-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DC4rNdvyI9ODHWelOIZCkIANTguKBLPetC/WUDLhDNBgz1nnUTrV7bApLY41v7rm E4LQ+RltMROiLvqLcfDdEg== 0000950134-03-011609.txt : 20030813 0000950134-03-011609.hdr.sgml : 20030813 20030813153645 ACCESSION NUMBER: 0000950134-03-011609 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FULLNET COMMUNICATIONS INC CENTRAL INDEX KEY: 0001092570 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 731473361 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-27031 FILM NUMBER: 03841090 BUSINESS ADDRESS: STREET 1: 201 ROBERT S KERR AVENUE STREET 2: SUITE 210 CITY: OKLAHOMA CITY STATE: OK ZIP: 73102 BUSINESS PHONE: 4052320958 MAIL ADDRESS: STREET 1: 200 N HARVEY STREET 2: SUITE 1704 CITY: OKLAHOMA CITY STATE: OK ZIP: 73102 10QSB 1 d08183e10qsb.txt FORM 10-QSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________________ to __________________________. COMMISSION FILE NUMBER: 000-27031 FULLNET COMMUNICATIONS, INC. ---------------------------- (Exact name of registrant as specified in its charter) OKLAHOMA 73-1473361 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 201 Robert S. Kerr Avenue, Suite 210,Oklahoma City, Oklahoma 73102 ------------------------------------------------------------------ (Address of principal executive offices) (405) 236-8200 -------------- (Issuer's telephone number) CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] The number of shares outstanding of the Issuer's Common Stock, $.00001 par value, as of August 8, 2003 was 6,663,135. Transitional Small Business Disclosure Format (Check one): YES [ ] NO [X] FORM 10-QSB TABLE OF CONTENTS
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2003 (Unaudited) and December 31, 2002......................... 3 Consolidated Statements of Operations - Three and six months ended June 30, 2003 and 2002 (Unaudited).................................................................................. 4 Consolidated Statement of Stockholders' Deficit - Six months ended June 30, 2003 (Unaudited)........................................................................................... 5 Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2002 (Unaudited)........................................................................................... 6 Notes to Consolidated Financial Statements (Unaudited)................................................ 7 Item 2. Management's Discussion and Analysis or Plan of Operation............................................. 12 Item 3. Controls and Procedures............................................................................... 19 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds............................................................. 20 Item 3. Defaults Upon Senior Securities....................................................................... 20 Item 4. Submission of Matters to a Vote of Security Holders................................................... 20 Item 6. Exhibits and Reports on Form 8-K...................................................................... 20 Signatures..................................................................................................... 25
-2- FULLNET COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, 2003 2002 ---------------------------------- (Unaudited) ASSETS CURRENT ASSETS Cash $ 11,952 $ 26,955 Accounts receivable, net 167,052 122,569 Prepaid expenses and other current assets 57,786 36,137 ----------- ----------- Total current assets 236,790 185,661 PROPERTY AND EQUIPMENT, net 1,112,640 978,249 INTANGIBLE ASSETS, net 361,734 506,273 OTHER ASSETS 15,336 28,323 ----------- ----------- TOTAL $ 1,726,500 $ 1,698,506 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable - trade $ 521,826 $ 413,037 Accrued and other current liabilities 459,234 382,677 Notes payable, current portion 1,057,201 865,057 Capital lease obligations, current portion 44,192 52,646 Deferred revenue 378,460 401,552 ----------- ----------- Total current liabilities 2,460,913 2,114,969 NOTES PAYABLE, less current portion 421,135 435,386 CAPITAL LEASE OBLIGATIONS, less current portion 27,995 47,949 OTHER 164,312 142,808 STOCKHOLDERS' DEFICIT Common stock - $.00001 par value; authorized, 10,000,000 shares; issued and outstanding, 6,592,878 shares in 2003 and 2002 66 66 Common stock issuable, 70,257 shares in 2003 and 2002 57,596 57,596 Additional paid-in capital 8,232,326 8,127,293 Accumulated deficit (9,637,843) (9,227,561) ----------- ----------- Total stockholders' deficit (1,347,855) (1,042,606) ----------- ----------- TOTAL $ 1,726,500 $ 1,698,506 =========== ===========
See accompanying notes to financial statements. -3- FULLNET COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ------------------------------- JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002 ------------- ------------- ------------- ------------- REVENUES Access service revenues $ 264,246 $ 378,702 $ 547,416 $ 781,788 Co-location and other revenues 255,328 238,321 513,940 453,589 ----------- ----------- ----------- ----------- Total revenues 519,574 617,023 1,061,356 1,235,377 OPERATING COSTS AND EXPENSES Cost of access service revenues 117,859 234,385 363,460 495,816 Cost of co-location and other revenues 27,379 26,877 60,845 50,707 Selling, general and administrative expenses 270,699 318,941 557,262 671,596 Loss (gain) on sale of assets (35,697) 6,110 (31,000) 27,420 Depreciation and amortization 125,730 181,423 255,870 357,125 ----------- ----------- ----------- ----------- Total operating costs and expenses 505,970 767,736 1,206,437 1,602,664 ----------- ----------- ----------- ----------- INCOME (LOSS) FROM OPERATIONS 13,604 (150,713) (145,081) (367,287) INTEREST EXPENSE (143,751) (89,301) (265,201) (171,262) ----------- ----------- ----------- ----------- NET LOSS $ (130,147) $ (240,014) $ (410,282) $ (538,549) =========== =========== =========== =========== Net loss per common share Basic and diluted $ (.02) $ (.04) $ (.06) $ (.08) =========== =========== =========== =========== Weighted average number of common shares outstanding Basic and diluted 6,663,135 6,671,481 6,663,135 6,665,573 =========== =========== =========== ===========
See accompanying notes to financial statements. -4- FULLNET COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2003
Common stock Common ------------ stock Additional Accumulated Shares Amount issuable paid-in capital Deficit Total ---------------------------------------------------------------------------------- Balance at January 1, 2003 6,592,878 $ 66 $ 57,596 $ 8,127,293 $(9,227,561) $(1,042,606) Intrinsic value of beneficial conversion feature on debt - - - 102,417 - 102,417 Warrants issued related to financing - - - 2,403 - 2,403 Options issued in exchange for compensation - - - 213 - 213 Net loss - - - - (410,282) (410,282) ----------- ----------- ----------- --------------- ----------- ----------- Balance at June 30, 2003 6,592,878 $ 66 $ 57,596 $ 8,232,326 $(9,637,843) $(1,347,855) =========== =========== =========== =============== =========== ===========
See accompanying notes to financial statements. -5- FULLNET COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2003 JUNE 30, 2002 ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(410,282) $(538,549) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization 255,870 357,125 Warrants issued related to financing 2,403 1,328 Options issued in exchange for compensation 213 - Amortization of discount and costs relating to financing 168,364 74,623 Accrued interest converted to equity - 23,630 (Gain) loss on sale of assets (31,000) 27,420 Provision for uncollectible accounts receivable 331 (1,118) Net (increase) decrease in Accounts receivable (44,814) 66,327 Prepaid expenses and other current assets (26,003) 40,311 Other assets 8,743 4,439 Net increase (decrease) in Accounts payable - trade 108,789 (41,541) Accrued and other liabilities 66,779 61,959 Deferred revenue (16,945) (19,273) --------- --------- Net cash provided by operating activities 82,448 56,681 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (43,872) (6,030) Proceeds from sale of assets, net of closing costs 56,485 22,000 --------- --------- Net cash provided by investing activities 12,613 15,970 CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on borrowings under notes payable (76,921) (62,916) Principal payments on note payable to related party (4,735) (4.350) Principal payments on capital lease obligations (28,408) (36,842) --------- --------- Net cash used in financing activities (110,064) (104,108) --------- --------- NET DECREASE IN CASH (15,003) (31,457) Cash at beginning of period 26,955 56,575 --------- --------- Cash at end of period $ 11,952 $ 25,118 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for interest $ 41,628 $ 51,357 Assets financed through note payable 202,200 - Assets acquired through capital lease - 52,128
See accompanying notes to financial statements. -6- FULLNET COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. UNAUDITED INTERIM FINANCIAL STATEMENTS The unaudited financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. The accompanying financial statements and related notes should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto for the year ended December 31, 2002. The information furnished reflects, in the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of the interim periods presented. Operating results of the interim period are not necessarily indicative of the amounts that will be reported for the year ending December 31, 2003. Certain reclassifications have been made to prior period balances to conform with the presentation for the current period. 2. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures; accordingly, actual results could differ from those estimates. 3. LOSS PER COMMON SHARE Loss per common share is calculated based on the weighted average number of shares outstanding during the period, including common shares issuable without additional consideration. Basic and diluted loss per share were the same for each period in 2003 and 2002 because the outstanding convertible notes payable, stock options and warrants were not dilutive. 4. INTANGIBLE ASSETS Intangible assets consist primarily of acquired customer bases and covenants not to compete and are carried net of accumulated amortization. Upon initial application of SFAS 142 as of January 1, 2002, the Company reassessed useful lives and began amortizing these intangible assets over their estimated useful lives and in direct relation to any decreases in the acquired customer bases to which they relate. Management believes that such amortization reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. Amortization expense for the three months ended June 30, 2003 and 2002 relating to intangible assets was $63,633 and $127,789, respectively. Amortization expense for the six -7- months ended June 30, 2003 and 2002 relating to intangible assets was $136,503 and $249,987, respectively. 5. NOTES PAYABLE Notes payable consist of the following:
June 30, December 31, 2003 2002 ---------- ------------ Three notes payable to a bank, payable in monthly installments aggregating $10,010, including interest ranging from 9.5% to 11.5%, maturing September 2008; collateralized by property and equipment, accounts receivable and Company common stock owned by the founder and CEO of the Company; guaranteed by the founder and CEO of the Company; partially guaranteed by the Small Business Administration $ 435,922 $ 474,523 Interim loan, interest at 10%, requires payments equal to 50% of the net proceeds received by the Company from its private placement of convertible notes payable, matured December 2001; unsecured (1) 320,000 320,000 Convertible notes payable; interest at 12.5% of face amount, payable quarterly; these notes are unsecured and $505,000 and $5,636 mature in 2003 and 2004, respectively; $510,636 face amount less unamortized discount of $138,959 ($196,271 for 2002); effective rate of 20% (convertible into approximately 911,850 and 810,535 shares at June 30, 2003 and December 31, 2002, respectively) (2) 371,677 314,365 Note payable to an individual, payable in monthly installments of $1,277 until paid in full, including interest at a variable rate (prime plus 2.25%; 6.5% at June 30, 2003), matures September 2014; collateralized by substantially all assets acquired in conjunction with the acquisition of Harvest Communications, Inc. 30,534 37,060 Note payable to the Company's founder and CEO, payable in monthly installments of $1,034 including interest at 8.5%, maturing May 2006; unsecured 31,757 36,492 Note payable, interest at 10%, requires monthly installments of $9,330 for 12 months then $18,209 for the remainder of the note, maturing August 2004, secured by a telephone switch (3) 171,236 - Other notes payable (4) 117,210 118,003 ---------- ---------- 1,478,336 1,300,443 ---------- ---------- Less current portion 1,057,201 865,057 ---------- ---------- $ 421,135 $ 435,386 ========== ==========
(1) This loan and accrued interest of $71,978 was past due on June 30, 2003; the Company has not made payment or negotiated an extension of the loan and the lender has not made any demands. -8- (2) On May 31, 2001, the Company exchanged 2,064,528 shares of its common stock and warrants (exercisable for the purchase of 436,748 shares of common stock at $2.00 per share) for convertible notes in the principal amount of $1,746,988 (recorded at $1,283,893) plus accrued interest of $123,414. The warrants expire on May 31, 2006. This exchange was accounted for as an induced debt conversion and a debt conversion expense of $370,308 was recorded. Pursuant to the provisions of the convertible notes payable, the conversion price was reduced from $1.00 per share on January 15, 2001 to $.56 per share on June 30, 2003 for failure to register under the Securities Act of 1933, as amended, the common stock underlying the convertible notes payable and underlying warrants on December 15, 2001. Reductions in conversion price are recognized at the date of reduction by an increase to additional paid-in capital and an increase in the discount on the convertible notes payable. Furthermore, the interest rate was increased to 12.5% per annum from 11% per annum because the registration statement was not filed before March 1, 2001. At June 30, 2003, the outstanding principal and interest of the convertible notes payable was $466,247. On January 1, 2002, the Company recorded 11,815 shares of common stock issuable in payment of $11,815 accrued interest on a portion of the Company's convertible notes payable. (3) During February 2003, upon the receipt and installation of a telephone switch the Company made a down payment of $14,950. The remaining balance of $202,200 was financed by the supplier at 10% interest to be paid in 18 monthly payments beginning in March 2003. (4) Includes three notes with past due principal and accrued interest totaling $53,368 at June 30, 2003. The Company has not made payment or negotiated an extension of the notes and the lenders have not made any demands. 6. COMMON STOCK OPTIONS AND WARRANTS The Company's employee stock options are accounted for under APB Opinion No. 25 and related interpretations. Had compensation cost for the Company's stock options been determined based on the fair value at the grant dates consistent with the method of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's net loss and loss per share for the three and six months ended June 30, 2003 and 2002 would have been increased to the pro forma amounts indicated below:
Three Months Three Months Six Months Six Months Ended Ended Ended Ended June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002 Net loss As reported $ (130,147) $ (240,014) $ (410,282) $ (538,549) Pro forma $ (153,815) $ (304,756) $ (483,206) $ (667,835) Basic and diluted loss per share As reported $ (.02) $ (.04) $ (.06) $ (.08) Pro forma $ (.02) $ (.05) $ (.07) $ (.10)
The fair value of each option grant prior to February 2000 was estimated on the date of grant using the minimum value method because there was no public trading market for the Company's securities. During February 2000, the Company's common stock began trading on the OTC Bulletin Board under the symbol FULO. The fair values of the options granted subsequent to February 2000 have been estimated at the date of grant using the Black-Scholes option pricing model. -9- The following table summarizes the Company's employee stock option activity for the three and six months ended June 30, 2003:
Three Months Weighted Six Months Weighted Ended Average Ended Average June 30, 2003 Exercise Price June 30, 2003 Exercise Price ------------- -------------- ------------- -------------- Options outstanding, beginning of period 1,589,252 $.80 1,589,252 $.80 Options issued during the period 85,100 .04 85,100 .04 --------- ---- --------- ---- Options outstanding, end of period 1,674,352 $.76 1,674,352 $.76 ========= ==== ========= ====
The following table summarizes the Company's common stock purchase warrant and certain stock option activity for the three and six months ended June 30, 2003:
Three Months Weighted Six Months Weighted Ended Average Ended Average June 30, 2003 Exercise Price June 30, 2003 Exercise Price ------------- -------------- ------------- -------------- Warrants and certain stock options outstanding, beginning of the period 2,201,681 $.66 2,151,681 $.68 Warrants and certain stock options issued during the period - - 50,000 .01 --------- ---- --------- ---- Warrants and certain stock options outstanding, end of the period 2,201,681 $.66 2,201,681 $.66 ========= ==== ========= ====
7. RECENTLY ISSUED ACCOUNTING STANDARDS In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). Subject to certain criteria defined in the Interpretation, FIN 46 will require consolidation by business enterprises of variable interest entities if the enterprise has a variable interest that will absorb the majority of the entity's expected residual losses on returns if they occur, or both. The Interpretation will be effective for the Company in the third quarter of 2003. Certain disclosures concerning variable interest entities are required in financial statements initially issued after January 31, 2003. The Company estimates that FIN 46 will have no material effect on its financial statements. 8. MANAGEMENT'S PLANS The Company sustained substantial net losses through June 30, 2003. In addition, at June 30, 2003, current liabilities exceed current assets by $2,224,123. The ability of the Company to continue as a going concern is dependent upon continued operations of the Company that in turn is dependent upon the Company's ability to meet its financing requirements on a continuing basis, to maintain present financing, and to achieve the objectives of its business plan. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence. The Company's business plan includes, among other things, expansion of its Internet access services through mergers and acquisitions and the development of its web hosting and co-location services. Execution of the Company's business plan will require significant capital -10- to fund capital expenditures, working capital needs, debt service and the cash flow deficits generated by operating losses. Current cash balances will not be sufficient to fund the Company's current business plan. As a consequence, the Company is currently focusing on revenue enhancement and cost cutting opportunities as well as working to sell non-core assets and to extend vendor payment terms. The Company continues to seek additional convertible debt or equity financing as well as the placement of a credit facility to fund the Company's liquidity. There can be no assurance that the Company will be able to raise additional capital on satisfactory terms or at all. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion is qualified in its entirety by the more detailed information in our Form 10-KSB and the financial statements contained therein, including the notes thereto, and our other periodic reports filed with the Securities and Exchange Commission since December 31, 2002 (collectively referred to as the "Disclosure Documents"). Certain forward-looking statements contained herein and in such Disclosure Documents regarding our business and prospects are based upon numerous assumptions about future conditions which may ultimately prove to be inaccurate and actual events and results may materially differ from anticipated results described in such statements. Our ability to achieve these results is subject to certain risks and uncertainties, such as those inherent generally in the Internet service provider and competitive local exchange carrier industries, the impact of competition and pricing, changing market conditions, and other risks. Any forward-looking statements contained in this Report represent our judgment as of the date of this Report. We disclaim, however, any intent or obligation to update these forward-looking statements. As a result, the reader is cautioned not to place undue reliance on these forward-looking statements. References to us in this report include our subsidiaries: FullNet, Inc. ("FullNet"), FullTel, Inc. ("FullTel") and FullWeb, Inc. ("FullWeb"). OVERVIEW We are an integrated communications provider offering integrated communications and Internet connectivity to individuals, businesses, organizations, educational institutions and government agencies. Through our subsidiaries, we provide high quality, reliable and scalable Internet access, web hosting, and equipment co-location. Our overall strategy is to become the dominant integrated communications provider for residents and small to medium-sized businesses in Oklahoma. Our principal executive offices are located at 201 Robert S. Kerr Avenue, Suite 210, Oklahoma City, Oklahoma 73102, and our telephone number is (405) 236-8200. We also maintain an Internet site on the World Wide Web ("WWW") at www.fullnet.net. Information contained on our Web site is not and should not be deemed to be, a part of this Report. COMPANY HISTORY We were founded in 1995 as CEN-COM of Oklahoma, Inc., an Oklahoma corporation, to bring dial-up Internet access and education to rural locations in Oklahoma that did not have dial-up Internet access. We changed our name to FullNet Communications, Inc. in December 1995, and shifted our focus from offering dial-up services to providing wholesale and private label network connectivity and related services to other Internet service providers. During 1995 and 1996, we furnished wholesale and private label network connectivity services to Internet service providers in Bartlesville, Cushing, Durant, Perry, Tahlequah, and Tulsa. During 1996, we sold our Internet service provider operations in Enid, Oklahoma and began Internet service provider operations in Ponca City, Oklahoma. In 1997 we continued our focus on being a backbone provider by upgrading and acquiring more equipment. We also started offering our own Internet service provider brand access and services to our wholesale customers. As of March 31, 2003, there was one Internet service provider in Oklahoma that used the FullNet brand name for whom we provide the backbone to the Internet. There was also one Internet service provider that used a private label brand name, for whom we are its access backbone and provide on an outsource basis technical support, systems management and -12- operations. Additionally, we provide high-speed broadband connectivity, website hosting, network management and consulting solutions to over 100 businesses in Oklahoma. In 1998 our gross revenues exceeded $1,000,000 and we made the Metro Oklahoma City Top 50 Fastest Growing Companies list. In 1998 we commenced the process of organizing a competitive local exchange carrier ("CLEC") through FullTel, and acquired Animus Communications, Inc. ("Animus"), a wholesale Web-service company, which enabled us to become a total solutions provider to individuals and companies seeking a "one-stop shop" in Oklahoma. Animus was renamed FullWeb in January 2000. With the incorporation of FullTel and the acquisition of FullWeb, our current business strategy is to become the dominant integrated communications provider in Oklahoma, focusing on rural areas. We expect to grow through the acquisition of additional customers for our carrier-neutral co-location space, the acquisition of Internet service providers, as well as through a FullNet brand marketing campaign. During 2000 and 2001, we completed eight separate acquisitions of Internet service provider companies, with customers in the Oklahoma cities of Tahlequah, Bartlesville, Enid, Nowata, Lawton, Oklahoma City, Adair, Jay Pryor, Wyandotte, Leach, Colcord and Moseley. During the month of February 2000, our common stock began trading on the OTC Bulletin Board under the symbol FULO. While our common stock trades on the OTC Bulletin Board, it is very thinly traded, and there can be no assurance that our stockholders will be able to sell their shares should they so desire. Any market for the common stock that may develop, in all likelihood, will be a limited one, and if such a market does develop, the market price may be volatile. In June 2000, we began providing co-location services to KMC Telecom V, Inc. ("KMC"), a facilities-based competitive local exchange carrier pursuant to an agreement that ends on December 31, 2005. Under the terms of this agreement, we receive $42,275 per month to provide co-location and support services for KMC's telecommunications equipment at our network operations center in Oklahoma City, Oklahoma. We completed our network operations center during the first quarter of 2001. KMC moved into our network operations center and began making payments during the third quarter of 2000. We plan to market additional carrier neutral co-location solutions in our network operations center to other competitive local exchange carriers, Internet service providers and web-hosting companies. Our co-location facility is carrier neutral, allowing customers to choose among competitive offerings rather than being restricted to one carrier. Our network operations center is Telco-grade and provides customers a high level of operative reliability and security. We offer flexible space arrangements for customers, 24-hour onsite support with both battery and generator backup. -13- RESULTS OF OPERATIONS The following table sets forth certain statement of operations data as a percentage of revenues for the three and six months ended June 30, 2003 and 2002:
THREE MONTHS ENDED ---------------------------------------------------------------------------- JUNE 30, 2003 JUNE 30, 2002 -------------------------------- ---------------------------------- AMOUNT PERCENT AMOUNT PERCENT Revenues: Access service revenues $ 264,246 50.9% $ 378,702 61.4% Co-location and other revenues 255,328 49.1 238,321 38.6 ----------- ----- ----------- --------- Total revenues 519,574 100.0 617,023 100.0 Cost of access service revenues 117,859 22.7 234,385 37.9 Cost of co-location and other revenues 27,379 5.3 26,877 4.4 Selling, general and administrative expenses 270,699 52.1 318,941 51.7 Loss (gain) on sale of assets (35,697) (6.9) 6,110 1.0 Depreciation and amortization 125,730 24.2 181,423 29.4 ----------- ------ ----------- --------- Total operating costs and expenses 505,970 97.4 767,736 124.4 ----------- ------ ----------- --------- Income (loss) from operations 13,604 (2.6) (150,713) (24.4) Interest expense (143,751) (27.7) (89,301) (14.5) ----------- ------ ----------- --------- Net loss $ (130,147) (25.1)% $ (240,014) (38.9)% =========== ====== =========== ========= SIX MONTHS ENDED ---------------------------------------------------------------------------- JUNE 30, 2003 JUNE 30, 2002 -------------------------------- ---------------------------------- AMOUNT PERCENT AMOUNT PERCENT Revenues: Access service revenues $ 547,416 51.6% $ 781,788 63.3% Co-location and other revenues 513,940 48.4 453,589 36.7 ----------- ------ ----------- --------- Total revenues 1,061,356 100.0 1,235,377 100.0 Cost of access service revenues 363,460 34.3 495,816 40.1 Cost of co-location and other revenues 60,845 5.7 50,707 4.1 Selling, general and administrative expenses 557,262 52.5 671,596 54.4 Loss (gain) on sale of assets (31,000) (2.9) 27,420 2.2 Depreciation and amortization 255,870 24.1 357,125 28.9 ----------- ------ ----------- --------- Total operating costs and expenses 1,206,437 113.7 1,602,664 129.7 ----------- ------ ----------- --------- Income (loss) from operations (145,081) (13.7) (367,287) (29.7) Interest expense (265,201) (25.0) (171,262) (13.9) ----------- ------ ----------- --------- Net loss $ (410,282) (38.7)% $ (538,549) (43.6)% =========== ====== =========== =========
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002 Revenues Access service revenues decreased $114,456 or 30.2% to $264,246 for the three-month period ended June 30, 2003 from $378,702 for the same period in 2002 primarily due to a net reduction in the number of customers, including the sale of approximately 160 and 400 customers, respectively, during 2003 and 2002. Co-location and other revenues increased $17,007 or 7.1% to $255,328 for the three-month period ended June 30, 2003 from $238,321 for the same period in 2002. This increase was primarily attributable to selling additional services to existing customers. Operating Costs and Expenses Cost of access service revenues decreased $116,526 or 49.7% to $117,859 for the three-month period ended June 30, 2003 from $234,385 for the same period in 2002. This decrease was primarily due to the restructuring of our network in order to operate in a more cost effective manner. Cost of co-location and other revenues remained essentially unchanged at $27,379 for the three-month period ended June 30, 2003 compared to $26,877 for the same period in 2002. Selling, general and administrative expenses decreased $48,242 or 15.1% to $270,699 for the three-month period ended June 30, 2003 from $318,941 for the same period in 2002. This decrease was primarily due to a decrease in employee costs. Employee costs decreased $32,829 for the period -14- ended June 30, 2003 from the same period in 2002 primarily due to a decrease in the number of employees to 14 during the period ended June 30, 2003 from 17 during the same period in 2002. The balance of the decrease was primarily a result of our overall focus on cost cutting opportunities in insurance, supplies and telephone expenses. Selling, general and administrative expenses as a percentage of total revenues increased to 52.1% during 2003 from 51.7% during 2002. During the three months ended June 30, 2003 we recorded a gain on sale of assets of $35,697 primarily attributable to the sale of a block of our access service revenue business that was located in a part of Oklahoma that was outside our primary geographic area of focus. During the same period in 2002 we recorded a loss on the sale of assets of $6,110 from the sale of non-core assets. Depreciation and amortization expense decreased $55,693 or 30.7% to $125,730 for the three-month period ended June 30, 2003 from $181,423 for the same period in 2002. In January 2002, upon initially applying Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Intangible Assets ("SFAS 142") we reassessed useful lives and we began amortizing our intangible assets over their estimated useful lives and in direct relation to any decreases in the acquired customer bases to which they relate. Amortization expense for the periods ended June 30, 2003 and 2002 relating to intangible assets was $63,633 and $127,789, respectively. Interest Expense Interest expense increased $54,450 or 61.0% to $143,751 for the three-month period ended June 30, 2003 from $89,301 for the same period in 2002. This increase was primarily attributable to the increase in amortization of the discount on our convertible notes payable. Pursuant to the provisions of the convertible notes payable, the conversion price decreased from $.75 at June 30, 2002 to $.56 at June 30, 2003. Reductions in conversion price are recognized as an interest expense at the date of reduction by an increase to additional paid-in capital and an increase in the discount on the convertible notes payable. SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002 Revenues Access service revenues decreased $234,372 or 30.0% to $547,416 for the six-month period ended June 30, 2003 from $781,788 for the same period in 2002 primarily due to a net reduction in the number of customers, including the sale of approximately 160 and 400 customers, respectively, during 2003 and 2002. Co-location and other revenues increased $60,351 or 13.3% to $513,940 for the six-month period ended June 30, 2003 from $453,589 for the same period in 2002. This increase was primarily attributable to selling additional services to existing customers. Operating Costs and Expenses Cost of access service revenues decreased $132,356 or 26.7% to $363,460 for the six-month period ended June 30, 2003 from $495,816 for the same period in 2002. This decrease was primarily due to the restructuring of our network in order to operate in a more cost effective manner. During the six-month period ended June 30, 2003 we received approximately $82,000 in back billings from Southwestern Bell. We are in the process of reviewing these bills and at June 30, 2003 they had been accrued and approximately $10,000 had been paid. -15- Cost of co-location and other revenues increased $10,138 or 20.0% to $60,845 for the six-month period ended June 30, 2003 over $50,707 for the same period in 2002. This increase was primarily due to an increase in cost of equipment related to co-location services. Selling, general and administrative expenses decreased $114,334 or 17.0% to $557,262 for the six-month period ended June 30, 2003 from $671,596 for the same period in 2002. This decrease was primarily due to a decrease in employee costs. Employee costs decreased $87,054 for the period ended June 30 2003 from the same period in 2002 primarily due to a decrease in the number of employees to 14 during the period ended June 30, 2003 from 17 during the same period in 2002. The balance of the decrease was primarily a result of our overall focus on cost cutting opportunities in insurance, supplies and telephone expenses. Selling, general and administrative expenses as a percentage of total revenues decreased to 52.5% during 2003 from 56.6% during 2002. During the six months ended June 30, 2003 we recorded a gain on sale of assets of $31,000 primarily attributable to the sale of a block of our access service revenue business that was located in a part of Oklahoma that was outside our primary geographic area of focus. During the same period in 2002 we recorded a loss on the sale of assets of $27,420 from the sale of non-core assets. Depreciation and amortization expense decreased $101,255 or 28.4% to $255,870 for the six-month period ended June 30, 2003 from $357,125 for the same period in 2002. In January 2002, upon initially applying SFAS 142 we reassessed useful lives and we began amortizing our intangible assets over their estimated useful lives and in direct relation to any decreases in the acquired customer bases to which they relate. Amortization expense for the periods ended June 30, 2003 and 2002 relating to intangible assets was $136,503 and $249,987, respectively. Interest Expense Interest expense increased $93,939 or 54.9% to $265,201 for the six-month period ended June 30, 2003 from $171,262 for the same period in 2002. This increase was primarily attributable to the increase in amortization of the discount on our convertible notes payable. Pursuant to the provisions of the convertible notes payable, the conversion price decreased from $.75 at June 30, 2002 to $.56 at June 30, 2003. Reductions in conversion price are recognized as an interest expense at the date of reduction by an increase to additional paid-in capital and an increase in the discount on the convertible notes payable. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2003, we had a deficit working capital of $2,224,123, while at December 31, 2002 we had a deficit working capital of $1,929,308. We do not have a line of credit or credit facility to serve as an additional source of liquidity. Historically we have relied on shareholder loans as an additional source of funds. Cash provided by operations was $82,448 and $56,681, respectively, for the six months ended June 30, 2003 and 2002. As of June 30, 2003, we had $11,952 in cash and $2,460,913 in current liabilities, including $378,460 of deferred revenues that will not require settlement in cash. Net cash provided by investing activities was $12,613 and $15,970, respectively, for the six months ended June 30, 2003 and 2002. Cash used for the purchases of equipment was $43,872 and $6,030, respectively, for the six months ended June 30, 2003 and 2002. Cash provided by the sales -16- of excess non-core assets was $56,485 and $22,000, respectively, for the six months ended June 30, 2003 and 2002. Cash used for principal payments on notes payable and capital lease obligations was $110,064 and $104,108, respectively, for the six months ended June 30, 2003 and 2002. The planned expansion of our business will require significant capital to fund capital expenditures, working capital needs, debt service and the cash flow deficits generated by operating losses. Our principal capital expenditure requirements will include: - mergers and acquisitions and - further development of operations support systems and other automated back office systems. Because our cost of developing new networks and services, funding other strategic initiatives, and operating our business depend on a variety of factors (including, among other things, the number of subscribers and the service for which they subscribe, the nature and penetration of services that may be offered by us, regulatory changes, and actions taken by competitors in response to our strategic initiatives), it is almost certain that actual costs and revenues will materially vary from expected amounts and these variations are likely to increase our future capital requirements. Our cash balances as of August 13, 2003 will not be sufficient to fund our current business plan beyond a few months. As a consequence, we are currently focusing on revenue enhancement and cost cutting opportunities as well as working to sell non-core assets and to extend vendor payment terms. We continue to seek additional convertible debt or equity financing as well as the placement of a credit facility to fund our liquidity needs. There is no assurance that we will be able to obtain additional capital on satisfactory terms or at all. In the event that we are unable to obtain additional capital or to obtain it on acceptable terms or in sufficient amounts, we will be required to delay the development of our network or take other actions. This could have a material adverse effect on our business, operating results and financial condition and our ability to achieve sufficient cash flows to service debt requirements. Our ability to fund the capital expenditures and other costs contemplated by our business plan and to make scheduled payments with respect to bank borrowings will depend upon, among other things, our ability to seek and obtain additional financing during 2003. Capital will be needed in order to implement our business plan, deploy our network, expand our operations and obtain and retain a significant number of customers in our target markets. Each of these factors is, to a large extent, subject to economic, financial, competitive, political, regulatory, and other factors, many of which are beyond our control. There is no assurance that we will be successful in developing and maintaining a level of cash flows from operations sufficient to permit payment of our outstanding indebtedness. If we are unable to generate sufficient cash flows from operations to service our indebtedness, we will be required to modify our growth plans, limit our capital expenditures, restructure or refinance our indebtedness or seek additional capital or liquidate our assets. There is no assurance that (i) any of these strategies could be effectuated on satisfactory terms, if at all, or on a timely basis or (ii) any of these strategies will yield sufficient proceeds to service our debt or otherwise adequately fund operations. -17- FINANCING ACTIVITIES During February 2003, upon the receipt and installation of a telephone switch we made a down payment of $14,950. The remaining balance of $202,200 was financed by the supplier at 10% interest to be paid in 18 monthly payments beginning in March 2003. As additional consideration we issued the supplier a warrant to purchase 50,000 shares of our common stock for $.01 per share for a period of five years from the date of issuance. On January 1, 2002, we agreed to issue 11,815 shares of common stock in payment of $11,815 accrued interest on a portion of our convertible debt. On January 5, 2001, we obtained a $250,000 interim loan. This loan bears interest at 10% per annum and requires payments equal to 50% of the net proceeds received by us from our private placement of convertible notes payable. Subsequently, the principal balance of the loan was increased to $320,000 and the due date was extended to December 31, 2001. Through June 30, 2003, we had made aggregate payments of principal and interest of $35,834 on this loan. Pursuant to the terms of this loan the balance was due on December 31, 2001 and we have not made payment or negotiated an extension of the loan and the lender has not made any demands. At June 30, 2003, the outstanding principal and interest of the loan was $391,978. Pursuant to the provisions of the convertible notes payable, the conversion price was reduced from $1.00 per share on January 15, 2001 to $.56 per share on June15, 2003 for failure to register under the Securities Act of 1933, as amended, the common stock underlying the convertible notes payable and underlying warrants on February 15, 2001. Reductions in conversion price are recognized at the date of reduction by an increase to additional paid-in capital and an increase in the discount on the notes payable. Furthermore, the interest rate was increased to 12.5% per annum from 11% per annum because the registration statement was not filed before March 1, 2001. At June 30, 2003, the outstanding principal and interest of the convertible notes payable was $466,247. RECENTLY ISSUED ACCOUNTING STANDARDS In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). Subject to certain criteria defined in the Interpretation, FIN 46 will require consolidation by business enterprises of variable interest entities if the enterprise has a variable interest that will absorb the majority of the entity's expected residual losses on returns if they occur, or both. The Interpretation will be effective for us in the third quarter of 2003. Certain disclosures concerning variable interest entities are required in financial statements initially issued after January 31, 2003. We estimate that FIN 46 will have no material effect on our financial statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect certain reported amounts and disclosures. In applying our accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. As you might expect, the actual results or outcomes are generally different than the estimated or assumed amounts. These differences are usually minor and are included in our consolidated financial statements as soon as they are known. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates. -18- We periodically review the carrying value of our intangible assets when events and circumstances warrant such a review. One of the methods used for this review is performed using estimates of future cash flows. If the carrying value of our intangible assets is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the intangible assets exceeds it fair value. We believe that the estimates of future cash flows and fair value are reasonable. Changes in estimates of such cash flows and fair value, however, could affect the calculation and result in additional impairment charges in future periods. ITEM 3. CONTROLS AND PROCEDURES Our Chief Executive Officer and Chief Financial Officer are responsible primarily for establishing and maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission. These controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Furthermore, our Chief Executive Officer and Chief Financial Officer are responsible for the design and supervision of our internal controls over financial reporting that are then effected by and through our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. These policies and procedures (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Our Executive Officer and Chief Financial Officer, based upon their evaluation of the effectiveness of our disclosure controls and procedures and the internal controls over financial reporting as of the last day of the period covered by this report, concluded that our disclosure controls and procedures and internal controls over financial reporting were fully effective during and as of the last day of the period covered by this report and reported to our auditors and the audit committee of our board of directors that no change in our disclosure controls and procedures and internal control over financial reporting occurred during the period covered by this report that would materially affected or is reasonably likely to materially affect our disclosure controls and procedures or internal control over financial reporting. In conducting their evaluation of our disclosure controls and procedures and internal controls over financial reporting, these executive officers did not discover any fraud that involved management or other employees who have a significant role in our disclosure controls and procedures and internal controls over financial reporting. Furthermore, there were no significant changes in our disclosure controls and procedures, internal controls over financial reporting, or other factors that could significantly affect our disclosure controls and procedures or internal controls over financial reporting subsequent to the date of their evaluation. Because no significant deficiencies or material weaknesses were discovered, no corrective actions were necessary or taken to correct significant deficiencies and material weaknesses in our internal controls and disclosure controls and procedures. -19- PART II-OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES We are in default on an interim loan that matured December 31, 2001. This loan bears interest at 10% per annum and requires payments equal to 50% of the net proceeds received by us from our private placement of convertible notes payable. Through June 30, 2003, we had made aggregate payments of principal and interest of $35,834 on this loan. At June 30, 2003, the outstanding principal and accrued interest of the loan was $391,978. We have not made payment or negotiated an extension of the loan and the lender has not made any demands. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this Report: Exhibit
Number Exhibit - ------ ------- 3.1 Certificate of Incorporation, as amended (filed as Exhibit 2.1 to Registrant's Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference). # 3.2 Bylaws (filed as Exhibit 2.2 to Registrant's Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference) # 4.1 Specimen Certificate of Registrant's Common Stock (filed as Exhibit 4.1 to the Company's Form 10-KSB for the fiscal year ended December 31, 1999, and incorporated herein by reference). # 4.2 Certificate of Correction to the Amended Certificate of Incorporation and the Ninth Section of the Certificate of Incorporation (filed as Exhibit 2.1 to Registrant's Registration Statement on form 10-SB, file number 000-27031 and incorporated by reference). # 4.3 Certificate of Correction to Articles II and V of Registrant's Bylaws (filed as Exhibit 2.1 to Registrant's Registration Statement on Form 10-SB, file number # 000-27031 and incorporated herein by reference). 4.4 Form of Warrant Agreement for Interim Financing in the amount of $505,000 (filed as Exhibit 4.1 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). # 4.5 Form of Warrant Certificate for Florida Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.2 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). # 4.6 Form of Promissory Note for Florida Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.3 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). #
-20- 4.7 Form of Warrant Certificate for Georgia Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.4 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). # 4.8 Form of Promissory Note for Georgia Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.5 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). # 4.9 Form of Warrant Certificate for Illinois Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.6 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). # 4.10 Form of Promissory Note for Illinois Investors for Interim Financing in the amount of $505,000 (filed as Exhibit 4.7 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). # 4.11 Form of Warrant Agreement for Interim Financing in the amount of $500,000 (filed as Exhibit 4.8 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). # 4.12 Form of Warrant Certificate for Interim Financing in the amount of $500,000 (filed as Exhibit 4.9 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). # 4.13 Form of Promissory Note for Interim Financing in the amount of $500,000 (filed as Exhibit 4.10 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). # 4.14 Form of Convertible Promissory Note for September 29, 2000, private placement (filed as Exhibit 4.13 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000 and incorporated herein by reference). # 4.15 Form of Warrant Agreement for September 29, 2000, private placement (filed as Exhibit 4.13 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000 and # incorporated herein by reference). 4.16 Form of 2001 Exchange Warrant Agreement (filed as Exhibit 4.16 to Registrant's Form 10-QSB for the quarter ended June 30, 2001 and incorporated herein by reference) # 4.17 Form of 2001 Exchange Warrant Certificate (filed as Exhibit 4.17 to Registrant's Form 10-QSB for the quarter ended June 30, 2001 and incorporated herein by reference) # 10.1 Financial Advisory Services Agreement between the Company and National Securities Corporation, dated September 17, 1999 (filed as Exhibit 10.1 to Registrant's Form 10-KSB for the fiscal year ended December 31, 1999, and incorporated herein by reference). # 10.2 Lease Agreement between the Company and BOK Plaza Associates, LLC, dated December 2, 1999 (filed as Exhibit 10.2 to Registrant's Form 10-KSB for the fiscal year ended December 31, 1999, and incorporated herein by reference). # 10.3 Interconnection agreement between Registrant and Southwestern Bell dated March 19, 1999 (filed as Exhibit 6.1 to Registrant's Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference). # 10.4 Stock Purchase Agreement between the Company and Animus Communications, Inc. (filed as Exhibit 6.2 to Registrant's Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference). #
-21- 10.5 Registrar Accreditation Agreement effective February 8, 2000, by and between Internet Corporation for Assigned Names and Numbers and FullWeb, Inc. d/b/a FullNic f/k/a Animus Communications, Inc. (filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended March 31, 2000 and incorporated herein by reference). # 10.6 Master License Agreement For KMC Telecom V, Inc., dated June 20, 2000, by and between FullNet Communications, Inc. and KMC Telecom V, Inc. (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-QSB for the Quarter ended June 30, 2000 and # incorporated herein by reference). 10.7 Domain Registrar Project Completion Agreement, dated May 10, 2000, by and between FullNet Communications, Inc., FullWeb, Inc. d/b/a FullNic and Think Capital (filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended June 30, 2000 and incorporated herein by reference). # 10.8 Amendment to Financial Advisory Services Agreement between Registrant and National Securities Corporation, dated April 21, 2000 (filed as Exhibit 10.3 to Registrant's Quarterly Report on Form 10-QSB for the Quarter ended June 30, 2000 and incorporated herein by reference). # 10.9 Asset Purchase Agreement dated June 2, 2000, by and between FullNet of Nowata and FullNet Communications, Inc. (filed as Exhibit 99.1 to Registrant's Form 8-K filed on June 20, 2000 and incorporated herein by reference). # 10.10 Asset Purchase Agreement dated February 4, 2000, by and between FullNet of Bartlesville and FullNet Communications, Inc. (filed as Exhibit 2.1 to Registrant's Form 8-K filed on February 18, 2000 and incorporated herein by reference). # 10.11 Agreement and Plan of Merger Among FullNet Communications, Inc., FullNet, Inc. and Harvest Communications, Inc. dated February 29, 2000 (filed as Exhibit 2.1 to Registrant's Form 8-K filed on March 10, 2000 and incorporated herein by reference). # 10.12 Asset Purchase Agreement dated January 25, 2000, by and between FullNet of Tahlequah, and FullNet Communications, Inc. (filed as Exhibit 2.1 to Registrant's Form 8-K filed on February 9, 2000 and incorporated herein by reference). # 10.13 Promissory Note dated August 2, 2000, issued to Timothy J. Kilkenny (filed as Exhibit 10.13 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.14 Warrant Agreement dated August 2, 2000, issued to Timothy J. Kilkenny (filed as Exhibit 10.14 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.15 Warrant Certificate dated August 2, 2000 issued to Timothy J. Kilkenny (filed as Exhibit 10.15 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.16 Stock Option Agreement dated December 8, 2000, issued to Timothy J. Kilkenny (filed as Exhibit 10.16 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.17 Warrant Agreement dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.17 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.18 Warrant Agreement dated December 29, 2000, issued to Roger P. Baresel (filed as Exhibit 10.18 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.19 Stock Option Agreement dated February 29, 2000, issued to Wallace L Walcher (filed as Exhibit 10.19 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.20 Stock Option Agreement dated February 17, 1999, issued to Timothy J. Kilkenny (filed as Exhibit 3.1 to Registrant's Registration Statement on Form 10-SB, file number 000-27031 and incorporated herein by reference). #
-22- 10.21 Stock Option Agreement dated October 19, 1999, issued to Wesdon C. Peacock (filed as Exhibit 10.21 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.22 Stock Option Agreement dated April 14, 2000, issued to Jason C. Ayers (filed as Exhibit 10.22 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.23 Stock Option Agreement dated May 1, 2000, issued to B. Don Turner (filed as Exhibit 10.23 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.24 Form of Stock Option Agreement dated December 8, 2000, issued to Jason C. Ayers, Wesdon C. Peacock, B. Don Turner and Wallace L. Walcher (filed as Exhibit 10.24 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.25 Warrant Certificate Dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.25 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.26 Warrant Certificate Dated November 9, 2000, issued to Roger P. Baresel (filed as Exhibit 10.26 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.27 Warrant Certificate Dated December 29, 2000, issued to Roger P. Baresel (filed as Exhibit 10.27 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.28 Stock Option Agreement dated October 13, 2000, issued to Roger P. Baresel (filed as Exhibit 10.28 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.29 Stock Option Agreement dated October 12, 1999, issued to Travis Lane (filed as Exhibit 10.29 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.30 Promissory Note dated January 5, 2001, issued to Generation Capital Associates (filed as Exhibit 10.30 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.31 Placement Agency Agreement dated November 8, 2000 between FullNet Communications, Inc. and National Securities Corporation (filed as Exhibit 10.31 to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000). # 10.32 Promissory Note dated January 25, 2000, issued to Fullnet of Tahlequah, Inc. # 10.33 Promissory Note dated February 7, 2000, issued to David Looper # 10.34 Promissory Note dated February 29, 2000, issued to Wallace L. Walcher # 10.35 Promissory Note dated June 2, 2000, issued to Lary Smith # 10.36 Promissory Note dated June 15, 2001, issued to higganbotham.com L.L.C. # 10.37 Promissory Note dated November 19, 2001, issued to Northeast Rural Services # 10.38 Promissory Note dated November 19, 2001, issued to Northeast Rural Services # 10.39 Form of Convertible Promissory Note dated September 6, 2002 # 10.40 Employment Agreement with Timothy J. Kilkenny dated July 31, 2002 # 10.41 Employment Agreement with Roger P. Baresel dated July 31, 2002 # 10.42 Letter from Grant Thornton LLP to the Securities and Exchange Commission dated January 30, 2003 # 10.43 Form 8-K dated January 30, 2003 reporting the change in certifying accountant #
-23- 22.1 Subsidiaries of the Registrant # 31.1 Certification pursuant to Rules 13a-14(a) and 15d-14(a) of Timothy J. Kilkenny * 31.2 Certification pursuant to Rules 13a-14(a) and 15d-14(a) of Roger P. Baresel * 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Timothy J. Kilkenny * 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Roger P. Baresel *
-------------------- # Incorporated by reference. * Filed herewith. (b) Reports on Form 8-K Registrant filed no reports on Form 8-K during the three months ended June 30, 2003. -24- SIGNATURES Pursuant to the requirements of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: FULLNET COMMUNICATIONS, INC. Date: August 13, 2003 By: /s/ TIMOTHY J. KILKENNY ----------------------- Timothy J. Kilkenny President and Chief Executive Officer Date: August 13, 2003 By: /s/ ROGER P. BARESEL -------------------- Roger P. Baresel Chief Financial and Accounting Officer -25- EX-31.1 3 d08183exv31w1.txt CERTIFICATION PURSUANT TO RULE 13A-14 & 15D-14(A) EXHIBIT 31.1 CERTIFICATIONS I, Timothy J. Kilkenny, certify that: 1. I have reviewed this Form 10-QSB for the three months ended June 30, 2003 of Fullnet Communications, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, was made known to us by others within those entities, particularly during the period in which this report was being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ TIMOTHY J. KILKENNY - ------------------------ Timothy J. Kilkenny President and Chief Executive Officer EX-31.2 4 d08183exv31w2.txt CERTIFICATION PURSUANT TO RULE 13A-14 & 15D-14(A) EXHIBIT 31.2 CERTIFICATIONS I, Roger P. Baresel, certify that: 1. I have reviewed this Form 10-QSB for the three months ended June 30, 2003 of Fullnet Communications, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, was made known to us by others within those entities, particularly during the period in which this report was being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ ROGER P. BARESEL - ------------------------ Roger P. Baresel Chief Financial Officer EX-32.1 5 d08183exv32w1.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned President and Chief Executive Officer of FullNet Communications, Inc. (the "Company"), hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-QSB of the Company for the three months ended June 30, 2003 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2003 /s/ Timothy J. Kilkenny, ----------------------- President and Chief Executive Officer EX-32.2 6 d08183exv32w2.txt CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002), I, the undersigned Chief Financial and Accounting Officer of FullNet Communications, Inc. (the "Company"), hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-QSB of the Company for the three months ended June 30, 2003 (the "Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2003 /s/ Roger P. Baresel, -------------------- Chief Financial and Accounting Officer -----END PRIVACY-ENHANCED MESSAGE-----