt would
increase our leverage and make us more vulnerable to economic downturns and
limit our ability to compete.
We intend to enter into negotiations with commercial banks to provide us
with a credit facility to be used for acquisitions, working capital, capital
expenditures and other general corporate purposes. Any such credit facility or
other debt financing will require that we make certain financial covenants which
could limit our operational and financial flexibility. We may not be able to
obtain adequate financing for our acquisition program at all or on terms we deem
acceptable. As a result, we might be unable to successfully pursue our
acquisition strategy. See "Management's Discussion and Analysis of Pro Forma
Financial Condition and Results of Operations--Pro Forma Liquidity and Capital
Resources."
12
WE ARE DEPENDENT UPON THE CONTINUED GROWTH OF THE INTERNET AS A MEDIUM OF
COMMERCE AND COMMUNICATION.
Many of our current and future products and services are targeted toward
users of the Internet, which has experienced rapid growth. The market for
Internet access and related services is relatively new and characterized by
rapidly changing technology, evolving industry standards, changes in customer
needs and frequent new product and service introductions. Our future success
will depend, in part, on our ability to effectively use leading technologies, to
continue to develop our technical expertise, to enhance our current services, to
develop new products and services that meet changing customer needs, and to
influence and respond to emerging industry standards and other technological
changes on a timely and cost-effective basis. We may not be successful in
effectively using new technologies, developing new services or enhancing our
existing services on a timely basis and such new technologies or enhancements
may not achieve market acceptance. If the market for Internet access services
fails to develop, develops more slowly than expected, or becomes saturated with
competitors, or if the Internet access and services we offer are not broadly
accepted, our business, operating results and financial condition will be
materially adversely affected.
In addition, critical issues concerning the commercial use of the Internet
remain unresolved and may impact the growth of Internet use, especially in the
business market we have targeted. Despite growing interest in the many
commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, inconsistent quality of service, lack of availability of cost-effective,
high-speed options, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of the
confidentiality of stored data and information moving across the Internet, and a
lack of tools to simplify Internet access and use. In particular, a perceived
lack of security of commercial data, such as credit card numbers, has
significantly impeded commercial exploitation of the Internet to date, and there
can be no assurance that encryption or other technologies will be developed that
satisfactorily address these security concerns. Capacity constraints caused by
growth in the use of the Internet may, unless resolved, impede further
development of the Internet to the extent that users experience delays,
transmission errors and other difficulties. Further, the adoption of the
Internet for commerce and communications, particularly by those individuals and
enterprises which have historically relied upon alternative means of commerce
and communication, generally requires the understanding and acceptance of a new
way of conducting business and exchanging information. The failure of the market
for business-related Internet solutions to continue to develop would adversely
impact our business, prospects, operating results and financial condition.
IF THE MARKET FOR OUR SERVICES DOES NOT CONTINUE TO GROW, OUR BUSINESS WILL BE
MATERIALLY ADVERSELY AFFECTED.
The market for high bandwidth Internet services for small and medium-sized
businesses is in the early stages of development. Since this market is new and
because current and future competitors are likely to introduce competing
services, it is difficult to predict the rate at which this market will grow, if
at all, or whether new or increased competition will result in market
saturation. Various providers of high-speed digital communications services are
testing products from various suppliers for various applications, and no
industry standard has been broadly adopted. Certain critical issues concerning
commercial use of the Internet and remote local area network access, including
security, reliability, ease and cost of access and quality of service, remain
unresolved and may impact the growth of such services. If the market for our
services, including Internet access, fails to develop, grows more slowly than
anticipated or becomes saturated with competitors, our business, prospects,
operating results and financial condition could be materially adversely
affected. See "Business--Market Opportunity."
13
ANY SYSTEM FAILURE, WHETHER FROM NATURAL DISASTER OR ANY OTHER CAUSE, COULD
CAUSE WIDESPREAD INTERRUPTIONS IN THE SERVICES WE PROVIDE.
Our operations are dependent upon our ability to support our highly complex
network infrastructure and avoid damage from fires, earthquakes, floods, power
losses, excessive sustained or peak user demand, telecommunications failures,
network software flaws, transmission cable cuts and similar events. The
occurrence of a natural disaster or other unanticipated problem at our network
operations center could cause interruptions in the services we provide.
Additionally, failure of an incumbent local exchange carrier or other service
provider, such as other competitive local exchange carrier service providers, to
provide communications capacity we require, as a result of a natural disaster,
operational disruption or any other reason, could cause interruptions in the
services we provide. Any damage or failure that causes interruptions in our
operations could have a material adverse effect on our business, prospects,
operating results and financial condition. See "Business--Network Architecture
and Technology."
HACKERS, COMPUTER VIRUSES AND OTHER DISRUPTIVE PROBLEMS COULD POSE SECURITY
RISKS AND CAUSE MATERIAL INTERRUPTIONS IN THE SERVICES WE PROVIDE.
Despite the implementation of security measures, our networks may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Internet service providers and corporate networks have in the past
experienced, and are likely in the future to experience, interruptions in
service as a result of accidental or intentional actions of Internet users,
current and former employees and others. Unauthorized access could also
potentially jeopardize the security of confidential information stored in the
computer systems of our customers and such customers' end-users, which might
result in our liability to our customers and also might deter potential
customers. Although we have implemented security measures that are standard
within the telecommunications industry, and plan to deploy new company-developed
security measures, there can be no assurance that we will implement such
measures in a timely manner or to the degree that may be compatible with our
various customers' expectations, or that if and when implemented, such measures
will not be circumvented. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
our customers and such customers' end-users, which could have a material adverse
effect on our business, prospects, operating results and financial condition.
See "Business--Network Architecture and Technology."
OUR RELIANCE ON THIRD-PARTY VENDORS INVOLVES A NUMBER OF RISKS, ANY OF WHICH
COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS.
We rely and will continue to rely on outside parties to manufacture our
network equipment, such as customer premise equipment modems, network routing
and switching hardware, network management software, systems management software
and database management software. We also rely on incumbent local exchange
carriers to bill and collect for certain of our long distance customers in the
Southwestern Bell and Ameritech regions. As we sign additional service
contracts, we believe there may need to be a significant increase in the amount
of manufacturing and other services supplied by third parties in order for us to
meet our contractual commitments. We have in the past experienced supply
problems with certain of our vendors and there can be no assurance that these
vendors will be able to meet our needs in a satisfactory and timely manner in
the future or that we will be able to obtain additional vendors when and if
needed. Although we have identified alternative suppliers for technologies that
we deem critical and we are not constrained to use the same customer premise
equipment vendor in multiple regions, it could take a significant period of time
to establish relationships with alternative suppliers for critical technologies
and substitute their technologies into our networks. Our reliance on third-party
vendors involves a number of additional risks, including the absence of
guaranteed capacity and reduced control over delivery schedules, quality
assurance, production yields and costs. The loss of any of our relationships
with these suppliers could have a material adverse effect on
14
our business, prospects, operating results and financial condition. See
"Business--Network Architecture and Technology."
OUR SUCCESS IS HEAVILY DEPENDENT UPON OUR RETENTION OF CERTAIN OF OUR KEY
OFFICERS AND THE HIRING OF ADDITIONAL PERSONNEL.
Our performance is dependent on the performance of our executive officers
and key employees. In particular, our senior management has significant
experience in the data communications, telecommunications and personal computer
industries, and the loss of any one of our executive officers could have a
material adverse effect on our ability to execute our business strategy
effectively. In addition, we will be dependent upon the regional general
managers for each new region we enter. Regional general managers will have
direct responsibility for sales, service and market development efforts in their
respective regions, and the loss of one could disrupt significantly the
operations in the region. Additionally, given our early stage of deployment, we
are dependent on our ability to retain and motivate high quality personnel,
especially our management. We do not have "key person" life insurance policies
on any of our employees. We currently have employment agreements with Joseph A.
Gregori, Peter Parrinello, Tony Howlett and Glenn Kramer. However, certain
others of our current key personnel may not continue to be employed by us, and
we may not be able to attract and retain technical, sales, marketing and
managerial personnel in the future. Our future success also depends on our
continuing ability to identify, hire, train and retain other highly qualified
technical, sales, marketing and managerial personnel in connection with our
expansion within our existing regions and the deployment and marketing of our
network into targeted regions. Competition for such qualified personnel is
intense, particularly in software development, network engineering and product
management. The inability to attract and retain our officers and key employees
and the necessary technical, sales, marketing and managerial personnel could
have a material adverse effect upon our business, prospects, operating results
and financial condition. See "Business--Employees" and "Management."
THE INCREASE OF CURRENT GOVERNMENTAL SURCHARGES AND FEES ON OUR GROSS REVENUES
WOULD ADVERSELY AFFECT OUR BUSINESS.
Telecommunications providers pay a variety of surcharges and fees related to
the provision of interstate and intrastate services. Interstate surcharges
include federal universal service fees, common carrier regulatory fees,
numbering administration and primary interexchange carrier charges. In addition,
state regulators impose similar surcharges and fees on intrastate services. The
division of our services between interstate services and intrastate services is
a matter of interpretation and may in the future be contested by the FCC or
relevant state commissions. A change in the characterization of the jurisdiction
of our services could cause an increase in our payment obligations. In addition,
pursuant to periodic revisions by state and federal regulators of the applicable
surcharges, we may be subject to increases in the surcharges and fees currently
paid.
OUR BUSINESS IS HIGHLY REGULATED AND MAY BE ADVERSELY AFFECTED BY FUTURE CHANGES
IN GOVERNMENTAL REGULATIONS RELATING TO OUR INDUSTRY.
Our services are subject to federal, state and local government regulation.
The 1996 Telecommunications Act, which became effective in February 1996,
introduced widespread changes in the regulation of the telecommunications
industry, including provisions to increase competition among all
telecommunications providers, including the local markets in which we operate.
The 1996 Telecommunications Act eliminates many of the pre-existing legal
barriers to competition in telecommunications service markets and establishes
basic criteria for relationships between telecommunications providers.
Among other things, the 1996 Telecommunications Act removes barriers to
entry in the local exchange telephone market by preempting state and local laws
that restrict competition and by providing competitors interconnection, access
to unbundled network elements and retail services at wholesale rates. The FCC's
primary rules interpreting the 1996 Act, which were issued on August 8, 1996,
have in
15
large part, been upheld by the United States Supreme Court except, as noted
earlier, with respect to the minimum list of unbundled network elements.
Additional judicial challenges to FCC rules or changes in these rules could have
a material adverse effect on our business, prospects, operating results and
financial condition.
The FCC has also simultaneously proposed additional rules requiring
incumbent local exchange carriers to provide forms of collocation and unbundled
loops to competitive local exchange carriers on more favorable terms than
previously prescribed by the FCC. The FCC has also proposed additional rules
under which incumbent local exchange carriers may offer advanced
telecommunications services. The FCC's rulings, proposals and actions thereunder
may be appealed or reconsidered, and it is uncertain whether the FCC will in
fact order more favorable collocation and loop availability for competitive
local exchange carriers.
No assurance can be given that changes to current regulations or the
adoption of new regulations by the FCC or state regulatory authorities or
legislative initiatives, such as changes to the 1996 Act, or court decisions
will not have a material adverse effect on our business, prospects, operating
results and financial condition. See "Business--Government Regulations" and
"--Legal Proceedings."
In addition, we are subject to government regulation in several respects
which could cause additional operating costs and which must be monitored for
compliance. In particular, federal and state law prohibits the practice known as
"slamming," whereby telephone companies switch a customer's local or long
distance carrier without the customer's permission. We have been involved in
several legal proceedings in various states in which we were alleged to have
been engaged in slamming. Some of those cases have been settled while others are
still pending. See "Business--Legal Proceedings." In response, we have adopted
safeguards, including new policies and procedures, to reduce significantly and
substantially the number of slamming complaints against us. There can be no
assurance that we will not be penalized again for possible slamming practices in
the future, despite our new safeguards, and that such penalty, whether in the
form of a fine or a suspension of our right to conduct business, will not have a
material adverse impact on our business, prospects, operating results and
financial condition. We must also comply with advertising and disclosure rules
relating to our sale of long distance telephone services to the public. Our
retail marketing program, which utilizes representatives to recruit retail
customers and additional representatives, is subject to state laws regulating
network marketing programs. We must be registered with the public utility
commissions of most states in order to provide telephone service in those
states. Some state commissions also must approve changes in ownership of AXCES
and ARC, as well as the issuance of the securities contemplated by this
offering. We are also subject to federal, state and local government regulations
relating to health, safety, employment, wages and working conditions. There can
be no assurance that we will receive all necessary government approvals or that
government regulations will not have a material adverse impact on our business,
prospects, operating results and financial condition.
WE MAY INCUR LIABILITY AS AN INTERNET SERVICE PROVIDER.
We are an Internet service provider. As a general matter, Internet service
providers are not subject to federal and state regulations. However, laws
governing use of the Internet, including taxation of transactions, privacy,
security, digital signatures, and encryption are continually under consideration
at the state and federal level. In particular, the law governing the liability
of online service providers and Internet access providers for participating in
the hosting or transmission of objectionable materials or information currently
remains unsettled. Under the terms of the 1996 Telecommunications Act, courts
can impose civil and criminal penalties for the use of interactive computer
services for the transmission of certain indecent or obscene communications. The
United States Supreme Court in 1997 held this provision unconstitutional as it
relates to indecent, but not obscene, communications. In October 1998, Congress
enacted the Child Online Protection Act, which requires that online material
that is "harmful" to minors be restricted. This law is currently being
challenged and on February 1, 1999 a U.S.
16
District Court judge issued a preliminary injunction against enforcement of
portions of that act. The U.S. Justice Department has filed an appeal of the
February 1999 ruling. Also, some states have adopted or may adopt in the future
similar requirements. The constitutionality of such state requirements remains
unsettled at this time. In addition, several private parties have filed lawsuits
seeking to hold Internet service providers accountable for information that they
transmit, such as libelous material and copyrighted material. We cannot predict
the outcome of this litigation or the potential for the imposition of liability
on Internet service providers for information that they host, distribute or
transport. These suits and other regulations could materially change the way
ISPs must conduct business and could impact our determination to expand or
continue this business. To the extent that we become parties to future
litigation or there are new regulations, such litigation or new regulations
could have a material adverse effect on our business, prospects, operating
results and financial condition.
OTHER COMPANIES HAVE NAMES SIMILAR TO OURS.
Even though we are using the mark "OmniLynx Communications" in the United
States, other companies in many different industries have preexisting rights to
the name "OmniLynx" within defined territories. One specific company may have
the right to use the name for telecommunications services within an established
area. If any of these other companies are successful with their claims to our
name, we may be required to either obtain a license from them for the use of the
name "OmniLynx," or be required to change our name within certain defined
territories. Either result would cause us to incur additional expenses. If we
are required to change our name, we may lose the goodwill associated with the
"OmniLynx" name in these markets.
A GENERAL ECONOMIC DOWNTURN COULD CAUSE CUSTOMERS TO REDUCE THEIR EXPENDITURES
RELATED TO OUR SERVICES.
In the last few 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 or of
the metropolitan areas in which we currently operate 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 our services. Any such decline or concern
about an imminent decline could delay decisions among certain of our customers
to roll out our services or could delay decisions by prospective customers to
make initial evaluations of our services. Such delays would have a material
adverse effect on our business, prospects, operating results and financial
condition.
MANAGEMENT AND CERTAIN STOCKHOLDERS WILL CONTROL A MAJORITY OF OUR STOCK.
Our executive officers, directors and principal stockholders together will
beneficially own approximately 63.8% of the outstanding common stock after
completion of this offering (approximately 61.6% if the over-allotment option is
exercised in full). Accordingly, these stockholders will be able to determine
the composition of our Board of Directors, will retain the voting power to
approve all matters requiring stockholder approval and will continue to have
significant influence over our affairs. This concentration of ownership could
have the effect of delaying or preventing a change in control of or otherwise
discouraging a potential acquiror from attempting to obtain control of us, which
in turn could have a material adverse effect on the market price of the common
stock or prevent our stockholders from realizing a premium over the then
prevailing market prices for their shares of common stock. See "Management" and
"Principal Stockholders."
WE MAY EXPERIENCE PROBLEMS ASSOCIATED WITH THE YEAR 2000.
Some computers, software, and other equipment include computer codes in
which calendar year data is abbreviated to only two digits. Some of these
computer systems could fail to operate properly if
17
they interpret "00" to mean 1900, rather than 2000. This problem is widely known
as the "Year 2000 problem." We are highly dependent on our computer systems and
those of third party suppliers, vendors and customers. The Year 2000 problem
affects some of our computers, software, and other equipment, including the
computers which run our administrative functions. If we fail to properly
identify, correct and test our computer systems for the year 2000 problem, our
business operations could be adversely affected.
We are taking steps to remediate our Year 2000 problem. We do not believe
that the cost to remediate our Year 2000 problem will have a material adverse
effect on our operations. We believe that our computer systems will be Year 2000
compliant and will function adequately by, during and after the Year 2000. At
this time, however, we cannot assure you that our computer systems will not be
affected to some degree by the Year 2000 problem, in spite of our continuing
efforts. More importantly, we cannot assure you that the computer systems used
by our service providers such as billing vendors, telecommunications service
providers, our customers and other third parties, will function properly by the
Year 2000. A failure of our service providers to cause their computers systems
to be Year 2000 compliant could have an adverse effect on our operations. Their
Year 2000 problem could become our Year 2000 problem. See "Management's
Discussion and Analysis of Pro Forma Financial Condition and Results of
Operations--Year 2000 Compliance--Combined."
THE ABSENCE OF AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK MAY MAKE IT
DIFFICULT FOR YOU TO RESELL YOUR SHARES AT OR ABOVE THE OFFERING PRICE, AND OUR
STOCK PRICE MAY FLUCTUATE.
Prior to this offering, there has been no public market for the common
stock, and there can be no assurance that an active public market for the common
stock will develop or be sustained after the offering. The initial public
offering price will be determined by negotiation between us and the underwriters
based upon several factors and may not be indicative of the market price of the
common stock after the offering. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
trading price of the common stock could be subject to wide fluctuations in
response to factors included in this prospectus, many of which are beyond our
control. In addition, in recent years the stock market has experienced extreme
price and volume fluctuations. These fluctuations have had a substantial effect
on the market prices for many emerging growth companies, often unrelated to the
operating performance of the specific companies. Such market fluctuations could
adversely affect the price of our common stock.
SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK MAY ADVERSELY AFFECT OUR STOCK
PRICE AND MAKE FUTURE OFFERINGS TO RAISE CAPITAL MORE DIFFICULT.
When this offering closes, approximately 65% of the outstanding shares of
common stock will be contractually restricted from resale until the second
anniversary of this offering, unless the price of the common stock is at least
$17, at which time portions of such shares could begin to be freely tradeable as
early as the first anniversary of the offering. In addition, there are
approximately 3,585,459 shares which are issuable as contingent common stock and
pursuant to various warrants, options, convertible notes and convertible
preferred stock, 327,917 of which are automatically eligible for resale after
the first anniversary of the offering. The holders of 281,667 of those shares
can require us to register their shares for resale at any time beginning one
year after the closing of this offering. In addition, 165,000 shares of common
stock have been registered for resale by Benchmark Equity Group for a period of
90 days, which period shall begin 90 days after the closing of this offering.
Subsequent sales of these shares or the perception that those sales might occur
could materially adversely affect the price of our common stock and make it more
difficult for us to raise funds through future offerings of common stock. See
"Shares Eligible for Future Sale."
18
YOU WILL EXPERIENCE IMMEDIATE, SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF THE SHARES YOU PURCHASE.
Purchasers of our common stock in this offering:
- will pay a price per share that substantially exceeds the value on a per
share basis of our assets after we subtract from those assets our
intangible assets and our liabilities;
- will contribute a majority of the funds we will need to complete our
initial acquisitions and repay indebtedness, but will own only 34.9% of
the outstanding shares of our common stock, and 30.8% of the voting
interest; and
- may experience further dilution in the net tangible value of their common
stock as a result of future issuances of common stock.
See "--We May Require Significant Additional Capital for Future Acquisitions"
and "Dilution."
WE DO NOT INTEND TO PAY CASH DIVIDENDS ON OUR COMMON STOCK IN THE NEAR FUTURE.
We have never paid cash dividends and have no plans to do so in the
foreseeable future. Our future dividend policy will be determined by our Board
of Directors and will depend upon a number of factors, including our earnings,
capital requirements and overall financial condition. See "Dividend Policy."
WE MAY ISSUE ADDITIONAL PREFERRED STOCK WHOSE TERMS COULD ADVERSELY AFFECT THE
VOTING POWER OR VALUE OF OUR COMMON STOCK.
Our certificate of incorporation authorizes us to issue, without the
approval of our stockholders, one or more classes or series of preferred stock
having such preferences, powers and relative, participating, optional and other
rights, including preferences over our common stock respecting dividends and
distributions, as our board of directors may determine. The terms of one or more
classes or series of preferred stock could adversely impact the voting power or
value of our common stock. For example, we might afford holders of preferred
stock the right to elect some number of our directors in all events or on the
happening of specified events or the right to veto specified transactions.
Similarly, the repurchase or redemption rights or liquidation preferences we
might assign to holders of preferred stock could affect the residual value of
the common stock. We currently have two series of preferred stock outstanding.
See "Description of Capital Stock--Preferred Stock."
PROVISIONS IN OUR CORPORATE DOCUMENTS AND DELAWARE LAW COULD DELAY OR PREVENT A
CHANGE IN CONTROL OF OUR COMPANY, EVEN IF THAT CHANGE WOULD BE BENEFICIAL TO OUR
STOCKHOLDERS.
The existence of some provisions in our corporate documents and Delaware law
could delay or prevent a change in control of our company, even if that change
would be beneficial to our stockholders. Our certificate of incorporation and
bylaws contain provisions that may make acquiring control of our company
difficult, including:
- provisions relating to the classification, nomination and removal of our
directors;
- provisions limiting the right to call special meetings of our board and
our stockholders;
- provisions regulating the ability of our stockholders to bring matters for
action at annual meetings of our stockholders;
- a prohibition of action by our stockholders without a meeting; and
- the authorization to issue and set the terms of preferred stock.
19
THE COMPANY
OMNILYNX COMMUNICATIONS CORPORATION. Our executive offices are located at
1770 Motor Parkway, Suite 300, Hauppauge, New York 11788, and our telephone
number is (516) 582-2222. We acquired ARC in June 1999. We will acquire
InfoHighway and AXCES simultaneously with and as a condition of the closing of
the offering. The following is a description of the founding companies:
AXCES, INC. AXCES is a switchless long-distance carrier that resells
long-distance service to the low-volume urban residential user. Although AXCES
generates the vast majority of its sales from its 1+ service, it also offers
paging service, 800 service, voice-mail and calling cards. AXCES is licensed in
20 states and maintains billing operations and customers in the Southwestern
Bell Telephone region, which includes Texas, Kansas, Missouri, Arkansas and
Oklahoma as well as in the Ameritech region, which includes Illinois, Indiana,
Michigan, Wisconsin and Ohio. As of June 15, 1999, AXCES had approximately
160,000 active customers concentrated in Dallas, Houston, San Antonio and
Chicago. AXCES maintains carrier agreements with Coastal Telephone Services and
Frontier Communications as well as billing and collection agreements with
Southwestern Bell Telephone and Ameritech. AXCES outsources its call rating
function. AXCES' objective is to become a leading provider of long-distance
service and expand its product line to include local service and Internet access
to residential customers in large metropolitan areas.
INFOHIGHWAY INTERNATIONAL, INC. InfoHighway is a business oriented Internet
service provider, based in Houston, Texas. InfoHighway was founded in 1994 and
was one of the earliest Internet service providers in the nation. InfoHighway
specializes in offering a high-speed Internet access product to high-rise office
buildings in Texas, New York, New Jersey and Florida. This service, called
DirectConnect, is faster than most comparably priced offerings from our
competitors. InfoHighway offers additional value-added Internet services to the
tenants of these DirectConnect buildings. InfoHighway also provides traditional
Internet services such as dial-up Internet access, ISDN connections and web-site
hosting to businesses not in DirectConnect buildings. During January 1999,
InfoHighway acquired the operations of Eden Matrix.
ARC NETWORKS, INC. ARC is a competitive local exchange carrier based in New
York and has been in business since 1993. ARC offers local phone service, long
distance, cabling and other network services to customers primarily in the New
York metropolitan area. ARC was founded as a division of Avionics Research
Corporation, an engineering firm that has provided design and engineering
services for over 40 years. ARC works within its customer's existing
communications infrastructure to offer an extensive array of services from
consulting services to complete turnkey telecommunication systems. Customers can
use ARC in conjunction with their existing providers or choose to receive all of
their telecommunications services on a single bill from ARC. ARC's sales force
and consultants work with clients to supply the most appropriate, cost-effective
telecommunications solutions. They have an extensive client list from a wide
spectrum of industries. They provide service to over 20 of Manhattan's most
prominent high-rise buildings and many brand name clients. Their mission is to
provide the highest level of customer satisfaction by offering quality service,
dependability and diversity at competitive prices.
20
USE OF PROCEEDS
The net proceeds we will receive from the offering, after deducting
estimated underwriting discounts and commissions and offering expenses, are
estimated to be approximately $13.3 million assuming an initial public offering
price of $10.00 per share ($15.4 million if the underwriters exercise their
over-allotment option in full.)
We anticipate that the $13.3 million of net proceeds of this offering will
be used to repay $6.8 million of indebtedness of OmniLynx and the founding
companies. We anticipate that the remaining $6.5 million of the net proceeds
will be used for:
- capital expenditures for hardware to enable us to serve additional
buildings;
- general working capital purposes; and
- future acquisitions.
We believe that the net proceeds of this offering will be sufficient to fund
our aggregate capital expenditures and working capital requirements, including
operating losses, for the foreseeable future. The amounts we actually expend for
these purposes may vary significantly depending upon a number of factors,
including future revenue growth, if any, capital expenditures and the amount of
cash generated by our operations. Additionally, if we determine it would be in
our best interest, we may increase or decrease the number, selection and timing
of entry of our targeted regions. Accordingly, our management will retain broad
discretion in the allocation of the net proceeds remaining after the repayment
of indebtedness in connection with the acquisitions. Although we may use a
portion of the net proceeds to pursue possible acquisitions of businesses,
technologies or products complementary to our current operations in the future,
there are no present understandings, commitments or agreements with respect to
any such acquisitions. Pending use of such net proceeds for the above purposes,
we intend to invest such funds in short-term, interest-bearing, investment-grade
securities. See "Risk Factors--We May Require Significant Additional Capital for
Future Acquisitions" and "Management's Discussion and Analysis of Pro Forma
Financial Condition and Results of Operations."
DIVIDEND POLICY
We have never paid cash dividends and have no plans to do so in the
foreseeable future. Our future dividend policy will be determined by our Board
of Directors and will depend upon a number of factors, including:
- our financial condition and performance;
- our cash needs and expansion plans;
- income tax consequences; and
- the restrictions Delaware and other applicable laws and our credit
arrangements then impose.
21
CAPITALIZATION
The following table sets forth the cash, short-term debt and current
maturities of long-term debt and capitalization as of March 31, 1999:
- on a pro forma combined basis to give effect to the acquisition of the
founding companies and the acquisition of Eden Matrix, and
- on a pro forma combined basis as adjusted to give effect to the offering
and the application of the estimated net proceeds.
See "Use of Proceeds" and Unaudited Pro Forma Combined Financial Statements
and the related notes thereto included elsewhere in this prospectus.
ˇ Enlarge/Download Table
MARCH 31, 1999
----------------------
PRO FORMA AS
COMBINED ADJUSTED
----------- ---------
(IN THOUSANDS)
Cash and cash equivalents................................................ $ 2,095 $ 8,631
----------- ---------
----------- ---------
Short-term debt and current maturities of long-term debt (1)............. 9,389 1,366
Long-term debt, less current maturities.................................. 9 1,209
Stockholders' equity
Preferred stock, $.0001 par value, 3,000,000 shares authorized:
Series A, 121,667 shares issued and outstanding, pro forma and as
adjusted........................................................... -- --
Series B, 60,000 shares issued and outstanding, pro forma and as
adjusted........................................................... -- --
Common stock, $.0001 par value, 25,000,000 shares authorized;
2,987,242 shares issued and outstanding, pro forma; and 4,587,242
shares issued and outstanding, as adjusted (2)..................... -- --
Additional paid-in capital............................................. 21,849 35,169
Deficit................................................................ (62) (89)
----------- ---------
Total stockholders' equity........................................... 21,787 35,080
----------- ---------
Total capitalization............................................... $ 31,185 $ 37,655
----------- ---------
----------- ---------
------------------------
(1) For a description of our debt, see the Notes to Unaudited Pro Forma Combined
Financial Statements and the Notes to the Financial Statements of the
founding companies included elsewhere herein.
(2) The calculation of the number of shares of common stock outstanding after
the offering in the table above consists of:
- 1,600,000 shares to be sold in the public offering;
- 939,000 shares issued to the founders of OmniLynx and other investors; and
- 2,048,242 shares to be issued to the shareholders of the founding
companies.
The number of shares of common stock outstanding after the offering in the
table above does not include:
- 727,511 shares issuable as contingent consideration to our management and
other investors and the previous shareholders of ARC and InfoHighway based
upon the performance of our common stock beginning 90 days after the
completion of this offering (approximately one half of these shares are
issuable when the common stock reaches a 10-day average of $16 per share,
and the remaining one half are issuable when the common stock reaches a
10-day average of $21 per share);
22
- 600,000 shares issuable upon conversion of our Series B Preferred Stock
which will be issued to the shareholders of AXCES at a conversion price of
$15 per share;
- 600,000 shares issuable upon exercise of options at $8 per share which
were granted to certain members of our management in connection with the
acquisition of ARC;
- 573,333 shares issuable upon exercise of warrants at $8 per share which
were issued in connection with certain bridge loans to OmniLynx prior to
the offering;
- 291,000 shares issuable upon exercise of options at $10 per share which
will be issued to certain members of our management and board of directors
upon consummation of the offering;
- 206,250 shares issuable upon conversion of a convertible promissory note
issued to a former debtholder of ARC at a conversion price of $8 per
share;
- 160,000 shares issuable upon exercise of warrants at $12 per share which
will be issued to the representative of the underwriters in connection
with this offering (184,000 if the underwriters exercise their
over-allotment option in full);
- 159,000 shares issuable upon exercise of options at $5 per share which
will be issued to our management upon consummation of the offering;
- 121,667 shares issuable upon conversion of our Series A Preferred Stock
which was issued to a former debtholder of ARC at a conversion price of
$10 per share;
- 90,000 shares issuable upon exercise of warrants at $8 per share which
were issued to a former debtholder of ARC;
- 36,185 shares issuable upon conversion of warrants at $5.71 which were
issued to a consultant prior to the offering (26,005 of these warrants
have already vested, 5,090 of these warrants vest when the common stock
reaches a 10-day average of $16 per share, and the remaining 5,090 of
these warrants vest when the common stock reaches a 10-day average of $21
per share); and
- 20,513 shares issuable upon conversion of warrants at $121.853 per share
which were issued to former warrant holders of ARC.
23
DILUTION
The deficit in our pro forma combined net tangible book value as of March
31, 1999 was approximately $(6.5) million, or approximately $(2.18) per share,
after giving effect to the acquisitions and the acquisition of Eden Matrix but
before giving effect to the offering. The deficit in pro forma net tangible book
value per share represents the amount by which our pro forma total liabilities
exceed our pro forma net tangible assets as of March 31, 1999, divided by the
number of shares to be outstanding after giving effect to the acquisitions and
the acquisition of Eden Matrix. After giving effect to the sale of the 1,600,000
shares offered hereby and deducting the estimated underwriting discount and
estimated offering expenses payable by us, our pro forma net tangible book value
as of March 31, 1999 would have been approximately $6.8 million, or
approximately $1.48 per share, based on an assumed initial public offering price
of $10.00 per share (the midpoint of the estimated initial public offering price
range). This represents an immediate increase in pro forma net tangible book
value of approximately $3.66 per share to existing shareholders and an immediate
dilution of approximately $8.52 per share to new investors purchasing shares of
this offering. The following table illustrates this per share pro forma
dilution:
ˇ Enlarge/Download Table
Assumed initial public offering price per share............................. $ 10.00
Pro forma net tangible book value (deficit) per share before this
offering................................................................ $ (2.18)
Increase per share attributable to new investors............................ 3.66
---------
As adjusted pro forma net tangible book value per share after the
offering.................................................................. 1.48
---------
Dilution per share to new investors......................................... $ 8.52
---------
---------
The following table summarizes, on a pro forma basis as of March 31, 1999,
the difference between the existing stockholders and new investors with respect
to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid at an assumed initial
public offering price of $10.00 per share (before deducting estimated
underwriting discounts and commissions and offering expenses payable by us):
ˇ Enlarge/Download Table
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
----------------------- ------------- PRICE PER
NUMBER PERCENT AMOUNT SHARE
---------- ----------- ------------- -----------
Existing stockholders........................................... 2,987,242 65.1% $ (6,525,000 (1) $ (2.18)
New investors................................................... 1,600,000 34.9% 16,000,000 $ 10.00
---------- ----- -------------
Total........................................................... 4,587,242 100.0% $ 9,475,000
---------- ----- -------------
---------- ----- -------------
------------------------
(1) Total consideration paid by existing stockholders represents our pro forma
combined stockholders' equity less pro forma combined goodwill and other
intangible assets, in each case before giving effect to the post acquisition
adjustments set forth in the Unaudited Pro Forma Combined Balance Sheet of
OmniLynx and the founding companies included herein.
The foregoing table assumes no exercise of the over-allotment option and no
exercise of stock options or warrants outstanding. To the extent options and
warrants are subsequently exercised, there will be further dilution to new
investors. See "Management" and Notes to Unaudited Pro Forma Combined Financial
Statements.
24
SELECTED FINANCIAL DATA
OmniLynx acquired ARC in June 1999. We will acquire InfoHighway and AXCES
simultaneously with and as a condition of the closing of this offering. OmniLynx
has not conducted any operations to date, except in connection with this
offering and the acquisitions. For financial statement presentation
purposes, AXCES has been identified as the accounting acquiror. The following
selected historical financial data for AXCES for the years ended December 31,
1994, 1995, 1996, 1997 and 1998, and as of December 31, 1994, 1995, 1996, 1997
and 1998 have been derived from the audited financial statements of AXCES. The
following selected historical financial data for AXCES for the three months
ended March 31, 1998 and 1999, and as of March 31, 1999 have been derived from
the unaudited financial statements of AXCES which have been prepared on the same
basis as the audited financial statements and, in the opinion of AXCES, reflects
all adjustments consisting of normal recurring adjustments, necessary for a fair
presentation of such data. Our summary unaudited pro forma financial information
presents certain data, as adjusted for:
- the effects of the acquisition of the founding companies on a historical
basis;
- the effects of certain pro forma adjustments to the historical financial
statements;
- the closing of the offering and the application of the proceeds therefrom;
and
- the effects of the reverse stock split.
Our pro forma financial data do not purport to represent what our results of
operations or financial position actually would have been had these events, in
fact, occurred on the date or at the beginning of the period indicated, nor are
they intended to project our results of operations or financial
position for any future date or period. See the Unaudited Pro Forma Combined
Financial Statements and the notes thereto included elsewhere in this
prospectus.
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THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS) (UNAUDITED)
STATEMENTS OF OPERATIONS DATA:
AXCES:
Revenues................................. $ 667 $ 2,691 $ 8,468 $ 19,474 $ 30,280 $ 10,387 $ 5,411
Cost of services......................... 441 1,606 3,960 8,003 9,889 2,864 1,853
--------- --------- --------- --------- --------- --------- ---------
Gross profit............................. 226 1,085 4,508 11,471 20,391 7,523 3,558
Selling, general and administrative
expenses............................... 203 823 3,674 8,910 17,934 3,563 2,507
Depreciation and amortization............ 1 7 61 135 204 44 58
--------- --------- --------- --------- --------- --------- ---------
Income from operations................... 22 255 773 2,426 2,253 3,916 993
Interest income (expense), net........... -- (11) 37 (19) (208) (56) (3)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes............... 22 244 810 2,407 2,045 3,860 990
Provision (benefit) for income taxes..... 1 74 279 837 (917) (917) --
--------- --------- --------- --------- --------- --------- ---------
Net income............................... $ 21 $ 170 $ 531 $ 1,570 $ 2,962 $ 4,777 $ 990
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
25
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PRO FORMA COMBINED
------------------------------
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1998 MARCH 31, 1999
-------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA (1):
Revenues.................................................. $ 46,373 $ 9,947
Cost of services.......................................... 22,719 5,490
-------------- --------------
Gross profit.............................................. 23,654 4,457
Selling, general and administrative expenses (2).......... 21,536 4,578
Depreciation and amortization (3)......................... 3,818 977
-------------- --------------
Loss from operations...................................... (1,700) (1,098)
Interest expense, net (4)................................. (459) (72)
-------------- --------------
Loss before income taxes.................................. (2,159) (1,170)
Provision (benefit) for income taxes (5).................. 245 (172)
-------------- --------------
Net loss before dividends on preferred stock.............. $ (2,404) $ (998)
Dividends on preferred stock.............................. 842 210
-------------- --------------
Net loss applicable to common stockholders................ $ (3,246) $ (1,208)
-------------- --------------
-------------- --------------
Net loss per share--basic and diluted..................... $ (0.71) $ (0.26)
-------------- --------------
-------------- --------------
Shares used in computing pro forma net loss per share
(6)..................................................... 4,587,242 4,587,242
-------------- --------------
-------------- --------------
OTHER DATA:
EBITDA.................................................... 2,118 $ (121)
EBITDA margin............................................. 4.6% (1.2)%
Gross margin.............................................. 51.0% 44.8%
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AXCES
------------------------------------------------------- AS OF MARCH 31, 1999 (UNAUDITED)
-------------------------------------
AS OF DECEMBER 31, PRO FORMA
------------------------------------------------------- AXCES COMBINED AS ADJUSTED
1994 1995 1996 1997 1998 ACTUAL (7) (8)
----- --------- --------- --------- --------- --------- ----------- -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)..... $ 49 $ 127 $ 391 $ 1,538 $ 4,706 $ 5,703 $ (8,379) $ 6,114
Total assets.................. 81 919 2,235 4,735 8,269 7,063 41,210 47,680
Total debt, including current
portion..................... -- 130 19 63 1,734 -- 9,398 2,575
Stockholders' equity.......... 34 204 736 2,306 5,268 6,258 21,787 35,080
------------------------
(1) Assumes the acquisition of the founding companies and the offering were
closed on January 1, 1998.
(2) Reflects adjustments to salaries, bonuses and benefit amounts to reflect
those established in contractual agreements with key management personnel of
the founding companies.
(3) Reflects the amortization of excess purchase price relating to the
acquisition of the founding companies which has been preliminarily allocated
to an undifferentiated pool of intangible assets to be amortized over an
average period of 10 years for pro forma purposes. Also reflects annual
amortization of the customer list acquired in connection with InfoHighway's
acquisition of Eden Matrix in January 1999 over the estimated useful life of
three years and annual depreciation on
26
property and equipment also acquired in the acquisition of Eden Matrix over
the estimated useful life of five years.
(4) Reflects the reduction in interest expense due to the planned repayment and
planned conversion of certain debt in connection with the acquisitions.
(5) Assumes all income is subject to a federal corporate tax rate of 34%.
(6) Includes (a) the 939,000 shares outstanding immediately prior to the
offering, (b) 2,048,242 shares to be issued to the owners of the founding
companies, and (c) 1,600,000 shares to be sold in the offering. Does not
include contingent common stock or shares issuable pursuant to warrants,
options, convertible notes and convertible preferred stock since their
effect would be anti-dilutive.
(7) The pro forma combined balance sheet data assume that the acquisition of the
founding companies occurred on March 31, 1999.
(8) Adjusted for the sale of the 1,600,000 shares of common stock included in
the offering and the application of the net proceeds therefrom. See "Use of
Proceeds."
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Pro Forma Combined Financial Statements and related notes thereto and "Selected
Financial Data" appearing elsewhere in this prospectus.
SUMMARY
We were formed to become a leading provider of Internet, data and
telecommunications solutions to businesses and consumers. Prior to the
acquisition of ARC, we had conducted no operations. We acquired ARC in June
1999. We will acquire InfoHighway and AXCES simultaneously with and as a
condition of the closing of this offering. Our services include high-speed
Internet access, local phone services with innovative features, long distance
service at competitive rates, and other value added Internet services that are
under development. On a pro forma basis, the combined operations generated
revenues of $46.4 million and $9.9 million for the year ended December 31, 1998
and the three months ended March 31, 1999, respectively.
We intend to integrate these businesses and their operations and
administrative functions. This integration process may present opportunities to
reduce costs through the elimination of duplicative functions and through
economies of scale, but will necessitate additional costs and expenditures for
corporate management and administration. The founding companies have been
managed throughout the periods discussed below as independent private companies,
and their results of operations reflect different tax structures (S Corporation
and C Corporations) which have influenced, among other things, their historical
levels of owners' compensation. Except for the compensation and benefits
reductions aggregating $2.6 million for the year ended December 31, 1998 and
$28,000 for the three months ended March 31, 1999, as provided for in agreements
entered into in connection with the acquisition of the founding companies, no
such cost savings were reflected in the pro forma results of operations data. We
will also incur corporate expenses related to being a public company,
implementation of an acquisition program and systems integration. These various
costs and possible cost savings may make comparison of pro forma operating
results not comparable to, nor indicative of, future performance.
ORGANIZATION
We will acquire the founding companies for an aggregate consideration of
approximately $28.7 million (including consideration to consummate the
acquisition of Eden Matrix), assuming an initial public offering price of $10.00
per share, as described in the following table:
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CONTINGENT COMMON
PREFERRED
COMMON STOCK STOCK STOCK
--------------------- ---------------------- ----------
VALUE OF VALUE OF VALUE OF
ACQUISITION SHARES SHARES SHARES SHARES SHARES
---------------------------------------- --------- ---------- --------- ----------- ----------
AXCES................................... 700,000 $6,300,000 -- $ -- $9,000,000
InfoHighway............................. 958,166 8,623,494 235,878 -- --
ARC..................................... 390,076 3,510,684 152,672 -- 1,216,674
--------- ---------- --------- ----- ----------
Total................................... 2,048,242 $18,434,178 388,550 $ -- $10,216,674
--------- ---------- --------- ----- ----------
--------- ---------- --------- ----- ----------
The value of the common shares has been determined using an estimated fair
value of $9.00 per share, which represents a discount of ten percent from the
assumed initial public offering price of $10.00 per share (the midpoint of the
range of estimated actual public offering prices set forth on the cover page of
this prospectus) due to restrictions on the sale and transferability of the
shares issued.
The estimated purchase price for the acquisitions is based upon preliminary
estimates and is subject to certain purchase price adjustments at and following
closing. In the opinion of management, the final allocation of the purchase
price will not materially differ from these preliminary estimates.
28
The closing of the acquisitions is subject to certain customary conditions,
including the accuracy of the representations and warranties made by the
founding companies, the performance of their respective covenants in the
agreements and the nonexistence of a material adverse change in the results of
operations, financial condition or business of each founding company.
OPERATIONS
REVENUES. Our revenues are derived from two principal sources, namely
Internet services and telecommunication services.
INTERNET SERVICES. Internet services fall into two categories:
DirectConnect Internet access and standard Internet services. DirectConnect
is a high-speed Internet service offered in office buildings in Texas, New
York, New Jersey and Florida. DirectConnect service provides building
tenants access to a shared high-speed dataline. The DirectConnect service
provides several benefits over traditional dial-up services, including
higher speed, continuous connection, fewer technical problems, lower cost,
increased security and greater usability.
Standard Internet services include access to the Internet over regular
dial-up telephone lines, as well as rapid access to the Internet via
high-speed technologies such as dedicated facilities including T-1 and ISDN
and Frame-Relay. We also establish e-mail addresses for our customers, as
well as provide web site hosting services.
Internet services are typically billed to a customer at an established
rate per service offering pursuant to a contract. Contract terms range from
one month to one year. Revenue is recognized over the period that services
are rendered.
TELECOMMUNICATION SERVICES. Service offerings include local phone
service, private data and voice lines, long distance, cabling and other
network services to customers primarily in the New York metropolitan area
and across several major cities in Texas and Illinois. In our business
segment, we work within our customers' existing communications
infrastructure to offer an extensive array of services from consulting to
complete turnkey telecommunications systems. Services are offered through
contracts with a variety of incumbent and competitive local exchange
carriers.
For local and long distance telephone service, revenue is recognized as
service is provided to customers. Revenue from our data cable installation
services is recognized using the percentage of completion method, measured
by the percentage of cost incurred to date to the total estimated cost for
each contract. Revisions in cost estimates and recognition of losses, if
any, on these contracts are reflected in the accounting period in which the
facts become known.
COST OF SERVICES AND GROSS PROFIT. Cost of services consists primarily of
long distance telephone and network charges, salaries and benefits for operating
personnel and technical support staff. Gross profit percentages vary among the
founding companies, primarily because of the differences in local market demand
and competition as well as differences in the mix of products and services. The
founding companies' gross profit percentages for telecommunication services has
differed significantly among the founding companies, and has ranged from
approximately 8% to 67% in recent years.
GOODWILL AND OTHER INTANGIBLE ASSETS. In July 1996, the SEC issued Staff
Accounting Bulletin No. 97 relating to business combinations immediately prior
to an initial public offering. Staff Accounting Bulletin No. 97 requires that
these combinations be accounted for using the purchase method of accounting.
Under the purchase method, the founding company whose owners receive the largest
portion of voting rights in the combined enterprise is presumed to be the
accounting acquiror. Accordingly, AXCES has been designated as the accounting
acquiror. As a result of the acquisitions of the founding companies, the excess
of the consideration paid over the fair value of the net assets to be acquired
for the founding companies other than the accounting acquiror has been
preliminarily allocated to an undifferentiated pool of intangible assets. We
intend to obtain independent appraisals of the founding
29
companies for purposes of determining values under purchase accounting for the
tangible and intangible net assets acquired. Upon completion of the appraisals
and in accordance with the terms thereof, the intangible assets in the pool will
be allocated to the appropriate asset classifications, including customer lists,
non-compete agreements, and goodwill and will be amortized over the appropriate
useful lives of the individual intangible assets. Until such time as the
appraisals are finalized, the pool of intangible assets will be amortized over
an average period of 10 years which represents management's best estimation for
the average useful life of the intangible assets.
S CORPORATION ELECTIONS. Prior to the acquisition of AXCES, its parent
company, MTM, elected to be treated as an S Corporation, and elected to have
AXCES treated as a qualified subchapter S Corporation, under the Internal
Revenue Code of 1986, as amended. Following the acquisition of AXCES, it will be
subject to federal and state income taxes. In general, a qualified subchapter S
Corporation and its parent S Corporation's are not treated as a separate taxable
entity, and their respective gains, income, losses and separately stated tax
items are taxed to the parent S Corporation's shareholders on a pro rata basis.
In connection with the acquisition of AXCES, its qualified subchaper S
Corporation status will terminate. Prior to the acquisition, AXCES will make
distributions to MTM in an aggregate amount not to exceed $6.5 million,
provided, that such distributions do not reduce working capital below $0.6
million. AXCES' working capital as of March 31, 1999 was $5.7 million. The
distributions are to be funded by up to $3.0 million in borrowings (which will
be repaid from the proceeds of the offering) and cash balances of AXCES.
INCOME TAXES. We have adopted the liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Deferred income taxes are recognized for temporary
differences between financial statement and income tax bases of assets and
liabilities and net operating loss carryforwards, and is measured using enacted
tax rates expected to apply to taxable income in the years in which these
temporary differences are expected to be recovered or settled.
PRO FORMA RESULTS OF OPERATIONS
We acquired ARC in June 1999. We will acquire InfoHighway and AXCES
simultaneously with and as a condition of the closing of this offering. The
following summary unaudited pro forma financial information presents certain
data for OmniLynx, as adjusted for (1) the effects of the acquisitions on a
historical basis, (2) the effects of certain pro forma adjustments to the
historical financial statements, and (3) the closing of the offering and the
application of the proceeds therefrom. See "Selected Financial Information" and
the Unaudited Pro Forma Combined Financial Statements and the notes thereto
included elsewhere in this prospectus.
30
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA
ˇ Enlarge/Download Table
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, 1998 MARCH 31, 1999
-------------------- --------------------
AMOUNT % AMOUNT %
--------- --------- --------- ---------
(UNAUDITED, $ IN THOUSANDS EXCEPT NUMBER
OF SHARES AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues............................................ $ 46,373 100.0% $ 9,947 100.0%
Cost of services.................................... 22,719 49.0 5,490 55.2
--------- --------- --------- ---------
Gross profit........................................ 23,654 51.0 4,457 44.8
Selling, general and administrative expenses........ 21,536 46.5 4,578 46.1
Depreciation and amortization....................... 3,818 8.2 977 9.8
--------- --------- --------- ---------
Loss from operations................................ (1,700) (3.7) (1,098) (11.1)
Interest expense, net............................... (459) (1.0) (72) (0.7)
--------- --------- --------- ---------
Loss before income taxes............................ (2,159) (4.7) (1,170) (11.8)
Provision (benefit) for income taxes................ 245 0.5 (172) (1.7)
--------- --------- --------- ---------
Net loss............................................ (2,404) (5.2) (998) (10.1)
Preferred dividend requirement...................... 842 1.8 210 2.1
--------- --------- --------- ---------
Net loss available to common stockholders........... $ (3,246) (7.0) $ (1,208) (12.2)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per share--basic and diluted............... $ (0.71) $ (0.26)
--------- ---------
--------- ---------
Shares used in computing pro forma net loss per
share-- basic and diluted........................... 4,587,242 4,587,242
--------- ---------
--------- ---------
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, on a pro forma basis after giving effect to the
acquisition of the founding companies, the acquisition of Eden Matrix, and the
closing of the offering and the application of its net proceeds, we would have
had an aggregate of $8.6 million of cash and cash equivalents, working capital
of $6.1 million, and long-term debt net of current maturities of $1.2 million.
We intend to increase capital expenditures and operating expenses in order
to integrate the founding companies, expand networks to support additional
expected end-users in existing and future markets and to market and provide
services to a growing number of potential end-users. Current capital resources,
including the proceeds of this offering, are anticipated to be sufficient to
fund aggregate capital expenditures and working capital requirements, including
operating losses, if any, for the foreseeable future.
Future acquisitions may require significant capital. We cannot predict with
certainty what our capital needs will be for future acquisitions. We currently
intend to use our common stock to fund a portion of the purchase price of future
acquisitions. If our common stock does not maintain an acceptable price in the
public markets or if potential acquisition candidates are unwilling to accept
our common stock as part of the consideration for the sale of their businesses,
we may have to use more cash to finance our acquisition program. If we do not
have enough cash resources, our ability to make acquisitions could be limited
unless we are able to obtain additional cash through future debt or equity
financings. Incurring debt would increase our leverage and make us more
vulnerable to economic downturns and limit our ability to compete.
We intend to enter into negotiations with commercial banks to provide us
with a credit facility to be used for acquisitions, working capital, capital
expenditures and other general corporate purposes. Any such credit facility or
other debt financing will require that we make certain financial covenants which
could limit our operational and financial flexibility. We may not be able to
obtain financing for
31
our acquisition program at all or on terms we deem acceptable. As a result, we
might be unable to successfully pursue our acquisition strategy.
INFLATION
Due to the relatively low level of inflation experienced in 1998, inflation
did not have a significant effect on the pro forma results of our operations in
1998. However, there can be no assurances that our business will not be affected
by inflation in the future.
YEAR 2000 COMPLIANCE--COMBINED
Many software applications, computer hardware and related equipment and
systems that use embedded technology, such as microprocessors, rely on two
digits rather than four digits to represent years in performing computations and
decision-making functions. These programs, hardware items and systems may fail
on January 1, 2000 or earlier because they misinterpret "00" as the year 1900
rather than 2000. These failures could have an adverse effect on us because of
our direct dependence on our own applications, equipment and systems and our
indirect dependence on those of third parties.
Our Year 2000 program consists of the following phases:
- identifying all items that may be affected by the Year 2000;
- investigating those items for Year 2000 compliance;
- assessing the potential impact of Year 2000 noncompliance;
- designing solutions for noncompliant items;
- repairing and replacing any noncompliant items and testing those
improvements; and
- contingency planning.
Each company we are acquiring has assigned one or more individuals in its
organization Year 2000 responsibility. We have also assigned an individual
overall Year 2000 responsibility to track and coordinate the efforts of the
individual companies. Each of the founding companies has completed
identification of its mission-critical information technology hardware and
software, including business applications, operations software, service
providers and product suppliers that may be affected by the Year 2000. We have
determined that the potential impact of embedded technologies on the founding
companies is not substantial.
We are also contacting various third parties to obtain representations and
assurances that their hardware, embedded technology systems and software which
we use or will impact us are, or will be modified on a timely basis to be, Year
2000 compliant. We have contacted all of our primary vendors based on their
importance to our business. These third parties include telecommunications and
billing companies. The founding companies began contacting these third parties
as early as 1998 and have received responses from approximately 50% to date. All
the third parties that have responded have stated that they are or expect to be
Year 2000 compliant by the end of 1999. We expect to have this part of our
program completed by the fourth quarter of 1999. To date, our costs associated
with assessing and monitoring the progress of third parties in resolving their
Year 2000 issues have not been significant, and we do not expect to incur any
material costs in the future relating to this aspect of our Year 2000 program.
All of the founding companies are in the solution design phase of their
efforts to determine whether noncompliant information hardware and software
systems can be repaired or replaced. We estimate that we have completed
approximately 90% of this phase and expect to complete it by the fourth quarter
of 1999.
As part of the acquisitions, we are replacing some of their financial and
other systems in order to obtain internal consistency. Some systems we are
replacing happen not to be Year 2000 compliant, but
32
we would replace them in all events this year and are not including the cost of
their replacements as a part of our Year 2000 program.
We have decided not to develop formal budgets or perform detailed analysis
of the costs associated with this effort. We based this decision on the low
number of systems that comprise our technical environment and the fact that our
Year 2000 efforts are being addressed during the normal course of business. To
date, our external costs of our Year 2000 program have not been significant and
we do not expect to incur significant costs in the future. We have not deferred
other information technology projects because of our Year 2000 efforts.
We have begun a formal analysis of various failure scenarios, their
potential impact and possible contingency plans. We expect that we will have
completed the development of the necessary contingency plans by the fourth
quarter of 1999 and that these will primarily consist of replacing noncompliant
third-party suppliers and service providers, and developing backup procedures to
handle the failure of any of our internal systems.
We do not anticipate any material adverse effect from Year 2000 failures,
but we cannot guarantee that we will achieve total compliance. Factors that give
rise to this uncertainty include our possible failure to identify all
susceptible systems, noncompliance by third parties whose systems and operations
impact us and a possible loss of technical resources to perform the work.
Our most likely worst-case Year 2000 noncompliance scenarios are:
- failures of an incumbent local exchange carrier or other service provider;
- equipment failures;
- an interruption in our ability to bill or collect amounts due from
customers; and
- loss of accurate accounting records.
Depending on the length of any noncompliance or system failure, any of these
situations could have a material adverse impact on our ability to serve our
customers in a timely manner and result in lost business and revenues or
increased costs.
This disclosure is subject to protection under the Year 2000 Information and
Readiness Disclosure Act of 1998, Public Law 105-271, as a "Year 2000 Statement"
and "Year 2000 Readiness Disclosure" as that Act defines those terms.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments and hedging activities. It requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
provisions of this statement are effective for all fiscal quarters of all fiscal
years beginning after June 15, 1999. The Financial Accounting Standards Board
recently issued Statement of Financial Accounting Standards No. 135, "RESCISSION
OF FASB STATEMENT NO. 75 AND TECHNICAL CORRECTIONS." The Statement is effective
for financial statements issued for fiscal years ending after February 15, 1999.
We believe that these standards will not have a material impact on our financial
statements or disclosures thereto.
Statement of Position No. 98-5, "REPORTING ON THE COSTS OF START-UP
ACTIVITIES," requires all start-up and organizational costs to be expensed as
incurred. It also requires all remaining historically capitalized amounts of
these costs existing at the date of adoption to be expensed and reported as the
cumulative effect of a change in accounting principles. Statement of Position
No. 98-5 is effective for all fiscal years beginning after December 31, 1998. We
believe that the adoption of Statement of Position No. 98-5 will not have a
material impact on their financial statements or disclosures thereto.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMBINED AND FOUNDING COMPANIES
The following discussions should be read in conjunction with the financial
statements of the founding companies and related notes appearing elsewhere in
this prospectus.
COMBINED FOUNDING COMPANIES GROSS PROFIT DATA
The following unaudited combined financial information does not purport to
present the combined historical results of operations of the founding companies
in accordance with generally accepted accounting principles, but represents
merely a summation of the revenues, cost of services, and gross profit of the
individual founding companies. The historical combined results as shown below
will not be comparable to, and are not necessarily indicative of, anticipated
post-combination results for a number of reasons, including:
- the founding companies were not under common control or management during
the periods presented;
- using the purchase method of accounting, we will revalue the assets
acquired and liabilities assumed at their fair market value and record
goodwill and other intangible assets to be amortized in future periods;
- we will incur additional costs for corporate management and the costs
associated with being a publicly-traded company; and
- we anticipate increased revenues and cost savings once we begin operating
as a combined entity.
The following table sets forth certain historic combined data and such data
of the founding companies as a percentage of revenues for the periods indicated:
ˇ Enlarge/Download Table
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------- ------------------------------------------
1996 1997 1998 1998 1999
-------------------- -------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
Revenues............ $ 14,477 100% $ 30,037 100% $ 45,595 100% $ 14,151 100% $ 9,947 100%
Cost of services.... 9,252 64% 17,546 58% 22,535 49% 6,119 43% 5,490 55%
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........ $ 5,225 36% $ 12,491 42% $ 23,060 51% $ 8,032 57% $ 4,457 45%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES. Combined revenues declined $4.2 million, or 30%, from $14.1
million in 1998 to $9.9 million in 1999. The revenue shortfall was due to a $5.0
million decrease in revenues generated at AXCES as discussed below.
GROSS PROFIT. Combined gross profit decreased $3.5 million, or 45%, from
$8.0 million in 1998 to $4.5 million in 1999. Overall combined gross profit as a
percentage of combined revenues was 57% and 45% for the three months ended March
31, 1998 and 1999, respectively.
COMPARISON OF 1998, 1997 AND 1996
REVENUES. Combined revenues increased $15.6 million, or 52%, from $30.0
million for 1997 to $45.6 million for 1998. Combined revenues increased $15.6
million, or 107%, from $14.5 million in 1996 to $30.0 million in 1997. This
increase was primarily attributable to revenue growth experienced at AXCES and
secondarily due to growth in ARC's operations.
34
GROSS PROFIT. Combined gross profit increased $10.6 million, or 85%, from
$12.5 million for 1997 to $23.1 million for 1998. Combined gross profit
increased $7.3 million, or 139%, from $5.2 million for 1996 to $12.5 million for
1997. Overall combined gross profit as a percentage of combined revenues was
36%, 42%, and 51% in 1996, 1997 and 1998, respectively. The increase in combined
gross profit was primarily due to significant margin improvement experienced at
AXCES.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected unaudited cash flow information for
OmniLynx on a combined historical basis:
ˇ Enlarge/Download Table
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Net cash provided by (used in) operating activities.............. $ 88 $ (814) $ (2,430) $ 450 $ 2,594
Net cash used in investing activities............................ (797) (941) (980) (49) (141)
Net cash provided by (used in) financing activities.............. 1,146 1,430 3,607 160 (1,026)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and equivalents.................. $ 437 $ (325) $ 197 $ 561 $ 1,427
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
For the three months ended March 31, 1999, on a combined basis, operating
activities generated $2.6 million of cash due primarily to increased collections
of accounts receivable and federal income tax receivables by AXCES. Combined net
cash used in investing activities approximated $0.2 million, primarily from
investments in property and equipment. Combined financing activities consumed
$1.0 million due primarily to $1.7 million of debt repayments on short-term debt
at AXCES which offset short-term borrowings at InfoHighway and ARC.
For the year ended December 31, 1998, on a combined basis, operating
activities consumed $2.4 million of cash due primarily to net losses generated
by InfoHighway and ARC, and higher investments in accounts receivable across all
companies. Combined net cash used in investing activities approximated $1.0
million, primarily for a strategic telecommunication acquisition and purchases
of property and equipment. Combined net cash provided by financing activities
totaled $3.6 million, due to debt and equity financings from various sources
including private placement offerings, commercial bank lendings, and related
party transactions.
For the year ended December 31, 1997, on a combined basis, operating
activities consumed $0.8 million of cash for the same reasons noted above for
1998. Combined net cash used in investing activities approximated $0.9 million
due primarily to purchases of property and equipment and repayment of notes to
related parties. Combined financing activities generated $1.4 million primarily
through common stock issuances, proceeds from notes payable to shareholders, and
other related party financings.
For the year ended December 31, 1996, operating activities generated
break-even cash flow as negative operating cash flows incurred by InfoHighway
and ARC were offset by positive operating cash flow by AXCES. Combined net cash
used in investing activities approximated $0.8 million due principally to
purchases of property and equipment. Combined financing activities generated
$1.1 million primarily through various debt financings and common stock
issuances.
At March 31, 1999 on a combined basis, we had an aggregate of $0.2 million
of cash and cash equivalents, and a working capital deficit of $8.4 million.
We intend to increase capital expenditures and operating expenses
significantly in order to integrate the founding companies, expand networks to
support additional expected end-users in existing and future markets and to
market and provide services to a growing number of potential end-users.
35
Current capital resources, including the proceeds of this offering, are
anticipated to be sufficient to fund aggregate capital expenditures and working
capital requirements, including operating losses, for the foreseeable future.
Our expansion through acquisitions may require significant capital. We
cannot predict with certainty what our capital needs will be for future
acquisitions. We currently intend to use our common stock to fund a portion of
the purchase price of future acquisitions. If our common stock does not maintain
an acceptable price in the public markets or if potential acquisition candidates
are unwilling to accept our common stock as part of the consideration for the
sale of their businesses, we may have to use more cash to finance our
acquisition program. If we do not have enough cash resources, our ability to
make acquisitions could be limited unless we are able to obtain additional cash
through future debt or equity financings. Incurring debt would increase our
leverage and make us more vulnerable to economic downturns and limit our ability
to compete.
We intend to enter into negotiations with a group of commercial banks to
provide us with a credit facility to be used for acquisitions, working capital,
capital expenditures and other general corporate purposes. Any such credit
facility or other debt financing will require that we make certain financial
covenants which could limit our operational and financial flexibility. We cannot
guarantee that we will be able to obtain financing for our acquisition program
or, if available, that it will be available on terms we deem acceptable. As a
result, we might be unable to successfully pursue our acquisition strategy. See
"Management's Discussion and Analysis of Pro Forma Financial Condition and
Results of Operations--Pro Forma Liquidity and Capital Resources."
AXCES, INC.
RESULTS OF OPERATIONS
The following table sets forth certain historical financial data of AXCES
and that data as a percentage of revenues for the periods indicated (dollars in
thousands):
ˇ Enlarge/Download Table
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
-------------------- -------------------- -------------------- -------------------- ---------
Revenues............... $ 8,468 100% $ 19,474 100% $ 30,280 100% $ 10,387 100% $ 5,411
Cost of services....... 3,960 47% 8,003 41% 9,889 33% 2,864 28% 1,853
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........... 4,508 53% 11,471 59% 20,391 67% 7,523 72% 3,558
SG&A expenses.......... 3,674 43% 8,910 46% 17,934 59% 3,563 34% 2,507
Depreciation and
amortization......... 61 1% 135 1% 204 1% 44 -- 58
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating income....... $ 773 9% $ 2,426 12% $ 2,253 7% $ 3,916 38% $ 993
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Revenues............... 100%
Cost of services....... 34%
---------
Gross profit........... 66%
SG&A expenses.......... 47%
Depreciation and
amortization......... 1%
---------
Operating income....... 18%
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES. Revenues decreased $5.0 million from $10.4 million in 1998 to
$5.4 million in 1999. The decrease in revenues can be attributed primarily to:
(1) loss of all GTE accounts due to a changing relationship with our carriers
which eliminated our ability to bill GTE customers under our carriers' billing
contracts, (2) elimination of Texas state line charges and (3) development of
our proprietary verification system which delayed the switching of new accounts
and reduced the number of accounts being switched. As a result of these factors,
AXCES undertook a change in its marketing strategy to focus on increasing sales
to its more profitable customers and reducing sales to its less profitable
customers.
GROSS PROFIT. Gross profit decreased $4.0 million from $7.5 million in 1998
to $3.5 million in 1999. Overall gross profit as a percentage of revenues was
72% and 66% in 1998 and 1999, respectively. The
36
decrease in the gross profit can be attributed to: (1) loss of all GTE accounts
due to a changing relationship with our carriers which eliminated our ability to
bill GTE customers under our carriers' billing contracts, (2) elimination of
Texas state line charges, and (3) development of our proprietary verification
system which delayed the switching of new accounts and reduced the number of
accounts being switched.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $1.0 million or 30% from $3.5 million in 1998
to $2.5 million in 1999. The significant decrease in expense levels was due
primarily to: (1) a $0.6 million accrual of performance bonuses for the owners
in 1998 and (2) significant changes in our marketing strategy which reduced
selling expenses by 43%.
COMPARISON OF 1998, 1997 AND 1996
REVENUES. Revenues increased $10.8 million, or 55%, from $19.5 million in
1997 to $30.3 million in 1998. Revenues increased $11.0 million, or 130%, from
$8.5 million in 1996 to $19.5 million in 1997. The significant revenue increases
experienced over these periods were primarily attributable to growth in customer
base resulting from: (1) new office openings, (2) expanded sales force, (3)
intensified sales and marketing campaigns, and (4) new user fees in 1998
associated with various state and federal assessments.
GROSS PROFIT. Gross profit increased $8.9 million from $11.5 million in
1997 to $20.4 million in 1998. Gross profit increased $7.0 million from $4.5
million in 1996 to $11.5 million in 1997. Overall gross profit as a percentage
of revenues was 53%, 59% and 67% in 1996, 1997 and 1998, respectively. Gross
profit percentages have improved dramatically over recent years due to: (1) cost
synergies resulting from expanding the customer base from approximately 9,600
customers at December 31, 1995 to 160,000 customers at December 31, 1998, (2)
new user fees in 1998 associated with various state and federal assessments, (3)
successful sales and marketing efforts, and (4) improved pricing on service
offerings.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $9.0 million, or 101%, from $8.9 million in
1997 to $17.9 million in 1998. The significant increase in expense levels was
due primarily to: (1) a $2.4 million increase in compensation, benefits and
performance bonuses received by the owners during 1998, (2) a $2.1 million
increase in sales and marketing-related expenses due to higher personnel costs
resulting from higher average headcount in sales force and increased exhibit
space rentals and other promotional expenses, and (3) growth in personnel and
administrative expenses overall across most functional areas due to the
sustained growth in operations.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from AXCES' statements
of cash flows (in thousands):
ˇ Enlarge/Download Table
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities................ $ 762 $ 269 $ (1,249) $ 23 $ 3,207
Net cash used in investing activities.............................. (260) (642) (348) -- (26)
Net cash provided by (used in) financing activities................ (110) 43 1,670 (6) (1,734)
--------- --------- --------- --- ---------
Net decrease in cash and equivalents............................... $ 392 $ (330) $ 73 $ 17 $ 1,447
--------- --------- --------- --- ---------
--------- --------- --------- --- ---------
37
For the three months ended March 31, 1999, operating activities generated
$3.2 million of cash due primarily to increased collections of accounts
receivable and federal income tax receivables of $2.1 million and $0.7 million,
respectively. Investing activities were minimal and consisted of property and
equipment purchases net of retirements. Financing activities consumed $1.7
million due to repayments of short-term debt.
For the three months ended March 31, 1998, operating activities were
break-even as positive operating cash flow was offset by increases in accounts
receivable and related party receivables in the amounts of $3.9 million and $1.8
million, respectively. Financing activities were minimal and consisted of
repayments of long-term debt.
For the year ended December 31, 1998, operating activities consumed $1.2
million of cash as positive cash flow from operations was offset by a
significant investment in working capital, including increases of $7.2 million
and $0.7 million in accounts receivable and tax refund receivables,
respectively. Net cash used in investing activities totaled $0.3 million,
consisting of purchases of property and equipment and note issuances to related
parties of $0.1 million and $0.2 million, respectively. Financing activities
generated $1.7 million consisting of a $1.0 million short-term note payable to
an independent third party lender and a $0.7 million short-term bank line of
credit.
For the year ended December 31, 1997, operating activities generated $0.3
million of cash as positive cash flow from operations was largely offset by
investments in various working capital accounts, primarily a $3.8 million
increase in accounts receivable. Net cash consumed by investing activities
totaled $0.6 million, including purchases of property and equipment and
issuances of notes to related parties of $0.4 million and $0.2 million,
respectively. Minimal financing activities occurred during 1997 as $0.06 million
was raised from proceeds of long-term notes payable and principal payments on
long-term debt totaled $0.02 million.
For the year ended December 31, 1996, operating activities generated $0.8
million of cash as positive cash flow from operations was partially offset by
investments in working capital, including a $1.1 million increase in accounts
receivable. Investing activities, consisting of purchases of property and
equipment, totaled $0.3 million. Financing activities consumed $0.1 million due
primarily to payments on a note payable to a vendor.
AXCES expects to be able to fund its cash needs such as working capital
through cash it generates from its operations. AXCES generally funds its
purchases of property and equipment with internally generated cash or debt.
INFOHIGHWAY INTERNATIONAL, INC.
RESULTS OF OPERATIONS
The following table sets forth certain historical financial data of
InfoHighway International, Inc. and that data as a percentage of revenues for
the periods indicated (dollars in thousands):
ˇ Enlarge/Download Table
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
-------------------- -------------------- -------------------- -------------------- ---------
Revenues................ $ 426 100% $ 915 100% $ 1,384 100% $ 302 100% $ 535
Cost of services........ 218 51% 648 71% 995 72% 226 75% 336
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit............ 208 49% 267 29% 389 28% 76 25% 199
SG&A expenses........... 639 150% 1,481 162% 1,339 97% 333 110% 335
Depreciation and
amortization.......... 52 12% 175 19% 261 19% 69 23% 131
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating loss.......... $ (483) (113%) $ (1,389) (152%) $ (1,211) (88%) $ (326) (108%) ($ 267)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Revenues................ 100%
Cost of services........ 63%
---------
Gross profit............ 37%
SG&A expenses........... 63%
Depreciation and
amortization.......... 24%
---------
Operating loss.......... (50%)
38
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES. Revenues increased $0.2 million, or 77%, from $0.3 million in
1998 to $0.5 million in 1999. The significant revenue increases experienced over
these periods were primarily attributable to the following: (1) consummation of
the acquisition of Eden Matrix during January 1999, and (2) overall growth in
demand for Internet access services.
GROSS PROFIT. Gross profit increased $0.1 million from $0.1 million in 1998
to $0.2 million in 1999. Overall gross profit as a percentage of revenues was
25% and 37% for 1998 and 1999, respectively. The improvement in gross profit
percentages was due to efficiencies derived from the full integration of several
1997 acquisitions during 1998 and improved product pricing.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses totaled $0.3 million for each of the periods presented.
Despite growth in personnel headcount, expense levels remained constant due to
expense efficiencies upon the full integration during 1998 of acquisitions
consummated during 1997.
COMPARISON OF 1998, 1997 AND 1996
REVENUES. Revenues increased $0.5 million, or 51%, from $0.9 million in
1997 to $1.4 million in 1998. Revenues increased $0.5 million, or 115%, from
$0.4 million in 1996 to $0.9 million in 1997. The significant revenue increases
experienced over these periods were primarily attributable to the following: (1)
overall growth in demand for Internet access services, (2) revenue contributions
from the acquisition of several Internet service providers located in Texas and
California during 1997, and (3) the introduction of the DirectConnect service
offering during 1997. DirectConnect is a high-speed Internet service currently
offered in office buildings in Texas, New Jersey and Florida, which provides
building tenants access to a shared high-speed dataline. The DirectConnect
service provides several benefits over traditional dial-up services, including
continuous connection, faster connection speeds, fewer technical problems, lower
cost, increased security and greater usability.
GROSS PROFIT. Gross profit increased $0.1 million from $0.3 million in 1997
to $0.4 million in 1998. Gross profit increased from $0.2 million in 1996 to
$0.3 million in 1997. Overall gross profit as a percentage of revenues was 49%,
29% and 28% in 1996, 1997 and 1998, respectively. Gross profit percentages
declined from 1996 to 1998 due to significant increases in technical support
staff and higher communication costs as InfoHighway expanded its network.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2 million, or 10%, from $1.5 million in
1997 to $1.3 million in 1998. The decline in expenses was primarily attributable
to higher expense levels experienced during 1997 for specific expenses
including: (1) non-recurring stock compensation charges, (2) higher expenses
incurred on the closing of equity offerings, and (3) duplicative network and
staffing costs on acquisitions prior to full integration into InfoHighway.
Selling, general and administrative expenses increased $0.8 million, or 132%,
from $0.6 million in 1996 to $1.5 million in 1997. The increase in expenses was
reflected across most expense categories, due primarily to increased personnel
costs to support revenue growth and the specific 1997 expenses noted above.
39
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from InfoHighway's
statements of cash flows (in thousands):
ˇ Enlarge/Download Table
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities................... $ (250) $ (604) $ (587) $ 29 $ (136)
Net cash used in investing activities................................. (121) (216) (147) (31) (84)
Net cash provided by financing activities............................. 353 820 734 2 220
--------- --------- --------- --------- ---------
Net decrease in cash and equivalents.................................. $ (18) $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
For the three months ended March 31, 1999, operating activities consumed
$0.1 million as the net loss from operations was partially offset by increases
in working capital liabilities, primarily deferred revenues and accrued
expenses. Investing activities consumed $0.08 million due to purchases of
certain intangible assets and property and equipment. Financing activities
generated $0.2 million due to short-term borrowings.
For the three months ended March 31, 1998, operating activities approximated
break-even results as negative operating cash flow was offset by reductions in
the working capital position, primarily pertaining to accounts payable and
deferred revenues. Investing activities were minimal and pertained primarily to
purchases of property and equipment. Financing activities approximated
break-even results as unit offering proceeds were offset by payments on capital
leases.
For the year ended December 31, 1998, operating activities consumed $0.6
million as the net loss from operations was partially offset by a $0.3 million
increase in accounts payable and accrued expenses. Net cash used in investing
activities totaled $0.1 million due primarily to purchases of property and
equipment. Financing activities generated $0.7 million of cash flow, including
$0.5 million of proceeds from a unit offering of debt and equity securities and
$0.5 million of proceeds from a note payable executed with Trident III during
the fourth quarter, which served to offset net payments of notes payable to
shareholders and repayments of capital lease obligations in the amounts of $0.2
million and $0.1 million, respectively.
For the year ended December 31, 1997, operating activities consumed $0.6
million as the net loss from operations was partially mitigated by increases in
accounts payable and deferred revenues totaling $0.4 million. Approximately $0.2
million was incurred on investing activities for the purchase of property and
equipment. Financing activities generated $0.8 million consisting of $0.2
million of net proceeds from notes payable to shareholders and $0.6 million from
common stock issuances under private placement offerings.
For the year ended December 31, 1996, operating activities consumed $0.3
million as the net loss from operations was partially offset by increases in
accounts payable and deferred revenues totaling $0.2 million. Investing
activities, consisting of purchases of property and equipment, totaled $0.1
million. Financing activities consisted of common stock issuances which raised
$0.4 million in capital for the year.
Since its inception, InfoHighway has suffered losses and negative cash flows
from operations and has a working capital deficit and stockholders' deficit that
raise substantial doubt about its ability to continue as a going concern. Its
ability to continue as a going concern is dependent upon the success of its
marketing efforts, its ability to produce sufficient margins to cover operating
and overhead expenses and its access to sufficient funding to enable it to
continue operations.
40
ARC NETWORKS, INC.
RESULTS OF OPERATIONS
The following table sets forth certain historical financial data of ARC and
that data as a percentage of revenues for the periods indicated (dollars in
thousands):
ˇ Enlarge/Download Table
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------------------- -------------------------------
1996 1997 1998 1998 1999
-------------------- -------------------- -------------------- -------------------- ---------
Revenues............... $ 5,583 100% $ 9,648 100% $ 13,931 100% $ 3,462 100% $ 4,001
Cost of services....... 5,074 91% 8,895 92% 11,651 84% 3,029 88% 3,301
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........... 509 9% 753 8% 2,280 16% 433 12% 700
SG&A expenses.......... 1,439 26% 2,695 28% 3,465 24% 523 15% 968
Depreciation and
amortization......... 17 -- 436 5% 407 3% 155 4% 97
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Operating loss......... $ (947) (17%) $ (2,378) (25%) $ (1,592) (11%) $ (245) (7%) $ (365)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Revenues............... 100%
Cost of services....... 83%
---------
Gross profit........... 17%
SG&A expenses.......... 24%
Depreciation and
amortization......... 2%
---------
Operating loss......... (9%)
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
REVENUES. Revenues increased $0.5 million, or 16%, from $3.5 million in
1998 to $4.0 million in 1999. Long distance and local telephone revenues
increased $0.6 million, or 26%, from $2.3 million in 1998 to $2.9 million in
1999. The increase is a result of greater market penetration into the local
telephone market, principally New York City, through ARC's reseller programs
with Teleport Communications Group and Winstar Communications, both competitive
local exchange carriers, and with Bell Atlantic, the incumbent local exchange
carrier, which began in April 1997. Also contributing was the aggressive
marketing of ARC's long distance telephone service. Data cabling revenues
remained unchanged at $1.1 million.
GROSS PROFITS. Gross profit increased $0.3 million, or 62%, from $0.4
million in 1998 to $0.7 million in 1999. Overall gross profit as a percentage of
revenues was 12.5% and 17.5% in 1998 and 1999, respectively. Gross profit on
long distance and local telephone revenue increased $0.3 million, or 369%, from
$0.1 million in 1998 to $0.4 million in 1999. Gross profit on data cabling
revenues decreased $0.1 million, or 25%, from $0.4 million in 1998 to $0.3
million in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.4 million, or 79%, from $0.5 million in
1998 to $0.9 million in 1999. These increases were primarily due to increased
personnel costs associated with revenue growth, establishment of a customer
service operation, the cost of external billing services associated with long
distance and local telephone revenues and administrative and accounting costs.
Selling, general and administrative expenses as a percent of revenues were 15%
and 24% in 1998 and 1999, respectively.
COMPARISON OF 1998, 1997 AND 1996
REVENUES. Revenues increased $4.3 million, or 44%, from $9.6 million in
1997 to $13.9 million in 1998. Revenues increased $4.0 million, or 73%, from
$5.6 million in 1996 to $9.6 million in 1997. Long distance and local telephone
revenues increased $2.7 million, or 38%, from $7.2 million in 1997 to $9.9
million in 1998. Long distance and local telephone revenues increased $2.8
million, or 64%, from $4.4 million in 1996 to $7.2 million in 1997. The increase
in both periods is a result of greater market penetration into the local
telephone market, principally New York City, through ARC's reseller programs
with Teleport Communications Group and Winstar Communications, both competitive
local exchange carriers, and with Bell Atlantic, the incumbent local exchange
carrier, which began in April 1997. Also contributing was the aggressive
marketing of ARC's long distance telephone service. Data cabling revenues
increased $1.6 million, or 64%, from $2.5 million in 1997 to $4.1 million in
1998.
41
Data cabling revenues increased $1.3 million, or 108%, from $1.2 million in 1996
to $2.5 million in 1997. Revenues in both periods increased principally as a
result of services to New York State in connection with updating its buildings
for computers and Internet services. ARC also was a subcontractor to Mitel
Systems, Inc. who was the primary contractor with New York City schools to
rewire classrooms for computer and Internet services.
GROSS PROFITS. Gross profit increased $1.5 million, or 203%, from $0.8
million in 1997 to $2.3 million in 1998. Gross profit increased $0.3 million, or
48%, from $0.5 million in 1996 to $0.8 million in 1997. Overall gross profit as
a percentage of revenue was 9.1%, 7.8% and 16.4% in 1996, 1997 and 1998,
respectively. Gross profit on long distance and local telephone revenues
increased $0.8 million, or 800%, from $0.1 million in 1997 to $0.9 million in
1998. Gross profit on long distance and local telephone revenues decreased $0.2
million, or 67%, from $0.3 million in 1996 to $0.1 million in 1997. Our total
gross profit and gross profit for the long distance and local telephone market
decreased in 1997 as a result of unfavorable performance in ARC's discontinued
prepaid telephone debit card operation. Gross profit on data cabling revenues
increased $0.7 million, or 100%, from $0.7 million in 1997 to $1.4 million in
1998. Gross profit on data cabling revenues increased $0.5 million, or 250%,
from $0.2 million in 1996 to $0.7 million in 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $0.8 million, or 29%, from $2.7 million in
1997 to $3.5 million in 1998. Selling, general and administrative expenses
increased $1.3 million, or 87%, from $1.4 million in 1996 to $2.7 million in
1997. These increases were primarily due to increased personnel costs associated
with revenue growth, establishment of a customer service operation, the cost of
external billing services associated with long distance and local telephone
revenue and administrative and accounting costs. Selling, general and
administrative expenses as a percent of revenue were 26%, 28% and 24% in 1996,
1997 and 1998, respectively. In 1997, ARC recorded a loss on an impaired asset
of $0.4 which was the primary cause of the increase in the 1997 percentage of
revenue.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from ARC's statements of
cash flows (in thousands):
ˇ Enlarge/Download Table
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities.................... $ (424) $ (479) $ (594) $ 398 $ (410)
Net cash used in investing activities.................................. (416) (83) (485) (18) (31)
Net cash provided by financing activities.............................. 903 567 1,203 164 388
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and equivalents........................ $ 63 $ 5 $ 124 $ 544 $ (53)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
For the three months ended March 31, 1999, ARC used cash in operating
activities of $0.4 million. ARC also incurred a net loss of $0.5 million which
was offset by non-cash items of $0.2 million and a net decrease in other working
capital accounts of $0.2 million. Net cash used in investing activities of $0.03
million was primarily for the acquisition of office equipment such as computers.
Net cash provided by financing activities of $0.4 million was the result of an
increase in debt financing received from a related party.
For the three months ended March 31, 1998, ARC generated $0.4 million,
primarily by an increase in interim billings in excess of costs and earnings of
$1.2 million and non-cash items of $0.2 million offset by a net loss of $0.4
million and a decrease in other working capital accounts of $0.5 million. Net
42
cash used by investing activities of $0.02 million was for office equipment such
as personal computers. Net cash provided by financing activities of $0.2 million
was due to an increase in funding from ARC's former asset based lender.
For the year ended December 31, 1998, ARC used cash in operating activities
of $0.6 million. ARC also incurred a net loss of $1.9 million which was offset
by non-cash items of $0.9 million and a net decrease in other working capital
accounts of $0.4 million, including a $1.5 million reserve on disputed amounts
under contract. Net cash used in investing activities of $0.5 million was
primarily for the acquisition of a long distance telephone customer base of $0.4
million. Net cash provided by financing activities of $1.2 million was primarily
the result of a $2.0 million debt refinancing received from a related party
offset by debt repayments of $0.8 million.
For the year ended December 31, 1997, ARC used cash in operating activities
of $0.5 million. ARC also incurred a net loss of $2.7 million which was offset
by non-cash items of $0.8 million including a write down of $0.4 for an impaired
asset in ARC's prepaid telephone calling card operation and a $1.4 million
decrease in other working capital accounts. Net cash used for investing
activities of $0.1 was for office equipment such as personal computers. Net cash
provided by financing activities of $0.6 million was due to $0.9 million of
loans received to support its operating activities offset by debt repayments of
$0.3 million.
For the year ended December 31, 1996, ARC used cash in operating activities
of $0.4 million. ARC also incurred a net loss of $1.1 million which was
partially offset by non-cash items of $0.1 million and a net decrease in other
working capital accounts of $0.6 million. Net cash used in investing activities
of $0.4 million was for the acquisition of telephone switching equipment. Net
cash provided by financing activities of $0.9 million resulted from $0.4 million
in loans received from related parties to support its operating activities and
$0.4 million to acquire equipment.
Since its inception, ARC has suffered losses and negative cash flows from
operations and has a working capital deficit and stockholders' deficit that
raise substantial doubt about its ability to continue as a going concern. Its
ability to continue as a going concern is dependent upon the success of its
marketing efforts, its ability to produce sufficient margins to cover operating
and overhead expenses and its access to sufficient funding to enable it to
continue operations.
43
BUSINESS
OVERVIEW
We acquired ARC in June 1999. We will acquire InfoHighway and AXCES
simultaneously with and as a condition of the closing of this offering. Through
these companies, we intend to offer an extensive array of Internet and
telecommunications services to businesses and consumers. These services will
initially include a combination of high-speed Internet access, and local phone
and long distance telephone service. In the future, we intend to offer cable
television, video conferencing, secure online shopping, online data backup,
virtual private networks and other advanced data services. We currently operate
principally in New York, New Jersey, Florida, Illinois, Texas and California.
The combination of these three companies creates an extensive product mix,
and produces efficiencies by combining sales and marketing efforts, back office
operations and customer service. Our complementary product lines will enable us
to become a full service telecommunications company. We will offer both bundled
services for customer convenience and a wide array of unbundled services for
specific applications. We intend to service both residential and commercial
end-users, providing us with a balance between the long sales cycle of the
complex bundled services sold to corporations and the mass marketing efforts
that enjoy a short sales cycle in the less complex residential arena.
We currently offer a broad range of Internet and telecommunication services
including high speed Internet access, local phone service, long distance, and
other value added data services. Combining ARC's competitive local exchange
carrier expertise with InfoHighway's Internet and data background and AXCES'
marketing experience in the resale of telecommunications services, we will be
able to offer an integrated "single bill" solution for customer phone and
Internet needs. By using new technology, we will be able to offer traditional
telecommunication services at a competitive price as well as new data services
not currently available through traditional carriers.
In addition, we intend to continue to grow in all of our markets through the
acquisition or merger of complementary technology or service companies. This
could significantly increase Internet service provider and competitive local
exchange carrier revenues in our target markets.
Our objective is to become a leading provider of long-distance service and
expand our product line to include local service and Internet access to low
volume residential customers in large metropolitan areas. In order to achieve
this goal, we will continue to emphasize the following key elements of our
operating strategy:
- Continue to develop effective marketing campaigns that offer high value to
potential customers through customized telecommunications offerings,
- Focus on maintaining a highly efficient direct sales effort with direct
contact with our end user customers,
- Develop new promotional packages that integrate both local telephone
service and Internet access to our target market and,
- Expand our product offering to additional cities consistent with our
acquisition strategy.
With our DirectConnect service, we presently provide or have agreed to
provide high-speed Internet service to 30 multi-story buildings. This service is
significantly faster than dial up modem connections, yet sells for less than the
cost of a dedicated high-speed connection. We also provide Internet and
telephone services to over 10,000 access lines, and serve more than 160,000
residential customers with long distance service. We believe significant
opportunities exist to expand revenues by cross selling various products to
current customers. In addition, we intend to continue to grow in all of our
markets through the acquisition of complementary technologies or companies. We
intend to use
44
these acquisitions to increase our Internet service provider and competitive
local exchange carrier revenues in our target markets.
Low-volume urban residential users presently account for a significant
portion of the overall market. We believe this segment of the market is
extremely attractive and has been largely underserved by many interexchange
carriers. In addition, we believe low-volume urban residential users are more
receptive to direct sales programs and more likely to be influenced by
promotional items. We also believe these customers are more likely to switch
long-distance service providers.
Each of the founding companies has at least five years of experience in its
respective industry and a seasoned management team. Mr. Joseph A. Gregori is our
Chief Executive Officer, and has over 13 years in the telecommunications
industry. Prior to becoming ARC's Executive Vice President in 1998, he served as
Chief Operating Officer of PriCellular Corporation, a publicly traded wireless
telephone provider, and President of Nationwide Cellular Service Inc. and its
successor company, MCI Wireless. Mr. Peter F. Parrinello, our Chairman of the
Board and President, has over 25 years of experience in the telecommunications
industry. Mr. Tony Howlett, our Chief Technology Officer, founded InfoHighway
and has served as Chief Executive Officer since 1995.
MARKET OPPORTUNITY
There is significant market opportunity for our services through the opening
up of the telecommunications market brought about by the Telecommunications Act
of 1996, the growing demand for high speed digital communications bandwidth, and
the emergence of new technologies such as digital subscriber line and virtual
private networks.
We believe that the following market conditions support our business
strategy:
- Demand for Internet service, particularly high-speed Internet for
corporate applications and residential users is increasing.
- There is increasing demand by companies and individuals for buildings that
provide access to an advanced telecommunications infrastructure.
- The growing supply of available bandwidth, which should continue to grow
through the deployment of new technologies, is creating a buyer's market
for wholesale bandwidth.
- Individuals and businesses currently purchase Internet, data and
telecommunications services from many different vendors.
- There is a demand for an alternative to the complexity of the current
voice/data/Internet supplier mix, and for an alternative to traditional
monopoly providers of local phone service.
- There is a large segment of the current telecommunications marketplace
that is underserved by existing independent and competitive local exchange
carriers due to past credit issues or unfamiliarity with the procedures
involved in obtaining service. These market segments will pay above
average rates for access to both basic and enhanced communications
services.
Our goal is to attract customers in our target market segments with a
unified product offering high-speed Internet and telecommunications service from
one vendor whose focus is on customer service, market sensitive pricing and
superior performance. We believe we can meet this goal, in part, because of the
market conditions and rate of growth in the telecommunications industry. The
Internet is experiencing explosive growth at a rate of over 100% per year
worldwide. Currently, over 147 million people use the Internet and that number
is expected to be over 320 million by the end of the year 2000 according to
Computer Almanac Industry, Inc 1998. Furthermore, businesses are embracing the
Internet in record numbers. In 1998, 36% of businesses were online with
projected growth to 88% by 2001. We believe the unique requirements of business
data and communications traffic will continue to
45
drive high-speed Internet demand. Additionally, the Telecommunications Act of
1996 deregulated the telecommunications industry by mandating that competitive
local exchange carriers be allowed to provide competitive services using the
existing networks and infrastructure of the incumbent local exchange carriers.
Our goal is to take advantage of these expanded markets and increased
opportunities to compete and become a leading provider in our target markets
with a bundle of high speed Internet, local voice, long distance and other
telecommunications services. We believe that by making a variety of services
available we will be able to sell some or all of our services to various
customers in our markets. In addition, by marketing and using integrated billing
and customer service, we believe that there will be significant opportunity to
cross sell and increase the penetration of our other services.
BUSINESS STRATEGY
Our objective is to become one of the leading providers of bundled high
speed Internet service, data services and telecommunications service in each of
the markets in which we operate. Through the founding companies, we currently
have offices or facilities in the following markets: San Diego, New York, New
Jersey, Houston, Dallas, San Antonio, Jacksonville and Chicago. We intend to
combine our high speed Internet data products with our local and long distance
products and deliver this telecommunications bundle to new and existing
customers. Additionally, we expect to purchase switching facilities to further
improve our operating margins and begin to establish our position as a
facilities-based provider. We believe there is significant demand for our
products, including the bundling thereof, which will deliver a single-sourced
telecommunications package to our DirectConnect and residential niche markets.
New technologies such as the emergence of high speed Internet data products
coupled with alternatives to traditional telecommunications service as provided
by the regional Bell operating companies are driving this demand. We plan on
implementing the following business strategy:
MARKET PENETRATION STRATEGY. We are pursuing a strategy of providing
service to our DirectConnect and residential niche markets by targeting
highly populated, multi-tenant business and residential buildings in major
U.S. cities where there is significant demand for dedicated, high-speed
Internet access services, where we can deliver our local and long distance
product offerings at attractive margins. Additionally, as we reach
successful penetration of these markets, we will then deploy telephone
switches to further enhance our operating margins through the utilization of
unbundled network elements. Our approach will be to target niche markets and
highly populated, multi-tenant buildings by negotiating agreements directly
with the landlords or managing agents of such buildings and delivering a
bundle of services to the tenants to better serve their needs and offer
discounts on such services to create more value to the end user.
FOCUS ON HIGH-SPEED INTERNET SERVICES. We intend to focus on our
DirectConnect Internet product, which offers high-speed Internet access to
tenants of high rise office and residential buildings located in selected
cities around the country. This service, called DirectConnect, is provided
by installing data switches in buildings pursuant to a contract with the
owner of the building. We offer individual tenants of the building Internet
access at speeds near those achieved if they had dedicated T-1 lines and
will be able to provide local and long distance phone service to the tenants
as well. For those customers that sign up for more than one of our services,
additional discounts will be offered across selected product lines. In this
manner, we expect to be able to provide a highly competitive bundle of
Internet and telecommunications services to our end-users.
LEVERAGE THE ECONOMICS OF SUCCESS-BASED PENETRATION. To date, we have
only installed data switches for high-speed Internet access after a building
has been signed under contract, thereby limiting our exposure to capital
expenditures. It is our intention to deploy telephone switches only after we
have successfully penetrated our key markets, thereby postponing capital
expenditures until we are well marketed in an area and largely
success-based.
46
PROVIDE A SUPERIOR PRODUCT AND SERVICE SOLUTION. We believe that we can
build a significant competitive position by providing a comprehensive
product offering and service solution to our customers. We undertake to
provide all of the necessary product and service elements required to
establish and maintain high-speed Internet and telecommunication services in
our target markets, including:
- providing a service that is superior to other competitors in terms of
speed and responsiveness at a price point that is equal to or lower
than competitive offerings at every service level;
- provisioning all local and long distance service required to initiate
service providing a single point of contact and hassle free install;
- providing all billing and customer service functions on a 24
hour-a-day, 7 day-a-week basis; and
- by providing a responsive, customer-oriented approach to our business
that will distinguish us from traditional phone companies and new
competitors.
ACQUIRE SELECT COMPETITORS IN TARGET MARKETS TO ACCELERATE GROWTH AND
MARKET PENETRATION. The founding companies have in the past acquired small
competitors involved in the Internet service industry and have undertaken
the purchase of a customer base in the telephone sector where it was
determined to be of strategic importance. We intend to continue to seek out
opportunities where we believe that acquisitions provide for either valuable
customer bases and/or accelerated access into a desired market. We believe
that acquisitions can be a valuable part of our overall strategy to expand
our business offerings and achieve faster entry into new markets.
INTERNET SERVICES
DIRECTCONNECT INTERNET SERVICES
We have created a service called DirectConnect to pursue a significant niche
opportunity in the business and high-end residential market. DirectConnect is a
high-speed Internet service offered in office buildings in Texas, New York, New
Jersey and Florida. DirectConnect service provides building tenants access to a
shared high-speed data line. Few tenants can afford the cost of this line by
themselves, but by aggregating traffic and taking advantage of the fact that
most Internet connections are idle much of the time, the tenant experiences very
fast access for a fraction of the cost. The current implementation of
DirectConnect uses a T-1 data line that sends and receives data at 1.54 MBPS,
which is up to 24 times faster than a standard 56K modem. We intend to deploy
T-3 and digital subscriber line technology in the markets in which we operate as
they become available.
The DirectConnect service provides several benefits over traditional dial-up
services:
- CONTINUOUS CONNECTION. The customer never receives a busy signal since
it is always connected through a network connection rather than a
modem. This is ideal for customers accessing stock tickers, news
updates and other information that require a dedicated connection.
- FEWER TECHNICAL PROBLEMS. Over 90% of technical problems encountered
by Internet users today are modem related. With DirectConnect, a
network card provides a continuous connection, and since there is no
modem involved, most connection problems are eliminated.
- LOWER COST. DirectConnect provides much faster connection speeds at
significantly lower cost than other alternatives such as ISDN or
dedicated T-1.
47
- INCREASED SECURITY. As part of the DirectConnect service, a basic
firewall service is provided at each site to keep unwanted hackers and
other visitors out of customer's networks. Additional protection is
available for a fee.
- GREATER USABILITY. Because of the higher speeds, clients can use
additional services that are not practical at lower speeds, such as
video-conferencing, virtual private networks and online data backup. We
already offer data backup, and plan to introduce video conferencing and
virtual private networks as such technology becomes available.
VALUE ADDED INTERNET SERVICES
We are also developing a number of value added services that will be offered
to the DirectConnect clients. The nature of the high-speed connection will allow
us to provide unique services that will differentiate us from other companies
providing similar services. These services should also have the effect of
increasing client retention, as customers are not currently able to get this
combination of services elsewhere. These services include:
ONLINE DATA BACKUP. We are able to provide secure online data backup for
clients using the DirectConnect service. Utilizing our network at night when
bandwidth usage is very low, a central backup computer, currently provided on
contract to InfoHighway, remotely contacts the client's server and downloads
files onto archival storage over the DirectConnect link. The files are encrypted
for security purposes. The benefit of this service is that no personnel or
hardware is required at the customer site. Additionally, the backup data is
off-site and thus protected from a catastrophic loss such as fire or flood.
Finally, the stored data is available immediately online. The customer can
restore or recall the data instantly with the click of a mouse as compared to
off-site alternatives which require shipping of physical tapes.
VIRTUAL PRIVATE NETWORKS. More and more companies are recognizing the value
of using the Internet for inter-office communications versus using expensive
private data lines. However, there are security concerns when using the public
Internet to transmit sensitive corporate data. With the DirectConnect service,
the customer can connect two physically separate networks without transmitting
the sensitive data across the public Internet. The information would flow across
our private Intranet allowing for much faster transmission times and security.
INTERNET TELEPHONE. As the underlying technology permits, we plan to offer
Internet telephone services such as long distance and local dial tone using
voice over Internet technology to our DirectConnect customers. These services
may offer additional revenue and further cement the customer relationship.
TELECOMMUNICATIONS SERVICES
LOCAL AND REGIONAL TELEPHONE SERVICE
As a result of the Telecommunications Act of 1996, the regional bell
operating companies were required to sell at wholesale rates their local
telephone services to other telecommunications carriers. A customer may now keep
his existing local exchange carrier service and have it provided by ARC at a
discounted rate. ARC entered the local telephone market in 1993, when it
recognized the potential in the local market with over $100 billion of annual
recurring revenue and the marketing advantage provided by offering local service
as a part of a bundle of discounted telecommunications services. We offer an
extensive array of local services. We have the ability to install local service
facilities at a discount to and that bypass the incumbent local exchange
carrier.
As we expand our role in the local market, the focus will be on expanding
services offered and increasing profit margins. To accomplish this, we have
received competitive local exchange carrier status
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with the Public Service Commission in New York. This will allow us to purchase
unbundled network elements from the incumbent local exchange carrier and to
reduce costs and increase the flexibility of who provides each element of the
phone network. It is our intention to continue to obtain competitive local
exchange carrier certification in various other states that we choose to enter.
Since 1993, we have been providing alternate local telephone, wide area
network, and private line services to large corporate customers in the
metropolitan New York City area. These services offer reliable
disaster-resistant local and regional calling as well as access to long distance
carriers. In addition to adding diversity to a subscriber network, we have been
successful in providing significant savings to its customers.
LONG DISTANCE SERVICE
Today's subscribers are bombarded with various types of calling plans from
long distance companies. However, the restrictions and billing methods with most
of these promotions may raise the actual costs of the service. We offer a
straight forward long distance service for either a switched or dedicated
customer. The billing rate is a competitive flat rate, seven days a week, which
is billed in six second increments. We entered the long distance market in
response to demand from our customers for full service providers who could
deliver a bundle of telecommunications services. In addition to traditional
nationwide long distance, we have taken the initiative to offer new
international calling plans for our customers. Further, we offer our customers
dedicated facilities, such as T-1s, to allow access to our point of presence at
60 Hudson St. in New York City to allow for connection directly to an
international long distance carrier whose service we resell.
We are exploring opportunities with international telephone companies as
they prepare for deregulation of worldwide telecommunications services.
Currently, we have a collocation arrangement with an international carrier that
gives us access to the carrier's facilities in New York and Los Angeles and the
option to purchase international usage at the largest carrier discount
available.
Additionally, we are exploring arrangements with certain competitive local
exchange carriers to provide dedicated access to our local central office. This
will allow us to sell a bundled service of long distance services and to offer
discounted dedicated rates when providing local services from the competitive
local exchange carriers' facilities. In this manner, very competitive rates can
be offered when using our local phone service. We also offer combined billing
and management reports for our local and long distance services. We are
constantly seeking new markets and alliances as the telecommunications industry
continues to evolve and change pursuant to the effects of deregulation.
We also offer a competitive flat rate with a monthly fee to residential
customers who might not otherwise have been able to obtain a long distance
service as well as to customers attracted to our convenient payment plan. We are
currently licensed to provide our service in 20 states and do so to over 160,000
customers monthly. We have also recently begun to offer paging services to our
customers as the first of other related products that we intend to distribute to
this customer base.
As a non-facilities based provider, our focus has been on sales and
marketing and attracting large numbers of customers through our promotional
service offerings. We believe that our successful marketing techniques in the
residential market, coupled with both local telephone service and Internet
access will prove to be an even more attractive offering to this market segment.
Through our direct sales force we intend to solicit residential customers with
various promotional offerings, including competitive flat rate minute pricing
plans. We attribute our success to maintaining control over the sales and
marketing campaigns through our direct sales force, direct contact with the
end-user customer and focusing our efforts on marketing programs that appeal to
various urban residential and ethnic customers. We also intend to create
customer interest in our products by promoting to a special or niche interest in
our prospective target market by offering a low promotional price point on a
particular portion of our service offering. We believe that this segment of the
marketplace, specific niches of
49
the urban residential population are underserved and through creative marketing
campaigns including such promotions as special low rates to international
countries will allow us to be successful in marketing to these customer groups.
We believe that with our marketing experience and the availability of
additional telephone products including local service and Internet access, we
will have an attractive marketing package to sell to our target market. To date,
our sales force has primarily sold our long distance products in Texas and
Illinois. Through the combination of the founding companies we will begin to
expand upon our product offering and open new markets consistent with our
expansion plans.
Currently, our sales force consists of approximately 50 employees who
utilize various sales methods in reaching prospective customers. One of our
principal methods of reaching our prospective customers is to take temporary
space such as kiosks or counter space in large retail traffic areas such as
malls, supermarkets, and fairs and promote our products directly. In this manner
we are able to reach a large prospective audience without the high fixed selling
costs associated with long-term store leases and related overhead. Additionally,
this approach allows us to capitalize on successful marketing programs and sign
up large numbers of customers. To the extent that a promotional offering does
not have the expected appeal, we are able to modify such and remarket it within
days to the same prospective audience.
Our core product offering is 1 + long-distance service. We also provide
paging service, 800 service, voice-mail and calling cards, although these
products and services represent a small percentage of total sales. We offer our
long distance service through approximately 30 different pricing plans. However,
we generate the vast majority of our sales from several pricing plans. One of
our plans bills a flat rate of $6.95 per month plus 9.9 CENTS per minute for
interstate calls and our standard rate for intrastate calls. International calls
are billed at varying prices based on the day and time, as well as the
destination of the call.
We intend to develop additional products and services. In addition to
prepaid calling cards, we will offer a special rate plan for customers who make
a high number of calls to one primary international destination. This plan will
initially be offered to customers with a high number of calls to Mexico. The
success of this initial roll-out will determine the other countries to which we
will provide these services.
LOCAL AREA NETWORKING (LAN) AND CABLING
We provide the services of highly specialized fiber optic technologists, as
well as equipment and cable installation, including outside plant. Through ARC,
we established an early reputation as an industry expert in this field and were
involved in the early 1990's to resolve technical difficulties with the newly
installed fiber crossing the Hudson River into New York City. ARC has a long
history of being an industry leader in providing network design and
installation. We provide customer solutions for premise network wiring, local
and wide area networks and system integration. We presently have a network
wiring contract with the State of New York Office of General Services. This
contract enables various state agencies to purchase service directly from us
without the traditional bid process. Under this agreement, we have made strides
in the education market where the Federal Government E Rate program has financed
enhanced data infrastructure in schools and created business arrangements with
companies in various parts of the country to support these needs.
BUNDLED SERVICES
We have the ability to offer all the above services bundled together and
offer volume discounts and one-stop shopping for both businesses and residential
customers. This bundling offers additional marketing opportunities as well as
convenience for the customer. Commercial customers have the option of purchasing
local, long distance and dedicated Internet access services over the same local
loop delivered to their office. There are few competitive local exchange
carriers or other providers in
50
the country offering this range of services. Residential customers can purchase
a unique high-speed Internet access product as well as local phone service, and
long distance in buildings serviced by us. This capability is an effective
marketing tool and provides the company with a significant identity separate and
distinct from others in the highly competitive telecommunications marketplace.
SALES AND MARKETING
Our marketing goal is to provide a wide range of Internet and
telecommunications-related services to our DirectConnect and residential niches
in our target markets. We have initially targeted principal cities in Illinois,
New York, New Jersey, Florida, Texas and California. We currently have a
presence and a customer base in these locations because they contain a large
part of the population and most of the major markets. The business market is
targeted due to the low penetration of this market for Internet services and the
potential for cross-selling additional services. The residential market is
targeted because it provides large numbers of customers who have historically
been infrequent users of telecommunications products due to credit problems or
unfamiliarity with the procedures involved in obtaining service. Currently less
than 50% of this market is connected to the Internet. This provides us with an
enormous opportunity to expand our penetration in both of these niches.
We plan to leverage our high-speed Internet services as a way to establish
relationships with businesses and consumers alike. The Internet is creating huge
opportunities for businesses and, in fact, is changing the way business is done.
Once only an idea, e-commerce is projected to grow to $400 billion by the year
2002, reflecting a 1997 to 2002 compound annual growth rate of 103% (Source: IDC
Corp.). By capitalizing on this huge market opportunity, we will use our
Internet offering as our lead product and then, after successfully reaching our
targeted customer, cross-sell our telecommunications products. Because almost
all businesses already purchase local phone service and long distance, we will
then market our services as an additional opportunity to save money, as an
alternative to the incumbent local exchange carriers and as a chance to have one
provider handle the business's account. Many businesses have yet to get on the
Internet and by using our high-speed, competitively priced Internet product to
establish a relationship with the customer, the salesperson can then expand the
sale to include all of our telecommunications services.
In the case of the residential market, we believe that providing access to
basic telephone service at prices below the regional Bell operating companies
bundled with an Internet service will be extremely attractive. Though current
penetration of Internet service is low in our residential market, we believe
that the advent of extremely low cost personal computers coupled with the desire
of lower income persons for the entertainment and educational opportunities
afforded by the Internet will drive demand. By bundling this product with local
service and long distance, we believe that we will be able to dramatically
increase customer retention and cross-selling opportunities.
CUSTOMERS
In our Internet service sector, we presently provide or have agreed to
provide service to 30 buildings who subscribe to our high-speed Internet
product. We have successfully sold to and serviced a significant number of
prestigious clients. We are also involved in a pilot project with Bell Atlantic
as a marketing agent to deliver a bundle of Internet and telecommunications
products to luxury high rise multiple dwelling units in New York. The following
is a partial list of the telecommunications customers serviced by us:
Avis
Century 21
New York Daily News
Bronx Community College
New York Transit Authority
Daiwa Securities America, Inc.
DKNY
J. Crew Inc.
Lehman College
Lord and Taylor
CUNY Law School
Winstar Wireless Inc.
IONA College
Queens College
The MONY Group
United Jewish Appeal
Harper Collins Publishing
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In our residential market, we currently service over 160,000 customers on a
monthly basis with our long distance products. We have recently introduced a
paging product and feel that the ability to offer additional products to the
base including local service and Internet access will both increase customer
retention and increase revenue per customer.
INTEGRATION STRATEGY
The acquisition of the founding companies creates marketing and operational
strengths that will allow us to bring a complete communications solution to our
customers. Cross-selling opportunities among each of the founding companies'
existing customer bases create significant revenue potential. Technical
integration of the network will allow us to provide combined services over the
same wire, which will cut costs and allow us to stay ahead of the competition in
terms of price and offerings. Billing integration will allow for single bill
capability that will greatly increase convenience for customers. By combining
telecommunications purchasing, volume discounts can be achieved with major
carriers and other strategic partners. Finally, by combining certain operations
and back-office functions, additional cost savings and economies of scale will
be achieved.
It is expected that initially, bundled and cross-marketed services from the
founding companies will be provided on different networks. In the early stages
of integration, we anticipate that we will consolidate our telecommunications
service offerings to take advantage of maximizing vendor discounts. In the
future, as we install state-of-the-art switches and digital subscriber line
technologies that support voice over Internet protocol, it will be possible to
begin providing these services over the same wire. Additionally, we may consider
the purchase of switches that will allow us to begin providing proprietary long
distance and local service, rather than purchasing unbundled network elements
and reselling the incumbent local exchange carrier and competitive local
exchange carrier services.
The acquisition of the founding companies involves a number of risks. See
"Risk Factor--There Are Risks Associated With The Integration of The Founding
Companies Which Could Adversely Affect Our Business."
We will incur certain expenses in connection with the integration of the
founding companies, which are not expected to be significant. However, the
actual amount of these expenses could be higher than anticipated. Factors that
could increase such costs include any unexpected employee turnover, unforeseen
delays in addressing duplicate facilities once the acquisitions have been
completed and the associated costs of hiring temporary employees, and any
additional fees and charges to obtain consents, regulatory approvals or permits.
We may not achieve the benefits and strategic objectives sought through the
acquisitions. Costs associated with the acquisitions, or liabilities and
expenses associated with the operations of the founding companies, that exceed
our expectations, could have a material adverse effect on our business,
prospects, operating results and financial condition. See "Management's
Discussion and Analysis of Pro Forma Financial Condition and Results of
Operations--Pro Forma Liquidity and Capital Resources."
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NETWORK ARCHITECTURE AND TECHNOLOGY
The key design principles of our network are intended to provide:
HIGH-SPEED CONNECTION. Our DirectConnect service was developed to provide a
high-speed connection to business and individuals within high-rise office and
apartment buildings. This service provides a connection that is up to 24 times
faster than a 56K modem. Since it is always connected, DirectConnect avoids many
of the technical problems associated with dial-up connections. It is also more
secure from intrusion from unauthorized users. The service is marketed at a
price that is significantly lower than other high-speed alternatives such as
ISDN or dedicated T-1 service.
REDUNDANCY AND BACKUP. Our network is built to provide maximum uptime for
corporate users. These users depend much more heavily on the Internet than
low-end consumer users. In many cases, the Internet represents a critical part
of their business. Therefore, we have built a network that experiences minimal
downtime. It maintains multiple connections into Tier 1 Internet backbone
providers to ensure connectivity even when a major provider goes down. It also
maintains all of its data on servers that are backed up by an online data back
up system. This means that in the event of a server outage, data can be
immediately recovered and that data loss and customer downtime are minimized.
Finally, we maintain hot spares in our primary computer center so that any
equipment outage is generally not noticed by customers.
SCALABLE AND EXPANDABLE NETWORK. We have built our network with the maximum
amount of flexibility and scalability in mind. As we grow rapidly, we must be
able to add links to our network and expand its bandwidth capability rapidly.
Through an agreement with Level 3, a major carrier and Tier 1 provider, we are
able to rapidly expand our network and, if necessary, increase bandwidth on any
given link. Generally, bandwidth can be increased on any given link within 48
hours of being requested. We are also installing equipment that allows
upgradability to new features and allows us to offer new services in the future.
We use servers from Ascend Communications which can be upgraded to provide
virtual private networks, digital subscriber lines and even voice over Internet
protocol. Our digital subscriber line vendor of choice, AccessLAN, offers
upgradability to provide virtual private network and voice over Internet
protocol as well as frame relay services.
COMPETITION
The markets for business and consumer telecommunications and data services
are intensely competitive and we expect that such markets will become
increasingly competitive in the future. Our most immediate potential competitors
are the incumbent local exchange carriers, interexchange carriers, Internet
service providers, online service providers, wireless data service providers and
other competitive local exchange carriers. Many of these competitors are
offering, or may soon offer, technologies and services that directly compete
with some or all of our high-speed digital services. Such technologies include
ISDN, digital subscriber line, wireless data and cable modems. The principal
bases of competition in our markets include transmission speed, reliability of
service, breadth of service availability, price/performance, network security,
ease of access and use, content bundling, customer support, brand recognition,
operating experience, capital availability and exclusive contracts. We believe
that we compare unfavorably with our competitors with regard to, among other
things, brand recognition, operating experience, exclusive contracts, and
capital availability. Many of our competitors and potential competitors have
substantially greater resources than do we and there can be no assurance that we
will be able to compete effectively in our target markets.
INCUMBENT LOCAL EXCHANGE CARRIERS. All of the largest incumbent local
exchange carriers present in our target markets are conducting technical and/or
market trials or have entered into commercial deployment of the digital
subscriber line based services. We recognize that each incumbent local exchange
carrier has the potential to quickly overcome many of the issues that we believe
have slowed their wide deployment of digital subscriber line services in the
past. The incumbent local exchange
53
carriers represent strong competition in all of our target service areas. The
incumbent local exchange carriers have an established brand name and reputation
for high quality in their service areas, possess sufficient capital to deploy
digital subscriber line equipment rapidly, have their own copper lines and can
bundle digital data services with their existing analog voice services to
achieve economies of scale in serving customers. Certain of the incumbent local
exchange carriers have aggressively priced their consumer digital subscriber
line services as low as $30-$40 per month, placing pricing pressure on our
DirectConnect services. The incumbent local exchange carriers are in a position
to offer service from collocation spaces where we are unable to secure
collocation space and offer service because of asserted or actual space
restrictions, which provides the incumbent local exchange carriers with a
potential competitive advantage compared with us. Accordingly, we may be unable
to compete successfully against the incumbent local exchange carriers, and any
failure to do so would materially and adversely affect our business, prospects,
operating results and financial condition. See "Risk Factors-- The
Telecommunications Industry is Highly Competitive and Subject to Rapid
Technological Change."
CABLE MODEM SERVICE PROVIDERS. Cable modem service providers such as @Home
Network and MediaOne (and their respective cable partners) are deploying
high-speed Internet access services over hybrid fiber and coaxial cable
networks. Where deployed, these networks provide similar and in some cases
higher-speed Internet access and remote local access network access than we
provide. They also offer these services at lower price points than our
DirectConnect services and target residential consumers, as well as business
customers. They achieve these lower price points in part by offering a consumer
grade of service, which shares the bandwidth available on the cable network
among multiple end-users. This architecture is well-suited to compete with our
consumer Internet market but is less well-suited to our markets for business
Internet access and remote local access network access where guaranteed
bandwidth, symmetric upstream and downstream bandwidth and network security
issues are more important than in the consumer market. In addition, different
regions within a metropolitan area may be served by different cable modem
service providers, making it more difficult to offer the blanket coverage
required by potential business and remote local area networks access customers.
Also, much of the current cable infrastructure in the U.S. must be upgraded to
support cable modems, a process which we believe is significantly more expensive
and time-consuming than the deployment of traditional networks. Actual or
prospective cable modem service providers competition may have a significant
negative effect on our ability to secure customers and may create downward
pressure on the prices we can charge for our services.
NATIONAL LONG DISTANCE CARRIERS. Interexchange carriers, such as AT&T,
Sprint, MCI WorldCom and Qwest have deployed large-scale Internet access
networks and asynchronous transfer mode networks, sell connectivity to
businesses and residential customers, and have high brand recognition. They also
have interconnection agreements with many of the incumbent local exchange
carriers and a number of collocation spaces from which they are currently
offering or could begin to offer competitive long distance services.
FIBER-BASED COMPETITIVE LOCAL EXCHANGE CARRIERS. Companies such as Teleport
Communications Group, Inc. (acquired by AT&T), Brooks Fiber Properties, Inc.
(acquired by WorldCom) and MFS (acquired by MCI WorldCom) have extensive fiber
networks in many metropolitan areas primarily providing high-speed digital and
voice circuits to large corporations. They also have interconnection agreements
with the incumbent local exchange carriers pursuant to which they have acquired
collocation space in many markets targeted by us. These companies are modifying
or could modify their current business focus to include residential and small
business customers using digital subscriber lines in combination with their
current fiber networks.
INTERNET SERVICE PROVIDERS. Internet service providers such as BBN
(acquired by GTE), UUNET Technologies (acquired by WorldCom), Earthlink
Networks, Concentric Network, Mindspring Enterprises, Netcom On-Line
Communication Services and PSINet provide Internet access to residential and
54
business customers, generally using the existing public switched telephone
network at ISDN speeds or below. Some Internet service providers such as UUNET
Technologies in California and New York, HarvardNet Inc. and InterAccess have
begun offering digital subscriber line services.
ONLINE SERVICE PROVIDERS. Online service providers include companies such
as America Online, CompuServe (acquired by AOL), MSN (a subsidiary of Microsoft
Corp.) and WebTV (acquired by Microsoft Corp.) that provide, over the Internet
and on proprietary online services, content and applications ranging from news
and sports to consumer video conferencing. These services are designed for broad
consumer access over telecommunications-based transmission media, which enable
the provision of digital services to the significant number of consumers who
have personal computers with modems. In addition, they provide Internet
connectivity, ease-of-use and consistency of environment. Many of these online
service providers have developed their own access networks for modem
connections.
WIRELESS AND SATELLITE DATA SERVICE PROVIDERS. Wireless and satellite data
service providers are developing wireless and satellite-based Internet
connectivity. We may face competition from terrestrial wireless services,
including 2 and 28 Gigahertz wireless cable systems (Multi-channel Microwave
Distribution System and Local Multi-channel Distribution System), and 18 and 39
Gigahertz point-to-point microwave systems. For example, the FCC has adopted new
rules to permit multi-channel microwave distribution system licensees to use
their systems to offer two-way services, including high-speed data, rather than
solely to provide one-way video services. The FCC also recently auctioned
spectrum for local multi-channel distribution system services in all markets.
This spectrum is expected to be used for wireless cable and telephony services,
including high-speed digital services. In addition, companies such as Teligent
Inc., Advanced Radio Telecom Corp. and WinStar Communications, Inc., hold
point-to-point microwave licenses to provide fixed wireless services such as
voice, data and video conferencing.
We also may face competition from satellite-based systems. Motorola
Satellite Systems, Inc., Hughes Communications (a subsidiary of General Motors
Corporation), Teledesic and others have filed applications with the FCC for
global satellite networks which can be used to provide broadband voice and data
services, and the FCC has authorized several of these applicants to operate
their proposed networks.
OTHER COMPETITIVE LOCAL EXCHANGE CARRIERS. Other companies such as Rhythms
NetConnections and NorthPoint Communications offer high-speed digital services
similar to ours. The 1996 Act specifically grants competitive local exchange
carriers the right to negotiate interconnection agreements with the incumbent
local exchange carriers. Further, the 1996 Act allows competitive local exchange
carriers to enter into interconnection agreements which can be and are identical
to other competitors.
We seek the following strategic benefits in each selected market that we
enter:
- securing and retaining customers before the same high-speed services are
available from others,
- engendering end-user loyalty through superior coverage and high customer
satisfaction; and
- capturing the largest customer base and thereby achieving economies of
scale sufficient to drive down prices and develop a leadership position.
We may not be able to achieve these benefits if substantial competition from
any of the foregoing competitors exists or develops in our markets.
GOVERNMENT REGULATION
OVERVIEW. Our services are subject to a extensive federal and state
regulations. The FCC has jurisdiction over all our services and facilities to
the extent that we provide interstate and international telecommunications
services. To the extent we provide identifiable intrastate services, our
services and facilities are subject to state regulations. In addition, local
municipal government authorities also assert jurisdiction over our facilities
and operations. The jurisdictional reach of the various federal, state and
55
local authorities is subject to ongoing controversy and judicial review, and we
cannot predict the outcome of such review.
FEDERAL REGULATION. Our provision of telecommunications services must
comply with the requirements of the Communications Act of 1934, as amended by
the 1996 Telecommunications Act, as well as regulations promulgated by the FCC
under the statute. The 1996 Act eliminates many of the pre-existing legal
barriers to competition in the telecommunications and video programming
communications businesses, preempts many of the state barriers to local
telecommunications service competition that previously existed in state and
local laws and regulations, and sets basic standards for relationships between
telecommunications providers. The law delegates to the FCC and the states broad
regulatory and administrative authority to implement the 1996 Act.
Among other things, the 1996 Act removes barriers to entry in the local
telecommunications market by preempting state and local laws that are barriers
to competition and by requiring incumbent local exchange carriers to provide
nondiscriminatory access and interconnection to potential competitors, such as
cable operators, wireless telecommunications providers, interexchange carriers
and competitive local exchange carriers such as us.
On January 25, 1999, the United States Supreme Court rejected the FCC's
implementation of the network element unbundling obligations, including the
minimum set of network elements incumbent local exchange carriers must make
available to competitive local exchange carriers. In response to the court, the
FCC has instituted a rulemaking seeking comments on how the FCC should identify
such network elements and whether network elements used to provide advanced
services should be unbundled. For instance, the FCC is considering imposing
additional obligations on the incumbent local exchange carriers to allow
competitive local exchange carriers to provide access, including higher speed
services through local loops that involve digital loop carrier systems.
Regulations promulgated by the FCC under the 1996 Act specify in greater
detail the requirements of the 1996 Act imposed on the incumbent local exchange
carriers among other things, to open their networks to competition by providing
competitors interconnection, collocation space, access to unbundled network
elements, retail services at wholesale rates and nondiscriminatory access to
telephone poles, ducts, conduits, and rights-of-way. As a result of these
changes, companies such as us are now able to interconnect with the incumbent
local exchange carriers in order to provide local telephone exchange services
and to use portions of the incumbent local exchange carriers existing network to
offer new and innovative services such as those we are currently offering.
The 1996 Act also allows the regional Bell operating companies to enter the
long distance market within their own local service regions upon meeting certain
requirements. To date, the FCC has rejected each Regional Bell Operating
Company's attempts to provide long distance service and it is uncertain when
they will grant the first request. The timing of the various Regional Bell
Operating Companies in-region long distance entry will likely affect the level
of cooperation we receive from each of the regional Bell operating companies.
In addition, the 1996 Act provides relief from the earnings restrictions and
price controls that have governed the local telephone business for many years.
Incumbent local exchange carriers tariff filings at the FCC have been subjected
to increasingly less regulatory review. However, precisely when and to what
extent the incumbent local exchange carriers will secure pricing flexibility or
other regulatory freedom for their services is uncertain. For example, under the
1996 Act, the FCC is considering eliminating certain regulations that apply to
the incumbent local exchange carriers' provision of services that are
competitive with ours. The timing and the extent of regulatory freedom and
pricing flexibility and regulatory freedom granted to the incumbent local
exchange carriers will affect the competition we face from the incumbent local
exchange carriers competitive services.
Finally, the 1996 Act allows the FCC to take explicit regulatory action in
order to encourage the deployment of advanced services to all Americans. In
August 1998, the FCC released an Order and a
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Notice of Proposed Rulemaking proposing additional regulations it believes are
required to ensure this goal. These rules would place conditions on the ability
of the incumbent local exchange carriers to offer digital subscriber line
services on an unregulated basis through a separate affiliate. In addition, the
FCC has proposed rules that would provide us an enhanced ability to gain
collocation space in incumbent local exchange carriers' collocations. While we
believe that these proposed rules are advantageous to us, there can be no
guarantee that the actual regulations, when and if implemented, will enhance our
ability to compete.
Any changes in applicable federal law and regulations, in particular,
changes in the interconnection obligations of incumbent local exchange carriers,
the prospective entry of the Regional Bell Operating Companies into the
in-region long distance business and grant of regulatory freedom and pricing
flexibility to the incumbent local exchange carriers, could have a material
adverse impact on our business prospects, operating results and financial
condition. To date, the FCC has not asserted jurisdiction over companies that
provide Internet access services. However, the FCC is considering a petition
that seeks to require providers of Internet telephone services to pay access
charges.
STATE REGULATION. To the extent we provide identifiable intrastate services
or have otherwise submitted to the jurisdiction of the relevant state
telecommunications regulatory commissions, we are subject to such jurisdiction.
To date, we are authorized under state law to operate as a competitive local
exchange carrier in New York, Florida, Michigan and Connecticut and intend to
obtain authorization in the other states necessary to cover our target regions.
We are also authorized to provide intrastate long distance services in
approximately 20 states. Some of the states in which we hold competitive local
exchange carrier and long distance licenses must approve the changes in
ownership of ARC and AXCES, as well as the issuance of the securities
contemplated in this offering.
LOCAL GOVERNMENT REGULATION. In certain instances, we may be required to
obtain various permits and authorizations from municipalities in which we
operate our own facilities. Whether various actions of local governments over
the activities of telecommunications carriers such as us, including requiring
payment of franchise fees or other fees for access to public rights-of-way, pose
barriers to entry for competitive local exchange carriers, and which may be
preempted by the FCC is the subject of litigation. Although we rely primarily on
the unbundled network elements of the incumbent local exchange carriers, in
certain instances, we will deploy our own facilities, and therefore may need to
obtain certain municipal permits or other authorizations. The actions of
municipal governments in imposing conditions on the grant of permits or other
authorizations or their failure to act in granting such permits or other
authorizations could have a material adverse effect on our business, prospects,
operating results and financial condition.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation affecting the telecommunications
industry. Other existing federal regulations are currently the subject of
judicial proceedings, legislative hearings and administrative proposals, which
could change, in varying degrees, the manner in which communications companies
operate in the U.S. The ultimate outcome of these proceedings, and the ultimate
impact of the 1996 Act or any final regulations adopted pursuant to the 1996 Act
on us or our business cannot be determined at this time but may well be adverse
to our interests. We cannot predict the impact, if any, that future regulation
or regulatory changes may have on our business and there can be no assurance
that such future regulation or regulatory changes will not have a material
adverse effect on our business, prospects, operating results and financial
condition. See "Risk Factors--We Depend Upon Entering Into Agreements with Third
Parties in Order to House and Operate Certain Components of Our Network Which
Are Subject to Various Government Regulations" and "--Our Business is Highly
Regulated and May Be Adversely Affected by Future Changes in Governmental
Regulations Relating to Our Industry."
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The law governing the liability of online service providers and Internet
access providers for participating in the hosting or transmission of
objectionable materials or information currently remains unsettled. Under the
terms of the 1996 Telecommunications Act, courts can impose civil and criminal
penalties for the use of interactive computer services for the transmission of
certain indecent or obscene communications. The United States Supreme Court in
1997 held this provision unconstitutional as it relates to indecent, but not
obscene, communications. In October 1998, Congress enacted the Child Online
Protection Act, which requires that online material that is "harmful" to minors
be restricted. This law is currently being challenged and on February 1, 1999 a
U.S. District Court judge issued a preliminary injunction against enforcement of
portions of that act. The U.S. Justice Department has filed an appeal of the
February 1999 ruling. Also, certain states have adopted and other states may
adopt similar requirements in the future. The constitutionality of such state
requirements remains unsettled at this time. In addition, several private
parties have filed lawsuits seeking to hold Internet service providers
accountable for information that they transmit, such as libelous material and
copyrighted material. We cannot predict the outcome of this litigation or the
potential for the imposition of liability on Internet service providers for
information that they host, distribute or transport. These suits and other
regulations could materially change the way Internet service providers must
conduct business and could impact our determination to expand or continue this
business. To the extent that we become parties to future litigation, such
litigation could have a material adverse effect on our business, prospects,
operating results and financial condition.
INTELLECTUAL PROPERTY
We regard our products, services and technology as proprietary and will
attempt to protect it with copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. There can be no assurance these
methods will be sufficient to protect our technology. We also generally enter
into confidentiality or license agreements with our employees and consultants,
and generally control access to and distribution of our documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use our products, services or
technology without authorization, or to develop similar technology
independently. In addition, effective copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries. There can
be no assurance that the steps we have taken and will take will prevent
misappropriation or infringement of our technology. In addition, litigation may
be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Such litigation could result in substantial costs
and diversion of resources and could have a material adverse effect on our
business, prospects, operating results and financial condition.
EMPLOYEES
As of May 31, 1999, we had 166 employees (excluding temporary personnel and
consultants), employed in engineering, sales, marketing, customer support and
related activities, and general and administrative functions. None of our
employees is represented by a labor union, and we consider our relations with
our employees to be good. Our ability to achieve our financial and operational
objectives depends in large part upon the continued service of our senior
management and key technical, sales, marketing and managerial personnel, and our
continuing ability to attract and retain highly qualified technical, sales,
marketing and managerial personnel. Competition for such qualified personnel is
intense, particularly in software development, network engineering and product
management.
FACILITIES
Our facilities are all located in the United States and consist of eight
leased facilities. We lease our corporate headquarters office in Hauppauge, New
York and lease a sales office from a related party in New York City on a
month-to-month basis, and have two branch offices under lease in Houston, Texas.
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(See "Certain Relationships and Related Transactions") We lease sales offices in
San Antonio and Dallas, Texas, and Chicago, Illinois. We have a warehouse for
our data cabling operations in Hauppauge, New York under lease. Our current
leases have remaining terms ranging from less than six months to four years.
We consider our current facilities adequate for our current needs and
believe that suitable additional or replacement space will be available, as
needed, to accommodate further physical expansion of our operations or
relocation.
LEGAL PROCEEDINGS
From time to time we may be involved in litigation that arises in the normal
course of business operations. As of the date of this prospectus and except as
described below, we are not a party to any litigation that we believe could
reasonably be expected to have a material adverse effect on our business or
results of operations.
ARC
In January 1999, ARC was served with a summons from the State Supreme Court
of New York, County of New York, by Mitel Telecommunications Systems, Inc., for
a breach of contract claim in the amount of $1,715,000 relating to cabling and
installation services for which ARC has been paid in full. As is customary, ARC
recorded this payment as a liability for unearned contracts. ARC believes the
action is without merit and filed a motion to dismiss the action based on
numerous defenses available to it. In addition, ARC continues to perform all
requested services under the contract from Mitel with Mitel's consent, thereby
reducing the liability over time. As of March 31, 1999, ARC estimates that its
maximum exposure resulting from this claim was $1,394,000 and has reduced the
liability to that amount. Since that time, as additional contract work has been
performed, ARC has further reduced the liability to approximately $1 million. In
June 1999, Mitel amended its summons to include Consolidated Technology Group,
Ltd., SIS Capital Corp., Technology Acquisitions, Ltd., and the officers,
directors and shareholders of ARC, Consolidated, SIS and Technology
Acquisitions, Ltd. Consolidated and SIS were parent companies of ARC prior to
its acquisition in June 1999. Technology Acquisitions is controlled by Benchmark
Equity Group and acquired 67% of ARC prior to our acquisition of ARC.
In March 1999, ARC was served with a summons from the State Supreme Court of
New York, County of Orange, by an employee of a customer of ARC located in
Thiells, N.Y., for $1,000,000. The employee claims to have fallen over wiring
which was negligently installed by ARC. ARC has a liability insurance policy
which should provide sufficient coverage in the event the plaintiff's claim is
successful. ARC believes the action is without merit and filed a motion to
dismiss the action based on numerous defenses available to it.
AXCES
The Public Utility Commission of Texas, or PUC, and the Office of the
Attorney General for the State of Texas brought claims under the Texas Deceptive
Trade Practices Act alleging that AXCES engaged in the practice known as
slamming. Slamming involves the unauthorized change of a customer's long
distance service. The Texas Attorney General sought to restrain certain
marketing practices and to assess damages. The case was settled in June 1998 for
$155,000 and while the settlement did not constitute an admission of liability
on AXCES' part, AXCES did agree to comply with the rules promulgated by the PUC.
The settlement agreement required a payment of approximately $150,000 which has
been paid.
In May 1999, the PUC informed AXCES that it had received additional
complaints concerning slamming allegations, and that it was seeking
administrative penalties of approximately $400,000.
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AXCES intends to vigorously contest this matter, and believes these claims are
without merit and covered by the prior settlement with the PUC.
Similar claims were brought against AXCES in early 1998 by the Attorneys
General of Illinois, Oklahoma, Kansas, and Missouri. Inquiries were also
received from the Attorneys General of Arkansas and Wisconsin regarding
allegations of slamming. AXCES settled with the Illinois Attorney General in
March 1999 for $50,000. The settlement amount is included in accrued liabilities
at December 31, 1998.
The remaining suits request, amongst other things, fines, restitution and
loss of ability to conduct business in these states. AXCES believes these claims
are without merit, that it has meritorious defenses to them and intends to
vigorously defend itself against these claims.
In addition, AXCES was named a defendant in two suits seeking class action
certification. Both cases involve allegations of slamming, and in one case the
alleged class includes Spanish-speaking individuals in the Brownsville, Texas,
area. No amount of damages is set forth in the pleadings and the number of
persons potentially affected is also not presently estimable. Both suits are in
the preliminary phases of discovery, and management of AXCES intends to
vigorously contest them.
AXCES and one of its officers have also been sued by a former employee for
violation of wage and hour laws, wrongful termination and tortious interference
with employment. This case is in the preliminary phases of discovery. AXCES
believes that this claim is without merit and intends to vigorously contest this
case.
Pursuant to the AXCES acquisition agreement, MTM and its owners have agreed
to indemnify us for any damages incurred in connection with pending litigation
and administrative proceedings on the same basis as we are indemnified for any
breaches of representations and warranties made by AXCES in the acquisition
agreement except that the indemnity does not cover attorneys' fees and
litigation costs. Because of this, MTM and its owners will be required to
indemnify us for breaches of representations and warranties in the acquisition
agreement and liabilities incurred in the pending litigation to the extent that
such amounts exceed, in the aggregate, $200,000, and for any tax liability of
AXCES, MTM and its owners that exceeds $1.6M in the aggregate. However, the
indemnification threshold related to litigation shall increase to the extent of
AXCES' net income plus noncash expenses for the period from May 1, 1999 until
the closing of the acquisition, less any amounts used to pay agreed settlements
of the scheduled litigation. The aggregate liability of MTM and its owners may
not exceed the value of the shares of OmniLynx common stock issued to MTM on the
closing, plus the value of the shares of OmniLynx common stock issuable on
conversion of the Series B Preferred Stock (assuming conversion occurred on
consummation of this offering). The value of each share of OmniLynx common stock
is set at the initial public offering price. In addition, the aggregate
liability of any owner of MTM may not exceed $2,000,000.
IN GENERAL
The founding companies have also been subject to other legal proceedings
which have arisen in the ordinary course of business and have not been fully
adjudicated. In addition, we routinely receive inquiries from state and federal
regulatory authorities concerning consumer billing complaints which we respond
to. Although there can be no assurance as to the ultimate disposition of these
matters and the proceedings disclosed above, in the opinion of management, based
upon information available at this time and the availability of indemnification
from AXCES discussed above, the cost of defense or settlement of these actions,
individually or in the aggregate, will not have a material adverse effect on our
financial position or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the names, ages, and positions of our directors and
executive officers. All directors hold office until their successors are duly
elected and qualified and all executive officers hold office at the pleasure of
the Board of Directors.
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DIRECTOR
NAME AGE POSITION CLASS
--------------------------------------------- --- --------------------------------------------- -------------
Joseph A. Gregori........................... 45 Chief Executive Officer and Director Class III
*Peter Parrinello............................ 50 Chairman, Board of Directors and President Class III
*Tony Howlett................................ 30 Chief Technical Officer
*Glenn Kramer................................ 52 President of Internet Services and Director Class I
John Vanderhider............................ 40 Chief Financial Officer
*Harry Bennett (1)(2)........................ 54 Director Class II
Christopher Efird (1)....................... 35 Director Class I
*Weatherly Nominee (1)(2).................... -- Director Class II
*Michael Macaluso............................ 47 Director Class III
------------------------
* Appointment will become effective upon closing of this offering.
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
JOSEPH A. GREGORI. Mr. Gregori became our Chief Executive Officer and a
director upon consummation of the acquisition of ARC in June 1999. Over the last
25 years, Mr. Gregori has had extensive business experience in the wireless
telecommunications industry and public accounting. Prior to joining ARC in June
1998, Mr. Gregori was Chief Operating Officer for PriCellular Corp., (d/b/a,
Cellular One), an AMEX listed rural cellular telephone provider. Mr. Gregori
joined PriCellular in September 1996 and served as COO until June 1998, when
PriCellular was acquired by American Cellular Corp. From 1986 through April of
1996, Mr. Gregori was employed by Nationwide Cellular Service, Inc., a Nasdaq
listed reseller of cellular telephone service. Mr. Gregori served in a number of
senior positions, including VP of Operations, COO and finally as President.
Nationwide Cellular was acquired by MCI in October of 1995 and Mr. Gregori
served as president of MCI Wireless until he resigned his position in April
1996. Mr. Gregori began his professional career in public accounting and worked
in the audit department of Deloitte Touche (formerly Touche Ross) as a senior
manager. He is an honors graduate (Magna Cum Laude) of Adelphi University and is
a CPA.
PETER PARRINELLO. Mr. Parrinello will become our Chairman of the Board and
President upon the consummation of this offering. CEO and founder of ARC, Mr.
Parrinello was formerly Executive Vice President of Avionics Research
Corporation, where he established the engineering firm's telecommunications
division. In 1993, this division took the name of ARC and became one of the
first re-sellers of local telephone service in the United States. Mr.
Parrinello's background in telecommunications spans over twenty-five years
starting with Military Networks in Southeast Asia in the late 1960's and early
70's. His professional career began at New York Telephone in Central Office
Operations in 1971 and later moved to Litton Industries during the establishment
of the interconnect industry in 1972. Mr. Parrinello started with Tel Plus in
1975 during the inception of that company and served to develop new markets.
Seimens Corporation later acquired TelPlus. Mr. Parrinello received his BS at
New York Institute of Technology at Old Westbury (Cum Laude), in Electrical
Engineering and Business Administration.
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TONY HOWLETT. Mr. Howlett will become our Chief Technical Officer upon
consummation of the acquisition of InfoHighway. Mr. Howlett founded InfoHighway
in 1994 and was one of the principal shareholders of InfoHighway. Previously,
from April 1993 to July 1994 he was the owner of Howlett Consulting Company, a
database and networking consulting firm, and a sales engineer from 1989 to 1993
for MCP, a personal computer reseller providing networking technologies to
Fortune 1000 firms. He was a contributing editor to Texas Computing Magazine.
Mr. Howlett holds a BBA in Management Information Systems from the University of
Houston.
GLENN KRAMER. Mr. Kramer will become our President of Internet Services and
a director upon consummation of the acquisition of InfoHighway. Mr. Kramer, a
25-year veteran of the computer industry, has served in a number of management
capacities throughout his career. He served as Southern Regional Manager for SCM
Corporation from 1970 to 1972, as Marketing Manager for National Business &
Security Systems, Inc. from 1972 to 1976 and 1978 to 1987, and as Eastern
Regional Manager of Mylee Digital Sciences, Inc. from 1976 to 1978. As the
President and CEO of Classic Configurations, Inc. from 1987 to 1996, he was the
architect of a national computer dealer franchise. He has also served as a
consultant to a number of industry leaders such as Hewlett Packard, Digital,
Novell, and MicroAge. Mr. Kramer attended the University of Maryland where he
pursued a liberal arts education.
JOHN VANDERHIDER. Mr. Vanderhider will become our Chief Financial Officer
upon consummation of the acquisitions. Since December 1997, Mr. Vanderhider has
served as founding principal of an outsource services company named OutSourcers
which provides consulting services to transition stage companies, particularly
in the areas of mergers and acquisitions. Mr. Vanderhider has extensive
experience in the execution of mergers and acquisitions and in public and
private debt and equity financings. From 1994 through 1997, Mr. Vanderhider
served as Director of Finance and Accounting for BSG Corporation, a leading
systems integrator. Prior to this time, Mr. Vanderhider held various officer
positions with several public companies. Mr. Vanderhider graduated with highest
honors from Texas A&M University in 1981 with a BBA in Accounting. Mr.
Vanderhider is a certified public accountant.
HARRY BENNETT. Mr. Bennett will become a director upon consummation of this
offering. Mr. Bennett has served as Chairman and Chief Executive Officer of
TelaLink Network, Ltd. since 1998. Mr. Bennett served as Executive Vice
President, Local Services for AT&T from 1993 to 1998. During his 25-year career
with AT&T, he was responsible for the phone giant's move into local service
markets across the United States after passage of the Telecommunication Act of
1996. Bennett was named to this position January 1, 1996, and was responsible
for local services activities in both the consumer and business markets.
Previously, Bennett had been vice president and general manager for AT&T's
IntraLATA/Local Markets organization, where he led AT&T's activities in
IntraLATA and local access markets, developing new markets to increase AT&T's
revenues from sources other than its traditional long-distance services base.
Bennett joined AT&T in 1973 as an operations supervisor in Washington, D.C. He
later served as National Account Manager in Chicago and then Division
Manager--Market Management at AT&T Communications. Bennett joined the
headquarters marketing team in 1985 and was later promoted to Director--Market
Management Center, Service Vice President. A 1968 graduate of the U.S. Military
Academy at West Point, Bennett earned a master's degree in management from the
Massachusetts Institute of Technology, where he was a Sloan Fellow.
CHRISTOPHER EFIRD. Mr. Efird has served as one of our directors since April
1997. Mr. Efird is a principal of Benchmark Equity Group, Inc., one of our
principal stockholders, where his duties include the origination and management
of consolidation and restructuring transactions. Since joining Benchmark at
inception in April 1994, Mr. Efird has participated in the execution of mergers
and acquisitions of domestic and international companies, as well as the
completion of new public equity offerings for the firm's clients. Mr. Efird is a
graduate of Texas A&M University and holds a Masters of Arts degree
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from Sam Houston State University with a concentration in the quantitative
analysis of the political risk faced by international companies.
[BIO OF DIRECTOR TO BE NOMINATED BY WEATHERLY TO BE PROVIDED BY AMENDMENT]
MICHAEL MACALUSO. Mr. Macaluso will become a director upon consummation of
this offering. Mr. Macaluso founded International Printing & Publishing in 1989
and served as President and a director of that company until 1998. International
Printing was a joint venture between Mr. Macaluso and Touche Holdings, a partner
investment fund for a large accounting firm. International Printing recently
merged with another company to form Page/International Communications, a large
sheet-fed printing operation located in Texas. He serves as a director of this
new company. Mr. Macaluso became a principal and a director at AXCES in 1997. He
holds a seat on the board and owns 25% of MTM Holdings Corporation, the parent
company of AXCES. A graduate of Canisius College, Mr. Macaluso played
professional basketball and attended graduate school at Golden Gate University
in San Francisco. He brings both operational and M&A experience to our board.
CLASSIFIED BOARD
Our Board of Directors is divided into three classes, each of which,
following a transition period, will serve for three years, with one class being
elected each year at our annual stockholders' meeting. During the transitional
period, the terms of the Class I directors will expire at the 2000 annual
meeting, while the terms of the Class II directors and the Class III directors
will expire at the 2001 and 2002 annual meetings, respectively. Classification
of our Board of Directors could have the effect of lengthening the time
necessary to change the composition of a majority of the members comprising the
Board. In general, at least two annual meetings of stockholders will be
necessary for stockholders to effect a change in a majority of the members of
the Board.
COMMITTEES OF THE BOARD OF DIRECTORS
In June 1999, the board of directors established a compensation committee
and an audit committee. The compensation committee makes recommendations
concerning salaries and incentive compensation of our employees and consultants
and administers our stock option plan. The audit committee reviews, acts on and
reports to the board of directors with respect to various auditing and
accounting matters, including reviewing our audit policies, overseeing the
engagement of our independent auditors and developing our financial strategies.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to June 1999, we had no separate compensation or stock option
committee or other board committee performing equivalent functions, and these
functions were performed by our board of directors. In June 1999, we established
compensation, audit and executive committees of our board of directors. The
compensation committee is composed of non-employee directors. See "--Committees
of the Board of Directors."
DIRECTOR COMPENSATION
All non-employee directors are reimbursed for travel and other related
expenses incurred in attending meetings of the board of directors. In addition,
each non-employee director serving on the board of directors will be granted
options to purchase 10,000 shares of common stock upon his initial appointment
to the Board, and will receive 10,000 additional options upon the date of the
first board meeting in the second calendar quarter of each year pursuant to our
option plan. The options will vest immediately and will have an exercise price
equal to the fair market value of the common stock on the date of grant.
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EXECUTIVE COMPENSATION; EMPLOYMENT AGREEMENTS
We had not conducted any operation other than activities related to the
acquisition of the founding companies prior to the consummation of this
offering, and have not paid any compensation to our executive officers. As of
the closing of this offering, we will enter into the following employment
agreements with our executive officers:
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NAME SALARY POSITION
-------------------------------------------------- ---------- --------------------------------------------------
Joseph A. Gregori................................. $ 150,000 Chief Executive Officer
Peter Parrinello.................................. $ 160,000 Chairman of the Board and President
Tony Howlett...................................... $ 120,000 Chief Technical Officer
Glenn Kramer...................................... $ 120,000 President of Internet Services
The following summary of the employment agreements of these executives and
key officers does not purport to be complete and is qualified by reference to
them, a form of which has been filed as an exhibit to the registration statement
of which this prospectus is a part. Each of these agreements entitles the
employee to participate in all of our employee benefit plans in which other
members of our management participate. Each of these agreements is for an
initial term of three years from the closing of this offering, subject to our
right to terminate the employee's employment at any time after one year. If we
terminate the employee's employment for any reason other than for cause (as
defined), voluntary resignation or death, the employee will be entitled to the
payment of any annual base salary and continuation of health insurance benefits
for six months. Each employment agreement contains a covenant limiting
competition with us following the termination of employment for a period of the
longer of one year after commencement of the employment agreement or one year
after employment terminates.
Under the agreements, "cause" is defined as a determination by the Board of
Directors that:
- the employee has breached the agreement;
- the employee has willfully failed to substantially perform his duties
thereunder or failed to follow the directives of the Board of Director; or
- the employee has willfully engaged in misconduct which is materially
injurious to OmniLynx.
In addition, we issued stock options as follows:
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EXERCISE
NAME OPTIONS PRICE
---------------------------------------------------------------------------------------- --------- -------------
Joseph A. Gregori....................................................................... 300,000 $ 8.00
113,443 $ 10.00
66,557 $ 5.00
Peter Parrinello........................................................................ 300,000 $ 8.00
47,267 $ 10.00
27,733 $ 5.00
The options at $8.00 per share vested one-third in June 1999, and vest an
additional one-third in June 2000 and 2001. The options at $10.00 per share vest
ratably each month over the three-year period from the closing of this offering.
The options at $5.00 per share all vest on the closing of this offering.
INCENTIVE PLAN
The description below summarizes all material features of our 1999 Stock
Incentive Plan. The summary is not complete and is qualified by reference to the
Incentive Plan, a copy of which has been filed as an exhibit to the registration
statement of which this prospectus is a part.
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GENERAL. The objectives of our Incentive Plan, which has been approved by
our board of directors, are to attract and retain selected key employees,
consultants and outside directors, encourage their commitment, motivate their
performance, facilitate their obtaining equity ownership interests (aligning
their personal interests to those of our shareholders) and enable them to share
in our long-term growth and success.
SHARES SUBJECT TO INCENTIVE PLAN. Under the Incentive Plan, we may issue
Incentive Awards (defined below) covering at any one time an aggregate of
1,500,000 shares of common stock. No more than 1,500,000 shares of common stock
will be available for incentive stock options. The number of securities
available under the Incentive Plan and outstanding incentive awards are subject
to adjustments to prevent enlargement or dilution of rights resulting from stock
dividends, stock splits, recapitalization or similar transactions or resulting
from a change in applicable laws or other circumstances.
ADMINISTRATION. The Incentive Plan will be administered by the compensation
committee of our board of directors. The committee consists only of non-employee
directors, each of whom is (1) an "outside director" under Section 162(m) of the
Internal Revenue Code and (2) a "non-employee director" under Rule 16b-3 under
the Exchange Act. The committee may delegate to our chief financial officer or
other senior officers its duties under the Incentive Plan, except for the
authority to grant incentive awards or take other action on persons who are
subject to Section 16 of the Exchange Act or Section 162(m) of the Internal
Revenue Code. In the case of an incentive award to an outside director, the
entire board of directors acts as the committee. Subject to the express
provisions of the Incentive Plan, the committee is authorized to, among other
things, select grantees under the Incentive Plan and determine the size,
duration and type, as well as the other terms and conditions (which need not be
identical), of each incentive award. The committee also construes and interprets
the Incentive Plan and any related agreements. All determinations and decisions
of the committee are final, conclusive and binding on all parties. We will
indemnify members of the committee against any damage, loss, liability, cost or
expenses in connection with any claim by reason of any act or failure to act
under the Incentive Plan, except for an act or omission constituting willful
misconduct or gross negligence.
ELIGIBILITY. Key employees, including our officers (whether or not they are
directors), consultants and non-employee directors are eligible to participate
in the Incentive Plan. A key employee generally is any of our employees who, in
the committee's opinion, is in a position to contribute materially to our
growth, development and financial success.
TYPES OF INCENTIVE AWARDS. Under the Incentive Plan, the Committee may
grant incentive awards which can be any of the following:
- incentive stock options as defined in Section 422 of the Internal Revenue
Code,
- nonstatutory stock options,
- shares of restricted stock, and
- other stock-based awards.
Incentive stock options and nonstatutory stock options together are called
"options." The terms of each incentive award will be reflected in an incentive
agreement between us and the participant.
OPTIONS. Generally, options must be exercised within 10 years of the grant
date. Incentive stock options may be granted only to employees, and the exercise
price of each incentive stock options may not be less than 100% of the fair
market value of a share of our common stock on the date of grant. The committee
has the discretion to determine the exercise price of each nonstatutory stock
option granted under the Incentive Plan. To the extent that the aggregate fair
market value of shares of our common stock for which incentive stock options are
exercisable for the first time by any employee during any calendar year exceeds
$100,000, those options must be treated as nonstatutory stock options.
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The exercise price of each option is payable in cash or, in the committee's
discretion, by the delivery of shares of common stock owned by the optionee, or
the withholding of shares that would otherwise be acquired on the exercise of
the option, or by any combination of the two.
An employee will not recognize income for federal income tax purposes at the
time an incentive stock option is granted, or on the qualified exercise of an
incentive stock option, but instead will recognize capital gain or loss (as
applicable) upon the subsequent sale of shares acquired in a qualified exercise.
The exercise of an incentive stock option is qualified if a participant does not
dispose of the shares acquired by the participant's exercise within two years
after the incentive stock option grant date and one year after the exercise
date. We are not entitled to a tax deduction for the grant or qualified exercise
of an incentive stock option.
An optionee will not recognize income for federal income tax purposes, nor
will we be entitled to a deduction, when a nonstatutory stock option is granted.
However, when a nonstatutory stock option is exercised, the optionee will
recognize ordinary income in an amount equal to the difference between the fair
market value of the shares received and the exercise price of the nonstatutory
stock option, and we will generally recognize a tax deduction in the same amount
at the same time.
This summary is not a complete statement of the relevant provisions of the
Internal Revenue Code, and does not address the effect of any state, local or
foreign taxes.
RESTRICTED STOCK. Restricted stock may be subject to a substantial risk of
forfeiture, a restriction on transferability or rights of repurchase or first
refusal on our behalf, as determined by the committee. Unless the committee
determines otherwise, during the period of restriction, the grantee will have
all other rights of a stockholder, including the right to vote and receive
dividends on the shares.
OTHER STOCK-BASED AWARDS. Other stock-based awards are awards denominated
or payable in, valued in whole or in part by reference to, or otherwise related
to, shares of our common stock. Subject to the terms of the Incentive Plan, the
committee may determine any terms and conditions of other stock-based awards,
provided that, in general, the amount of consideration we receive shall be
either (1) no consideration other than services actually rendered or to be
rendered (in the case of the issuance of shares) or (2) in the case of an award
in the nature of a purchase right, consideration (other than services rendered)
at least equal to 50% of the fair market value of the shares covered by such
grant on the grant date. Payment or settlement of other stock-based awards will
be in shares of common stock or in other consideration related to such shares.
OTHER TAX CONSIDERATIONS. Upon accelerated exercisability of options and
accelerated lapsing of restrictions upon restricted stock or other Incentive
Awards in connection with a "change in control" (as defined in the Incentive
Plan), certain amounts associated with such incentive awards could, depending
upon the individual circumstances of the participant, constitute "excess
parachute payments" under Section 280G of the Internal Revenue Code. Such a
determination would subject the participant to a 20% excise tax on those
payments and deny us a corresponding deduction. The limit on deductibility of
compensation under Section 162(m) of the Code is also reduced by the amount of
any excess parachute payments. Whether amounts constitute excess parachute
payments depends upon, among other things, the value of the Incentive Awards
accelerated and the past compensation of the participant.
Taxable compensation earned by executive officers who are subject to Section
162(m) of the Code with respect to incentive awards is subject to certain
limitations set forth in the Incentive Plan. Those limitations are generally
intended to satisfy the requirements for "qualified performance-based
compensation," but we may not be able to satisfy these requirements in all
cases, and we may, in our sole discretion, determine in one or more cases that
it is best not to satisfy these requirements even if we can.
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TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL. Except as otherwise
provided in the applicable incentive agreement, if a participant's employment or
other service with us (or our subsidiaries) is terminated other than due to his
death, disability, retirement or for cause (each term being defined in the
Incentive Plan), his then exercisable options will remain exercisable until the
earlier of their expiration date or 90 days after termination. If this
termination is due to disability or death, his then exercisable options will
remain exercisable until the earlier of their expiration date or one year
following termination. On retirement, his then exercisable options will remain
exercisable for six months (except for incentive stock options, which will
remain exercisable for three months). On a termination for cause, all his
options will expire at the opening of business on the termination date.
If we undergo a change in control, any restrictions on restricted stock and
other stock-based awards may be deemed satisfied, all outstanding options may
become immediately exercisable and any other stock-based awards may become fully
vested and deemed earned in full, all at the discretion of the committee. These
provisions could in some circumstances have the effect of an "anti-takeover"
defense because, as a result of these provisions, a change in control could be
more difficult or costly.
INCENTIVE AWARDS NONTRANSFERABLE. No incentive award may be assigned, sold
or otherwise transferred by a participant, other than by will or by the laws of
descent and distribution, or be subject to any lien, assignment or charge;
provided, that, the committee may permit nonstatutory stock options to be
transferred to the participant's immediate family or trusts or partnerships
established exclusively for the benefit of his immediate family. An incentive
award may be exercised during the participant's lifetime only by the
participant, the participant's legal guardian or a permitted transferee.
AMENDMENT AND TERMINATION. Our board of directors may amend or terminate
the Incentive Plan at any time. However, the Incentive Plan may not be amended,
without shareholder approval, if the amendment would (1) increase the number of
shares of common stock which may be issued under the Incentive Plan, except in
connection with a recapitalization of our common stock, (2) amend the
eligibility requirements for employees to purchase our common stock under the
Incentive Plan, or (3) extend the term of the Incentive Plan. Without a
participant's consent, no termination or amendment of the Incentive Plan shall
adversely affect in any material way any outstanding incentive award previously
granted to him.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ORGANIZATION OF OMNILYNX
We were initially capitalized with $1,000 provided by Benchmark Equity
Group, Inc. for 939,000 shares of common stock. Benchmark Equity Group, Inc. is
a Delaware corporation whose president and sole shareholder is Frank DeLape. In
August 1998, Benchmark transferred 236,203 of the 939,000 shares by gift to the
following: Emerging Ventures L.L.C.--97,260 shares; Christopher H. Efird--
115,429 shares; and Jeffrey W. Tomz--23,514 shares. Emerging Ventures L.L.C. is
a Delaware limited liability company of which Benchmark is the manager and a 1%
interest holder and Trident III, L.L.C. is a 33% interest holder. Mr. Efird is
one of our current directors. Mr. Tomz served as a director until June 1999.
In June 1999 and in connection with the acquisitions of the founding
companies, we issued contingent stock issue rights representing up to a total of
277,372 shares of common stock to the following: Benchmark--up to 158,363
shares; Emerging Ventures, L.L.C.--up to 38,067 shares; Mr. Efird--up to 67,243
shares; and Mr. Tomz--up to 13,699 shares. Approximately one-half of these
shares are issuable, if at any time within three years of the issuance of those
contingent stock issue rights, when the common stock reaches a 10-day average of
$16.00 per share. The remaining one-half are issuable, if at any time within
three years of the issuance of the contingent stock issue rights, the common
stock reaches a 10-day average of $21.00 per share.
In September 1998, we entered into a letter agreement with Benchmark. Under
the terms of the agreement, Benchmark agreed to serve as our non-exclusive agent
in connection with an acquisition or disposition by us for a term of two years.
Benchmark's fee under the agreement is equal to five percent of the first $5
million of aggregate consideration, four percent of the second $5 million of
aggregate consideration, three percent of the third $5 million of aggregate
consideration, and two percent of any consideration over $15 million in the
aggregate paid in connection with an Eligible Transaction, as defined, with a
minimum fee of $100,000. The acquisitions of ARC, AXCES and InfoHighway are
excluded from the fee requirement of the agreement, as amended.
In September 1998, we entered into a consulting agreement with Benchmark
which provided for, among other things, a monthly consulting fee of $14,000 for
a two year period and reimbursement of expenses incurred during the course of
the consulting engagement. In June 1999, the consulting agreement was amended to
waive any accrued or future consulting fees and to recognize the aggregate
amount of expenses to be reimbursed as of that date to be $105,000.
During the first quarter of 1999, we entered into an agreement with John
Vanderhider, our chief financial officer, for services to be rendered in
conjunction with the offering. The agreement, as amended, provided for, among
other things, the granting of five-year exercisable warrants to purchase 86,844
shares of our common stock at $5.71 per share in exchange for services rendered.
Warrants for 7,237 shares of common stock vest each month over a period of
twelve months starting in February 1999. Of the warrants for 7,237 shares, (1)
warrants for 5,201 shares are immediately exercisable upon vesting, (2) warrants
for 1,018 shares are exercisable when the common stock has closed at a price of
at least $16.00 per share for 10 consecutive trading days, and (3) warrants for
1,018 shares are exercisable when the common stock has closed at a price of at
least $21.00 per share for 10 consecutive trading days.
In March 1999, we issued a $100,000 13% promissory note to Trident III,
L.L.C., maturing at the earlier of March 1, 2000 or the closing of an outside
financing, as defined, by us with
68
minimum gross proceeds of $500,000. Trident III, L.L.C. also received warrants
to purchase an aggregate of 100,000 shares of common stock at an exercise price
of $8.00 per share subject to certain provisions and terms. The warrants have a
term of five years and have registration rights. In June 1999, we repaid this
note out of the proceeds of the $1.5 million June promissory note offering
described below.
In April 1999, we issued a $100,000 13% promissory note to Trident III,
L.L.C., maturing at the earlier of April 5, 2000 or the closing of an outside
financing, as defined, by us with minimum gross proceeds of $500,000. Trident
III, L.L.C. also received warrants to purchase an aggregate of 50,000 shares of
common stock at an exercise price of $8.00 per share subject to certain
provisions and terms. The warrants have a term of five years and have
registration rights. In June 1999, we repaid this note out of the proceeds of
the $1.5 million June promissory note offering described below.
THE ACQUISITIONS
We acquired ARC in June 1999. We will acquire InfoHighway and AXCES
simultaneously with and as a condition of the closing of this offering. Subject
to certain adjustments described below, the aggregate consideration we will pay
to acquire the founding companies consists of 2,048,242 shares of common stock,
388,550 shares of contingent common stock issue rights and $10,216,674 in Series
A and Series B Preferred Stock. We will also repay an aggregate of approximately
$6.8 million of indebtedness of OmniLynx and the founding companies with the
proceeds of the offering.
The consideration we are paying for each founding company was determined by
arm's length negotiations between us and a representative of that founding
company. Subject to certain adjustments described below, the following table
sets forth for each founding company the consideration we will pay to its
stockholders in the acquisitions in cash, shares of common stock, shares of
contingent common stock and shares of Series A and Series B Preferred Stock.
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CONTINGENT COMMON STOCK PREFERRED
COMMON STOCK STOCK
--------------------- ------------------------ -------------
VALUE OF VALUE OF VALUE OF
ACQUISITION SHARES SHARES SHARES SHARES SHARES
------------------------------------------------------- --------- ---------- ----------- ----------- -------------
AXCES.................................................. 700,000 $6,300,000 -- $ -- $ 9,000,000(1)
InfoHighway............................................ 958,166 8,623,494 235,878(3) -- --
ARC.................................................... 390,076 3,510,684 152,672 -- 1,216,674(2)
--------- ---------- ----------- ----- -------------
Total.................................................. 2,048,242 $18,434,178 388,550 $ -- $ 10,216,674
--------- ---------- ----------- ----- -------------
--------- ---------- ----------- ----- -------------
--------------------------
(1) This amount represents 60,000 shares of Series B 8% Cumulative Convertible
Preferred Stock valued at $150.00 per share.
(2) This amount represents 121,667 shares of Series A 10% Convertible Preferred
Stock valued at $10.00 per share.
(3) All of the contingent common stock issue rights issued to the former
shareholders of InfoHighway, except for 81,425 which were issued to Trident
III, L.L.C, are subject to pro rata reduction if InfoHighway fails to
maintain certain monthly revenue levels prior to the closing of this
offering.
For a detailed description of the contingent common stock issue rights and
the Series A and Series B Preferred Stock, see "Shares Eligible For Future Sale"
and "Description of Capital Stock."
We will repay an aggregate of approximately $1.95 million of our
indebtedness when the offering closes. In addition, indebtedness of ARC and
InfoHighway of approximately $0.75 million and $1.1 million, respectively, will
be repaid when the offering closes, and indebtedness of ARC and InfoHighway of
approximately $2.4 million and $0.05 million will be assumed and paid over time,
respectively. Additionally, we will repay up to $3.0 million of debt of AXCES as
described below.
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Prior to the closing of the acquisition, AXCES may incur up to $3.0 million
of debt the proceeds of which may only be used for distribution to MTM Holdings
Corporation, its sole shareholder prior to this offering. AXCES may distribute
to its owner prior to closing of the acquisitions up to $6.5 million in cash,
including the loan proceeds, provided that the distributions do not decrease
AXCES' working capital below a minimum level. The minimum level is an amount
equal to (1) $600,000, plus (2) the amount of AXCES' net income plus noncash
expenses for the period from May 1, 1999 to the closing date of the
acquisitions, minus (3) the amount of AXCES' net income and noncash expenses in
that period used to settle the litigation shown on the schedule of litigation
involving AXCES attached to the acquisition agreement.
Following the closing of the acquisition, AXCES will pay, or OmniLynx will
cause AXCES to pay, certain tax liabilities of AXCES, MTM and its former
shareholders attributable to AXCES' operations from January 1, 1999 through the
closing date and any fees and expenses of counsel engaged to give advice on
methods to decrease that tax liability. Portions of the tax liability may be
payable over time. Our obligation to pay the tax liability and fees and expenses
of counsel may not exceed $1.6 million in the aggregate or $400,000 in any
calendar quarter. Any amount of tax liability and costs and expenses of counsel
exceeding $1.6 million in the aggregate must be paid by MTM and its owners.
The closing of the AXCES and InfoHighway acquisitions are subject to
customary conditions. These conditions include, among others: the accuracy on
the closing date of the acquisitions of the representations and warranties made
by the founding companies, their principal stockholders and OmniLynx; the
performance of each of their respective covenants included in the agreements
relating to the acquisitions; and nonexistence of a material adverse change in
the result of operations, financial condition or business of each founding
company. We can give no assurance that the conditions to the closing of all
acquisitions will be satisfied or waived or that each of the acquisitions will
close.
The acquisition agreements for AXCES and InfoHighway may be terminated,
under certain circumstances, prior to the closing of this offering:
- by the mutual consent of our board of directors and the boards of
directors of AXCES or InfoHighway;
- by AXCES or InfoHighway, their respective stockholders or us, if the
offering and the acquisition of AXCES or InfoHighway are not closed by
October 31, 1999;
- by us if the schedules to the acquisition agreement are amended to reflect
a material adverse change in AXCES or InfoHighway; or
- by AXCES or InfoHighway, their respective stockholders or us, if a
material breach or default under the agreement by one party occurs and is
not waived by the other party.
Pursuant to the acquisition agreements, certain stockholders of each of the
founding companies have agreed not to compete with us for a period of two or
three years commencing on the date of closing of the acquisitions. For
information regarding the employment agreements to be entered into by certain
key officers of the founding companies, see "Management--Executive Compensation;
Employment Agreements."
In connection with the acquisitions, OmniLynx will grant certain
registration rights to former stockholders of the founding companies. However,
these are subject to provisions in the acquisition agreements that restrict the
transfer of certain percentages of common stock for up to two years depending
upon the performance of the common stock. See "Shares Eligible for Future Sale."
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ACQUISITIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
Persons who are or will become directors, executive officers, or beneficial
owners of 5% or more of our common stock will receive the following
consideration in the acquisitions for their equity interests in the founding
companies.
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CONTINGENT COMMON STOCK
PREFERRED
COMMON STOCK ISSUE RIGHTS STOCK
---------------------- -------------------------- ---------
VALUE OF VALUE OF VALUE OF
ACQUISITION SHARES SHARES SHARES SHARES SHARES
------------------------------------------------------------ ----------- --------- ----------- ------------- ---------
Peter Parrinello............................................ 39,060 $ 351,540 15,289 -- $ --
Tony Howlett................................................ 114,598 1,031,382 23,596 -- --
Glenn Kramer................................................ 44,076 396,684 9,075 -- --
Michael Macaluso............................................ 175,000 1,575,000 -- -- 2,250,000
----------- --------- ----------- --- ---------
Total..................................................... 372,734 $3,354,606 47,960 -- $2,250,000
----------- --------- ----------- --- ---------
----------- --------- ----------- --- ---------
REAL ESTATE AND OTHER TRANSACTIONS
ARC occupies space leased by Consolidated Technology Group, Ltd. in New York
City. There is no formal lease agreement between Consolidated and ARC. Rent is
charged by SIS Capital Corp., a Delaware corporation and wholly owned subsidiary
of Consolidated, to ARC which amounted to $23,153, $27,752 and $14,066 for the
years ended December 31, 1996, 1997 and 1998, respectively.
In connection with the acquisition of ARC, $750,000 of the outstanding
balance of approximately $2.4 million on March 31, 1999 on the revolving line of
credit due to Consolidated will be repaid with the proceeds from the offering.
The balance of the revolving line of credit of $1.65 million was exchanged for a
14% convertible note of which $450,000 matures in January 2000, and the
remaining $1.2 million matures in June 2000 if not previously converted. The
outstanding balance of this note is convertible into shares of common stock at
$8.00 per share at Consolidated's option at any time. In addition, Consolidated
has been issued five-year exercisable warrants to purchase 90,000 shares of
common stock at $8.00 per share in exchange for the delaying of debt.
Consolidated was granted piggy back registration rights with respect to the
shares issuable upon conversion of the note and exercise of the warrants. See
"Description of Capital Stock--Registration Rights" and "Shares Eligible for
Future Sale."
AXCES purchases printing services from Page/IPP Communications, L.L.C., a
company in which MTM Holdings Corporation owns a 30% interest, from time to
time. During 1998 and 1997, AXCES purchased printing services totaling $281,660
and $284,660, respectively, from Page/IPP. Amounts due Page/IPP at December 31,
1997 and 1998 were $16,583 and $66,265, respectively. MTM is owned as follows:
25% by Michael Macaluso, a director and 5% beneficial owner of OmniLynx; 37.5%
by Michael Avignon, a 5% beneficial owner of OmniLynx; and 37.5% by Timothy
Till, a 5% beneficial owner.
In connection with the acquisition, $499,250 owed by InfoHighway to Trident
III, L.L.C., pursuant to a loan agreement dated September 18, 1998, will be
repaid from the proceeds of the offering.
AXCES entered into a consulting agreement with MTM Holdings Corporation, the
previous sole shareholder of AXCES. The consulting agreement is effective on the
closing of this offering and has a three year term subject to early termination
rights held by both parties. MTM Holdings has been engaged to seek out
acquisition targets for us in addition to providing other services towards the
consummation of these acquisitions. The agreement provides for a $115,000 annual
retainer, payable in equal monthly installments, and a commission payable on
acquisitions consummated during the agreement term or within one year
thereafter. The retainer is an advance of any fees earned. The fee is three
percent of the first million of the purchase price, two percent of the second
million and one
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percent of any amount over $2 million. The commission will be decreased by the
amount of any retainer previously paid to the owner. The agreement terminates
automatically upon the death or disability of Mr. Michael Macaluso. Prior to the
expiration of the three year term, AXCES may terminate the agreement with or
without cause, and MTM Holdings may terminate the agreement for any reason. If
the agreement is terminated due to Mr. Macaluso's death, the retainer through
the termination date and any unpaid commission must be paid. If AXCES terminates
the agreement without cause, it must pay MTM Holdings the retainer through the
termination date, any commission that is due and payable and not previously
paid, monthly installments on the retainer for six months following the
termination date, and commission on any acquisition consummated within one year
following the termination date that relates to a potential acquisition that was
the subject of a notice from the owner to the surviving corporation given before
the date of termination. The agreement also contains certain non-competition and
non-disclosure provisions that remain in effect for a period of three years
after termination.
During June 1999, AXCES entered into employment agreements with Michael
Avignon and Timothy Till which provide for the retention of Mr. Avignon and Mr.
Till in the capacities of Operations Manager and MIS Director, respectively, for
a three year term commencing upon the consummation of the offering. The
agreements provide each employee an annual base salary of $160,000 and a monthly
car allowance of $1,000 together with one year non-competition obligations,
among other things. Both agreements provide for an annual bonus payment to each
employee; however, Mr. Avignon's annual bonus is based upon the net income
performance of AXCES, while Mr. Till's bonus is payable in an amount at the
discretion of the Board. The agreements also contain certain non-competition and
non-disclosure provisions that remain in effect for a period of one year after
their termination.
COMPANY POLICY
In the future, any transactions with our directors, officers, employees or
affiliates are anticipated to be minimal and will, in any case, be approved in
advance by a majority of the board of directors, including a majority of
disinterested members of the board of directors.
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PRINCIPAL STOCKHOLDERS
The following table shows, immediately after giving effect to the closing of
the acquisitions and this offering, the beneficial ownership of our common stock
for:
- each person beneficially owning more than 5% of our outstanding common
stock;
- each of our directors;
- each of our executive officers; and
- all of our directors and executive officers as a group.
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SHARES BENEFICIALLY
OWNED AFTER OFFERING
(2)
-----------------------
BENEFICIAL OWNER (1) NUMBER PERCENT
-------------------------------------------------------------------------------------------- ---------- -----------
Frank M. DeLape (3)
Benchmark Equity Group, Inc................................................................. 1,235,041 25.29%
700 Gemini, Suite 100
Houston, Texas 77058
MTM Holdings Corporation (4)................................................................ 1,300,000 25.06%
2500 Wilcrest, Suite 540
Houston, Texas 77042
Michael Avignon (3)(5)...................................................................... 587,500 11.96%
2500 Wilcrest, Suite 540
Houston, Texas 77042
Timothy Till (3)(6)......................................................................... 562,500 11.51%
Technology Acquisitions, Ltd. (7)........................................................... 557,895 11.42%
Clarendon House, 2 Church Street
Hamilton, HM II
Bermuda
Joseph Gregori (8).......................................................................... 480,000 9.47%
Peter Parrinello (9)........................................................................ 414,060 8.34%
Lighthouse Capital Insurance Company (10)
Trident Equity Management Group, Inc.
Trident III, L.L.C.......................................................................... 358,040 7.56%
c/o MeesPierson (Cayman) Ltd.
P.O. Box 2003 GT
Grand Pavilion Comm. Centre
Bougainvillea Way
802 West Bay Road
Grand Cayman BWI
Michael Macaluso (3)(11).................................................................... 325,000 6.86%
2500 Wilcrest, Suite 540
Houston, Texas 77042
Consolidated Technologies Group, Ltd. (12).................................................. 296,250 6.07%
700 Gemini, Suite 100
Houston, Texas 77058
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SHARES BENEFICIALLY
OWNED AFTER OFFERING
(2)
-----------------------
BENEFICIAL OWNER (1) NUMBER PERCENT
-------------------------------------------------------------------------------------------- ---------- -----------
Christopher Efird........................................................................... 115,429 2.52%
700 Gemini, Suite 100
Houston, Texas 77058
Tony Howlett (13)........................................................................... 114,598 2.50%
Glenn Kramer (14)........................................................................... 44,076 *
John Vanderhider (15)....................................................................... 36,185 *
Harry Bennett (16).......................................................................... 10,000 *
35 Airport Road, Suite 120
Morristown, New Jersey 07960
[Weatherly Nominee--To Be Provided by Amendment] (16)....................................... 10,000 *
[Address]
All directors and officers as a group (9 persons) (8,9,11,13-16)............................ 1,549,348 27.43%
------------------------
(1) All persons listed have sole voting and investment power with respect to
their shares unless otherwise indicated. Unless otherwise indicated, the
address of each person listed is 1770 Motor Parkway, Suite 300, Hauppauge,
New York 11788.
(2) Assumes none of these persons intends to acquire shares directly from the
underwriters in connection with this offering. Shares shown include shares
of common stock that could be acquired on exercise of currently outstanding
options which have not vested and do not vest within 60 days hereof.
However, the share amounts do not include shares of common stock which are
issuable in connection with the contingent common stock issue rights.
(3) Includes (a) 579,886 shares of common stock beneficially held by Benchmark
Equity Group, Inc., a Delaware corporation, which is wholly-owned by Mr.
DeLape; (b) 261,645 shares of common stock beneficially held by Technology
Acquisitions, Ltd., a Bermuda corporation all of the voting stock of which
is owned by Benchmark, of which Mr. DeLape is a director; (c) 296,250 shares
of common stock beneficially held by Consolidated Technology Group, a New
York corporation of which Mr. DeLape is a director; and (d) 97,260 shares of
common stock beneficially held by Emerging Ventures, L.L.C., a Delaware
limited liability company which is managed by Benchmark. Does not include
358,040 shares of common stock beneficially held by Lighthouse Capital
Insurance Company, a Cayman Island unlimited licensed insurance company,
which has issued a variable universal life insurance contract of which Mr.
DeLape and his children are remote contingent beneficiaries. Mr. DeLape
disclaims beneficial ownership of such shares held by Lighthouse and does
not have voting or dispositive power with respect to such shares.
(4) Includes (a) 700,000 shares of common stock; and (b) 600,000 shares of
common stock issuable upon conversion of the 60,000 outstanding shares of
our Series B Preferred Stock. All of these shares of common and preferred
were issued to MTM, the former sole shareholder of AXCES, as consideration
for the acquisition of AXCES. MTM is owned by Mr. Till (37.5%), Mr. Avignon
(37.5%) and Mr. Macaluso (25%).
(5) Includes (a) 262,500 shares of common stock; (b) 225,000 shares of common
stock issuable upon conversion of 22,500 shares of our Series B Preferred
Stock; (c) 36,977 shares issuable upon exercise of options at $5.00 per
share; and (d) 63,023 shares issuable upon exercise of options at $10.00 per
share. The shares of common and preferred were issued to MTM, the former
sole shareholder of AXCES, as consideration for the acquisition of AXCES.
The options at $5.00 per share all vest on the closing of this offering. The
options at $10.00 per share vest ratably each month over the three-year
period following the closing of this offering.
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(6) Includes (a) 262,500 shares of common stock; (b) 225,000 shares of common
stock issuable upon conversion of 22,500 shares of our Series B Preferred
Stock; (c) 27,733 shares issuable upon exercise of options at $5.00 per
share; and (d) 47,267 shares issuable upon exercise of options at $10.00 per
share. The shares of common and preferred were issued to MTM, the former
sole shareholder of AXCES, as consideration for the acquisition of AXCES.
The options at $5.00 per share all vest on the closing of this offering. The
options at $10.00 per share vest ratably each month over the three-year
period following the closing of this offering.
(7) Includes (a) 261,645 shares of common stock held by Technology Acquisitions,
Ltd.; and (b) 296,250 shares of common stock beneficially held by
Consolidated Technology Group, an affiliate of Technology Acquisitions.
(8) Includes (a) 300,000 shares of common stock issuable upon exercise of
options at $8.00 per share; (b) 66,557 shares issuable upon exercise of
options at $5.00 per share; and (c) 113,443 shares issuable upon exercise of
options at $10.00 per share. The options at $8.00 per share vested one-third
in June 1999, and vest an additional one-third in June 2000 and 2001. The
options at $5.00 per share all vest on the closing of this offering. The
options at $10.00 per share vest ratably each month over the three-year
period following the closing of this offering.
(9) Includes (a) 39,060 shares of common stock held by Mr. Parrinello which were
issued as consideration for the purchase of ARC (5,965 of which are held by
members of his immediate family); (b) 300,000 shares of common stock
issuable upon exercise of options at $8.00 per share; (c) 27,733 shares
issuable upon exercise of options at $5.00 per share; and (d) 47,267 shares
issuable upon exercise of options at $10.00 per share. The options at $8.00
per share vested one-third in June 1999, and vest an additional one-third in
June 2000 and 2001. The options at $5.00 per share all vest on the closing
of this offering. The options at $10.00 per share vest ratably each month
over the three-year period following the closing of this offering.
(10) Includes (a) 208,040 shares of common stock held by Trident III; and (b)
150,000 shares of common stock issuable upon exercise of warrants at $8.00
per share issued to Trident III in connection with promissory notes we
issued prior to the offering. Trident III is managed by Trident Equity
Management Group, Inc., a Cayman Islands exempted company and wholly-owned
subsidiary of Lighthouse.
(11) Includes (a) 175,000 shares of common stock; and (b) 150,000 shares of
common stock issuable upon conversion of 15,000 shares of our Series B
Preferred Stock. The shares of common and preferred were issued to MTM, the
former sole shareholder of AXCES, as consideration for the acquisition of
AXCES.
(12) Includes (a) 206,250 shares of common stock issuable upon conversion at
$8.00 per share of a $1.65 million note issued to Consolidated in exchange
for outstanding debt of ARC; and (b) 90,000 shares issuable upon exercise of
warrants at $8.00 per share which were issued to Consolidated in connection
with the restructuring of ARC's note to Consolidated.
(13) Represents 114,598 shares of common stock held by Mr. Howlett which were
issued as consideration for the purchase of InfoHighway.
(14) Represents 44,076 shares of common stock held by Mr. Kramer which were
issued as consideration for the purchase of InfoHighway.
(15) Represents shares issuable upon exercise of warrants at $5.71 issued to Mr.
Vanderhider for services rendered prior to the offering.
(16) Represents shares issuable upon exercise of options at $10.00 issued to
each of our outside directors upon appointment to the board.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of our capital stock does not purport to
be complete and is qualified in its entirety by reference to the actual terms of
the capital stock contained in our certificate of incorporation and other
agreements referenced below which are filed as exhibits to the registration
statement of which this prospectus is a part.
Upon the closing of this offering, our authorized capital stock, after
giving effect to the amendment of our certificate of incorporation, will consist
of 25,000,000 shares of common stock and 3,000,000 shares of preferred stock.
The common stock and preferred stock each have a par value of $.0001 per share.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding series of preferred stock, the holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of a liquidation, dissolution
or winding up, the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable, and the
shares of common stock offered hereby will, upon the closing of the offering, be
fully paid and non-assessable.
CONTINGENT COMMON STOCK ISSUE RIGHTS
As of the closing of this offering, there will be approximately 727,511
contingent common stock issue rights. These rights were issued to certain of the
founders of OmniLynx and to the former shareholders of ARC and InfoHighway in
connection with the acquisition of those companies. The contingent stock issue
rights entitle the holder to receive shares of our common stock based upon its
market performance beginning 90 days after the closing of this offering.
Approximately one-half of the shares are issuable when the common stock reaches
a 10-day average of $16.00 per share. The remaining one-half are issuable when
the common stock reaches a 10-day average of $21.00 per share. The rights expire
after three years. No dividends are payable with respect to the rights and the
rights are not transferrable or assignable except by the laws of descent and
distribution, by will or by operation of law. All of the 235,878 contingent
common stock issue rights issued to the former shareholders of InfoHighway,
except for 81,425 which were issued to Trident III, L.L.C, are subject to pro
rata reduction if InfoHighway fails to maintain certain monthly revenue levels
prior to the closing of this offering.
PREFERRED STOCK
At the direction of our board, we may issue up to 3,000,000 shares of
preferred stock from time to time. Our board may, without any action by holders
of the common stock:
- adopt resolutions to issue preferred stock in one or more classes or
series;
- fix or change the number of shares constituting any class or series of
preferred stock; and
- establish or change the rights of the holders of any class or series of
preferred stock.
The rights any class or series of preferred stock may evidence may include:
- general or special voting rights;
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- preferential liquidation or preemptive rights;
- preferential cumulative or noncumulative dividend rights;
- redemption or put rights; and
- conversion or exchange rights.
We may issue shares of, or rights to purchase, preferred stock the terms of
which might:
- adversely affect voting or other rights evidenced by, or amounts otherwise
payable with respect to, the common stock;
- discourage an unsolicited proposal to acquire us; or
- facilitate a particular business combination involving us.
Any such action could discourage a transaction that some or a majority of our
stockholders might believe to be in their best interests or in which our
stockholders might receive a premium for their stock over its then market price.
SERIES A 10% CONVERTIBLE PREFERRED STOCK. Upon the closing of this
offering, 1,216,674 shares of our Series A 10% Convertible Preferred Stock will
be outstanding, of 1,217,000 shares authorized. The Series A Preferred is
convertible into common stock at any time after 90 days from the closing of this
offering at the option of the holder. The number of shares of common stock
issuable upon conversion of the Series A Preferred is determined by multiplying
the number of shares being converted by the conversion rate as defined in the
statement of designation. The conversion rate is calculated by dividing $1.00 by
the lesser of the offering price (assumed to be $10.00) or the five-day average
closing price ending on the trading day prior to any such conversion date
(subject to adjustment). Annual dividends of $.10 per share are payable each
March 1, commencing on March 1, 2000, and are cumulative. Except as otherwise
required by law, the shares of Series A Preferred Stock have no voting rights.
We may redeem any or all of the shares of Series A Preferred Stock at any time
for the redemption price of $1.00 per share, plus accrued but unpaid dividends,
upon at least 5 days notice. The shares of Series A Preferred Stock have a
liquidation right of $1.00 per share, plus accrued but unpaid dividends, and
rank on parity with the Series B Preferred Stock.
SERIES B 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK. Upon the closing of
this offering, all 60,000 authorized shares of our Series B 8% Cumulative
Convertible Preferred Stock will be outstanding. Each share of the Series B
Preferred is convertible into 10 shares of common stock (subject to adjustment)
at any time at the option of the holder. Annual dividends of $12.00 per share
are payable quarterly and are cumulative. The holders of Series B Preferred
Stock shall have the same voting rights as, and shall vote with, the holders of
the common stock on an as-converted basis. We may redeem any or all of the
shares of Series B Preferred Stock at any time beginning 36 months after the
closing of this offering for cash, or assign to the holders a designated portion
of our cash flow, for the redemption price of $150.00 per share, plus accrued
but unpaid dividends, upon at least 30 days notice. The shares of Series B
Preferred Stock have a liquidation right of $150.00 per share plus accrued but
unpaid dividends, and rank on parity with to the Series A Preferred Stock. If
our common stock trades for an average of $20.00 per share or more for a period
of 10 consecutive days, we may force a conversion of the Series B Preferred
Stock into common stock.
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REGISTRATION RIGHTS
Pursuant to certain registration rights agreements, the holders of the
securities listed below are entitled to certain registration rights for the
number of shares of common stock and as indicated below:
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SHARES OF COMMON STOCK
TYPE OF SECURITY WITH REGISTRATION RIGHTS REGISTRATION RIGHTS
------------------------------------------------------ ---------------------------- ---------------------------
Common Stock.......................................... 2,048,242 Piggy Back
Common Stock Contiengent Issue Rights................. 727,511 Piggy Back
Series A Preferred Stock.............................. 121,667 Demand and Piggy Back
Series B Preferred Stock.............................. 600,000 Piggy Back
Warrants.............................................. 720,031 Piggy Back
Underwriter Warrants.................................. 160,000 Demand and Piggy Back
Convertible Promissory Note........................... 206,250 Piggy Back
For a detailed description of these registration rights, see "Shares
Eligible for Future Sale."
SPECIAL PROVISIONS OF OUR CHARTER, BYLAWS AND DELAWARE LAW
The following charter and bylaw provisions and provisions of Delaware law
may have the effect of delaying, deterring or preventing a change of control of
OmniLynx.
AUTHORIZATION OF PREFERRED STOCK. As noted above, our Board of Directors,
without stockholder approval, has the authority under our Certificate of
Incorporation to issue preferred stock with rights superior to the rights of the
holders of common stock. As a result, preferred stock could be issued quickly
and easily, could adversely affect the rights of holders of common stock and
could be issued with terms calculated to delay or prevent a change of control of
OmniLynx or make removal of management more difficult.
ELECTION AND REMOVAL OF DIRECTORS. Our charter and Bylaws provide for the
division of our Board of Directors into three classes, as nearly equal in number
as possible, with the directors in each class serving for a three-year term, and
one class being elected each year by our stockholders. Directors may be removed
only for cause. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of OmniLynx and may maintain the incumbency of the Board of
Directors, as it generally makes it more difficult for stockholders to replace a
majority of directors. See "Management--Classified Board."
STOCKHOLDER MEETINGS AND WRITTEN CONSENT. Under our Bylaws, a special
meeting of the stockholders may be called by the Board of Directors, by written
order of a majority of the Board, the Chairman of the Board, the Chief Executive
Officer, the President or the stockholders by the written request of not less
than two-thirds of the common stock entitled to vote at such meeting. Our
Certificate of Incorporation provides that stockholders may not act by written
consent and, accordingly, can only act at a meeting.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our Bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the Board of
Directors or a committee thereof.
INDEMNIFICATION. Delaware law authorizes Delaware corporations to limit or
eliminate the personal liability of directors for monetary damages for breach of
a director's fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors must exercise an informed business
judgment based on all material information reasonably available to them. Absent
the
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limitations Delaware law authorizes, directors of Delaware corporations are
accountable to those corporations and their stockholders for monetary damages
for conduct constituting gross negligence in the exercise of their duty of care.
Delaware law enables Delaware corporations to limit available relief to
equitable remedies such as injunction or rescission. Our certificate of
incorporation limits the liability of our directors to us or our stockholders to
the fullest extent Delaware law permits, and no member of our board will be
personally liable for monetary damages for breach of the member's fiduciary duty
as a director, except for liability:
- for any breach of the member's duty of loyalty to us or our stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation
Law; or
- for any transaction from which the member derived an improper personal
benefit.
This provision could have the effect of reducing the likelihood of derivative
litigation against our directors and may discourage or deter our stockholders or
management from bringing a lawsuit against our directors for breach of their
duty of care, even though such an action, if successful, might otherwise have
benefited our stockholders and us. Our bylaws provide indemnification to our
officers and directors and other specified persons with respect to their conduct
in various capacities, and we have entered into agreements with each of our
directors and executive officers which indemnify them to the fullest extent
Delaware law and our certificate of incorporation permit.
STATUTORY BUSINESS COMBINATION PROVISION. Until June 2000, we are subject
to Section 203 of the Delaware General Corporation Law. Section 203 prevents an
"interested stockholder," which is defined generally as a person owning 15% or
more of a Delaware corporation's outstanding voting stock or any affiliate or
associate of that person, from engaging in a broad range of "business
combinations" with the corporation for three years following the date that
person became an interested stockholder unless:
- before that person became an interested stockholder, the board of
directors of the corporation approved the transaction in which that person
became an interested stockholder or approved the business combination;
- on completion of the transaction that resulted in that person's becoming
an interested stockholder, that person owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, other than stock held by (1) directors who are also officers of
the corporation or (2) any employee stock plan that does not provide
employees with the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange offer; or
- following the transaction in which that person became an interested
stockholder, both the board of directors of the corporation and the
holders of 66 2/3% of the outstanding voting stock of the corporation not
owned by that person approve the business combination.
Under Section 203, the restrictions described above also do not apply to
specific business combinations proposed by an interested stockholder following
the announcement or notification of designated extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors, if a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed those directors by a majority of those directors
approve or do not oppose that extraordinary transaction.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company is the transfer agent and
registrar for our common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect market prices prevailing from time to time. Sales
of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon the completion of this offering, we will have 4,587,242 shares of
common stock outstanding (4,827,242 if the over-allotment option is exercised).
Of these shares, the 1,600,000 shares sold in this offering will be freely
tradable without restriction under the Securities Act, unless held by our
"affiliates," as that term is defined in Rule 144 under the Securities Act. In
addition, we have registered 165,000 shares of common stock for resale by
Benchmark Equity Group over a period of 90 days beginning 90 days after the
closing of this offering. An additional 327,917 shares of common stock issuable
upon conversion of the Series A Preferred Stock and conversion of a convertible
promissory note will be eligible for sale beginning 12 months from the closing
of this offering subject to volume limitations pursuant to Rule 144. The
remaining 2,987,242 shares of common stock held by existing stockholders were
issued and sold by us in reliance on exemptions from the registration
requirements of the Securities Act. These shares may be sold in the public
market only if registered, or pursuant to an exemption from registration such as
Rule 144, 144(k) or 701 under the Securities Act.
Except for 327,917 shares not subject to the lock up, our directors,
executive officers, all other stockholders and all other option, warrant and
contingent stock issue right holders, who in the aggregate held all of the
shares of our common stock or securities convertible into our common stock
outstanding immediately prior to the completion of this offering, are subject to
lock-up agreements under which they have agreed not to directly or indirectly,
offer, sell, contract to sell, grant any option to purchase, pledge or otherwise
dispose of, or, in any manner, transfer all or a portion of the economic
consequences associated with the ownership of any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock
beneficially owned by them for a period of 24 months after the date of this
prospectus, without the prior written consent of Weatherly Securities
Corporation. However, if the average of the closing prices for our common stock
during the last ten trading days of each measurement period following the
closing of this offering, as listed in the table below, is at least $17.00 per
share, then the designated percentage of all of the shares subject to the lockup
then outstanding shall be irrevocably released from such restrictions:
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MEASUREMENT PERIOD PERCENTAGE RELEASED
------------------- ---------------------
12 months 10%
15 months 20%
18 months 30%
21 months 40%
24 months All shares not
previously released
We may grant options and issue stock under our 1999 Incentive Plan in connection
with strategic relationships, and in connection with acquisitions of businesses,
technologies or products complementary to ours, provided that the recipients of
such stock agree to be bound by a lock-up agreement for the remainder of the
lock-up period.
Upon expiration of the lock-up agreements, approximately 6,268,784 shares of
common stock outstanding or issuable upon conversion or exercise of outstanding
securities will become eligible for immediate public resale, subject in some
cases to volume limitations pursuant to Rule 144. Pursuant to certain
registration rights agreements, the holders of the securities listed below are
entitled to certain registration rights for the number of shares of common stock
and as indicated below:
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SHARES OF COMMON STOCK
WITH REGISTRATION
TYPE OF SECURITY RIGHTS REGISTRATION RIGHTS
----------------------------------------------------------- ----------------------- ---------------------------
Common Stock............................................... 2,048,242 Piggy Back
Common Stock Contingent Issue Rights....................... 727,511 Piggy Back
Series A Preferred Stock................................... 121,667 Demand and Piggy Back
Series B Preferred Stock................................... 600,000 Piggy Back
Warrants................................................... 720,031 Piggy Back
Underwriter Warrants....................................... 160,000 Demand and Piggy Back
Convertible Promissory Note................................ 206,250 Piggy Back
Pursuant to a registration rights agreement entered into with the
representative of the underwriters, the representative has certain demand and
"piggy-back" registration rights with respect to the 160,000 shares of common
stock issuable upon exercise of the warrants issued to the representative in
connection with the closing of the offering. The representative is entitled to
one demand registration right during the four year period beginning one year
after the closing of this offering unless a registration statement is filed and
is either withdrawn or does not become effective in which case, the
representative will not have been deemed to exercise the "demand" registration
right.
Trans Global, the holder of our Series A Preferred Stock, or its transferees
are entitled to "piggy back" registration rights with respect to 121,667 shares
of common stock issuable upon the conversion of Series A Preferred Stock,
subject to certain limitations and provisions. The number of securities
requested to be included in a registration involving the exercise of "piggy
back" registration rights are subject to pro rata reduction upon the request of
the managing underwriter. As a condition to including the securities in the
offering, the managing underwriter may require that the holders of the Series A
Preferred Stock agree not to sell the securities for a six month period
following the effective date of the registration statement. The holders of the
Series A Preferred Stock may exercise the "piggy back" registration rights from
the date of this offering until the holders of the Series A Preferred Stock can
sell the underlying common stock pursuant to Rule 144(k) of the Securities Act
of 1933, as amended. In addition, any holder(s) of the Series A Preferred Stock
who own(s) 25% of the Series A Preferred Stock is entitled to "demand"
registration rights with respect to the shares of common stock issuable upon the
conversion of Series A Preferred Stock. The holders of the Series A Preferred
Stock may exercise the "demand" registration rights at any time twelve months
from the date of this offering, if the underlying common stock has not been
previously registered, until holders of the Series A Preferred Stock can sell
the underlying common stock pursuant to Rule 144(k) of the Securities Act of
1933, as amended. The holders of the Series A Preferred Stock are entitled to
only one "demand" registration right unless a registration statement is filed
and is either withdrawn or does not become effective, in which case, the holders
of the Series A Preferred Stock will not have been deemed to exercise the
"demand" registration right.
Pursuant to the certain registration rights agreements, the holders of the
remaining 4,302,034 shares of common stock with registration rights are entitled
to "piggy-back" registration rights, subject to certain limitations and
conditions. Except for the 206,250 shares of common stock issuable upon
conversion of the convertible note issued to Consolidated, these shares remain
subject to the lock-up agreement even if registered pursuant to these
registration rights. The number of securities request to be included in a
registration involving the exercise of "piggy-back" rights are subject to a pro
rata reduction based on the number of shares of common stock held by each such
security holder and any other security holders exercising their respective
registration rights to the extent that we are so advised by the managing
underwriter, if any, that the total number of securities requested to be
included in the underwriting is such as to materially and adversely affect the
success of the offering. The registration rights terminate as to any such
security holder at the later (1) 3 years after the offering made hereby or (2)
such time as such security holder may sell under Rule 144 in a three month
period all registrable securities then held by such holder.
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As of the date of this offering, 1,050,000 shares were subject to
outstanding options under our 1999 Incentive Plan and 904,031 shares were
subject to outstanding warrants to purchase common stock. All of these shares
are subject to the lock-up agreements described above. Approximately 90 days
after the date of this prospectus, we intend to file a Registration Statement on
Form S-8 covering shares issuable under our 1999 Incentive Plan (including
shares subject to then outstanding options under such plan), thus permitting the
resale of such shares in the public market without restriction under the
Securities Act after expiration of the applicable lock-up agreements. In
addition, the holders of the warrants to purchase shares of common stock are
entitled to certain registration rights with respect to such shares as described
above.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner, except an affiliate) is
entitled to sell in a "broker's transaction" or to market makers, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (i) one percent of the
number of shares of common stock then outstanding or (ii) the average weekly
trading volume of the common stock during the four calendar weeks preceding the
required filing of a Form 144 with respect to such sale. Sales under Rule 144
are generally subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not deemed to have been one of our affiliates
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without having to comply with the manner of sale, public information,
volume limitation or notice provisions of Rule 144. Under Rule 701 under the
Securities Act, persons who purchase shares upon exercise of options granted
prior to the effective date of this offering are entitled to sell such shares 90
days after the effective date of this offering in reliance on Rule 144, without
having to comply with the holding period requirements of Rule 144 and, in the
case of non-affiliates, without having to comply with the public information,
volume limitation or notice provisions of Rule 144.
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UNDERWRITING
Weatherly Securities Corporation is acting as representative for the
underwriters named below in connection with this offering. The underwriters have
severally agreed, subject to the terms and conditions of the underwriting
agreement, among them and our company, to purchase from us, and we have agreed
to sell to them, the number of shares of common stock set forth below:
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NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
----------------------------------------------------------------------- -----------------
Weatherly Securities Corporation.......................................
Westport Resources Investment Services, Inc............................
-----------------
Total.................................................................. 1,600,000
-----------------
-----------------
The underwriters are committed to purchase all the shares of common stock
offered hereby, if they purchase any of such common stock (excluding shares
covered by the over-allotment option discussed below). The underwriting
agreement provides that the obligations of the underwriters are subject to
certain conditions precedent.
We have been advised by the representative that the underwriters initially
propose to offer the shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus and to certain
dealers at such price less concessions not in excess of $ per share of
common stock. Such dealers may re-allow a concession not in excess of $ per
share of common stock to certain other dealers. After the commencement of this
offering, the public offering price, concession and reallowance may be changed
by the representative.
We have agreed to pay to the representative a non-accountable expense
allowance equal to three (3%) percent of the gross proceeds derived from the
sale of the common stock underwritten, of which $ has been paid to date.
We have granted to the underwriters an over-allotment option, exercisable
during the forty-five (45) day period from the date of this prospectus, to
purchase up to 240,000 shares of common stock at the initial public offering
price per share of common stock offered hereby, less underwriting discounts and
the non-accountable expense allowance. Such option may be exercised only for the
purpose of covering over-allotments, if any, incurred in the sale of the common
stock offered hereby. To the extent such option is exercised in whole or in
part, each underwriter will have a firm commitment, subject to certain
conditions, to purchase the number of the additional Common Stock proportionate
to its initial commitment.
We have also agreed to sell to the representative, for nominal
consideration, warrants to purchase up to 160,000 shares of our common stock
(184,000 if the underwriters exercise their over-allotment option in full). The
representative's warrants are initially exercisable at a price of 120% of the
initial public offering price per share of common stock. The representative's
warrants may be exercised for a period of five years, commencing one year from
the date of this prospectus. The representative's warrants provide for
adjustment in the number of shares of common stock issuable upon the exercise
thereof and in the exercise price of the representative's warrants as a result
of certain events, including subdivisions and combinations of the common stock.
The representative's warrants grant to their holders certain demand and
"piggyback" rights to register the common stock issuable upon exercise of the
warrants.
We have agreed for a period of three years after the date hereof, if
requested by the representative, to use our best efforts to nominate one person
designated by the representative for election to our company's board of
directors. In the event the representative elects not to exercise such right, it
may designate a person to receive all notices of meetings of our board of
directors and all other correspondence and communications sent by us to our
board of directors and to attend all such meetings of our
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board of directors. We have agreed to reimburse the representative's designee
for his out-of-pocket expenses incurred in connection with his attendance of
meetings of our board of directors.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price of our common stock has
been determined by negotiation between us and the representative and does not
necessarily bear any relationship to our asset value, net worth, or other
established criteria of value. The factors considered in such negotiations, in
addition to prevailing market conditions, included the history of and prospects
for the industry in which we compete, an assessment of our management, the
prospects of our company, our capital structure, the market for initial public
offerings, and certain other factors as were deemed relevant. The common stock
has been approved for quotation on the American Stock Exchange under the symbol
" " subject to office notice of issuance.
In connection with this offering, certain underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the common stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M of the Exchange Act of 1934, pursuant to which
such persons may bid for or purchase common stock for the purpose of stabilizing
their respective market prices. The underwriters also may create a short
position for the account of the underwriters by selling more common stock in
connection with this offering than they are committed to purchase from us, and
in such case may purchase common stock in the open market following completion
of this offering to cover all or a portion of such short position. A "syndicate
covering transaction" is the bid for or the purchase of the common stock on
behalf of the underwriters to reduce a short position created in connection with
the offering. The underwriters may also cover all or a portion of such short
position by exercising the over-allotment option referred to above. In addition,
the representative, on behalf of the underwriters, may impose "penalty bids"
under contractual arrangements with the underwriters whereby it may reclaim from
an underwriter (or dealer participating in this offering) for the account of
other underwriters, the selling concession with respect to common stock that are
distributed in this offering but subsequently purchased for the account of the
underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the common stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The offering of the shares is made for delivery, when, as, and if accepted
by the underwriters and subject to prior sale and to withdrawal, cancellation,
or modification of the offering without notice. The underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The underwriters do not expect any sales of shares of common stock to be
made to discretionary accounts.
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LEGAL MATTERS
The validity of the shares of the common stock offered hereby will be passed
upon for us by Porter & Hedges, L.L.P., Houston, Texas. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Ruskin, Moscou, Evans & Faltischek, P.C., Mineola, New York.
EXPERTS
The financial statements of OmniLynx Communications Corporation included in
this prospectus and in the registration statement have been audited by BDO
Seidman, LLP, independent certified public accountants, to the extent and for
the periods set forth in their reports appearing elsewhere herein and in the
registration statement, and are included herein in reliance upon such reports
given upon the authority of said firm as experts in auditing and accounting.
The financial statements of InfoHighway International, Inc. as of December
31, 1998 and 1997, and for each of the years in the three year period ended
December 31, 1998, have been included elsewhere in this registration statement
in reliance upon the report of KPMG LLP, independent auditors, appearing
elsewhere in the registration statement, and upon the authority of such firm as
experts in accounting and auditing.
The audited financial statements of ARC Networks, Inc. included in this
prospectus have been audited by Moore Stephens, P.C., independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of such firm as experts in giving such
report.
The audited financial statements of AXCES, Inc. included in this prospectus
have been audited by Pannell Kerr Forster of Texas, P.C., independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of such firm as experts in giving such
report.
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WHERE YOU CAN FIND MORE INFORMATION
This prospectus constitutes a part of a Registration Statement on Form S-1
that we filed with the SEC under the Securities Act. This prospectus, which
forms a part of the Registration Statement, does not contain all the information
set forth in the Registration Statement. Reference is hereby made to the
Registration Statement and related exhibits and schedules filed therewith for
further information with respect to us and the shares offered hereby. Statements
contained herein concerning the provisions of any document are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed by us with
the SEC and each such statement is qualified in its entirety by such reference.
The Registration Statement and the exhibits and schedules thereto may be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, NW, Washington, D.C. 20594, and at the following regional
offices of the SEC: New York Regional Office, Seven World Trade Center, New
York, New York 10048, and Chicago Regional Office, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such reports and other information may be
obtained from the Public Reference Section of the SEC: 450 Fifth Street, NW,
Washington, D.C. 20549, upon payment of the prescribed fees.
We are currently subject to the periodic reporting and other information
requirements of the Exchange Act, and in accordance therewith file reports and
other information with the SEC. Such reports and other information may be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, NW, Washington, D.C. 20594, and at the following regional
offices of the SEC: New York Regional Office, Seven World Trade Center, New
York, New York 10048, and Chicago Regional Office, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such reports and other information may be
obtained from the Public Reference Section of the SEC: 450 Fifth Street NW,
Washington, D.C. 20549, upon payment of the prescribed fees. The SEC maintains a
Web site that contains reports and information statements and other information
regarding registrants that file electronically with the SEC. Copies of such
documents and the Registration Statement may be obtained from the SEC's Internet
address at http://www.sec.gov.
86
OMNILYNX COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
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OMNILYNX COMMUNICATIONS CORPORATION AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Basis of Presentation.................................................................................. F-2
Unaudited Pro forma Combined Balance Sheet............................................................. F-3
Unaudited Pro forma Combined Statement of Operations................................................... F-4
Notes to Unaudited Pro Forma Combined Financial Statements............................................. F-6
OMNILYNX COMMUNICATIONS CORPORATION HISTORICAL FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants..................................................... F-14
Balance Sheets......................................................................................... F-15
Statements of Loss..................................................................................... F-16
Statements of Stockholders' Equity..................................................................... F-17
Statements of Cash Flows............................................................................... F-18
Notes to Financial Statements.......................................................................... F-19
FOUNDING COMPANIES:
AXCES, INC.
Independent Auditors' Report........................................................................... F-23
Balance Sheets......................................................................................... F-24
Statements of Operations............................................................................... F-25
