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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For The Fiscal Year Ended December 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-50588
LIGHTFIRST INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-4437640
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
25 NORTHWEST POINT BOULEVARD, SUITE 700, ELK GROVE VILLAGE, IL 60007
(Address of principal executive offices)
(847) 640-8880
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
PAR VALUE $.001 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ ] Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of the close of business on June 30, 2003 was $16,427,500.
As the registrant's securities are not traded on any public market, the
aggregate market value of the voting stock held by non-affiliates of the
registrant was calculated by using a price per share of $10.00, which is the
price at which the registrant is selling shares of its common stock in its
initial public offering. See Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters below.
As of the date of this annual report, there were 6,406,000 shares of
the registrant's common stock outstanding.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
PART I
Page No.
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity Securities and Related Stockholder
Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosure About Market Risk 32
Item 8. Financial Statements and Supplementary Data 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 53
Item 9A. Controls and Procedures 53
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 60
Item 13. Certain Relationships and Related Transactions 61
Item 14. Principal Accountant Fees and Services 63
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 64
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "look," "is designed to,"
"estimate," "may," "will" and "continue" or similar words. You should read
statements that contain these words carefully. They discuss our future
expectations, contain projections of our future results of operations or our
financial condition or state other forward-looking information, and may involve
known and unknown risks over which we have no control. You should not place
undue reliance on forward-looking statements. We cannot guarantee any future
results, levels of activity, performance or achievements. Moreover, we assume no
obligation to update forward-looking statements or update the reasons actual
results could differ materially from those anticipated in forward-looking
statements, except as required by law. The factors discussed in the sections
captioned "Business," "Certain Factors that May Affect Future Results," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report and the documents incorporated in it by reference
identify important factors that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
PART I
ITEM 1. BUSINESS
Our objective is to be a leading provider of consolidated electronic
bill presentment and payment services, or e-bill consolidation services, for
consumers. E-bill consolidation is the practice of using a single online
location to manage the bill paying process: the typical e-bill consolidator
provides electronic bill presentment, bill payment, and record-keeping services.
We have developed a new model that looks to build upon the prevailing model by
adding discounts, rebates and payment programs that add convenience and value to
the online bill paying experience.
Our model expands our role in the online billing process by positioning
us as an intermediary that will manage the relationship between consumers and
providers of household products and services, such as utilities,
telecommunications services, insurance, financial services, and others. As the
intermediary, we intend to use the combined buying power of our customer base to
negotiate volume discounts, rebate and reward arrangements, reduced interest
rates and premiums, and other money-saving advantages for our customers. In
addition, our model incorporates processes that are designed to help us overcome
the barriers that have, until now, prevented widespread adoption of e-bill
consolidation services by the mass market.
Our activities in 2003 focused on laying the groundwork for a
full-scale introduction of our e-bill consolidation services to the consumer
market. During this preparatory phase, we did not actively pursued revenues, but
concentrated our efforts on establishing our private network infrastructure to
ensure secure online transactions, recruiting our force of direct-contact
marketing associates, and growing the customer base for our Internet access
service, which serves as our distribution channel for our e-bill consolidation
services.
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Currently, we provide dial-up Internet access service to approximately
10,000 consumers in the Chicago metropolitan area.
LightFirst Inc. is a Delaware corporation. Our headquarters are located
at 25 Northwest Point Boulevard, Suite 700, Elk Grove Village, Illinois 60007.
Our telephone number is (847) 640-8880. Our website address is
www.lightfirst.com. The information found on our website is not part of this
annual report.
INDUSTRY BACKGROUND
TRADITIONAL BILL PRESENTMENT AND PAYMENT PROCESS
The dominant method of bill presentment and payment in the United
States today is the traditional, paper-based method. Under this method,
businesses that bill their customers for products or services, which we refer to
in this annual report as "billers," present bills to their customers by
delivering paper bills to those customers through the mail. Customers, in turn,
pay paper bills by delivering paper checks to billers through the mail. The
traditional, paper-based method of bill presentment and payment is a slow
process. A paper bill or paper check typically takes between three and five days
to reach its destination. The traditional, paper-based method of bill
presentment and payment is also expensive. For example it is estimated that
generating a print bill and mailing it to a customer costs a large biller
between $0.75 and $1.25 per bill, and that approximately 17 billion bills are
mailed to consumers each year.
ELECTRONIC BILL CONSOLIDATION
For approximately two decades, companies have been attempting to
replace the paper-based method of bill presentment and payment with a fully
computerized bill-paying method. These attempts have led to the development of
e-bill consolidation, which allows customers to receive electronic bills and
transmit payments for those bills electronically via a network connection using
a single online application. E-bill consolidation services propose to provide
the following benefits to consumers: make bills accessible online at a single
location, allow access to bills from any location at any time, eliminate cost
and time delays associated with traditional postal delivery, simplify record
keeping, and eliminate the need for storage of paper bills. As the penetration
of personal computers and Internet access into consumer households grew in
recent years, industry analysts predicted that a great demand would develop for
e-bill consolidation services.
THE CHALLENGE OF E-BILL CONSOLIDATION SERVICES
Companies entering into or operating in the e-bill consolidation
services market may meet with numerous challenges. To date, the results achieved
by e-bill consolidators have consistently fallen short of the optimistic
predictions of market researchers. Would-be e-bill consolidators have had
difficulty engaging both billers and bill-payers in the e-bill consolidation
process.
Billers. In order to present bills electronically to consumers, e-bill
consolidators must rely on billers to transmit customers' bills to them
electronically for online presentment. Many billers have resisted allowing
third-party consolidators to present their bills to customers for payment for a
number of reasons, including the following:
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- They may perceive the participation of a third party in the
bill-paying process as a threat to their control of the
customer's account;
- They may lack the resources or be unwilling to expend
resources to develop software and systems that interact with
the consolidator's software and systems; and
- They may lack the ability to manage the process of receiving
electronic payments from customers.
Bill-Payers. Although surveys indicate that many bill-payers would like
to try e-bill consolidation services, the vast majority of these consumers
continue to use the traditional paper-based method for bill paying. We believe
that, of these consumers, most have not tried e-bill consolidation services for
the following reasons:
- they are value conscious and unwilling to pay a fee for
bill-paying services;
- they expect the enrollment process to be confusing or lengthy;
- they believe there are risks associated with the transmission
of financial information online;
- they may be unwilling to spend the time needed to learn a new
software application;
- they do not perceive the paper-based bill-paying process to be
particularly burdensome or inconvenient; and
- they lack a compelling reason to change their established
bill-paying habits.
THE LIGHTFIRST SOLUTION
We have developed a set of solutions that we believe will allow us to
overcome the obstacles that have inhibited participation in e-bill consolidation
on the part of both billers and consumers. Our solutions require us to do the
following:
- redefine the e-bill consolidation service as a money-saving
tool for consumers;
- develop payment processing procedures that relieve billers'
technical and administrative difficulties and reduce costs for
billers;
- create a secure network environment for e-bill consolidation
transactions;
- identify the correct target for e-bill consolidation services
and develop a marketing strategy to reach this market; and
- simplify the process of using e-bill consolidation services
and provide adequate training and technical support.
OUR PRODUCTS AND SERVICES
OUR E-BILL CONSOLIDATION SERVICE
We couple inexpensive dial-up or broadband Internet access service with
an e-bill consolidation service designed to save our customers money. We use our
Internet access service to initiate a relationship with our customers. Using the
aggregate buying power of our customer base, we intend to negotiate with billers
to provide our customers with discounts on products and services. These
discounted products and services will be offered to our customers through e-Bill
Manager, which is a component of our Internet access service. Our e-bill
consolidation service
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will also offer our customers opportunities for savings through rebate and
reward programs. And, unlike the prevailing e-bill consolidator model, we do not
intend to charge fees for our e-bill consolidation services.
HOW IT WORKS
Signing up for Our Service. When customers sign up for our Internet
access service, we obtain their social security numbers and permission to order
their credit reports. We need a copy of our customers' credit reports because we
intend to assist in making arrangements to have credit available to our
customers for the payment of their bills. We intend to provide such assistance
for our customers through a financial institution with which we plan to
associate. We do not intend to lend money to our customers. We will obtain
permission from our customers to share their credit report with the financial
institution, and we will perform periodic credit checks to keep our records
accurate. It is our intention that the financial institution with which we plan
to associate will pre-qualify our customers for certain credit terms, which will
enable us to offer "one-click financing" to our customers through e-Bill
Manager.
Using e-Bill Manager. We require each of our Internet access service
customers to pay for such access using e-Bill Manager, which enables them to
develop a habit of paying bills online. The e-Bill Manager is located within a
separate, security-enhanced area of our website to which customers log in using
a unique e-Bill Manager password. When customers enter e-Bill Manager, they can
view and approve payment of our bill for Internet access service. We charge
customers' payments of our bill against the credit card account numbers that
they provide. We store the customers' credit card information in our database
and do not require them to re-enter it each month. In the future, we intend to
offer customers the ability to pay bills with electronic funds transfers from
their checking accounts.
Adding Bills within e-Bill Manager. After we negotiate discount
agreements with billers, we intend to offer customers products and services
provided by these billers at discounted prices through e-Bill Manager. When a
customer enters e-Bill Manager to pay our Internet access service bill, offers
from billers to purchase their products and services at discounted prices will
also be displayed. If customers desire to purchase any of these products or
services, they will click the appropriate link in e-Bill Manager. That link will
take customers to an area of e-Bill Manager where they can purchase the desired
product or service and add the biller's bill for such product or service to the
portfolio of bills they pay via e-Bill Manager. For services requiring that the
customer sign an agreement, an electronic signing process will automatically
initiate once the appropriate link is clicked. In addition, we intend to handle
the exchange of customer information with billers without the need for
additional customer action. We expect that, overall, our customers will perceive
the process of applying for or ordering a product or service through e-Bill
Manager as fast and efficient.
e-Bill Manager Bill Payment. Our customers use e-Bill Manager to pay
bills. Currently, all of our Internet access service customers use e-Bill
Manager to pay our bill for Internet service. Upon entering e-Bill Manager, a
list of bills currently due is displayed. Customers can click on the name of a
particular bill to view details about that bill. Customers select the bills to
be paid by placing a checkmark in a box beside the name of each bill and then
clicking a button to proceed to the payment page, where they will be able to
choose among several payment options, which are as follows:
- ACH Transfer. ACH, or Automated Clearing House, is a secure
payment transfer system that connects U.S. financial
institutions. If customers select the ACH transfer option, we
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will pay the designated bill on their behalf and then debit
their checking account for the amount of the bill. This option
will result in multiple ACH transfers from a customer's bank
account every month if multiple bills are paid.
- Instant Credit. If customers select this option, we will pay
the bill immediately on their behalf, and we will then permit
them to take up to 15 days to reimburse us for the bill. By
utilizing this option, a customer could combine the payment of
multiple bills into a single regular payment to us every 15
days.
- Rebate Credits. Customers can pay all or part of any bill with
credits accumulated through our retail rebate program.
- Combination. Customers can use a combination of the above
options.
Once customers have chosen a payment option, we will deduct the
corresponding amount from the customer's checking account, subtract that amount
from accumulated rebate credits, or carry the cost of the paid bill for up to 15
days. We expect that, in most cases, the biller will have already received
payment from us in advance pursuant to bulk pre-payment terms that we will have
negotiated with billers.
Instant Credit. If customers want to combine multiple bills into a
single convenient payment or to defer a payment for a short time, they can use
our Instant Credit option. We intend to offer this option to customers who are
both paying at least two bills (our Internet access service bill plus another
bill) using e-Bill Manager and have been pre-qualified by the financial
institution with which we intend to associate. When customers select the Instant
Credit option, we intend to permit them to take up to 15 days to reimburse us
for that bill via check or ACH transfer. By utilizing this option, a customer
could combine the payment of many bills into a single regular payment to us.
Extended Credit. If customers do not fully reimburse us within 15 days
for payments made to billers by us on their behalf, the outstanding balance that
they owe to us will be transferred to the financial institution with which we
plan to associate. The financial institution will lend the customer money to
cover the outstanding balance owed to us by paying us the outstanding balance
directly. The financial institution will charge the customer interest on this
loan. The transfer of the balance and the involvement of the financial
institution will be clearly described to the customer, who will make loan
payments and receive information about the loan through e-Bill Manager. We
expect that the financial institution with which we plan to associate will lend
money to our customers at competitive interest rates.
Saving Customers Money. There are several categories of biller
agreements that we believe will allow us to offer discounted products and
services to our customers.
- Reseller Agreements. We intend to enter into agreements with
service providers, such as local and long-distance telephone
service providers, cellular telephone service providers, cable
and satellite television providers and, where government
regulations permit, electricity and natural gas providers. We
plan to purchase services offered by these providers at
wholesale prices and resell them to our customers at a markup,
which should net us a profit on each transaction. The markup
will be small, however, so that the overall cost of a service
should still be less than the cost for a similar service
offered directly by competing businesses. We envision that
upon visiting e-Bill Manager and discovering the savings they
could realize for similar services, our customers will
terminate their existing relationships for the types of
services that we intend to offer and
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will enter into new relationships with service providers
associated with us. We are not currently a party to any
reseller agreements.
- Affiliate Agreements. We intend to enter into agreements with
financial service providers, such as mortgage lenders, banks,
and insurance companies, which will furnish our customers with
attractive terms, such as low interest rates, low closing
costs and low premiums. Where permitted by law, we hope to
receive a commission or referral fee from the financial
service providers for every new loan, insurance policy or
other products for which our customers apply through e-Bill
Manager. Under certain circumstances, we may be able to split
our commissions or referral fees with our customers to further
reduce fees assessed against them by the financial service
providers. We envision that upon visiting e-Bill Manager and
discovering the attractive terms we plan to offer, our
customers will terminate existing relationships and will enter
into new relationships with the financial service providers
with which we are associated. We are not currently a party to
any affiliate agreements.
- Administrative Discount Agreements. Where regulations do not
permit reselling activities, we may enter into agreements with
providers of household utility services, such as gas,
electricity, refuse collection and water. Under these
agreements, we propose to assume the administrative cost of
generating the bills of the household utility service
providers with which we associate in exchange for them
reducing our customers' bills for such service by an
equivalent amount. We would handle the presentment and payment
of such bills through e-Bill Manager. This service would be
offered to our customers as a convenience. We are not
currently a party to any administrative discount agreements.
- Rebate Agreements. We may enter into agreements with retail
businesses, such as grocery stores and gas stations, whereby
our customers would receive rebates on purchases they make
with a LightFirst co-branded credit card issued by a financial
institution with which we may associate. A portion of such
rebates would appear as credits on our customers' e-Bill
Manager account and could be used by our customers to pay
other bills in e-Bill Manager. We would retain the balance of
any rebates provided. We are not currently a party to any
rebate agreements.
As of the date of this annual report, we have not entered into any
agreements with billers for any of the benefits described above. We believe that
the successful negotiation of biller agreements depends upon the expansion of
our customer base. Our strategy, therefore, is to add large numbers of customers
to our network rapidly upon completion of our initial public offering. We
believe that our ability to negotiate and finalize biller agreements will be
enhanced by our status as a public company.
LIGHTFIRST CO-BRANDED CREDIT CARD
Co-Branded Credit Card. We intend to enter into an agreement with a
major credit card company to offer our customers a co-branded credit card. The
bill for this credit card will be payable on e-Bill Manager, and we hope to earn
a merchant fee of up to 1% on purchases made with the card. At this time, we do
not offer our customers a co-branded credit card, nor are we in discussions with
any major credit card companies.
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Retail Rebate Program. If we are able to offer our customers a
co-branded credit card, we intend to enable our customers to earn rebates when
they make purchases with our co-branded credit card at businesses that
participate in our retail rebate program. Within e-Bill Manager, we will
identify businesses that participate in our retail rebate program. To earn
rebates, our customers will make purchases at participating businesses with our
co-branded credit card. We will use purchase data we receive from our credit
card provider to calculate the amount of customer rebates, which we will then
credit to customer accounts. Customers will be able to use these rebates to pay
other bills.
ADMINISTRATIVE ADVANTAGES FOR BILLERS
Our model is designed to eliminate the two main administrative
obstacles associated with billers' participation in e-bill consolidation
services: software system incompatibilities and ACH payment receipt
complexities.
Software System Incompatibilities. Under the prevailing e-bill
consolidation model, billers must be able to transmit billing information to
e-bill consolidators in a format that allows for electronic presentment of bills
to consumers. If a biller's software system cannot generate information in a
format that is compatible with the e-bill consolidator's software systems, then
the biller and consolidator must work together to develop additional software
that manages communication between the two systems. Many billers have been and
may continue to be unwilling to devote resources to making this interaction
possible.
Payment Receipt Complexities. Currently, billers that allow presentment
and payment of their bills through third parties receive random ACH payments
from multiple customers and must have software systems that decipher the
information received along with an ACH transfer for the purpose of crediting the
correct customer's account. Developing a system to automate the reconciliation
of electronic funds transfers with payment information provided by consolidators
has been and may continue to be cost-prohibitive to many billers.
Bulk Pre-Payment to Billers. We intend to incorporate certain terms
into our agreements with billers that allow us to pre-pay the bills of our
customers. We intend to issue one payment per month to each biller for the full
amount due for all of our customers' accounts with that biller. We will then
assume responsibility for generating the electronic bill using account activity
information that the biller will provide to us. Although we believe this
procedure may not entirely eliminate the need for coordination of systems
between billers and us, we believe that it will remove the need to automate the
ACH receipt process and that it will simplify the process of sharing customers'
billing information.
In addition, our proposed pre-payment structure provides the following
benefits to billers:
- reduces costs for billers by reassigning responsibility for
bill creation and delivery to us and by eliminating delays in
receipt of payment; and
- reduces billers exposure to risks associated with potential
default by customers and minimizes related collection
expenses.
We believe that these added benefits will make participation in our
e-bill consolidation service more attractive to billers than participation in
competing services that do not offer these added benefits.
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OUR INTERNET ACCESS SERVICES
Our Internet access service is an important component of our e-bill
consolidation service. We currently offer dial-up Internet access services, and
we have entered into an agreement to purchase and resell DSL service.
Dial-up Service. We offer dial-up Internet access accounts, which
include Internet connectivity and e-mail services. Our service offers the
following benefits and features:
- Low cost. We charge $6.95 per month for 40 hours of dial-up
Internet access service or $9.95 per month for unlimited
dial-up Internet access service. We believe that this pricing
structure is highly competitive.
- Multiple mailboxes for electronic mail. We provide the ability
for account owners to create up to five additional e-mail
accounts for members of their household.
- Content filtering available. Our customers can choose to block
or limit children's access to adult content.
- Robust and secure network. In addition to a secure network
environment, we offer connection speeds equal to the highest
dial-up rates now available, and a low
subscriber-to-connection ratio allows us to minimize busy
signals.
- Ability to keep America Online at same or reduced cost.
America Online's "Bring Your Own Access" or "BYOA" program
allows America Online customers to connect to America Online
content using an Internet provider of their own choosing for a
reduced, "content-only" price. Our low pricing for Internet
access allows our customers to maintain or reduce their
monthly Internet costs if they choose to use their Internet
access account with us to connect to America Online through
"BYOA."
DSL Service. Digital Subscriber Line, or DSL, services use
sophisticated modulation technology to increase the data transmission capacity
of the ordinary copper wires that are customarily used to connect a telephone
company's central office with its various customer locations for the purpose of
providing high-speed Internet access. In October 2003, we entered into an
agreement with a major telecommunications service provider to purchase DSL
services at wholesale prices and resell these services to our customers. We
further intend to offer our DSL customers many of the same benefits that we
offer our dial-up customers, including competitive pricing, multiple e-mail
accounts, optional content filtering, and a secure network environment. In
addition, AOL offers a content-only solution for broadband customers for the
same price as its dial-up BYOA plan. As of the date of this annual report, we
had not yet begun to market our DSL service.
SALES AND MARKETING
We currently market our services in the Chicago, Illinois metropolitan
area. Our target market consists of adults in middle-class households with
school-age children. We market our services through a community marketing
program - the LightFirst Associate Program - through which we engage residents
and active members of the communities we serve to promote our service in their
local areas. We have developed a series of community enrichment programs that
benefit schools and community organizations and that also help us build
awareness of our services among members of our target market. Participants in
our Associate Program, whom we
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call "City Managers" and "Community Associates," are responsible for introducing
our community programs in their assigned areas.
The primary program through which we introduce ourselves to members of
our target market is our Fundraiser Program. We allow organizations, such as
parent-teacher associations, extracurricular school clubs, libraries and
community centers, to host fundraising events. At such events, the constituents
of these groups will be invited to subscribe for our Internet access service in
exchange for us making a cash donation to the host organization for each
Internet access service subscription obtained at the fundraiser that continues
for at least 90 days.
The other programs that our City Managers and Community Associates
introduce in their communities include a program that provides free Internet
access to disadvantaged students, a student internship program, a discount
program for educators, a free directory service for local businesses, and an
Internet training program. Our City Managers and Community Associates use these
programs to generate awareness of our services and to help us establish a
reputation for benevolence in their local communities. Our marketing approach
stresses community involvement and face-to-face contact with potential
customers.
Our City Managers and Community Associates are independent agents who
perform their marketing and promotional tasks on a part-time basis pursuant to
an independent agent agreement. Their compensation is based on a percentage of
net transactional yield generated in their respective assigned territories. Net
transactional yield is defined in the independent agent agreement as the sum of
all amounts earned by us as profit on each transaction performed through our
online bill presentment service. For the purpose of the net transactional yield
calculation, "profit" is defined as the difference between the amount paid by
the consumer for a product or service and the cost to us to purchase and to
present the bill for such product or service. We may, as we deem appropriate and
necessary, also pay them bonuses and advances against their future commissions.
The activities of Associate Program participants are managed by a team
of full-time, salaried employees called Area Directors, who are responsible for
recruiting, training, and supervising City Managers and Community Associates in
their assigned areas. Area Directors, in addition to their salaries, are also
eligible to receive a percentage of the net transactional yield generated in
their respective territories. Because we have not yet begun to offer the ability
to pay third-party bills through e-Bill Manager, we did not pay any commissions
to our City Managers, Community Associates, or Area Directors in 2003.
During the past year, we have focused heavily on recruiting City
Managers, and as of December 31, 2003, we had approximately 100 City Managers.
We have City Managers in approximately 90 cities, towns and villages throughout
the Chicago metropolitan area.
COMPETITION
The online bill payment market is an emerging industry, and it
continues to evolve. We expect that we will face increased competition in the
future. Our current competitors include:
- CheckFree Corporation, which is the largest electronic bill
payment and processing company in the United States, with
approximately five million customers. CheckFree generates
electronic bill payment and processing revenues through
subscriber fees, collected from service distributors, and
transaction fees, collected from billers.
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- Banks with e-bill presentment and payment services, such as
Bank of America, Bank One Corp, and Wells Fargo. Many banks
have joined with a non-bank technology partner in order to
provide their customers with e-bill presentment and payment
services.
- Private Internet payment facilitators that are usually backed
by venture capital firms in partnership with technology
companies. Most of our competitors in this category propose to
earn revenues from monthly and per-transaction fees.
We believe that the factors determining success in the online bill
payment industry include:
- reputation for reliability of service;
- effective customer support;
- pricing;
- easy-to-use software;
- geographic coverage;
- scope of services; and
- the timing and introduction of new products and services.
Although we believe that we can compete favorably with respect to the
factors identified above, many of our competitors may have advantages over us
with respect to specific factors. We currently compete with established online
service and content providers and numerous regional and local commercial
Internet access service providers. We also compete against companies that offer
low-cost Internet access services or free products, such as personal computers,
bundled with, or as promotions for, Internet access services. Furthermore, we
expect that more companies will begin to offer such services or products in the
future. We also compete with, and expect increased competition from,
telecommunications service providers. These companies generally have far greater
resources, distribution channels, and brand awareness than we do. They also can
have lower costs than we can because they own or control the telecommunications
services that we must purchase on the open market.
Our dial-up Internet access service also competes with alternative
Internet access products, such as DSL and cable Internet connections, both of
which offer faster, dedicated connections known as broadband access. At the
present time, these services cost approximately four to eight times more per
month than our dial-up Internet access service. In addition, DSL has limited
availability in some areas. We believe that the high cost and limited
availability of broadband products will continue to limit utilization of these
services among members of our target market. We also recognize that the demand
for broadband Internet access is growing and will likely continue to grow. For
this reason, in October 2003, we entered into an agreement that will allow us to
provide DSL service at competitive rates to our customers.
We expect that, once we begin to offer DSL service on a large scale, we
will face competition from other DSL providers, which may include large and
small telecommunications service providers. Some of these providers have been in
business significantly longer than we have and have greater name recognition in
the marketplace. Our DSL service may also compete with alternative broadband
Internet services, such as digital cable, which may be faster, more widely
available, and may be associated with fewer and shorter delays relative to the
initial setup.
10
INTELLECTUAL PROPERTY
We regard our e-bill consolidation software and certain of our business
processes as proprietary and rely on a combination of methods to protect our
intellectual property, such as copyright and trade secret laws, as well as
employee and third party nondisclosure agreements. We have an application
pending with the United States Patent and Trademark Office to register our name
as a service mark. At this time, we do not hold any other service marks,
registered copyrights, trademarks or patents, nor do we have any applications
pending for such protections.
EMPLOYEES
We currently have nineteen employees, eighteen of whom are full-time
employees and one of whom is a part-time employee. Of our employees, seven
perform technical operations, six perform sales and marketing activities, and
six perform general and administrative activities. None of our employees are
subject to a collective bargaining agreement. We consider our relationship with
our employees to be good.
ITEM 2. PROPERTIES
Our headquarters consist of a leased office suite located at 25
Northwest Point Boulevard, Suite 700, Elk Grove Village, Illinois 60007. We
occupy 8,947 square feet of space at that location under a month-to-month lease
agreement. We do not own any real property.
ITEM 3. LEGAL PROCEEDINGS
We have an outstanding tax liability, including accrued penalties,
approximately $1,152,000 as of December 31, 2003 for unpaid FICA, Medicare,
state and federal employment taxes. This tax liability arose because certain of
our employees were initially characterized as being self-employed when they
should have been characterized as our employees. We incurred the tax liability
between May 2001 and June 2003, and it includes approximately $399,000 of
penalties and interest. The balance of approximately $753,000 represents the
amount under current tax law that should have been withheld from employees'
checks as well as our matching contributions to FICA, Medicare and unemployment
taxes. On July 22, 2003, the State of Illinois filed a tax lien against us for
approximately $62,000, which represents Illinois' portion of the tax liability.
To date, the Internal Revenue Service has not filed a lien against us, but it
could do so in the future. We intend to use a portion of the proceeds from this
offering to satisfy our tax liability.
We are not a party to any other material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fiscal year ending December 31, 2003.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has filed a Registration Statement on Form S-1 (File
No. 333-107769) with the Securities and Exchange Commission, which was declared
effective by the Commission on February 13, 2004. Shortly thereafter, the
Company commenced an initial public offering, on a best efforts basis, of
2,000,000 shares of the Company's common stock at a price of $10 per share. The
Company's board of directors determined the price of the company's common stock.
The offering closes on July 12, 2004.
There is currently no established public market on which the Company's
securities are traded. The Company has applied to list its common stock on the
American Stock Exchange, under the symbol "BLF" and has received approval
conditioned upon completion of the Company's initial public offering as
described in its registration statement on Form S-1, dated February 13, 2004.
As of the date of this annual report, there were 94 beneficial
shareholders of the Company's common stock.
We have not declared any dividends on our common stock during the past
two years. We currently anticipate that we will retain all of our future
earnings, if any, for use in the expansion and operation of our business and do
not anticipate paying any cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be the discretion of the board of
directors and will depend upon our financial condition, operating results,
capital requirements, and other factors the board of directors deem relevant.
In calculating the aggregate market value of the voting stock held by
non-affiliates of the Registrant shown on the cover page of this Report on Form
10-K, 4,121,910 shares of our Common Stock beneficially owned by the our Chief
Executive Officer and a security holder owning 10.3% of our Common Stock were
excluded, on the assumption that such persons could be considered "affiliates"
under the provisions of Rule 405 promulgated under the Securities Act of 1933.
12
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected historical financial and
operating data as of the dates and for the periods indicated. You should read
this data together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements included
elsewhere in this prospectus. The selected historical statement of operations
data for the period from April 11, 2001 (inception) to December 31, 2001 and the
years ended December 31, 2002 and December 31, 2003 and historical balance sheet
data as of December 31, 2001, 2002, and 2003 have been derived from our audited
financial statements. Our audited financial statements for the years ended
December 31, 2003, December 31, 2002, and December 31, 2001 are included
elsewhere in this annual report on Form 10-K.
April 11, 2001
(Inception) to Year Ended Year Ended
December 31, December 31, December 31,
2001 2002 2003
-------------- ------------ ------------
(Audited) (Audited) (Audited)
STATEMENTS OF OPERATIONS DATA:
Revenues $ 248,549 $ 420,296 $ 486,160
Cost of revenues $ 222,880 $ 341,533 $ 501,465
Gross profit $ 25,669 $ 78,763 $ (15,305)
General and administrative expenses $ 914,403 $ 2,523,551 $ 2,151,334
Operating loss $ (888,734) $(2,444,788) $(2,166,639)
Other income (expense):
Interest income $ -- $ 548 $ 652
Interest expense $ (500) $ (21,714) $ (132,103)
Gain (loss) on sale of investments $ 86,264 $ (6,516)
Total other income (expense) $ 85,764 $ (27,682) $ (131,451)
Loss before provision for income taxes $ (802,970) $(2,472,470) $(2,298,090)
Provision for income taxes $ -- $ -- $ --
Net loss $ (802,970) $(2,472,470) $(2,298,090)
Net loss per share:
Basic and diluted $ (0.16) $ (0.40) $ (0.36)
Weighted average shares outstanding:
Basic and diluted 5,166,222 6,132,900 6,398,083
April 11, 2001
(Inception) to Year Ended Year Ended
December 31, December 31, December 31,
2001 2002 2003
-------------- ------------ ------------
(Audited) (Audited) (Audited)
Balance Sheet Data:
Cash $ 15,232 $ 4,608 $ 9,645
Working capital (deficit) $(369,475) $(2,237,668) $(3,548,173)
Total assets $ 296,535 $ 220,095 $ 291,697
Long-term debt $ -- $ -- $ 708,387
Total stockholders' deficiency $(111,020) $(2,075,290) $(4,183,380)
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and the notes to those statements that appear
elsewhere in this annual report, and it contains forward-looking statements that
reflect our plans, estimates, and beliefs. Our actual results could differ
materially from those discussed in the forward-looking statements.
OVERVIEW
We currently earn revenues by providing Internet dial-up access to
approximately 10,000 customers in the Chicago, Illinois metropolitan area. Our
business plan calls for the use of our e-bill consolidation service to create
four additional primary revenue streams:
- we intend to purchase and resell products and services to our
customers at a markup;
- we hope to earn commissions and referral fees from businesses
we introduce to our customers;
- we intend to retain a portion of any administrative discounts
that we can negotiate for our customers; and
- we intend to retain a portion of any vendor rebates our
customers earn by using a co-branded credit card that we plan
to offer.
To date, we have focused mainly on building our distribution network,
an essential first step in generating all of our revenue streams. We have not
focused on establishing the significant strategic relationships that we believe
are essential to developing the revenue streams described above but intend to do
so following this offering. Specifically, we will seek to enter into agreements
with billers that will allow us to offer money-saving benefits to our customers.
The agreements we hope to negotiate with billers will fall into one of four
categories: reseller agreements, affiliate agreements, administrative discount
agreements and rebate agreements. We expect these agreements to provide us with
revenue from price mark-ups, commissions, referral fees, rebates and credits. In
addition, we must enter into a relationship with a financial institution that
will extend credit to our customers so they can take advantage of our full array
of bill-paying options. We intend to structure such a financial institution
relationship so that we receive a portion of any loan revenues generated by such
lending. We believe completing our initial public offering, which we commenced
shortly after our registration statement was declared effective by the
Securities and Exchange Commission on February 13, 2004, is an important factor
in winning these strategic contracts. We intend to pursue these relationships
when our initial public offering is complete.
Our main cost of revenue consists of fees paid for telecommunications
services, network and co-location costs, all related to operating our network
and connecting end users to the Internet.
Sales and marketing expenses consist primarily of costs of building a
distribution channel of city managers. We have built an extensive network of
independently contracted associates to distribute our service to communities in
the metropolitan area surrounding Chicago, Illinois.
14
General and administrative expenses consist primarily of salary,
benefits, and related expenses for management, technical, customer support and
accounting personnel; expenses relating to facilities; professional fees; and
other general corporate expenses. We expect that, in support of the continued
growth of our business and our operations as a public company, sales, general
and administrative expenses will continue to increase for the foreseeable
future.
Since our inception on April 2001, we have incurred significant losses
and, as of December 31, 2003, we had an accumulated deficit of $5,573,530. These
losses have resulted from the significant costs incurred for marketing and
building our distribution channel and expenses for the development and
maintenance of our technology platform. We intend to continue to invest heavily
in marketing, product development, and technology. As a result, we believe that
we will continue to incur substantial operating losses for the foreseeable
future.
CRITICAL ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which require that management make numerous estimates and assumptions. Actual
results could differ from those estimates and assumptions, affecting our
reported results of operations and financial position. Our significant
accounting policies are more fully described in Note A to our financial
statements included elsewhere in this annual report. The critical accounting
policies described here are those that are most important to the depiction of
our financial condition and results of operations. Their application requires
our management's subjective judgment in making estimates about the effect of
matters that are inherently uncertain.
We have incurred costs in connection with raising additional capital
through the sale of our common stock. These costs have been capitalized and will
be charged against additional paid-in capital should common stock be issued. If
there is no issuance of common stock, the costs incurred will be charged to
operations.
Revenues consist of subscriber Internet access service fees and are
recorded when earned (i.e., at the time services are provided). Deferred revenue
consists of amounts collected for annual Internet access service subscriptions
at the beginning of the subscription year. Of this deferred revenue, a
proportionate amount is recognized at the end of each month in which service has
been provided.
Deferred income tax assets and liabilities arise from temporary
differences associated with differences between the financial statement and tax
basis of assets and liabilities, as measured by the enacted tax rates that are
expected to be in effect when these differences reverse. Deferred tax assets and
liabilities are classified as current or noncurrent, depending on the
classification of the assets or liabilities to which they relate. Deferred tax
assets and liabilities not related to an asset or liability are classified as
current or noncurrent depending on the periods in which the temporary
differences are expected to reverse. The principal types of temporary
differences between assets and liabilities for financial statement and tax
return purposes are set forth in Note H to the financial statements included in
this annual report.
15
RESULTS OF OPERATIONS
The following table sets forth our results of operations expressed as a
percentage of net revenues. The following discussion concerning results of
operations should be read in conjunction with "Selected Financial Data," the
financial statements and accompanying notes and the other financial data
included elsewhere in this annual report. Our fiscal year is based on a 365- or
366-day year ending on December 31.
April 11, 2001
(Inception) to Year Ended Year Ended
December 31, December 31, December 31,
2001 2002 2003
-------------- ------------ ------------
(Audited) (Audited) (Audited)
STATEMENTS OF OPERATIONS DATA:
Revenues 100.0% 100.0% 100.0%
Cost of revenues 89.7% 81.3% 103.1%
Gross profit 10.3% 18.7% -3.1%
General and administrative expenses 367.9% 600.4% 442.5%
Operating loss -357.6% -581.7% -445.7%
Other income (expense):
Interest income 0.0% 0.1% 0.1%
Interest expense -0.2% -5.2% -27.2%
Gain (loss) on sale of investments 34.7% -1.6% 0.0%
Total other income (expense) 34.5% -6.6% -27.0%
Loss before provision for income taxes -323.1% -588.3% -472.7%
Provision for income taxes 0.0% 0.0% 0.0%
Net loss -323.1% -588.3% -472.7%
Comparison of Year Ended December 31, 2003 and Year Ended December 31, 2002.
Revenue
During the fiscal year 2003, net revenues increased 15.7% relative to
fiscal year 2002, from $420,296 to $486,160. This was due to the increase in
dial-up Internet access service revenue that resulted from the growth in our
subscriber base. Dial-up Internet access service revenue accounted for all of
the revenue for the fiscal year ending December 31, 2003 and for the fiscal year
ending December 31, 2002.
Cost of Revenue
Cost of revenue increased from $341,533, or 81.3% of net revenues, for
the fiscal year ended December 31, 2002, to $501,465 or 103.1% of net revenues,
for the fiscal year ended December 31, 2003. The increase as a percentage of
revenue is attributable to the increase in dollars, which is partially offset by
an increase in revenues. The increase in dollars can be attributed to the
following:
- Increases in technical support costs account for approximately
$21,000 of the increase in cost of revenues for fiscal year
2003 relative to fiscal year 2002. These increases were
16
due the expansion of our technical support program, including
costs associated with the addition of personnel and increases
in hours worked.
- Costs associated with one-time improvements to our network
made in 2003 account for approximately $8,000 of the increase
in cost of revenues for fiscal year 2003 relative to the prior
year.
- Increases in monthly telecommunications costs account for
approximately $24,000 of the increase in cost of revenues for
2003 relative to 2002. During 2002 and 2003, we were a party
to an agreement to purchase telecommunication services for the
interconnection of our end users with the Internet. This
agreement called for monthly payments, the amount of which
varied and was dependent upon allocated bandwidth and actual
usage of telecommunications facilities. During the fiscal year
ended December 31, 2003, usage of our network increased due to
the addition of subscribers to our network, which caused us to
increase our allocated bandwidth, resulting in an increase in
the average monthly cost from approximately $24,000 per month
in 2002 to approximately $26,000 per month during the fiscal
year ended December 31, 2003.
- Deferral of invoicing and payment for collocation services
accounts for approximately $24,000 of the increase in cost of
revenues for 2003 relative to 2002. We were a party to an
agreement to rent space to house telecommunications equipment,
or collocation, at a monthly payment of $6,000. Two months' of
collocation services that were provided in 2002 were not
invoiced and paid until 2003, resulting in an increase in cost
of revenues for 2003.
- One-time waivers of telecommunications and collocation
services payments account for approximately $32,000 of the
increase in cost of revenues for 2003 relative to the prior
year. Under the same agreements described above, our
telecommunications provider waived our monthly payment for
telecommunications services and collocation services for the
month of January 2002. These agreements terminated in December
2003.
- Costs associated with switching our telecommunications network
provider account for approximately $52,000 of the increase in
cost of revenues for the fiscal year ended December 31, 2003
as compared to previous year. In September 2003, we entered
into a new agreement to purchase telecommunications services
from a different telecommunications provider. In July 2003, we
also entered into an agreement with a different company to
rent space to house telecommunications equipment. The services
covered by the new agreements were intended to replace the
telecommunications and collocation services we had been
receiving from our former telecommunications provider, our
contract with which was to expire in December 2003. During
each of the three months in the last quarter of 2003, we
received invoices for collocation services from both
collocation providers. During the last month of 2003, we
received invoices for telecommunications services from both
telecommunications providers. This redundancy resulted in
$52,000 in one-time excess network costs.
The collocation services agreement into which we entered in July 2003
will result in an increase in monthly collocation costs in 2004 relative to
monthly collocation costs in 2003. Collocation costs in 2003 were approximately
$6,000 per month (excluding the redundant costs incurred in the fourth quarter
of 2003). The monthly collocation cost in 2004 is expected to be approximately
$8,500. In addition, monthly telecommunications services rates are slightly
higher
17
under the new telecommunications services agreement into which we entered in
August 2003; at current bandwidth usage, these increased rates result in an
approximate increase of $1,000 per month in telecommunications services charges.
Monthly telecommunications costs will also increase incrementally as we add
subscribers to our network as a result of increases in bandwidth usage.
Operating Expenses
Sales and Marketing. Sales and marketing costs relate to expenses to
develop our markets and channels of distribution to those markets, primarily the
cost of building up our pool of City Managers. These costs include the salaries
for the Area Directors responsible for recruiting, training, and managing City
Managers. We have not yet begun paying monetary compensation to City Managers.
During the fiscal year 2003, we continued to grow our roster of City Managers.
Sales and marketing expenses decreased from $1,037,081, or 246.7% of net
revenues, for the year ended December 31, 2002, to $792,326, or 163.0% of net
revenues for the year ended December 31, 2003. The decrease in dollars was
attributable to periods of vacancy of some Area Director positions during 2003.
The decrease in sales and marketing expenses as a percentage of net revenues is
the result both of this decrease in dollars and of an increase in net revenues
of 15.7%.
Product Development. Product development costs consist of internal
costs and external fees to develop our technical platform and back-end systems,
including salaries for our software development staff. Product development costs
increased to $353,979, or 72.8% of net revenues for the year ended December 31,
2003, from $297,270, or 70.7% of net revenues, for the prior year. The 19.1%
increase in dollars was attributable to an increase in product development
activities, primarily in connection with the development of web-based management
applications in support of our Associate Program, during fiscal year 2003 as
compared to the prior year. The increase as a percentage of net revenues was
attributable to this increase in costs, but was partially offset by the increase
in revenues during the same period.
General and Administrative. The main components of general and
administrative expenses were wages and employee benefits, taxes and insurance
expenses, and professional and consulting fees. General and administrative
expenses decreased from $1,188,284, or 282.7% of net revenues, for the twelve
months ended December 31, 2002, to $1,005,029, or 206.7% of net revenues, for
the twelve months ended December 31, 2003. The decrease in dollars was primarily
due to the expiration in May 2002 of an outsourcing contract for billing,
technical support, and software development services that represented an expense
of approximately $110,000 for the fiscal year ended December 31, 2002; this
contract was not in effect during fiscal year 2003. As a percentage of net
revenues, the decrease in general and administrative expenses is a result of
this decrease in costs and the increase in net revenues.
Other Income and Expenses
Interest Income. Interest income was $652 for the fiscal year ended
December 31, 2003 and $548 for the fiscal year ended December 31, 2002. The
increase was due to the accrual of interest on promissory notes held by us
during the fiscal year ended December 31, 2003.
Interest Expense. Interest expense was $132,103 in the year ended
December 31, 2003 and $21,714 in the year ended December 31, 2002. The increase
was primarily due to the accrual
18
of interest on two promissory notes made by us in July and November 2002,
respectively, as well as accrued interest on our operating line of credit.
Gain/Loss on Investment. Investment losses of $6,516 in the twelve
months ending December 31, 2002 were the result of the sale, at a loss, of
marketable securities we received as partial consideration for shares of our
common stock sold by us in two private placements. There was no comparable
transaction during the fiscal year ended December 31, 2003.
Comparison of Year Ended December 31, 2002 and Partial Year Ended
December 31, 2001
Revenue
Total revenue amounted to $420,296 for the twelve-month period ended
December 31, 2002, an increase of $171,747, or 69.1%, from the corresponding
period in 2001. It should be noted that the corresponding period for 2001
referred to here and elsewhere is not a full period. For 2001, the corresponding
period is from inception, April 11, 2001, to December 31, 2001. This unequal
comparison affects each of the listed categories.
Our dial-up revenue accounted for all of the revenue for the year ended
December 31, 2002 and all of the revenue for the partial year ended December 31,
2001.
Cost of Revenue
Cost of revenue increased from $222,880, or 89.7% of net revenues, for
the partial year ended December 31, 2001, to $341,533, or 81.3% of net revenues,
for the year ended December 31, 2002. The increase in dollars can be attributed
primarily to the difference in the length of the periods and to the increase in
revenues of 69.1%. The decrease in cost of revenue as a percentage of net
revenues is attributable to economies of scale achieved by adding subscribers to
our network.
We are a party to an agreement to purchase telecommunication services
for the interconnection of our end users with the Internet. The monthly payments
required under this agreement were approximately $24,000 for the year ending
December 31, 2002 and for the partial year ending December 31, 2001. We are also
party to an agreement to rent space to house telecommunications equipment;
payments under this agreement were approximately $6,000 per month for the year
ended December 31, 2002 and the partial year ended December 31, 2001. These
agreements end in December 2003.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist of costs to
develop our markets and channels of distribution to those markets, and the cost
of building up our pool of City Managers. Sales and marketing expenses increased
to $1,037,081, or 246.7% of net revenues, for the twelve-month period ended
December 31, 2002, from $274,251, or 110.3% of net revenues, for the partial
year ended December 31, 2001. The increase in dollars and percentage of revenue
is primarily due to our increased costs relative to the addition of Area
Directors and staff that we hired in 2002 to recruit City Managers on a large
scale. The increase in dollars is also due in part to the difference in the
lengths of the two periods being compared.
19
Product Development. Product development costs consist of internal
costs and external fees to develop our technical platform and back-end systems,
including salaries for our software development staff. Product development costs
increased to $297,270, or 70.7% of net revenues for the period ended December
31, 2002, from $93,821, or 37.8% of net revenues, for the same period in the
prior year. The 216.9% increase in dollars was attributable to an increase in
product development activities, primarily in connection with the development of
our e-bill platform and management applications in support of our Associate
Program. The increase in dollars was also due in part to the difference in
lengths of the two periods being compared. As a percentage of net revenues, the
increase in product development expenses is a result of the increase in costs.
General and Administrative. General and administrative expenses
increased to $1,188,284, or 282.7% of net revenues, for the twelve-month period
ended December 31, 2002, from $546,331, or 219.8% of net revenues for 2001. The
increase is primarily due to higher employee-related costs, such as wages, taxes
and insurance expenses, as well as rent for a larger facility, and professional
and consulting fees. As a percentage of net revenues, the increase in general
and administrative expenses is a result of this increase in costs.
Other Income and Expenses
Interest Income. Interest income was $548 for the year ended December
31, 2002 and $0 for the year ended December 31, 2001. The increase was due to
the accrual of interest on promissory notes held by us during the year ended
December 31, 2002.
Interest Expense. Interest expense was $21,714 in the year ended
December 31, 2002 and $500 in the partial year ended December 31, 2001. The
increase was due to the accrual of interest on two promissory notes made by us
in July and November 2002, respectively, as well as under our operating line of
credit.
Gain/Loss on Investment. Investment losses of $6,516 in the year ended
December 31, 2002 were the result of the sale, at a loss, of marketable
securities we received as partial consideration for shares of our common stock
sold by us in two private placements. Investment gains of $86,264 in the partial
year ended December 31, 2001 were the result of gains from the sale of
marketable securities we received as partial consideration for shares of our
common stock sold by us in two private placements.
LIQUIDITY AND CAPITAL RESOURCES
Year Ended December 31, 2003
Net cash used in operating activities was $1,021,253 during the year
ended December 31, 2003 and $1,136,519 during the year ended December 31, 2002.
The increase in cash flow was primarily the result of an increase in revenues
and a decrease in general and administrative expenses. During the fiscal year
ended December 31, 2003, we financed our operations primarily through accrued
expenses and accrued accounts payable of $638,897 and $224,863 respectively.
Net cash used for investing activities was $3,980 for the year ended
December 31, 2003. This consisted primarily of networking equipment purchases.
Net cash provided from investing activities was $2,020 for the year ended
December 31, 2002.
20
Net cash provided by financing activities was $1,030,270 for the year
ended December 31, 2003 and $1,123,875 for the year ended December 31, 2002. For
the fiscal year ending December 31, 2003, cash from financing activities
consisted of $1,195,987 in cash received pursuant to a $1,500,000 line of credit
from a shareholder, and was offset by an increase in deferred offering costs of
$184,315. For the year ending December 31, 2002, cash from financing activities
consisted primarily of $508,200 in cash received pursuant to a private placement
of securities and $689,000 in loans from stockholders.
Year Ended December 31, 2002
Net cash used in operating activities was $1,136,519 for the year ended
December 31, 2002, and $635,819 for the partial year ended December 31, 2001. In
each year, the use of cash for operations primarily consisted of net operating
losses offset by an accumulation of payables and accrued expenses.
In 2002, deferred revenues, an increase in trade payables, and an
increase in accrued expenses partially funded our operating loss. In the partial
year ended December 31, 2001, losses from operations were offset by a net
realized gain on the sale of investments and increases in payables and accrued
expenses. Non-cash items in the partial year ended December 31, 2001 included
investments received as consideration for sale of common stock and the
acquisition of a customer list, offset by deferred revenue.
Net cash provided by investing activities was $2,020 for the year ended
December 31, 2002 and $468,031 for the partial year ended December 31, 2001. In
2002, net cash provided by investing activities consisted of the sale of
investments. Net cash provided by investing activities in the partial year ended
December 31, 2001 primarily consisted of proceeds from the sale of investments,
offset by the purchase of investments, a customer list and property.
Net cash provided by financing activities was $1,123,875 for the year
ended December 31, 2002 and $183,020 in the partial year ended December 31,
2001. For the year ended December 31, 2002, cash provided by financing
activities consisted of the sale of the Company's common stock, plus an amount
received from (and due to) a stockholder of ours pursuant to two promissory
notes made by us in July and November 2002, respectively. Cash provided by
financing activities for the partial year ended December 31, 2001 consisted
primarily of the sale of the Company's common stock, plus an amount received
from (and due to) a stockholder of ours pursuant to two promissory notes made by
us in July and November 2002, respectively.
We have not generated any net cash from operations since our inception.
We have funded operations primarily through private sales of equity securities,
borrowings from third parties, deferred salary arrangements with our employees,
tax payment deferrals and trade payables.
21
EFFECTS OF CONTRACTUAL OBLIGATIONS AND FINANCING ACTIVITIES ON LIQUIDITY
The following tables summarize our contractual obligations as of
December 31, 2003, and the effect these obligations are expected to have on our
liquidity and cash flows in future periods.
Payments Due by Period
Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years
(In thousands)
Contractual Obligations:
- ----------------------------------------------------------------------------------------------------------------------
Short-Term Debt Obligations $ 1,760 $ 1,760 -- -- --
Long-Term Debt Obligations $ 708 $ 708 -- -- --
Operating Lease Obligations $ 2,586 $ 597 $ 1,175 $ 814 --
Other Short-Term
Liabilities:
Taxes $ 1,152 $ 1,152 -- -- --
Deferred Compensation $ 723 $ 723 -- -- --
-------- -------- -------- -------- --------
Total $ 6,929 $ 4,940 $ 1,175 $ 814 --
======== ======== ======== ======== ========
As of December 31, 2003, we had cash of approximately $9,645. In May
2001, we sold 1,200,000 shares of common stock for $1,200,000 in a private
placement. We received a portion the proceeds of this sale in 2001 and the
remainder in 2002. During 2002, we borrowed $620,000 from a stockholder and
issued two promissory notes totaling this amount and bearing an interest rate of
10%. These notes, as amended, become payable on the earlier of January 2, 2005
or the closing of our initial public offering.
In December 2002, we entered into a secured credit line agreement with
a stockholder for $750,000 in credit, which bears interest at a rate of 9% and
was to mature on December 12, 2003. In March 2003, this agreement was modified
to increase the credit line to $1,500,000 and to extend the maturity date to
December 12, 2004. As of December 31, 2003, we had availed ourselves of
$1,264,987 of this credit line and had $235,013 in remaining available credit.
On March 1, 2004, the agreement was modified to increase the credit line to
$3,000,000. The terms of the credit line agreement allow the company to draw
funds against the line of credit for any legitimate business purpose with three
days' notice, provided that the creditor, in his sole discretion, approves the
request. In October 2003, the creditor executed a waiver that allowed us to
defer interest payments due on our outstanding balance until the maturity date.
All amounts outstanding under the line of credit loan agreement, including
principal and accrued interest, become due and payable on January 1, 2005 or
upon the occurrence of an acceleration event, as defined in the loan documents,
including a successful public offering of the company's stock.
During 2002 and 2003, we increased our liquidity by entering into a
deferred compensation arrangement with certain of our employees. Pursuant to
this arrangement, certain employees have agreed to defer receipt of compensation
earned during the last quarter of 2002 until 2003. We believe that these
employees will agree to extend their compensation deferral until after the
closing of this offering. In addition, certain employees have agreed to defer
receipt of compensation earned in 2003 until after the closing of our initial
public offering, which cannot currently continue beyond July 12, 2004. Upon our
receipt of the proceeds of this offering, we will pay our employees any amounts
outstanding pursuant to this deferred compensation
22
arrangement. As of December 31, 2003, the amount outstanding under this
arrangement was approximately $722,855.
We have an outstanding tax liability of approximately $1,152,000 for
federal and state taxes. We are currently in negotiations for an offer of
compromise or a payment schedule with both the federal and state revenue
agencies. The Internal Revenue Service and Illinois Department of Revenue have
the authority to encumber our assets to protect their position relative to other
creditors. We have received notice that the Illinois Department of Revenue has
filed a lien. The Internal Revenue Service has not filed a lien on our assets
but could do so at any time. Upon our receipt of the proceeds of our initial
public offering, we will pay all outstanding state and federal taxes. We have
begun the process of formally requesting an offer of compromise or payment plan
from the Internal Revenue Service. We have retained tax counsel to advise us in
this matter, and our counsel has filed the necessary application forms in
connection with our request for an offer of compromise or payment plan. As of
the date of this annual report, we had not received a response from the Internal
Revenue Service pursuant to our request. We are also in the process of
negotiating with the Illinois Department of Revenue for a payment plan.
We filed a Registration Statement on Form S-1 (File No.333-107769) with
the Securities and Exchange Commission, which was declared effective by the
Commission on February 13, 2004. Shortly thereafter, we commenced an initial
public offering, on a best efforts basis, of 2,000,000 shares of the Company's
common stock at a price of $10 per share. The offering closes on July 12, 2004.
To receive the proceeds of the offering, we must sell a minimum of 1,200,000
shares for an aggregate price of $12,000,000. We may elect to close the offering
on an earlier date if we have received subscriptions for the maximum amount of
2,000,000 shares. Receipt of the proceeds of the offering, should it occur, will
contribute significantly to our liquidity.
Off-Balance Sheet Arrangements
As of December 31, 2003, we did not have an off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
RISK FACTORS
Set forth below and elsewhere in this annual report and in other
documents we file with the SEC are risks and uncertainties that could cause
actual results to differ materially from the results contemplated by the
forward-looking statements contained in this annual report.
RISKS RELATING TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS AND
OUR PROSPECTS.
We began our operations in April 2001. Thus, an evaluation of our
business and our prospects can only be based on our limited operating history.
Moreover, our historical results of operations do not set forth an accurate
indication of our future results of operations or prospects because we are a
development stage company and thus far have only implemented the first stage of
our business plan, which is the launch and development of our dial-up Internet
access service. We expect our operating results to change significantly if we
are able to successfully implement
23
the second stage of our business plan, which entails launching, and then
growing, our electronic bill presentment and payment service. No assurances
exist that we will be successful in these endeavors.
IF WE DO NOT OPERATE PROFITABLY, OUR BUSINESS WILL SUFFER. IN ADDITION, OUR
INDEPENDENT AUDITOR HAS EXPRESSED DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN IF OUR INITIAL PUBLIC OFFERING IS UNSUCCESSFUL OR IF WE CANNOT OBTAIN
ADDITIONAL CREDIT.
We have never operated profitably. We incurred net losses of
approximately $2,472,470 in 2002 and $802,970 in 2001. As of December 31, 2003,
we had an accumulated deficit of approximately $5,573,530. In the notes to our
audited financial information, doubt is expressed as to our ability to continue
if we do not complete our initial public offering successfully (please see "Note
N: Going Concern Uncertainty and Management's Plans," to our audited financial
statements). We can provide no assurances that such net losses will not continue
or increase or that we will be able to implement our business plan or achieve
profitability. If we do not operate profitably, our business will suffer.
OUR BUSINESS PLAN IS NEW AND UNPROVEN, WHICH MAKES IT MORE DIFFICULT TO EVALUATE
OUR CHANCES OF SUCCESS.
Our business plan to provide electronic bill presentment and payment
services is new and unproven and has not yet been fully implemented. For our
business plan to be successful, we must accomplish a number of goals, including
the following:
- Develop and market our electronic bill presentment and payment
services to achieve market acceptance by both consumers and
vendors of products and services.
- Enter into aggregating and reselling arrangements.
- Attract consumers that are appealing to vendors with whom we
will associate.
To our knowledge, no other company has successfully implemented a
business plan like ours. Our business plan differs significantly from those of
our competitors in the electronic bill presentment and payment industry in that
we intend to act as an intermediary between consumers and providers of household
services and to use our intermediary role to negotiate discounts and other
benefits for our customers. We are unaware of any other business in the
electronic bill presentment and payment industry that serves in such an
intermediary capacity. Thus, there is no similar model for our business to which
you can compare us in order to assess whether our business plan has the
potential to be successful. Furthermore, we might need to adapt our business
plan to adjust to changes in the electronic bill presentment and payment market.
Therefore, our business plan could change in the future, which makes evaluating
the viability of our business plan even more difficult. If we are unable to
successfully implement our business plan, our business will suffer and we will
not become profitable.
OUR GROWTH STRATEGY DEPENDS ON NUMEROUS FACTORS, MANY OF WHICH ARE BEYOND OUR
CONTROL
Some of the factors that could significantly affect our ability to
develop our business, but which we believe are beyond our control, include the
following:
24
- We might need to raise additional funds in the future. For
reasons beyond our control, such as general market and
economic conditions, we might be unable to obtain additional
funds in sufficient amounts or on acceptable terms.
- We are dependent on hardware and software products produced by
third parties to run our business, and we expect such
dependency to continue and perhaps increase in the future. For
reasons beyond our control, such as increased demand for such
products or a reduced supply of such products due to parts
scarcity, we might be unable to acquire necessary hardware and
software products in sufficient quantities or on acceptable
terms.
- We will attempt to attract customers who use America Online to
our service by enabling them to use America Online's "Bring
Your Own Access" or "AOL for Broadband" programs, which allow
them to connect to America Online's content and services for a
reduced monthly fee. We maintain no relationship with America
Online and have no ability to control or influence America
Online. Furthermore, the availability and pricing of "Bring
Your Own Access" or "AOL for Broadband" are under the sole
control of America Online. America Online could discontinue
these programs or substantially increase their costs, either
of which would eliminate or undermine our ability to use these
programs as an inducement to potential customers.
IF WE CANNOT ESTABLISH RELATIONSHIPS WITH BILLERS ON FAVORABLE TERMS, WE MAY BE
UNABLE TO ACHIEVE ALL OF THE REVENUE STREAMS CONTEMPLATED BY OUR BUSINESS PLAN.
Our business plan calls for us to enter into agreements with vendors of
household products and services, or billers, allowing us to offer our customers
discounts on such services and to present bills for these services to our
customers electronically. As of the date of this prospectus, we have not entered
into any agreements that allow us to present the bills of such providers to our
customers or to offer our customer discounts on these services. If we are unable
to negotiate agreements for all of the services that we currently intend to
offer, we will be forced to eliminate the products and services for which
agreements are unavailable from our planned service offerings, our ability to
earn revenue will be reduced.
IF WE DO NOT ESTABLISH A RELATIONSHIP WITH A BANK OR SIMILAR FINANCIAL
INSTITUTION ON FAVORABLE TERMS, MARKET ACCEPTANCE OF OUR SERVICES AND THE GROWTH
OF OUR BUSINESS WILL BE HINDERED.
We will not lend money to our customers, but we intend to assist in
making credit available to them through an unrelated financial institution, such
as a bank. We intend to do this by permitting our customers to defer payment on
bills. See "Business" for more information. As of the date of this annual
report, however, we are only in preliminary discussions with financial
institutions. We have not reached an agreement with any financial institution,
and there is no assurance that we will be able to do so on terms that will make
our services attractive to our customers. If we are unable to reach an agreement
with a financial institution for the provision of credit to our customers on
favorable terms, we may not be able to attract customers at the rate we would
otherwise attract them, and we may be unable to offer some of the services and
benefits contemplated by our business plan. Either or both of these results
could hinder our growth.
DEFAULTS ON LOANS BY OUR CUSTOMERS COULD STRAIN OUR FINANCIAL RESOURCES.
If we are successful in making arrangements to have consumer credit
available to our customers, such arrangements may require that we guarantee any
loans to them pursuant to such
25
credit arrangements, and we intend to guarantee such loans, if permitted by
applicable law. By doing so, we will bear the risk of payment defaults by our
customers. Thus, if a customer purchases goods or services by means of a loan
guaranteed by us and subsequently does not pay that loan, we would be liable for
up to the full amount of the loan. Guaranteeing our customers' loans exposes us
to a potentially significant credit risk. This could severely strain our
financial resources.
OUR OPERATING RESULTS MAY FLUCTUATE FROM QUARTER TO QUARTER, WHICH COULD CAUSE
THE PRICE OF OUR COMMON STOCK TO FLUCTUATE.
Since our quarterly operating results may fluctuate, the price of our
common stock might fluctuate as well. Our quarterly operating results might
fluctuate for a variety of factors, some of which are beyond our control. These
factors include:
- changes in our costs brought about by general market
conditions, such as scarcity or high demand;
- changes in our pricing policies, which are generally within
our control, or those of our competitors, which are beyond our
control;
- relative rates of acquisition of new customers, which could be
depressed by poor economic condition in the areas we serve;
- seasonal patterns;
- delays in the introduction of new or enhanced services,
software and related products or market acceptance of these
products and services; and
- other changes in operating expenses, personnel, and general
economic conditions.
If the price of our common stock is volatile, investors may not want to
buy our stock, which could cause the value of your investment to decline.
WE MUST GROW OUR BUSINESS EFFECTIVELY TO BE SUCCESSFUL.
Our business could be harmed if we fail to manage effectively any growth that we
achieve. If our business grows, our management systems, as well as our financial
and management controls and information systems, may be inadequate to support
such growth. Our ability to manage our growth effectively will require us to
expend funds to improve these systems, procedures, and controls, which we expect
will increase our operating expenses and capital requirements. In addition, we
must effectively expand, train, and manage our employees and independent
contractors. We cannot assure you that we will respond on a timely basis to the
changing demands that our planned expansion will impose on our management and on
our existing systems, procedures, and controls. For any of these reasons, we
could lose opportunities or overextend our resources, which, in turn, could harm
our business.
IF WE DO NOT SUCCESSFULLY DEVELOP AND MAINTAIN THE LIGHTFIRST BRAND, WE MAY LOSE
EXISTING CUSTOMERS AND FAIL TO ATTRACT NEW CUSTOMERS.
We believe that maintaining and developing the LightFirst brand is
critical to our success and that the importance of brand recognition may
increase as a result of new or future competitors offering products similar to
ours. If our brand-building strategy is unsuccessful, our business could suffer.
Our success in promoting and enhancing the LightFirst brand will depend
26
on our ability to provide customers with high-quality service. We cannot assure
you that our customers will perceive our service as being of high quality. If
they do not, the value of our brand name may be diminished, and our business
could suffer.
THE LOSS OF MARTIN P. GILMORE OR OUR INABILITY TO RETAIN OTHER SENIOR MANAGEMENT
PERSONNEL COULD HARM OUR BUSINESS.
We are dependent on the services of Martin P. Gilmore, our president
and chief executive officer. Our operations would suffer if we were to lose the
services of Mr. Gilmore. In addition, there is competition for qualified
management in our industry. Many of the companies with which we will compete for
experienced management personnel have greater financial and other resources than
we do. If we are unable to retain qualified management personnel or if a
significant number of our current management personnel were to leave our
employment, our business could lose direction.
WE DEPEND ON THIRD PARTIES TO FULFILL MANY OF OUR HARDWARE AND SOFTWARE NEEDS,
AS WELL AS TO PROVIDE US WITH NECESSARY SERVICES RELATING TO THE OPERATION OF
OUR BUSINESS.
The expansion of our network infrastructure places demands on our
suppliers, some of which have limited resources and production capacity. From
time to time, we have experienced delays in delivery from suppliers of modems,
servers, and other equipment. In particular, our servers are a critical part of
our infrastructure, and we will need to add additional servers to expand our
operations. We currently purchase all of our servers from Sun Microsystems, Inc.
Since we do not have an agreement with Sun Microsystems, Inc. regarding future
server purchases, we can provide no assurance that Sun Microsystems, Inc. will
continue to supply servers to us. We may be unable to implement our planned
expansion and our users may be unable to connect to our network if:
- we are unable to obtain modems, servers and other equipment in
a timely manner;
- such equipment is unavailable on commercially acceptable
terms; or
- we are unable to develop alternative sources of supply, if
required.
We depend on establishing and maintaining relationships with several
companies to provide Internet access services to our customers, and to provide
us with telecommunications, content filtering, and other support services. The
loss or impairment of any of these relationships would impair our ability to
deliver service to our customers and our business could decline as a result.
WE MAY EXPERIENCE BREAKDOWNS IN OUR SYSTEMS THAT COULD DAMAGE CUSTOMER RELATIONS
AND EXPOSE US TO LIABILITY.
The satisfactory performance, reliability, security, and availability
of our website, filtering systems, and network infrastructure are critical to
our reputation and our ability to attract and retain participating customers and
vendors. Our revenue depends on the number of online bills paid and electronic
purchases made by our customers. Any system interruptions that result in the
inability of our customers to pay bills or purchase goods and services, or more
generally, the unavailability of our service offerings, could reduce our
revenue. Thus, to operate our business successfully, we must try to protect our
systems from interruption, including by events beyond our control. Events beyond
our control that could cause system interruptions include:
27
- fire;
- earthquake;
- terrorist attacks;
- natural disasters;
- computer viruses;
- unauthorized access to our systems;
- telecommunications failure;
- computer denial of service attacks; and
- power loss.
In addition, we believe that customers who have a bad experience with
our service will be reluctant to continue using it and will not recommend us to
others.
We currently maintain a single telecommunications services network and
house our computer hardware in a single leased facility. If our
telecommunications provider or our co-location facility experiences a system
failure, we would be unable to provide service to our customers until these
facilities and services are restored or substitute facilities and services are
brought into use. Currently, we have no arrangements for substitute facilities
or services. Our insurance coverage may not compensate us for losses that occur
due to failures or interruptions in our systems. Disruptions, particularly if
they were for an extended period, would seriously harm our business.
SECURITY AND PRIVACY BREACHES IN OUR SYSTEMS COULD DAMAGE CUSTOMER RELATIONS AND
INHIBIT OUR GROWTH.
Any failure in our security and privacy measures could harm our
business by causing our customers to lose confidence in us. We plan to store
personal information about our customers, including bank account and credit card
information, social security numbers, and merchant account numbers. If we are
unable to protect, or consumers perceive that we are unable to protect, the
security and privacy of this information, our business could suffer.
A security or privacy breach may:
- expose us to liability;
- deter consumers from using our services;
- cause our customers to lose confidence in our services;
- harm our reputation;
- increase our expenses because of potential damages; or
- decrease market acceptance of electronic bill presentment and
payment.
We believe that we will utilize applications designed for data security
and integrity. Nevertheless, there is no assurance that our use of such
applications will be sufficient to address the security and privacy concerns of
our customers or protect their information.
28
WE BELIEVE IT TO BE LIKELY THAT WE WILL FACE SIGNIFICANT RISKS OF LOSS DUE TO
FRAUD AND DISPUTES BETWEEN CUSTOMERS AND VENDORS THAT USE OUR ELECTRONIC BILL
PRESENTMENT AND PAYMENT.
We believe it to be likely that we will face significant risks of loss
due to fraud and disputes between our customers and vendors using our services,
including:
- unauthorized use of information and identity theft;
- vendor fraud and other disputes over the quality of goods and
services;
- breaches of system security;
- employee fraud; and
- use of our system for illegal or improper purposes.
We take measures to detect and reduce the risk of fraud, but we cannot
assure you that these measures will be effective. If these measures fail, our
business will suffer. In addition, we may incur losses from fraud, including
claims from customers that vendors have not performed, that their goods or
services are not as described, or that the customer did not authorize the
purchases. We may also incur losses from erroneous transmissions and from
customers who have closed bank accounts or have insufficient funds in such
accounts to satisfy payments.
CUSTOMER COMPLAINTS OR NEGATIVE PUBLICITY COULD DAMAGE OUR REPUTATION AND CAUSE
US TO LOSE CUSTOMERS.
Customer complaints or negative publicity about our services could
undermine consumer confidence in and use of our services. Breaches of our
customer privacy and our security measures could have the same effect. Measures
we might take to combat fraud and breaches of privacy and security, such as
freezing customer accounts, could damage our relations with customers. These
measures heighten the need for prompt and accurate customer service to resolve
irregularities and disputes. If we do not handle customer complaints
effectively, our reputation might suffer and we may lose customers.
IF WE ARE FOUND TO BE SUBJECT TO LAWS OR REGULATIONS GOVERNING ELECTRONIC
COMMERCE, WE COULD INCUR LIABILITIES AND BE FORCED TO CHANGE OUR BUSINESS
PRACTICES.
We operate in an industry that is subject to certain government
regulations and that could become subject to additional government regulation.
For example, some states have money transmitter regulations to which we might be
subject. In addition, we may be subject to federal electronic fund transfer
regulations, such as to the Electronic Fund Transfer Act and Regulation E of the
Federal Reserve Board, which require that companies comply with certain
procedural rules and assume liability for unauthorized transactions. In
addition, we are subject to the financial privacy provisions of the
Gramm-Leach-Bliley Act and other related regulations, which restrict how we use
financial information obtained through our service. We may also be subject to
additional state or federal banking or financial services regulations, and
regulations relating to Internet transactions, among others. If we are found to
be in violation of any current or future regulations:
- we could be exposed to financial liability, including
substantial fines and disgorgement of any profits;
- we could be forced to change our business practices; and
- we could be forced to cease doing business in certain areas or
altogether.
29
In addition, because we propose to enter into an arrangement with a
lending institution that will lend our customers money to pay their bills and
that may offer our customers additional loan products, we may be subject to
federal and state regulations governing lending practices and loan brokers. In
many states, we may be required to obtain licenses to offer some of our proposed
products. To date, we have not implemented the part of our business plan that
may subject us to lending regulations, and we have not obtained any licenses. If
we cannot obtain the required licenses, we may be unable to offer some products
in certain areas, and we could be forced to change our business practices or
cease doing business in some states.
OUR PRESENT OPERATION SOLELY IN THE CHICAGO METROPOLITAN MARKET POTENTIALLY
EXPOSES US TO GREATER RISK THAN IF WE OPERATED IN ADDITIONAL MARKETS THROUGHOUT
THE UNITED STATES.
We presently operate our business only in the Chicago metropolitan
market. The concentration of our operations in this geographic market exposes us
to a greater risk from regional economic downturns than would be the case if we
were not so geographically concentrated.
COMPETITION IN OUR INDUSTRY IS FIERCE AND COULD IMPEDE THE GROWTH OF OUR
BUSINESS.
The electronic bill presentment and payment market is a relatively new
industry and, like the broader electronic commerce market, is evolving.
Competition in our industry is fierce. We expect competition to increase in the
future. Our current competitors include:
- banks with electronic bill presentment and payment services,
such as Bank of America, Bank One Corp, Wells Fargo and
Fleet-Boston Financial Corp;
- CheckFree Corporation, which is one of the largest electronic
bill presentment and payment companies in the United States;
and
- Internet payment facilitators, which are in various stages of
development and some of which are backed by prominent venture
capital firms.
Many of our existing competitors, as well as a number of potential new
competitors, have longer operating histories, greater name recognition, larger
customer bases, proven business models, and significantly greater financial,
technical, and marketing resources than we do. These competitors may engage in
more extensive product development, undertake broader marketing campaigns, adopt
more aggressive pricing structures, and make more attractive offers to existing
and potential vendors with which we have or will seek to have relationships.
Our ability to compete effectively depends on many factors, including:
- the pricing, breadth, ease of use, and convenience of the
services we offer;
- the timing of our entry into the electronic bill presentment
and payment market;
- the variety, quantity, and quality of the business
relationships we plan to build; and
- our ability to develop and use proprietary and scalable
technology and infrastructure.
Increased competition could lead to reduced margins or loss of market
share, the occurrence of either of which could impair our business, our results
of operations, and our financial condition.
30
In addition, improvements in the traditional methods by which bills are
paid may make electronic commerce a less attractive means for paying bills and
managing personal finances and could reduce our ability to generate revenue and
become profitable.
IF WE DO NOT RESPOND TO TECHNOLOGICAL CHANGE, OUR SERVICE COULD BECOME OBSOLETE.
To remain competitive, we must continually enhance the responsiveness,
functionality, and features of our service and develop other services that are
attractive to customers and vendors. We must also continually address the
evolving technological developments that characterize Internet commerce,
including the rapid advances in Internet connectivity. Currently, we only offer
our customers dial-up Internet access, which is a relatively slow way to connect
to the Internet. Because we cannot predict the nature or extent of future
technological challenges, we may be unable to respond to demands and challenges,
in which case our service could become obsolete.
WE MIGHT BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY BUSINESS
PROCESSES.
Our success and ability to compete in our market depends upon our
proprietary business processes. Failure to protect our intellectual property
could harm our brand and decrease our ability to compete. Moreover, we could
spend significant resources enforcing or defending our intellectual property
rights, which would be a drain on our financial resources. To protect our
intellectual property rights, we rely on a combination of intellectual property
laws and contractual arrangements. In addition, we have filed an application
with the United States Patent and Trademark Office to register our name as a
service mark, but this application has not yet been approved. The protective
steps we have taken may be insufficient to prevent the misuse of our proprietary
information, however. Furthermore, we may be unable to detect the unauthorized
use of, or take appropriate steps to enforce, our intellectual property rights.
We do not have any registered trademark or copyrights. We have not filed any
patent applications for our electronic bill presentment and payment service, and
we do not expect to do so in the future. Consequently, a third party might try
to imitate and exploit our business processes, which could undermine our
business.
OUR PRODUCTS AND SERVICES MIGHT INFRINGE UPON THE INTELLECTUAL PROPERTY RIGHTS
OF OTHERS, WHICH COULD EXPOSE US TO COSTLY LITIGATION OR REQUIRE US TO PURCHASE
EXPENSIVE LICENSES.
We are aware of various patents and other intellectual property rights
held by third parties in the area of electronic payment systems. The holders of
these rights could assert that we are infringing upon such rights. Although we
believe that we do not infringe any third-party's intellectual property rights,
we cannot assure you that our product features do not infringe on intellectual
property rights held by others or that they will not do so in the future. As a
result, third parties might assert infringement claims against us that could
result in litigation, which would drain our resources even if we defended
ourselves successfully. In lieu of litigation, we might be able to seek licenses
to use such intellectual property rights, but we cannot assure you that we could
secure licenses on reasonable terms or at all.
ANTI-TAKEOVER PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS AND UNDER DELAWARE LAW
MIGHT MAKE IT DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, WHICH COULD POTENTIALLY
DEPRIVE YOU OF AN OPPORTUNITY TO OBTAIN A PREMIUM FOR ANY OF OUR SHARES THAT YOU
HOLD.
31
Our certificate of incorporation and bylaws contain provisions that
might delay or prevent a change in our control, discourage bids at a premium
over the market price of our common stock, or otherwise affect adversely the
market price of our common stock and the voting and other rights of the holders
of our common stock. We are also subject to provisions of the Delaware
corporation law that, in general, prohibit any business combination with a
beneficial owner of 15% or more of our common stock for five years unless the
holder's acquisition of our stock was approved in advance by our board of
directors. Together, these provisions could make us unattractive to a buyer that
might otherwise be willing to pay our stockholders a premium for their shares.
OUR MANAGEMENT CONTROLS A MAJORITY OF OUR OUTSTANDING COMMON STOCK, WHICH
ENABLES THEM TO CONTROL THE OUTCOME OF STOCKHOLDER VOTING ON MATTERS SUBMITTED
FOR STOCKHOLDER APPROVAL.
Our executive officers and directors will, as a group, beneficially own
the majority of our common stock following this offering. These stockholders
will be able to dominate and control all matters requiring approval by our
stockholders, including electing directors and approving significant corporate
transactions, such as a change of control. You should note that the interests of
these stockholders may differ from your interests and the interests of our other
stockholders, and they might cause us to take actions with which you disagree
and that you will be unable to prevent.
WE DO NOT PLAN TO PAY DIVIDENDS TO OUR STOCKHOLDERS.
We do not anticipate paying cash dividends to our stockholders now or
in the future. Accordingly, you must rely upon subsequent sales after price
appreciation of the shares of our common stock that you purchase in this
offering as the sole method to realize a gain on your investment. There are no
assurances that the price of our common stock will ever appreciate in value.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have no floating rate indebtedness, hold no derivative
instruments, and do not earn foreign-sourced income. Accordingly, changes in
interest rates or currency exchange rates do not have a direct effect on our
financial position. To date the effects of inflation on us have been immaterial.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIGHTFIRST INC.
(A DEVELOPMENT STAGE COMPANY)
AUDITED FINANCIAL STATEMENTS
AND
INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 2003, 2002 AND 2001
33
CONTENTS
AUDITED FINANCIAL STATEMENTS PAGE
----
Independent Auditors' Report 35
Balance Sheets 36
Statements of Operations 38
Statements of Shareholders' Deficiency 39
Statements of Cash Flows 40
Notes to Financial Statements 42
34
INDEPENDENT AUDITORS' REPORT
Board of Directors
LightFirst Inc.
We have audited the accompanying balance sheets of LightFirst Inc. (a
development stage company) as of December 31, 2003 and 2002, and the related
statements of operations, shareholders' deficiency, and cash flows for the years
then ended, for the period from inception (April 11, 2001) to December 31, 2001
and for the period from inception (April 11, 2001) to December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LightFirst Inc. as of December
31, 2003 and 2002, and the results of its operations and its cash flows for the
years then ended, for the period from inception (April 11, 2001) to December 31,
2001 and for the period from inception (April 11, 2001) to December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note N to the
financial statements, the Company is in the development stage as of December 31,
2003, has incurred significant losses since inception and has a working capital
and shareholders' deficiency. Recovery of the Company's assets and satisfaction
of liabilities is dependent upon future events, the outcome of which is
indeterminable. In addition, successful completion of the Company's development
program and its transition, ultimately, to attaining profitable operations is
dependent upon obtaining adequate capital and financing to complete its
development activities and to achieve a level of revenues adequate to support
the Company's cost structure. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note N. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Mengel Metzger Barr & Co., LLP
Rochester, New York
March 25, 2004
35
LIGHTFIRST INC.
(A Development Stage Company)
BALANCE SHEETS
December 31,
------------------------
ASSETS 2003 2002
-------- --------
CURRENT ASSETS
Cash $ 9,645 $ 4,608
Accounts receivable, net of allowance for doubtful
accounts of $10,000 in 2003 and 2002 4,019 9,016
Note receivable -- 6,638
Due from officer/shareholder -- 16,917
Deferred offering costs 204,853 20,538
-------- --------
TOTAL CURRENT ASSETS 218,517 57,717
PROPERTY - Computer equipment 39,430 35,450
Less accumulated depreciation 27,695 15,657
-------- --------
11,735 19,793
OTHER ASSETS
Customer list, net of accumulated amortization of
$217,765 and $130,660 in 2003 and 2002, respectively 43,551 130,656
Deposit 17,894 11,929
-------- --------
61,445 142,585
-------- --------
$291,697 $220,095
======== ========
The accompanying notes are an integral part of the financial statements.
36
December 31,
------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY 2003 2002
----------- -----------
CURRENT LIABILITIES
Line of credit payable to shareholder $ 1,264,987 $ 69,000
Accounts payable 430,388 205,525
Deferred revenue 130,123 143,518
Accrued payroll 722,855 475,797
Accrued payroll taxes and related penalties 1,151,670 759,831
Notes payable to shareholder -- 620,000
Due to officer/shareholder 1,681 --
Accrued interest payable to shareholder 64,986 21,714
----------- -----------
TOTAL CURRENT LIABILITIES 3,766,690 2,295,385
LONG-TERM LIABILITIES
Notes payable to shareholder 620,000 --
Accrued interest payable to shareholder 88,387 --
----------- -----------
708,387 --
SHAREHOLDERS' DEFICIENCY Common stock, $.001 par value:
Authorized, 10,000,000 shares
Issued and outstanding, 6,406,000 shares and
6,387,000 shares in 2003 and 2002, respectively 6,406 6,387
Additional paid-in capital 1,383,744 1,193,763
----------- -----------
1,390,150 1,200,150
Deficit accumulated during the development stage (5,573,530) (3,275,440)
----------- -----------
(4,183,380) (2,075,290)
----------- -----------
$ 291,697 $ 220,095
=========== ===========
37
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
Period from Period from
inception inception
(April 11, (April 11,
2001) to Year ended December 31, 2001) to
December 31, ------------------------------- December 31,
2003 2003 2002 2001
------------ ----------- ----------- ------------
Revenues $ 1,155,005 $ 486,160 $ 420,296 $ 248,549
Cost of revenues 1,065,878 501,465 341,533 222,880
----------- ----------- ----------- -----------
GROSS PROFIT (LOSS) 89,127 (15,305) 78,763 25,669
General and administrative expenses 5,589,288 2,151,334 2,523,551 914,403
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (5,500,161) (2,166,639) (2,444,788) (888,734)
Other income (expense):
Interest income 1,200 652 548 --
Interest expense (154,317) (132,103) (21,714) (500)
Net realized gain (loss) from
sale of investments 79,748 -- (6,516) 86,264
----------- ----------- ----------- -----------
(73,369) (131,451) (27,682) 85,764
----------- ----------- ----------- -----------
NET LOSS $(5,573,530) $(2,298,090) $(2,472,470) $ (802,970)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted $ (0.93) $ (0.36) $ (0.40) $ (0.16)
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic and diluted 5,965,691 6,398,083 6,132,900 5,166,222
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
38
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF SHAREHOLDERS' DEFICIENCY
PERIOD FROM INCEPTION (APRIL 11, 2001) TO DECEMBER 31, 2003
Deficit
Common Stock accumulated
--------------------------- Additional during the Total
Number of paid-in development shareholders'
shares Amount capital stage deficiency
----------- ----------- ----------- ------------ -------------
Balance at April 11, 2001 -- $ -- $ -- $ -- $ --
Issuance of common stock to founding shareholder 5,000,000 5,000 (4,900) -- 100
Issuance of common stock to consultant 187,000 187 (137) -- 50
Issuance of common stock to investors 691,800 692 691,108 -- 691,800
Net loss for the period April 11, 2001
through December 31, 2001 -- -- -- (802,970) (802,970)
----------- ----------- ----------- ------------ -----------
BALANCE AT
DECEMBER 31, 2001 5,878,800 5,879 686,071 (802,970) (111,020)
Issuance of common stock to investors 508,200 508 507,692 -- 508,200
Net loss for the year -- -- -- (2,472,470) (2,472,470)
----------- ----------- ----------- ------------ -----------
BALANCE AT
DECEMBER 31, 2002 6,387,000 6,387 1,193,763 (3,275,440) (2,075,290)
Issuance of common stock in exchange for services 19,000 19 189,981 -- 190,000
Net loss for the year -- -- -- (2,298,090) (2,298,090)
----------- ----------- ----------- ------------ -----------
BALANCE AT
DECEMBER 31, 2003 6,406,000 $ 6,406 $ 1,383,744 $(5,573,530) $(4,183,380)
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
39
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
Period from Period from
inception inception
(April 11, 2001) to Year ended December 31, (April 11, 2001)
December 31, ------------------------------ to December 31,
2003 2003 2002 2001
----------- ----------- ----------- -----------
CASH FLOWS - OPERATING ACTIVITIES
Net loss for the period $(5,573,530) $(2,298,090) $(2,472,470) $ (802,970)
----------- ----------- ----------- -----------
Adjustments to reconcile net loss to net cash
used for operating activities:
Bad debts 16,638 6,638 10,000 --
Compensation expense 190,000 190,000 -- --
Interest expense 153,373 131,659 21,714 --
Depreciation and amortization 245,460 99,143 98,922 47,395
Net realized (gain) loss from sale of investments (79,748) -- 6,516 (86,264)
Changes in certain assets and liabilities
affecting operations:
Accounts receivable (14,019) 4,997 (12,516) (6,500)
Prepaid expenses -- -- 10,258 (10,258)
Deposit (17,894) (5,965) (11,929) --
Accounts payable 430,388 224,863 159,824 45,701
Deferred revenue (18,784) (13,395) 96,264 (101,653)
Accrued expenses 1,874,525 638,897 956,898 278,730
----------- ----------- ----------- -----------
NET CASH USED FOR
OPERATING ACTIVITIES (2,793,591) (1,021,253) (1,136,519) (635,819)
CASH FLOWS - INVESTING ACTIVITIES
Increase in note receivable (6,638) -- (548) (6,090)
Purchases of property (39,430) (3,980) -- (35,450)
Purchase of investments (108,260) -- -- (108,260)
Proceeds from the sale of investments 732,808 -- 2,568 730,240
Acquisition of customer list (112,409) -- -- (112,409)
----------- ----------- ----------- -----------
NET CASH PROVIDED FROM (USED FOR)
INVESTING ACTIVITIES 466,071 (3,980) 2,020 468,031
CASH FLOWS - FINANCING ACTIVITIES
Proceeds from issuance of common stock to
minority shareholders 655,250 -- 508,200 147,050
Proceeds from issuance of common stock to
founding shareholder 100 -- -- 100
Proceeds from line of credit payable to shareholder 1,884,987 1,195,987 689,000 --
Deferred offering costs (204,853) (184,315) (20,538) --
Due (from) to officer/shareholder 1,681 18,598 (52,787) 35,870
----------- ----------- ----------- -----------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 2,337,165 1,030,270 1,123,875 183,020
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 9,645 5,037 (10,624) 15,232
Cash at beginning of period -- 4,608 15,232 --
----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 9,645 $ 9,645 $ 4,608 $ 15,232
=========== =========== =========== ===========
40
LIGHTFIRST INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS, Cont'd
Period from Period from
inception inception
(April 11, 2001) to Year ended December 31, (April 11, 2001) to
December 31, --------------------------- December 31,
2003 2003 2002 2001
------------------- ---------- ---------- --------------------
NON-CASH OPERATING, INVESTING AND
FINANCING ACTIVITIES
Investments received as consideration for
sale of common stock $ 544,800 $ -- $ -- $ 544,800
========== ========== ========== ==========
Acquisition of customer list offset by
deferred revenue $ 148,907 $ -- $ -- $ 148,907
========== ========== ========== ==========
Issuance of common stock in exchange for
services $ 190,000 $ 190,000 $ -- $ --
========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements.
41
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
LightFirst Inc. (the Company) was incorporated on April 11, 2001, for the
purpose of developing electronic bill presentation services. The Company
currently derives its revenue primarily from providing dial-up Internet
access and electronic mail access to a customer base that is primarily
comprised of teachers and other individual users in the Chicago, Illinois
area. The Company reports one segment based upon Statement of Financial
Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
Since April 11, 2001 (date of inception), the Company's efforts have been
devoted primarily to developing the Company's software systems, developing
markets for its products, and to raising capital. The Company has not
generated significant revenues from its services as of December 31, 2003.
Accordingly, through the date of these financial statements, the Company
is considered to be in the development stage and the accompanying
financial statements represent those of a development stage enterprise.
Cash
The Company maintains its cash balances at two financial institutions
located in the Chicago, Illinois area. Accounts at these institutions are
insured by the Federal Deposit Insurance Corporation up to $100,000. There
were no uninsured balances at December 31, 2003.
Property
Property is recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the related
assets, which approximate three years. Major renewals and betterments are
capitalized, while repairs and maintenance are charged to operations as
incurred. Upon sale or retirement, the cost and accumulated depreciation
is removed from the accounts and the related gain or loss is reflected in
operations.
Deferred offering costs
The Company has incurred costs in connection with raising additional
capital through the sale of its common stock. These costs have been
capitalized and will be charged against additional paid-in capital should
common stock be issued. If there is no issuance of common stock, the costs
incurred will be charged to operations.
Valuation of long-lived assets
In accordance with SFAS No. 144, the Company evaluates the carrying value
of long-lived assets to be held and used whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable.
The carrying value of a long-lived asset is considered impaired when the
projected undiscounted future cash flows are less than its carrying value.
The Company measures impairment based on the amount by which the carrying
value exceeds the fair market value. Fair market value is determined
primarily using the projected future cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair market
values are reduced for the cost to dispose.
-42-
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Cont'd
DECEMBER 31, 2003, 2002 AND 2001
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
Revenue recognition
Revenues are recorded when earned (i.e., at the time services are
provided). Deferred revenue consists of amounts collected for services to
be provided in future periods of one year or less.
Income taxes
Deferred income tax assets and liabilities arise from temporary
differences associated with differences between the financial statement
and tax basis of assets and liabilities, as measured by the enacted tax
rates which are expected to be in effect when these differences reverse.
Deferred tax assets and liabilities are classified as current or
non-current, depending on the classification of the assets or liabilities
to which they relate. Deferred tax assets and liabilities not related to
an asset or liability are classified as current or non-current depending
on the periods in which the temporary differences are expected to reverse.
The temporary differences between assets and liabilities for financial
statement and tax return purposes are set forth in Note H.
Stock-based compensation costs
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS" or "Statement") No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure", which amends SFAS No.
123, "Accounting for Stock-Based Compensation". SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation, which
was originally provided under SFAS No. 123. The Statement also improves
the timeliness of disclosure by requiring the information be included in
interim, as well as annual, financial statements. The adoption of these
disclosure provisions did not have a material effect on the Company's
financial statements.
SFAS No. 123 encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the market price
of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. The option price of all the
Company's stock options is at least equal to the market value of the stock
at the grant date. As such, no compensation expense is recorded in the
accompanying financial statements. For purposes of pro-forma disclosure,
the Company believes there would not have been any additional stock-based
compensation expense to disclose had the fair value recognition provision
of SFAS No. 123 been applied.
Earnings per share
Basic net (loss) income per share is determined by dividing net (loss)
income by the weighted average number of common shares outstanding. There
were no dilutive potential common shares for all periods presented in the
accompanying statements of operations.
-43-
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Cont'd
DECEMBER 31, 2003, 2002 AND 2001
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
New accounting pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations", and No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 141 applies to all business combinations with
a closing date after June 30, 2001. SFAS No. 141 also further clarifies
the criteria for recognition of intangible assets separately from
goodwill. There was no material effect to the Company's financial
statements upon adoption of SFAS No. 141. SFAS No. 142 addresses the
recognition and measurement of goodwill and other intangible assets
subsequent to a business combination. The Company adopted this standard
effective January 1, 2002 and it did not have a material effect on the
Company's financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which requires companies to record a liability at
fair value for asset retirement obligations for the period in which they
are incurred. The associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset. The Company adopted
this standard effective January 1, 2003 and it did not have a material
effect on the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supercedes SFAS
No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" and replaces the accounting
and reporting provisions of APB Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", as it relates to the disposal of a segment of business.
SFAS No. 144 requires the use of a single accounting model for long-lived
assets to be disposed of by sale. SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 for recognition and measurement of the
impairment of long-lived assets to be held and used and measurement of
long-lived assets to be disposed of by sale. The Company adopted this
standard effective January 1, 2002 and it did not have a material effect
on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
associated with Exit or Disposal Activities", which is effective for exit
or disposal activities initiated after December 31, 2002. SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. The Company adopted this standard on January
1, 2003 and it did not have a material effect on the Company's financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This Interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain issued
guarantees. Under the provision of FIN 45, at the time a guarantee is
issued, the Company will recognize a liability for the fair value or
market value of the obligation it assumes. The initial measurement and
recognition provisions of this interpretation are applicable on a
prospective basis for guarantees issued or modified after December 31,
2002, and the disclosure requirements of this Interpretation are effective
for interim or annual financial statements issued after December 15, 2002.
The Company adopted FIN 45 as required and it did not have a material
effect on the Company's financial statements.
-44-
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Cont'd
DECEMBER 31, 2003, 2002 AND 2001
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and
the effect of the method used on reported results. The transition guidance
and annual disclosure provisions of SFAS No. 148 are effective for the
Company's fiscal year ended December 31, 2003. The Company continues to
account for stock-based compensation using the intrinsic value method in
accordance with the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees", as allowed by SFAS No. 123. The adoption of
SFAS No. 148 did not have any impact on the Company's financial
statements.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" was issued in April 2003 and its effective for all
derivative contracts entered into or modified after June 30, 2003. The
Company has had no derivative contracts since its inception. This standard
is not expected to have a material effect on the Company's financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity", which changes the accounting for certain financial instruments
that, under previous guidance, could be classified as equity, by now
requiring those instruments to be classified as liabilities (or assets in
some circumstances) in the statement of financial position. Further, SFAS
No. 150 requires disclosure regarding the terms of those instruments and
settlement alternatives. The guidance in SFAS No. 150 is generally
effective for all financial instruments entered into or modified after May
31, 2003, and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted SFAS No. 150 in
the second quarter of 2003. The adoption of SFAS No. 150 did not have a
material impact on the Company's financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities" and in December 2003, a revised interpretation was
issued (FIN No. 46, as revised) which addresses consolidation by business
enterprises of variable interest entities that have certain
characteristics. In general, FIN No. 46, as revised, requires a variable
interest entity to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entity's
activities or is entitled to receive a majority of the entity's residual
returns or both. An entity that meets this definition is considered the
"primary beneficiary". FIN No. 46, as revised, requires disclosures about
variable interest entities by the primary beneficiary and an enterprise
that holds significant variable interests in a variable interest entity
but is not the primary beneficiary. FIN No. 46, as revised, provides for
exceptions to the scope of this interpretation including transfers to
qualifying special purpose entities subject to the reporting of SFAS No.
140, which would not be consolidated. FIN No. 46, as revised, applies
immediately to variable interest entities created after January 31, 2003
and to variable interest entities in which an enterprise obtains an
interest after January 31, 2003. FIN No. 46, as revised, applies in the
first fiscal year, or interim period, beginning after December 15, 2003 to
variable interests entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. This statement did not
have a material impact on the Company's financial statements.
-45-
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Cont'd
DECEMBER 31, 2003, 2002 AND 2001
NOTE A: THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE B: CUSTOMER LIST
In April 2001, the Company purchased the right, title and interest in a
current base of subscribers, including service agreements, from
Avenew.com, Inc., a related party (also see Note J). An
officer/shareholder of Avenew.com, Inc. is also the founding shareholder
and an officer of the Company. Under the terms of the agreement, the
Company assumed the obligation to provide Internet access services to the
above cited subscribers for contract periods already paid for by the
subscribers. The remaining contract periods ranged from less than one
month to one year. The obligation for future services to be provided for
these contract periods amounted to $148,907. As additional consideration
for the customer list, the Company was also required to pay Avenew.com for
the cash received from the customer base for services during the six month
period following the acquisition, which amounted to $112,409. The total
consideration for the customer list amounted to $261,316, and is being
amortized on a straight-line basis over a thirty-six month period.
At the time of the purchase, the Company's president and chief executive
officer owned 100% of the outstanding common stock of LightFirst Inc. and
23% (on a fully diluted basis) of the outstanding common stock of
Avenew.com, Inc. Such stock holdings made the Company's president and
chief executive officer the controlling shareholder of both companies at
the date of the above-cited transaction.
NOTE C: DUE FROM/TO OFFICER/SHAREHOLDER
The Company has an amount due to an officer/shareholder of $1,681 at
December 31, 2003 and an amount due from an officer/shareholder of $16,917
at December 31, 2002. The amounts bear interest at a rate of 6%. The
amount due from an officer/shareholder was collected during 2003.
NOTE D: LINE OF CREDIT PAYABLE TO SHAREHOLDER
The Company has a line of credit arrangement available with a shareholder
of the Company, which provides for interest at a rate of 9%. The
arrangement provides for borrowings of up to $1,500,000 through its
expiration date of December 31, 2004. The arrangement is secured by all
assets of the Company. At December 31, 2003 and 2002, there was $1,264,987
and $69,000, respectively, outstanding under this arrangement.
-46-
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Cont'd
DECEMBER 31, 2003, 2002 AND 2001
NOTE E: ACCRUED PAYROLL
The Company has entered into written agreements with several employees,
whereby the employees have agreed to defer receiving certain amounts of
compensation. Such compensation will be payable at the earlier of ten days
following the successful completion and closing of the Company's initial
public offering (see Note N) or January 2, 2005. The total accrued payroll
related to these agreements amounted to approximately $703,000 and
$450,000 at December 31, 2003 and 2002, respectively.
NOTE F: ACCRUED PAYROLL TAXES AND RELATED PENALTIES
The Company has a liability for payroll taxes not remitted to various
Federal and State taxing authorities, amounting to approximately $753,000
and $539,000 at December 31, 2003 and 2002, respectively. In addition, the
Company has recorded a liability of approximately $399,000 and $221,000
for the estimated tax penalties associated with the non-payment of the
above-cited payroll taxes at December 31, 2003 and 2002, respectively.
NOTE G: NOTES PAYABLE TO SHAREHOLDER
The Company has two notes payable to a shareholder in the amounts of
$200,000 and $420,000. The notes were originally due in February 2003 and
April 2003, respectively; however, during 2003 the due dates for each note
were extended until the earlier of the successful completion of the
Company's initial public offering or January 1, 2005. The notes bear
interest at a rate of 10%. Principal and interest for both notes are due in
full on January 1, 2005. Principal plus accrued interest on these notes
approximated $708,000 and $641,000 at December 31, 2003 and 2002,
respectively. These notes are secured by certain real property owned by the
majority shareholder as well as his personal guarantee. In addition, the
$420,000 note described above is also secured by certain real property
owned by another shareholder of the Company as well as this shareholder's
personal guarantee.
NOTE H: INCOME TAXES
Deferred taxes resulting from temporary differences are as follows:
Asset
----------------------------
December 31,
----------------------------
2003 2002
---------- ----------
Net operating loss carryforward $1,260,000 $ 753,700
Deferred compensation 210,000 135,000
Customer list 51,000 30,500
---------- ----------
1,521,000 919,200
Less valuation allowance 1,521,000 919,200
---------- ----------
$ -- $ --
========== ==========
-47-
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Cont'd
DECEMBER 31, 2003, 2002 AND 2001
NOTE H: INCOME TAXES, Cont'd
As of December 31, 2003, the Company has a net operating loss carryforward
for tax purposes of approximately $3,750,000. This loss carryforward may
be used to offset future taxable income and expires at various dates
through 2023.
Because of the uncertainty surrounding the future utilization of the net
operating loss carryforward, future deferred compensation deductions and
the tax deductions associated with the customer list, the Company has
recorded a valuation allowance of $1,521,000 and $919,200 at December 31,
2003 and 2002, respectively, to completely offset the deferred tax asset
which may have otherwise been recorded.
NOTE I: COMMON STOCK AGREEMENTS
The Company had common stock agreements to sell and issue a total of
1,200,000 shares of the Company's common stock for an aggregate price of
$1,200,000. At December 31, 2001, a total of 691,800 shares of stock had
been issued in exchange for $544,800 of marketable securities and $147,000
of cash. The additional 508,200 shares of stock were issued in July 2002
upon receipt of $508,200 of cash.
NOTE J: AVENEW.COM AGREEMENT
The Company had an agreement with Avenew.com whereby Avenew.com provided
customer support, billing management, and software development services to
the Company for a charge of $1.50 per customer per month, with a minimum
charge of $22,000 per month. This agreement expired in May 2002. In
connection with this agreement, the Company incurred expenses of
approximately $110,000 and $163,000 for the year ended December 31, 2002
and for the period from April 11, 2001 (date of inception) through
December 31, 2001, respectively. Subsequent to the expiration of this
agreement, the Company began performing these services.
NOTE K: NETWORK SERVICES AND CO-LOCATION AGREEMENTS
In September 2003, the Company entered into an agreement with a service
provider for co-location services. This agreement provides for monthly
payments of $8,300, through its expiration in September 2004.
In November 2003, the Company entered into an agreement with a service
provider to purchase telecommunication services for the interconnection of
the Company's end users with the internet and to have access to Internet
bandwidth. This agreement provides for monthly payments of approximately
$25,000 through its expiration in October 2008.
-48-
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Cont'd
DECEMBER 31, 2003, 2002 AND 2001
NOTE K: NETWORK SERVICES AND CO-LOCATION AGREEMENTS, Cont'd
In January 2002, the Company entered into agreements with two service
providers to purchase telecommunication services for the interconnection
of the Company's end users with the internet, rent space to house
telecommunications equipment, and have access to Internet bandwidth. These
agreements provided for aggregate monthly payments of approximately
$31,000, depending on usage. These agreements expired in December 2003.
Prior to January 2002, the Company obtained services similar to those
cited above from a different service provider under agreements which were
terminated effective December 31, 2001.
The total cost of these agreements amounted to approximately $501,000 and
$342,000 for the years ended December 31, 2003 and 2002, respectively and
approximately $223,000 for the period from April 11, 2001 (date of
inception) through December 31, 2001. These costs have been included in
the accompanying statements of operations as cost of revenues.
NOTE L: COMMITMENTS
Lease agreements
The Company entered into a month to month lease agreement in May 2003 for
its operating facilities which requires monthly payments of $13,421. The
Company was previously committed under a sublease agreement for the same
space which required monthly payments of $11,929 through July 2003. During
September 2003, the Company settled a claim against it for disputed rent
in connection with this sub-lease agreement. As a result of the
settlement, the Company was able to extinguish approximately $50,000 of
previously recorded rent. Accordingly, the Company has recorded a
reduction of their rent expense in the accompanying statement of
operations for the year ended December 31, 2003. Total rent expense, net
of this reduction, amounted to $116,611 and $79,659 for the years ended
December 31, 2003 and 2002, respectively and $26,233 from the period April
11, 2001 (date of inception) through December 31, 2001.
Employment agreement
The Company entered into an employment agreement with its majority
shareholder, effective January 1, 2003, to serve as the President and
Chief Executive Office of the Company. The agreement covers a three year
period (unless terminated earlier in accordance with terms provided in the
agreement) and provides for an annual base salary of $1.00 plus bonuses
for the achievement of certain subscriber acquisition goals.
-49-
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Cont'd
DECEMBER 31, 2003, 2002 AND 2001
NOTE M: STOCK OPTION PLAN
On January 5, 2002, the Company's Board of Directors approved the
LightFirst Inc. 2002 Stock Option Plan (the "Plan"). The Plan is designed
to attract and retain key employees, directors, or consultants of the
Company and to encourage them to contribute to the Company's success by
providing the opportunity for stock ownership. The Plan provides for
annual grants of incentive stock options and non-statutory stock options
to key employees, directors and consultants of the Company to purchase up
to 10% of the outstanding common stock of the Company as of January 1st of
each year. In addition, until the Plan terminates, there shall also be
available for the grant of options pursuant to the Plan a total of 250,000
shares of common stock. The Plan is administered by a Stock Option
Committee, which is authorized to determine the recipients of options, the
type of options granted, the number of shares subject to each option, the
term of each option, exercise prices and other option features. The
exercise price for incentive stock options granted under the Plan shall
not be less than 100% of the fair market value of the shares subject to
the option. The option price for non-qualified stock options granted under
the Plan shall not be less than 85% of the fair market value (determined
as of the day the option is granted). Stock option grants will have a
contractual life of no more than ten years from the grant date and are
subject to early termination as provided for in the Plan.
On January 5, 2002, the Company granted non-qualified stock options to
purchase 88,750 shares of the Company's common stock. The awards had
exercise dates of January 5, 2003 (covering 59,500 shares) and January 5,
2004 (covering 29,250 shares). The expiration date for the exercise of all
of the above-cited awards is January 5, 2007. The exercise price for the
shares subject to options of the Company's common stock is at least equal
to the fair market value on the date of the grant.
Information relating to stock options outstanding is as follows:
Exercise
Number price per
of shares share
---------- ----------
Shares under option at January 1, 2002 -- $ --
Granted on January 5, 2002 88,750 2.50
Exercised -- --
---------- ----------
Shares under option at December 31, 2002 88,750 2.50
Granted -- --
Exercised -- --
---------- ----------
Shares under option at December 31, 2003 88,750 $ 2.50
========== ==========
-50-
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Cont'd
DECEMBER 31, 2003, 2002 AND 2001
NOTE N: GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLANS
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business as a going concern. As
discussed in Note A, the Company has been in the development stage since
its inception on April 11, 2001.
The Company has a limited operating history and its future prospects are
subject to the risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for Internet based
products and services. These risks include the failure to develop and
protect the Company's online brands, the failure of vendors and
third-party providers to supply hardware and software products and
services, systems and online security failure, the rejection of the
Company's services by Internet consumers, vendors and advertisers, the
inability of the Company to maintain and increase their customer base in
levels sufficient to generate profitable operations, as well as other
risks and uncertainties. The success of the Company also depends on the
continued growth of the Internet as a viable commercial marketplace.
In February 2004, a Registration Statement filed on Form S-1 with the
Securities and Exchange Commission ("SEC") was approved. The purpose of
this filing is to give the Company the ability to go to the public markets
for additional equity capital. There are no assurances that shares of
common stock will be sold in connection with the Registration Statement.
In the event the Company is not able to raise additional equity capital or
obtain additional amounts of debt financing, there is uncertainty as to
the Company's ability to continue as a going concern.
Management is currently devoting substantial efforts to sell its common
shares in connection with its Initial Public Offering. Should the public
offering be consummated, management believes the Company will be better
able to execute its business plan and begin their revenue producing
activities related to electronic bill presentation and related services.
NOTE O: SUBSEQUENT EVENT
In March 2004, the borrowings available under the line of credit
arrangement described in Note D were increased from $1,500,000 to
$3,000,000 and the maturity date was extended until January 1, 2005. The
maturity of the credit line is subject to acceleration upon the occurrence
of certain acceleration events, including the successful completion of a
public offering of securities by the Company. All other terms and
conditions of the arrangement remained the same as described in Note D.
Management believes that the shareholder cited in Note D will be able to
fund requested draws by the Company on this line of credit arrangement up
to the maximum available amount.
-51-
LIGHTFIRST, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS, Cont'd
DECEMBER 31, 2003, 2002 AND 2001
NOTE P: QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company's unaudited quarterly results for the years ended December 31,
2003 and 2002 were as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------- ----------- ----------- ----------- -----------
2003
Revenues $ 124,664 $ 122,506 $ 120,800 $ 118,190 $ 486,160
=========== =========== =========== =========== ===========
Gross profit (loss) $ (1,152) $ 14,179 $ 14,929 $ (43,261) $ (15,305)
=========== =========== =========== =========== ===========
Loss from operations $ (527,049) $ (725,702) $ (365,267) $ (548,621) $(2,166,639)
=========== =========== =========== =========== ===========
Net loss $ (547,841) $ (756,175) $ (401,196) $ (592,878) $(2,298,090)
=========== =========== =========== =========== ===========
Net loss per share - basic and diluted $ (0.09) $ (0.09) $ (0.09) $ (0.09) $ (0.36)
=========== =========== =========== =========== ===========
2002
Revenues $ 102,680 $ 90,500 $ 108,116 $ 119,000 $ 420,296
=========== =========== =========== =========== ===========
Gross profit $ 26,558 $ 33,768 $ 4,264 $ 14,173 $ 78,763
=========== =========== =========== =========== ===========
Loss from operations $ (564,739) $ (523,247) $ (574,700) $ (782,102) $(2,444,788)
=========== =========== =========== =========== ===========
Net loss $ (571,255) $ (523,247) $ (582,122) $ (795,846) $(2,472,470)
=========== =========== =========== =========== ===========
Net loss per share - basic and diluted $ (0.10) $ (0.09) $ (0.09) $ (0.12) $ (0.40)
=========== =========== =========== =========== ===========
-52-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants in fiscal
year 2003.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is
defined under Exchange Act Rule 13a-14(c), that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and
procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. We have carried out an evaluation, within the
90 days prior to the date of filing of this report, under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures. Based upon his evaluation and
subject to the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that there were no significant deficiencies or material
weaknesses in the our disclosure controls and procedures and therefore there
were no corrective actions taken.
There have been no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date we completed our evaluation.
As described in the Company's registration statement on Form S-1,
declared effective by the Commission on February 13, 2004, and elsewhere in
this annual report, the company currently has one director, Mr. Martin P.
Gilmore. The Company has nominated three independent persons for membership on
the board of directors, each of whom has agreed to serve on the board of
directors upon the completion of the Company's initial public offering. As
such, the company's sole director, who is also the Company's Chief Executive
Officer and Chief Financial Officer, currently oversees disclosure controls and
procedures, which will, upon the completion of the offering, become the
responsibility of the audit committee.
-53-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information about our directors,
director nominees, executive officers and significant employees as of the date
of this annual report.
Name Age Position
- ---- --- --------
Martin P. Gilmore 49 Chairman of the Board, President, Chief
Executive Officer, Chief Financial
Officer, and Director
Dr. Bin Yang 47 Vice President, System Engineering
Lawrence Kinsella 43 Vice President, Sales
Raymond Gavala 44 Vice President, Software Development
John Rehayem 51 Director Nominee
Stephen Kennedy 60 Director Nominee
Thomas Wheeler 51 Director Nominee
MANAGEMENT
Martin P. Gilmore. Mr. Gilmore is our chairman of the board, president, chief
executive officer, and chief financial officer. Mr. Gilmore has served as a
director of our company since April 2001. In addition, Mr. Gilmore is our
founder and is currently the sole member of our board of directors. In 1994,
Mr. Gilmore founded Avenew.com, Inc., a provider of dedicated Internet access
services. Mr. Gilmore served as the chief executive officer of Avenew.com, Inc.
until 2002, when that company was liquidated under Chapter 7 of the U.S.
Bankruptcy Code. In 1984, Mr. Gilmore founded MicroRepair and grew it into a
leading independent PC service company. Mr. Gilmore sold MicroRepair in 1994.
Dr. Bin Yang. Dr. Yang is our vice president, system engineering. Dr. Yang
joined us in April 2001, and he has more than 18 years of experience with
computer technologies. From 1995 to 2001, Dr. Yang was vice president, Internet
technologies for Avenew.com, Inc. From 1994 to 1995, Dr. Yang was head of
programming at SoftCom Systems, an Internet service provider. From 1993 to
1994, Dr. Yang was a software developer at the Panasonic/Matsushita Industrial
Equipment Research Laboratory in Franklin Park, Illinois. From 1988 to 1993 Dr.
Yang pursued doctoral studies in the U.S. and was awarded a research fellowship
at the University of Illinois, where he also served as a systems consultant for
campus mainframe and PC systems. From 1982 to 1988, Dr. Yang served in the
Institute of Atomic Energy, Beijing, China, as a software designer and
developer. Dr. Yang holds a Ph.D. in Computer Science from the University of
Illinois, Chicago.
Lawrence Kinsella. Mr. Kinsella serves as our vice president, sales, joining us
in April 2001. From 1998 to 2001, he held the position of vice president of
sales for La-Z-Boy Furniture Galleries. His main responsibilities included all
oversight of all sales functions and marketing efforts of the organization.
Before joining La-Z-Boy, Mr. Kinsella was a general manager for Computer City,
a large retail chain, subsequently purchased by Comp USA, specializing in the
-54-
sale of personal computers and related items. Before working for Computer City,
Mr. Kinsella owned and operated a retail floor- and wall-covering business with
two locations.
Raymond Gavala. Mr. Gavala serves as our vice president, software development,
joining us in April 2001. From 1996 until March 2001, he was employed by
Avenew.com, Inc., a provider of dial-up and dedicated Internet access services,
where he held several successive positions of increasing responsibility over
the course of his employment, ending with the position of programming manager.
Prior to Avenew.com, Inc., Mr. Gavala was employed as a programmer with the
Advanced Computing Group, a firm specializing in the development of custom
software applications for businesses. Mr. Gavala holds a B.S. in Computer
Science from Youngstown State University.
BOARD OF DIRECTORS
Martin P. Gilmore. Mr. Gilmore is currently our sole director and has served as
such since our inception. Further information about Mr. Gilmore is set forth
above under "Management."
John Rehayem. Mr. Rehayem is a director nominee and has agreed to serve as a
director, upon the completion of our initial public offering, until our next
annual meeting of stockholders or until his successor is duly elected and
qualified, whichever occurs later. Since 2001, he has served as chairman of the
board of InterCAPABLE, a not-for-profit charitable organization dedicated to
developing technologies to help disabled individuals, including the blind and
visually impaired, to access the Internet. Prior to founding InterCAPABLE in
2001, Mr. Rehayem worked at Motorola, Inc., most recently as senior director of
merchant ventures, after holding the positions of director of consumer
e-commerce and director of strategy and business development. Previously, he
served as an executive officer at a number of privately held technology
companies and worked as a program manager at Motorola, Inc. Mr. Rehayem
received a B.S. in computer science from Columbia University in 1976 and an
M.B.A. from Columbia University in 1978.
Stephen Kennedy. Mr. Kennedy is a director nominee and has agreed to serve as a
director, upon the completion of our initial public offering, until our next
annual meeting of stockholders or until his successor is duly elected and
qualified, whichever occurs later. Mr. Kennedy was a founder of Chicago
Capital, Inc., an investment banking firm and broker/dealer, for which he
served as president and chief executive officer since its inception in 1996.
Prior to joining Chicago Capital, he was a senior vice president at Stifel,
Nicolaus & Company, Inc. Previously, he was at The Chicago Corporation, where
he was a vice president in the Bank Equity Services Department. He has also
been an industry arbitrator for the National Association of Securities Dealers.
Mr. Kennedy received a B.A. in economics from the University of Chicago.
Thomas Wheeler. Mr. Wheeler is a director nominee and has agreed to serve as a
director, upon the completion of our initial public offering, until our next
annual meeting of stockholders or until his successor is duly elected and
qualified, whichever occurs later. Mr. Wheeler held the position of president
and chief executive officer of Wormser Apparel Group, a leading manufacturer of
marketer of children's licensed and private label sleepwear, from 2001 to 2003.
Previously, he worked at Hartmarx Corporation, serving as president and chief
operating officer of Biltwell Clothing Company, a division of Hartmarx, for
nine years. Prior to that, Mr. Wheeler held the positions of president and
chief operation officer of two other Hartmarx divisions.
5 -55-
BOARD STRUCTURE AND COMPOSITION
Our board currently consists of a single director, our founder Mr.
Gilmore. Upon the completion of our initial public offering, however, John
Rehayem, Stephen Kennedy and Thomas Wheeler have each agreed to join our board
of directors and serve as directors until our next annual meeting of
stockholders or until their successors are duly elected and qualified,
whichever occurs later.
Upon the completion of our initial public offering, our board of
directors will form an audit committee and a compensation and nominating
committee. The proposed members and functions of these committees are described
below.
AUDIT COMMITTEE
John Rehayem, Stephen Kennedy and Thomas Wheeler have each agreed to
serve on our audit committee upon the completion of our initial public offering,
and Thomas Wheeler has agreed to serve as the chair of the audit committee. We
anticipate that each of our audit committee members will be "independent" for
purposes of the listing standards of any national securities exchange on which
we intend to apply to list our common stock. Our audit committee will serve the
following functions:
- oversee our financial reporting process, compliance with legal and
regulatory requirements, and the independence and performance of our
independent and internal auditors;
- review the audited financial statements with management;
- recommend the appointment of our independent auditors;
- review with our independent auditors the scope and the planning of the
annual audit; and
- review findings and recommendations of our independent auditors and
management's response to the recommendations of our independent auditors.
Our audit committee will operate under a written charter that will be
adopted by our board of directors upon the completion of this offering.
COMPENSATION AND NOMINATING COMMITTEE
John Rehayem, Stephen Kennedy and Thomas Wheeler have each agreed to
serve on our compensation and nominating committee upon the completion of our
initial public offering, and John Rehayem has agreed to serve as the chair of
the compensation and nominating committee. We anticipate that each of our
compensation and nominating committee members will be "independent" for purposes
of the listing standards of any national securities exchange on which we intend
to apply to list our common stock. Our compensation and nominating committee
will serve the following functions:
- determine board organization, select director nominees and set director
compensation;
- review and recommend management compensation;
-56-
- administer our 2002 stock option plan;
- review senior management incentive structure and compensation; and
- review corporate structure and policies with respect to human resource
policies, corporate ethics, and long range planning and strategy.
Our compensation and nominating committee will operate under a written
charter that will be adopted by our board of directors upon the completion of
this offering.
Any stockholder may make recommendations to the compensation and
nominating committee for membership on our board of directors by sending a
written statement of the qualifications of the recommended individual to us.
Recommendations should be sent to the following address: LightFirst Inc.,
Attention: Compensation and Nominating Committee, 25 Northwest Point Boulevard,
Suite 700, Elk Grove Village, Illinois 60007.
CODE OF ETHICS
We have adopted a Code of Ethics for Directors and Officers that
applies to our chief executive officer, our chief financial officer, and all
other officers of the Company. The Code of Ethics for Officers is filed as
Exhibit 14.1 to this annual report.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During the fiscal year ending December 31, 2003, our directors,
officers, and holders of more than 10% of our common stock were not yet subject
to the reporting requirements of Section 16(a), because our registration
statement had not yet been accepted by the Commission. Therefore, there were no
delinquent Section 16(a) filings in 2003.
-57-
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation for services to
us in all capacities since our inception in April 2001 for our chief executive
officer and our four most highly compensated executive officers (other than our
chief executive officer) who were serving as executive officers on December 31,
2003, the last day of our fiscal year ended December 31, 2003 (collectively,
the "named executive officers").
SUMMARY COMPENSATION TABLE
Annual Compensation Long-term Compensation
Other Annual Restricted Securities All Other
Fiscal Compensation Stock Awards Underlying Compensation
Name and Principal Position Year Salary($) Bonus($) ($) ($) Option (#) ($)
MARTIN P. GILMORE 2003 1 -- -- -- -- --
Chairman of the Board, President, 2002 67,533 -- -- -- -- --
Chief Executive Officer 2001 -- -- -- -- -- --
and Chief Financial Officer
RAYMOND GAVALA 2003 85,000 -- -- -- -- --
Vice President, Software Development 2002 150,833 -- -- -- -- --
2001 21,250 -- -- -- -- --
LAWRENCE KINSELLA 2003 110,000 -- 7,200(1) -- -- --
Vice President, Sales 2002 110,000 -- 7,200(1) -- 30,000 --
2001 36,667 -- 1,800(1) -- -- --
THEODORE TVRDIK (2) 2003 72,692 -- -- -- -- --
Vice President, Networking 2002 140,000 -- -- -- -- --
2001 49,583 -- -- -- -- --
DR. BIN YANG 2003 110,000 -- -- -- -- --
Vice President, System Engineering 2002 151,042 -- -- -- -- --
2001 27,500 -- -- -- -- --
- ----------
(1) This amount consists of an automobile allowance.
(2) Mr. Tvrdik left the company in 2003.
-58-
STOCK OPTIONS
OPTION GRANTS IN LAST FISCAL YEAR
We did not grant stock options to any of our named executive officers
during the fiscal year ended December 31, 2003.
FISCAL YEAR-END OPTION VALUES
The following table contains information concerning stock options
which were unexercised at the end of 2003 with respect to the named executive
officers. No stock options were exercised in 2003 by any named executive
officer.
FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SARs at
Fiscal Year-End (#) Fiscal Year-End ($)(1)
--------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- --------------- ---------------- --------------- ----------------
MARTIN P. GILMORE N/A N/A N/A N/A
RAYMOND GAVALA N/A N/A N/A N/A
LAWRENCE KINSELLA 20,000 10,000 $150,000 $75,000
THEODORE TVRDIK (2) N/A N/A N/A N/A
DR. BIN YANG N/A N/A N/A N/A
- --------------
(1) There was no public trading market for our common stock as of December 31,
2003. Accordingly, the values set forth below have been calculated based
on an initial offering price of $10.00 per share of our common stock, less
the per share exercise price, multiplied by the number of shares
underlying the options.
(2) Mr. Tvrdik left the company in 2003.
DIRECTOR COMPENSATION
We will compensate each of our non-employee directors $20,000 per year
for serving on our board of directors. In addition, we will compensate each of
our non-employee directors $400 per meeting for attending board and committee
meetings, and we will reimburse all directors for reasonable expenses incurred
in connection with attending board and committee meetings. We will make an
annual grant of an option to purchase our common stock to each non-employee
director. The grant will consist of an option to purchase a specified number of
shares under our 2002 Stock Option Plan or then effective incentive plan. There
were no non-employee directors and no options were granted in 2003. For 2004,
the grant will consist of an option to purchase 12,000 shares. We do not
compensate employee-directors for their service on the board of directors.
-59-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the anticipated members of the compensation and nominating
committee is or has been an employee of ours at any time since our formation.
None of our executive officers serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation and nominating
committee.
EMPLOYMENT AGREEMENTS
Martin P. Gilmore entered into a three-year employment agreement with
us, which became effective as of January 1, 2003. Pursuant to this agreement,
Mr. Gilmore receives a base salary of $1 per year for serving as our president
and chief executive officer. In addition, Mr. Gilmore is eligible to receive a
quarterly bonus for achieving certain subscriber acquisition goals as set forth
in the employment agreement. The bonus for a particular quarter will be
calculated by multiplying the number of subscribers acquired during such
quarter by $0.50. If, however, the number of acquired subscribers for the
quarter meets or exceeds the goal, the bonus for that quarter will be $1.00 per
acquired subscriber.
We may terminate Mr. Gilmore's employment at any time, with or without
cause, and Mr. Gilmore may terminate his employment at any time upon giving
written notice of his resignation to us at least 60 days before the date of
such resignation. If Mr. Gilmore's employment with us is terminated by us
without cause, or due to his resignation for good reason, then Mr. Gilmore will
be entitled to receive his base salary through the date of termination; plus a
lump-sum cash calculated by multiplying the annual subscriber goal for a
twelve-quarter period by $1.00 and then subtracting the sum of all bonuses paid
to Mr. Gilmore between January 1, 2003 and the date of termination. In
addition, Mr. Gilmore would be eligible to continue his participation in our
health and other insurance benefit programs through the one-year anniversary of
the date of termination.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents information regarding the beneficial
ownership of our common stock as of December 31, 2003 of each of the following:
o each person who beneficially owns more than 5% of our common stock;
o each of our directors, director nominees and named officers; and
o all current executive officers and directors as a group.
Beneficial ownership is determined under the rules of the Securities
and Exchange Commission. These rules deem common stock subject to options
currently exercisable, or exercisable within 60 days, to be outstanding for
purposes of computing the percentage ownership of the person holding the
options or of a group of which the person is a member, but these rules do not
deem the stock to be outstanding for purposes of computing the percentage
ownership of any other person or group.
-60-
To our knowledge, the persons named in the table have sole voting and
sole investment control with regard to all shares beneficially owned. The
applicable percentage ownership for each stockholder before the offering is
based on 6,406,000 shares of our common stock outstanding as of the date of
this annual report.
Each person named in the table can be contacted at our principal
business address, which is 25 Northwest Point Boulevard, Suite 700, Elk Grove
Village, Illinois 60007.
Number of
Shares Percentage of
Beneficially Outstanding
Name Owned Shares
5% HOLDERS:
Richard R. Gritzke 660,000 10.3 %
Robert L. Gritzke 600,000 9.4 %
DIRECTORS, DIRECTOR NOMINEES AND NAMED
OFFICERS:
Martin P. Gilmore 4,121,250 64.5 %
John Rehayem 18,750 *
Steven Kennedy * *
Thomas Wheeler * *
Dr. Bin Yang 50,000 *
Lawrence Kinsella 30,000 *
Raymond Gavala 50,000 *
Executive officers and directors as a
group (7 persons) 4,270,000 66.9 %
- --------
* Less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTY TRANSACTIONS
We borrowed $620,000 from Richard R. Gritzke, a holder of our common
stock, pursuant to (1) a promissory note for $420,000 between Mr. Gritzke and
us, dated July 15, 2002, as amended, and (2) a promissory note for $200,000
between Mr. Gritzke and us, dated November 2, 2002, as amended. Each of these
promissory note bears interest at the rate of 10%, is due on January 2, 2005,
and is secured by a lien on the personal assets of our president and chief
executive officer, Martin P. Gilmore. In addition, the July 2002 promissory
note is personally guaranteed by Mr. Gilmore and Robert L. Gritzke, such that
they have each promised to repay the loan represented by the July 2002
promissory note if we do not repay the loan or otherwise are in default under
the promissory note.
As of December 31, 2003, we have borrowed $1,264,987 from Robert L.
Gritzke, a holder of our common stock, pursuant to the Revolving Line of Credit
Loan Agreement between Mr. Gritzke and us, dated December 12, 2002, and amended
on March 15, 2003 and again on March 1, 2004. Under the terms of this revolving
credit facility, which we use to partially satisfy
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our short-term needs for working capital, we may borrow up to $3,000,000 at an
interest rate of 9%. The revolving line of credit facility has a maturity date
of January 1, 2005, at which time the entire outstanding principal balance
under the revolving credit facility is due. We are permitted to prepay
principal at any time without penalty. Interest on amounts outstanding under
the revolving credit facility is due quarterly and is payable on the first day
of the fiscal quarter. In October 2003, Mr. Gritzke executed a waiver that
permits us to delay payment of all interest due until the maturity date of the
loan. The revolving credit facility contains customary default provisions.
These default provisions include our failure to make principal and interest
payments when due, except as otherwise waived, as well as our filing for credit
under insolvency laws. If a default provision is triggered, all amounts of
principal and interest then outstanding become immediately due. The revolving
credit facility is secured by a blanket lien on all of our assets.
We entered into registration agreements with each of Richard R.
Gritzke and Robert L. Gritzke on May 1, 2001 in connection with their
respective purchases of shares of our common stock. Pursuant to these
registration agreements, Messrs. Gritzke and Gritzke have the right to require
us to name them as selling securityholders with respect to all their shares of
common stock. Messrs. Gritzke and Gritzke have not elected to exercise such
registration rights in connection with our initial public offering.
In April 2001 we purchased Internet service subscriber accounts from
Avenew.com, Inc., a related party. Martin P. Gilmore, our president and chief
executive officer, was also the president and chief executive officer of
Avenew.com, Inc. at the time of the purchase. In addition, at the time of the
purchase, Mr. Gilmore owned all of our outstanding common stock and
approximately 23% of the outstanding common stock of Avenew.com, Inc. Such
stock holdings made Mr. Gilmore the controlling stockholder of both companies.
Furthermore, at the time of the purchase, Mr. Gilmore was the sole member of
the board of directors of each company. Under the terms of the purchase, we
agreed to assume the obligation to provide Internet service to the customer
base for the remainder of their prepaid contract period. The remaining contract
periods ranged from less than one month to one year. The cost of the acquired
customer list, as reflected in the accompanying balance sheet in the Index to
Financial Statements section of this prospectus, represented the total of the
deferred revenue at the original acquisition date along with the revenue
generated by the customer base during the first six months following the
purchase date. The customer list cost us $261,316 and is being amortized on a
straight-line basis over a thirty-six month period from the respective date of
acquisition.
In May 2001, we entered into an agreement with Avenew.com, Inc.
whereby Avenew.com, Inc. agreed to provide certain services to us and we agreed
to pay Avenew.com for such services. The services provided by Avenew.com were
broken up into three blocks: customer support services, billing services, and
software development services. For customer support services, the agreement
provided for us to pay Avenew.com the greater of $11,000 per month or the
product of $1.50 and the total number of our subscribers. In addition, for
billing services, the agreement provided for us to pay Avenew.com the greater
of $11,000 per month or the product of $1.50 and the total number of our
subscribers. The agreement further provided for us to pay $95.00 per hour, as
invoiced, to Avenew.com for software development services. Pursuant to the
billing services block of the agreement, Avenew.com collected funds from our
subscribers on our behalf and transferred the funds to us on a monthly basis.
The agreement concluded on May 31, 2002.
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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
AUDIT FEES
Fees for the quarterly reviews for the first three quarters of the
fiscal year 2003 total an amount of $8,500, of which all was paid to Mengel
Metzger Barr & Company LLP, as of March 5, 2004. Fees for the review of the
final quarter of 2003 and for the audit of fiscal year 2003 equal an amount of
$12,500, which has not yet been paid to Mengel Metzger Barr & Company LLP.
Fees for the fiscal year 2002 audit and quarterly reviews aggregated
$10,000, of which all has been paid.
AUDIT-RELATED FEES
Aggregate fees billed for all other services for fiscal year 2003 and
2002 were $0.
TAX FEES
Aggregated fees not yet billed or paid for tax services for fiscal
year 2003 will be $700.
Aggregated fees billed and paid for tax services for fiscal year 2002
were $0.
OTHER FEES
Fees for accounting services related to preparation of the
Company's registration statement on Form S-1 were $10,930, all of which has
been paid as of March 5, 2004. Invoices for approximately $3,000.00 in fees for
other services relating to fiscal year 2003 were received in March 2004; these
fees have not yet been paid.
No fees were billed or paid for fiscal year 2002 relating to other
services.
AUDIT COMMITTEE'S PRE-APPROVAL POLICIES AND PROCEDURES
As described in the Company's registration statement on Form S-1,
declared effective by the Commission on February 13, 2004, and elsewhere in
this annual report, the company currently has one director, Mr. Martin P.
Gilmore, who is also the Company's Chief Executive Officer and Chief Financial
Officer. As such, the engagement of Mengel Metzger Barr & Co., LLP to provide
audit services was approved by consent of the Company's sole director. In
addition, the engagement of Mengel Metzger Barr & Co. LLP to provide tax
services for fiscal year 2003 was also approved by the Company's sole director.
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this annual report:
(1) Financial Statements:
The following statements can be found in the independent
auditor's report, which is found on pages 33-52 of this
annual report:
Balance Sheets
Statements of Operations
Statements of Shareholders' Deficiency
Statements of Cash Flows
Notes to Financial Statements
(2) There are no financial statement schedules filed herewith.
(b) The company has not been required to file a Form 8-K, as it has
not experienced any material changes that have affected its usual way of doing
business, or that would otherwise significantly affect its ability to conduct
business in the future. Furthermore, the company has not experienced any
changes that materially alter its current financial condition, or that would
reasonably be expected to influence its future financial condition.
(c) The following exhibits are filed as part of this annual report on
Form 10-K:
EXHIBITS DESCRIPTION
+3.1 Certificate of Incorporation of the Registrant (Filed as
Exhibit 3.1 to the Company's Registration Statement [File No.
333-107769] on Form S-1 and incorporated herein by reference.)
+3.2 Bylaws of the Registrant (Filed as Exhibit 3.2 to the
Company's Registration Statement [File No. 333-107769] on
Form S-1 and incorporated herein by reference.)
+10.1 Employment Agreement between the Registrant and Martin P.
Gilmore (Filed as Exhibit 10.1 to the Company's Registration
Statement [File No. 333-107769] on Form S-1 and incorporated
herein by reference.)
+10.2 2002 Stock Option Plan of the Registrant (Filed as Exhibit
10.2 to the Company's Registration Statement [File No.
333-107769] on Form S-1 and incorporated herein by
reference.)
+10.3 Promissory Note made by Registrant in favor of Richard R.
Gritzke on July 15, 2002 and Modifications and Extensions
thereof (Filed as Exhibit 10.3 to the Company's Registration
Statement [File No. 333-107769] on Form
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S-1 and incorporated herein by reference.)
+10.4 Promissory Note made by Registrant in favor of Richard R.
Gritzke on November 2, 2002 and Modifications and Extensions
thereof (Filed as Exhibit 10. 4 to the Company's Registration
Statement [File No. 333-107769] on Form S-1 and incorporated
herein by reference.)
+10.5 Revolving Line of Credit Loan Agreement, Secured Promissory
Note and Security Agreement between the Registrant and Robert
L. Gritzke, dated December 12, 2002, Modification and
Extension thereof and Waiver (Filed as Exhibit 10.5 to the
Company's Registration Statement [File No. 333-107769] on
Form S-1 and incorporated herein by reference.)
*10.6 Modification and Extension of Promissory Notes, as amended,
made on July 15, 2002 and November 2, 2002 by Registrant in
favor of Richard R. Gritzke, dated January 4, 2004
*10.7 Modification and Extension of Revolving Line of Credit Loan
Agreement, Secured Promissory Note and Security Agreement
dated December 12, 2002, as amended, between Registrant and
Robert L. Gritzke, dated March 1, 2004
+10.8 First Amendment to Lease between the Registrant and
BB&K/Northwest Point, LLC, dated May 19, 2003; General
Release and Novation Agreement among the Registrant,
BB&K/Northwest Point, LLC, and AT&T Corp., dated May 19,
2003; and Office Lease between BB&K/Northwest Point, LLC and
Concert USA, dated August 1, 2000. (Filed as Exhibit 10.8 to
the Company's Registration Statement [File No. 333-107769] on
Form S-1 and incorporated herein by reference.)
+10.9 Service Agreement between the Registrant and SBC Communications
Inc. dated September 24, 2003 (filed as Exhibit 10.9 to the
Company's Registration Statement [File No. 333-107769] on Form
S-1 and incorporated herein by reference.)
+10.10 Service Agreement between the Registrant and SBC
Communications Inc. dated October 20, 2003 (Filed as Exhibit
10.10 to the Company's Registration Statement [File No.
333-107769] on Form S-1 and incorporated herein by
reference.)
+10.11 Collocation Agreements between the Registrant and Qwest
Communications Corp. dated July 11, 2003 (Filed as Exhibit
10.11 to the Company's Registration Statement [File No.
333-107769] on Form S-1 and incorporated herein by
reference.)
*10.12 Form of Deferred Compensation Agreement
+10.13 Registration Agreement between the Registrant and Robert L.
Gritzke dated May 1, 2001 (Filed as Exhibit 10.131 to the
Company's Registration Statement [File No. 333-107769] on
Form S-1 and incorporated herein by reference.)
+10.14 Registration Agreement between the Registrant and Richard R.
Gritzke dated May 1, 2001 (Filed as Exhibit 10.14 to the
Company's Registration Statement [File No. 333-107769] on
Form S-1 and incorporated herein by reference.)
*14.1 Code of Ethics for Officers of LightFirst Inc.
*23.1 Consent of Mengel Metzger Barr & Co. LLP
*31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
*31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
*32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant
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to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
+99.1 Consent of Director Nominee Thomas M. Wheeler (Filed as
Exhibit 99.2 to the Company's Registration Statement [File
No. 333-107769] on Form S-1 and incorporated herein by
reference.)
+99.2 Consent of Director Nominee John R. Rehayem (Filed as Exhibit
99.3 to the Company's Registration Statement [File No.
333-107769] on Form S-1 and incorporated herein by
reference.)
+99.3 Consent of Director Nominee Stephen J. Kennedy (Filed as
Exhibit 99.4 to the Company's Registration Statement [File
No. 333-107769] on Form S-1 and incorporated herein by
reference.)
+ Previously filed
* Filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
LIGHTFIRST INC.
(Registrant)
By: /s/ Martin P. Gilmore
-------------------------------------
Martin P. Gilmore
President and Chief Executive Officer
April 14, 2004
Pursuant to the requirements of the Securities Act of 1933, this report has
been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Martin P. Gilmore President, Chief Executive Officer and April 14, 2004
- -------------------------------------- Chairman of the Board of Directors --------------------------
Martin P. Gilmore (Principal Executive Officer)
/s/ Martin P. Gilmore Chief Financial Officer April 14, 2004
- -------------------------------------- (Principal Financial Officer and --------------------------
Martin P. Gilmore Principal Accounting Officer)
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