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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549
 FORM 10-K (Mark One) þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004
 o
    
    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 000-30401 CYPRESS COMMUNICATIONS HOLDING CO., INC.   DELAWARE
    
    36-4166222(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)
 15 PIEDMONT CENTER, SUITE 100, ATLANTA, GEORGIA 30305   (404) 869-2500   Securities registered pursuant to Section 12(b)
of the Act : Title of each class
    
    Name of each exchange on which registeredNone
    
    None
 Securities registered pursuant to Section 12(g)
of the Act : COMMON STOCK, $0.001 PAR VALUE þ o
 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 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. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes o No þ The aggregate market value of the registrants outstanding shares of common stock held by
non-affiliates as of June 30, 2004 was $2,131,595.59, computed by reference to the closing sale
price of the common stock of $0.61 per share on such date. Aggregate market value has been
estimated solely for the purposes of this report. For purposes of this calculation, all executive
officers, directors and 10% stockholders are classified as affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other purposes. Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date: 6,723,395 shares of common stock as of March 1, 2005.




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CYPRESS COMMUNICATIONS HOLDING CO., INC. FISCAL YEAR 2004 FORM 10-K ANNUAL REPORT   TABLE OF CONTENTS PART I
    
    
    
    
    1ITEM 1.
    
    BUSINESS
    
    
    2ITEM 2.
    
    PROPERTIES
    
    
    17ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    17ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    18PART II
    
    
    
    
    18ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    18ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    19ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    21ITEM 7A
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    33ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    34ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    70ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    70ITEM 9B.
    
    OTHER INFORMATION
    
    
    70PART III
    
    
    
    
    71ITEM 10.
    
    DIRECTORS and EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    71ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    73ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    77ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    79ITEM 14.
    
    PRINCIPAL ACCOUNTING FEES AND SERVICES
    
    
    81PART IV
    
    
    
    
    81ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES
    
    
    82SIGNATURES
    
    
    85EX-10.16 EXECUTIVE COMPENSATION ARRANGEMENTSEX-10.17 DIRECTOR COMPENSATION ARRANGEMENTSEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




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PART I SPECIAL CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS (All dollar amounts are presented in thousands, except per share amounts) Certain statements contained in this report constitute forward-looking statements within the
meaning of the United States Private Securities Litigation Reform Act of 1995. In some cases,
forward-looking statements can be identified by the use of forward-looking terminology such as
may, will, estimate, intend, continue, believe, expect, or plan or the negatives
thereof, variations thereon or similar terminology. These forward-looking statements are found at
various places throughout this report. These forward-looking statements generally relate to
estimates, plans and objectives related to future operations as well as the markets for our
services and products and are based upon managements estimates of future results or trends.
Although we believe that the plans and objectives reflected in or suggested by such forward-looking
statements are reasonable, such plans or objectives may not be achieved. Actual results may differ
from projected results due, but not limited, to assumptions which do not materialize, unforeseen
developments, and/or matters beyond our control, including developments relating to the following:  
    the availability and adequacy of our cash flow to satisfy our obligations, including our debt service obligations, and
our need for additional funds required to support capital improvements, development and acquisitions;  
    the consummation, or failure to consummate, the acquisition of Cypress by TechInvest Holding Company, Inc.;  
    recovery of the taxes and surcharges overpaid to certain telecommunications service providers;  
    economic, competitive, demographic, business and other conditions in our markets and with respect to our product
offerings;  
    changes or developments in the laws, regulations or taxes in the telecommunications industry;  
    actions taken or omitted to be taken by third parties, including customers, suppliers, competitors, and stockholders,
as well as legislative, regulatory, judicial and other governmental authorities;  
    the occupancy rates in the buildings in which we maintain access agreements and the rate at which customers move out of
and tenants move into such buildings;  
    the number of persons that our customers employ;  
    the amount charged by telecommunications carriers to provide voice and data network elements;  
    changes in business strategy, capital improvements and development plans;  
    changes in personnel or their compensation;  
    an inability to renew or early termination of our contracts;  
    an inability to increase revenues and reduce costs in our existing operations;  
    an inability to engage in future acquisitions;  
    the loss of any license or permit;  
    resolution of any pending or future litigation in a manner adverse to us; and  
    the other factors discussed under Risk Factors That May Affect Future Results in Item 1 and elsewhere in this report. You should read this report completely and with the understanding that actual future results
may be materially different from what we expect. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their
entirety by the foregoing 1




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factors and the factors discussed in Item 1 and elsewhere in this report. These
forward-looking statements speak only as of the date of the document in which they are made. We
disclaim any obligation or undertaking to provide any updates or revisions to any forward-looking
statement to reflect any change in our expectations or any change in events, conditions or
circumstances on which the forward-looking statement is based, in any future statement, report,
press release or other communication. 
 ITEM 1. BUSINESS INTRODUCTION Cypress Communications Holding Co., Inc. (together with its subsidiaries, Cypress Holding,
we, us, or our) (formerly U.S. RealTel, Inc.) operates in one business segment, namely, the
provision of telecommunications services. Since Cypress Holdings acquisition of Cypress
Communications, Inc. (Cypress Communications) in February 2002, it has provided a full range of
telecommunications services to small to medium sized businesses in commercial office buildings
located in select major metropolitan markets in the United States. During 2001 and through the
first quarter of 2002, Cypress Holding also operated in the telecommunications business rights
segment, all of which operations were conducted in Latin America, namely in Argentina and Brazil.
In March 2002, Cypress Holding liquidated its Latin American telecommunications rights operations.
See Description of Business  Discontinuance of Telecommunications Rights Business. TELECOMMUNICATIONS SERVICES Overview Cypress Holding, through Cypress Communications, is an on-demand communication solution
provider in 25 major metropolitan U.S. markets. Each day, Cypress connects more than 100,000
employees for over 8,000 small and medium-sized businesses in commercial office buildings. As the
nations largest provider of in-building, managed communication solutions, Cypress supplies fully
managed voice, data and Internet communications, including advanced digital and IP phones,
unlimited local and long distance calling, business-class and dedicated Internet connectivity,
firewalls, security and VPN solutions, audio/web conferencing, business television and IP
communication solutions. We deliver these services over fiber optic, digital and broadband
networks that we design, construct, own or lease and operate inside large and medium-sized office
buildings. We target large and medium sized commercial office buildings in central business districts and
suburban office markets within select major metropolitan markets in the United States where small
and medium-sized businesses are typically located. We believe that our target businesses generally
are under-served by incumbent telecommunication service providers. Properties that house many
tenants with heavy demand for telecommunications services are the most desirable properties and
offer us the opportunity to generate the highest revenue. Our current operations are in the
following 25 markets: Atlanta, Birmingham, Boston, Chicago, Dallas, Denver, Hartford, Houston,
Indianapolis, Miami, Minneapolis, Nashville, New Orleans, New Jersey, New York, Orlando,
Philadelphia, Phoenix, Pittsburgh, Portland, San Francisco, Seattle, Southern California (Los
Angeles and Orange County), Tampa and Washington, DC. In all of our markets we bundle voice and internet data services to provide one-stop
shopping communications solutions under the service brand EZ Office Communications to building
tenants at competitive prices. In 68 buildings, we also provide business class cable television
services as part of our comprehensive communications package. Because we currently own or lease
and operate our in-building networks, we are typically able to deploy services to a new customer
within a few days of receiving an order. In addition, we are often able to provide same day
service for existing customers requesting new services or features, such as increased internet
bandwidth or additional telephone lines. Our current telecommunications services include: 2




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Data Services. We utilize our in-building fiber optic networks to deliver high-speed Internet
access directly to our customers in approximately 20 percent of our in-service buildings. The
remaining buildings are served by leased facilities with the incumbent local exchange carriers and
other competitive local exchange carriers (CLEC). We also utilize in-building CATV (Category 5
Cable) to deliver high-speed Internet access directly to our customers under the service name
SmartNet in approximately another 20 percent of our in-service buildings. The buildings which
utilize fiber optic networks and CATV deliver the high-speed Internet access using a Cisco Systems
router and switch deployed in the building. The remaining buildings employ high speed Internet
access delivered through a Digital Subscriber Line Access Multiplexer (DSLAM) deployed in the
building over twisted pair copper infrastructure. Our Internet service provides full Internet
protocol routing, symmetric upstream and downstream bandwidth, and plug-and-play installation. Our
customers do not need to purchase or maintain any specialized hardware to use our Internet service.
Moreover, because our service is capable of delivering up to 10/100 Mbps Ethernet connectivity, we
are poised to meet our customers growing bandwidth needs. The key features of our Internet
services are:  
    Dedicated High Speed Connectivity: Our SmartNetservice is available with access
speeds of 768kbs to 45 Mbps or more and is designed to be always on, providing
instantaneous connections and the capability to receive or transmit information
continuously.
    Flexibility: We can usually increase a customers bandwidth speed within minutes
of receiving a request.
    Diversity: We incorporate logically and physically diverse Internet circuits in
our collocation facilities in each city to protect customer Internet connections
from disruption.
    Reliability: Each of our collocation facilities is supported by backup battery
power. Moreover, we monitor all of our equipment, circuits and connections from our
network operations centers in Atlanta and Norcross, Georgia. Should an outage occur
in our network, we are notified immediately. In addition to our standard Internet access service, we offer other enhanced data services,
including:  
    E-mail, featuring IPSwitchs mail server version 7.13 and Postfix. Our service
permits customers to use any e-mail client, including Microsoft Outlook, Outlook
Express and Netscape Mail; access e-mail remotely using any web browser; set
instant reply messages; and forward messages to supported pagers or voice e-mail
systems.
    Web conferencing, marketed under the SmartConferencing brand, offers our
customers a flexible Web conferencing and virtual collaboration solution. When
combined with EZ Offices audio conferencing, it transforms a phone and PC with an
Internet connection into a virtual conference room, an online auditorium or an
electronic brainstorming session. Employees can effortlessly meet, collaborate and
exchange ideas, documents and information in real time without ever leaving their
offices. With SmartConferencing, users benefit from a rich communication and
collaboration solution involving voice, data, video, and presence.
    Web site hosting, featuring Compaq Proliant Servers running Microsoft Windows
2000 Advanced Servers with IIS and Linux with Apache Servers. Our web site hosting
also includes, on the Linux servers, graphs of web site hit statistics, access to a
database called MySQL, PHP and PERL support.
    Domain Name Registration (DNS). DNS can include all or some of the following:
registration of a domain, hosting, and the ability to make DNS updates quickly with
one phone call.
    Network Security Solutions. We offer a fully managed, network security solution,
SmartShieldincludes managed firewall, content filtering, spam blocking, Virtual
Private Network (VPN) and virus protection options. SmartShielddetects, blocks and
reports on 3




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network security threats. Web content filtering helps to control where and when
employees surf. Spam blocking stops unwanted email, before it enters the network. The
SmartShield Virtual Private Network effectively secures network communications and
encrypts data between offices, telecommuters and traveling employees, and continuous
anti-virus protection guards against known viruses, worms, Web attacks and email
intrusions.
    Monitoring Services. We provide 24-hour monitoring of web servers, e-mail servers
and customer local area networks. We can monitor customer systems every 5 minutes,
24 hours a day. If we encounter problems, we can notify our customers via e-mail,
pager or both.
    NNTP Internet News Feed. We carry a network news feed that contains over 30,000
news groups. Voice Services. Substantially all of our voice services customers rent their telephone devices
from us. This ensures a compatible interface with our in-building communications equipment and
provides customers with a number of key benefits, including access to an advanced, multi-function
digital telephone system; significant reductions in up-front capital costs; and reduced risk of
technological obsolescence. Our voice offerings include both traditional telephone services, such
as local and long distance services, as well as value-added services, such as integrated voicemail,
audio conferencing, webconferencing, calling cards and customizable toll-free number services.
Additional enhanced features include call waiting, call forwarding, dial-back and caller
identification. Bundled Voice and Data Services. Our customers tell us that assessing needs and selecting and
managing vendors for voice, data and video communications services is becoming increasingly
complex. The historical approach to selling communications services has been a la carte
packaging from numerous vendors. In the fall of 2003, we introduced our EZ Office Communications
suite which provides complete solutions for a simplified seat price. This bundling approach has
been popular with both new and existing customers and has the potential to substantially optimize
the customer buying process. We have also seen a significant trend toward flat rate or unlimited
long distance packaging. We began packaging EZ Office Flat Rate solutions in the fall of 2003 and
expect a majority of future customers to purchase these types of solutions. Voice over Internet Protocol (VoIP) Services. In late 2003, we began offering our bundled VoIP
service offering both inside and outside our 1,300 on-net office buildings. EZ Office IP
Communications is a fully managed voice, data and Internet solution that combines the durability of
traditional telecom with the advanced functionality of a Web-enabled user interface and innovative
user features, such as:  
    Unified Messaging that delivers and manages voicemail using Microsoft Outlook.
    Remote office capability that allows a home phone, cell phone or hotel phone to
be used as a business phone.
    Simplified dialing and common functionality across multiple locations.
    Softphone for point-and-click dialing at the desktop.
    Attendant Soft Console for advanced, centralized call handling.
    Call center queuing, basic IVR, reports and agent interface.
    Virtual numbers for a local number presence anywhere in the United States.
    Customizable Music-On-Hold.
    Audio and Web conferencing for real-time collaboration. We launched the EZ Office IP Communications service offerings in mid-2004 to all of our 25
markets, which enables our VoIP solutions over our high speed Internet service. The specific
application for delivering voice communications features to end-users is known as IP Centrex. IP
Centrex can enable significant new functionality for our customers and is expected to be the next
wave of communications solutions for business customers. IP Centrex can also be provided over
managed local loops which 4




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allows us to provide services to customers in off-net buildings. The benefits of IP Centrex
for us include opportunities to:  
    Follow customers if they move out of our current buildings.
    Sell new services to existing customers.
    Compete for customers that want a common solution for multiple locations.
    Obtain customers that want the latest in technology.
    Sell to customers in almost any building. Our VoIP solution consists of our EZ Office Web Dashboard, unlimited local calling, bundled
minutes or unlimited long distance, high speed Internet and Cisco IP telephones. Functionality
includes:  
    IP Phones. To date, we have provided IP phones from Cisco, but there are other
potential providers in this market. IP phones provide the traditional telephone
features as well as the flexibility to plug the phone into a standard Ethernet
connection  at the office or home. Cisco has sold over 2.5 million IP phones and
is a leader in the market. IP phones permit software updates to be uploaded to
provide patches and enhancements that are not possible on traditional phones.
    Find Me. Provides the ability to control the routing of your incoming calls.
Establishes one number for all your phones (office, cell, home office). Manages
important calls and blocks calls as your business needs change.
    Visual Voicemail. Accesses and manages your voicemail just like email from your
laptop or desktop PC, which we believe is much easier to utilize than the
traditional method of using the keypad on a telephone.
    Unified Messaging. Delivers voicemails to your email inbox (such as Outlook) and
attaches voicemail messages to emails.
    Call Logs. Displays all received, missed and dialed calls for last 90 days.
Allows for simple click to call dialing, even when you are traveling.
    Instant Conferencing. Lets you join 2-10 people instantly from any Internet
connection.
    Scheduled Conferencing. Allows you to establish a scheduled conference call for
several participants with advanced functionality to manage the call.
    Company Private Instant Messaging. Allows employees to chat with each other
without the distractions of more commonly available instant messaging solutions.
    Soft Console. Allows users to determine each employees availability status,
even if they are remote.
    Management Console. Provides simple administration from a web interface for
set-up and changes. Video and Other Services. In 68 buildings, we offer our customers a comprehensive package of
business class television services consisting of news, business, sports and network programming. We
deliver these services directly to our customers over our in-building networks using a combination
of direct broadcast satellite programming and off-air local channels. Our customers can elect to
receive more or less programming depending on their needs. We continue to investigate, test and add, where appropriate, complementary communications
products and services to enhance our one-stop shopping strategy. 5




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Employees As of March 1, 2005 we employed 331 active, full-time employees, all in the United States.
All of these employees are employed by Cypress Holdings wholly-owned subsidiary, Cypress
Communications. We believe our employee relationships are good. Competition We face significant competition. Both existing competitors and numerous other companies that
may seek to enter one or more aspects of our businesses may expose us to severe price competition
for our services and for building access rights. Many of our competitors have significantly greater
financial resources and may also be able to respond more quickly to technological developments and
changes in customers needs. We face competition in providing telecommunications services from:  
    In-Building Communications Providers. Because our license agreements are
generally non-exclusive, substantially all of the landlords of the buildings in
which we provide services are free to grant access, sales and marketing rights to
one or more of our competitors. It is not yet clear whether it will be profitable
for two or more companies to operate in-building networks within the same property.
We are the only in-building provider in most of the buildings in which we operate,
however, there is no assurance that this will continue to be the case in the future.
    Local Telephone Companies. Incumbent local telephone companies (ILECs) have
several competitive strengths, including established brand names and reputations,
and sufficient capital resources to rapidly deploy or expand communications
equipment and networks. Although these companies had been limited until recently to
offering local services, they now are authorized to provide long distance service in
all states, enabling them to offer one-stop shopping for communications services
in competition with us. Recently, SBC Communications has entered into an agreement
to acquire AT&T Communications; and Verizon Communications has entered into an
agreement to acquire MCI Communications. If these mergers are consummated, other
ILECs are likely to acquire nationwide and worldwide network assets, and these
companies will evolve from local telephone companies into integrated, global
telecommunications enterprises, which will magnify the competitive strengths they
already enjoy. Many CLECs market retail services and selectively construct
in-building facilities within our licensed buildings. ILEC dominance, and the more
limited competition presented by CLECs, diminishes our opportunity to provide
competitive local exchange services and may necessitate reductions in, or shrink
potential margins from, our voice operations generally.
    Long Distance Companies. Many of the leading long distance companies, such as
AT&T, MCI and Sprint, have the capacity to build their own in-building voice and
data networks. Other national long distance carriers, such as Level 3, Qwest and
Williams Communications, are building and managing high speed, fiber-based, national
voice and data networks, and such companies may extend their networks by installing
in-building facilities and equipment. As noted above, the traditional boundaries
between local and long-distance providers are increasingly blurred, resulting in
greater competition in all forms of voice communications services.
    Internet Service Providers. Internet service providers, such as Earthlink,
Prodigy, Sprint and the UUNet subsidiary of MCI, provide traditional and high-speed
internet access to residential and business customers, generally using existing
communications infrastructure.
    Digital Subscriber Line Companies. Digital subscriber line companies and/or their
internet service provider customers, such as Covad, AT&T and various RBOC
affiliates, provide high capacity internet access using digital subscriber line
technology, which enables data 6




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traffic to be transmitted over standard copper telephone lines at much higher speeds
than these lines would normally allow.
    Cable-based Service Providers. Cable-based service providers use cable television
distribution systems to provide high capacity Internet access and video services.
    VoIP/ IP Centrex Providers. National Retail IP Centrex providers such as ICG and
MCI Advantage have competitive offerings today and may become more aggressive in the
marketplace. Wholesale providers such as Level 3 and GoBeam are expected to partner
with numerous national retail channels which could include RBOCs and long distance
companies. IP-PBX providers such as Cisco, Avaya, Nortel, Shoreline, Siemens and
others are competing for PBX upgrades and multi-site networks which would compete
for, or replace, our offerings. Network-only providers such as Cbeyond are using
low cost VoIP networks to package bundles of local/ long distance and Internet
services in competition to our offerings. Stand alone VoIP application providers
like Vonage also market their services to small business customers in competition
with us, and larger companies such as AT&T and Verizon have started to enter this
market as well. IP Phone providers likely will grow and could offer both phone and
service solutions in competition to our offerings. It is expected that most
telecommunications service providers will deploy VoIP services of some kind either
directly or through partnerships. There are still many issues with integration,
standardization, OSS systems, operational support and other areas that make building
your own network very complex. We expect numerous acquisitions to reshape the

industry players. For example, GoBeam recently announced merger with Covad. The
VoIP market is in the early stages and is rapidly evolving. Sales and Marketing We market our on-net telecommunications services directly to the tenants in our licensed
buildings. Our typical license agreement enables us to display and disseminate our marketing
materials in the leasing office and other locations within a building. Many of our license
agreements also require building owners, along with management and leasing representatives to
advise tenants of the availability of our services and notify us as new tenants enter the building.
In addition to these rights, we use landlord, property manager and tenant testimonials and
references as marketing tools. We currently provide data and/or voice communications services to
many of the landlords and property managers within our licensed buildings, due in part to the
requirement under some of our license agreements that we provide free basic Internet access to such
parties. Our VoIP based EZ Office Communications Suite allows us to utilize leased, high speed data
facilities to connect to any commercial customers premises in our 25 major metropolitan markets.
This bundled EZ Office IP Communications offering effectively expands our addressable market for
deploying bundles services outside of our traditional 1,000 on-net buildings. Our sales approach is highly consultative. In our initial sales meetings, we work closely
with prospective customers to assess their particular communications needs. We then present
potential customers with customized proposals which we believe are often less expensive, more
comprehensive and easier to administer than their current communications solutions. Real Estate Selection and Marketing Overall, as of December 31, 2004, we had license agreements giving us the right to operate our
networks in more than 1,500 buildings, representing more than 500 million rentable square feet of
office space in the United States and we were actually operating in approximately 1,000 of those
buildings, representing more than 300 million rentable square feet of office space. Under the
terms of our license agreements, we pay property owners a fixed rental fee and/or a percentage of
the revenue we receive from providing communications services to the tenants in a building. 7




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Suppliers We connect our in-building networks to local, long distance and Internet service providers in
order to serve our customers. In most of our markets, we connect our networks to, and lease
facilities from, CLECs, collocation service providers and local telephone companies. We purchase long-distance transmission capacity from several long-distance carriers, such as
MCI, XO Communications and AT&T. Under some of these agreements, we are required to undertake
material minimum revenue and/or volume commitments. For a description of our aggregate commitments
see Note 9(c) to the Notes to our Consolidated Financial Statements. To provide Internet services to our customers, we purchase intraLATA data transmission
connectivity between our licensed buildings and local points of presence from CLECs, including MCI,
XO Communications, Time Warner Telecom and local exchange carriers. We obtain our local points of
presence from collocation service providers, such as C3 Communications, IX2, Semaphore and Switch &
Data. We use broadband service providers, such as MCI, XO Communications, Level 3 and Sprint, to
procure connectivity between our collocation facilities and the Internet backbone. Our in-building networks contain equipment such as data switches and routers, voice switches
and other communications and video equipment that we purchase from Nortel Networks, Cisco Systems,
Viadux and other manufacturers. As of March 1, 2005, we do not have minimum purchase commitments
with any of our equipment manufacturers. There are alternative vendors available to us for all the
types of equipment that we purchase. Regulation Overview. Our telecommunications services are subject to regulation at the federal, state and
local levels. The regulations that apply to our operations are susceptible to change as a result
of ongoing administrative proceedings, litigation and new legislation. For example, the FCC has had
a pending proceeding for several years that could result in new rules affecting our competitive
position in multiple tenant environments (MTEs), such as limiting the preferences that landlords
may allow to an in-building provider. In addition, our costs are affected by regulations governing
the dominant local telephone companies, on which we rely for transmission facilities and network
access in many cases. The outcome of these various proceedings, as well as any other regulatory
initiatives, cannot be predicted. Future regulatory changes may have a material adverse affect on
our business and operations. Local Voice Telephone Service.Cypress Communications Operating Company, LLC (formerly Cypress
Communications Operating Company, Inc., Cypress Operating Company), a wholly owned subsidiary of
Cypress Communications, is authorized to provide local exchange service as a CLEC in Alabama,
Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana,
Louisiana, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania,
Tennessee, Texas, Utah, Washington and Washington, D.C. Another subsidiary of Cypress
Communications, Cypress Communications Holding Company of Virginia, LLC (formerly Cypress
Communications Holding Company of Virginia, Inc., Cypress Virginia), is authorized to provide
local exchange service in Virginia. As a CLEC, Cypress (including both Cypress Operating Company
and Cypress Virginia) is authorized to resell other carriers local voice services. If Cypress
obtains such services from ILECs, the tariff rates under which it obtains services may be subject
to change as the result of regulatory proceedings over which Cypress does not have control.
Depending on state regulations, Cypress may also construct its own facilities or purchase network
elements from ILECs in order to provide telecommunications services. To provide local voice
services as a CLEC, Cypress obtains interconnection services from an ILEC under the ILECs existing
tariff or by separate interconnection agreement. Cypress has entered into interconnection
agreements with the dominant ILECs in each of the markets in which it operates. Regulations promulgated by the FCC under the Telecommunications Act of 1996 Act (the 1996
Act) require ILECs to provide interconnection, including access to unbundled network elements and
retail 8




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services, at wholesale rates to CLEC competitors. Cypress has exercised its rights under the
1996 Act to obtain access to unbundled elements of the ILECs networks in several of its markets.
By doing this, as well as by migrating circuits to other CLECs, we have been able to reduce our
network operating costs. These cost savings, however, depend on the regulatory duties of ILECs to
provide us with unbundled elements at regulated rates. Because the regulatory duties of ILECs are
subject to change, we cannot assure you that we can continue to benefit from cost savings in the
future. The FCC has revised its interconnection regulations several times since 1996 and many of the
FCCs decisions have been subject to court appeals. During 2004 and early 2005, the FCC released
significant changes to its rules governing access to unbundled network elements, and proposed
additional changes (which have not yet been adopted) to its rules governing the prices for these
elements. The FCC rules are currently the subject of appeals before the U.S. Court of Appeals in
several circuits. The uncertainty from this and other pending judicial and regulatory proceedings
makes it difficult to predict whether we will be able to rely on existing interconnection rights
and obligations or have the ability to negotiate acceptable interconnection agreements in the
future. CLECs local and in-state telecommunications services are typically subject to some degree of
state regulation. Most states require that CLECs receive approval to operate from the states
public service commission. CLECs are generally required to file tariffs setting forth the terms,
conditions and prices for voice services. In addition, under federal law, including the 1996 Act,
CLECs are subject to additional obligations, including requirements to interconnect with other
carriers, to provide other carriers access to their networks, to comply with number portability and
dialing parity obligations, and to make the terms of their agreements available to other carriers
on a non-discriminatory basis. On the other hand, CLECs have the right, among other things, to
obtain interconnection with ILECs, to receive reciprocal compensation for terminating the calls of
other local carriers and access charges for originating and terminating long distance calls for
other long distance providers, and to purchase unbundled network elements and wholesale services of
the ILECs network at prices not available to other ILEC customers. As a CLEC, we are required to comply with a variety of state laws and regulations concerning
billing format, notices to customers, restrictions on disconnection for non-payment and other
causes, filing of tariffs and reports, and payment of taxes, fees, and surcharges, including the
federally-mandated universal service fund contribution. Compliance with these legal requirements
increases the cost of our operations. In addition, complaints by customers or by state regulatory
agencies alleging violations of any of these requirements could cause us to incur substantial legal
and administrative expenses and adversely affect our business, even if the allegations are not
ultimately proven. If we construct facilities that cross public rights-of-way, for example to connect customers
in two or more buildings, or to connect to the facilities of an ILEC, we may also be subject to
local government land use and franchise regulations. If local governments impose conditions on
granting permits or other authorizations or if they fail to grant such permits or other
authorizations in a timely manner, it may negatively impact our ability to expand our network on a
timely basis and adversely affect our business. Long Distance Voice Services. Under current regulations, we are not required to file tariffs
with the FCC in order to provide domestic interstate and international long distance services; but
we are required to adhere to certain basic rules and regulations regarding such services that are
promulgated by the FCC, including the payment of certain regulatory fees. Cypress Operating
Company is authorized by the FCC to provide international switched resale services. In some
states, we must obtain authorization to provide intrastate long distance voice services. Cypress
Operating Company is currently authorized to provide intrastate long distance services in Alabama,
Arizona, California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana,
Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Jersey,
New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas,
Utah, Washington, Washington, D.C. and Wisconsin. Cypress Virginia is authorized to provide
intrastate long distance services in Virginia. Data Services. Our Internet and data services generally are not subject to federal, state or
local regulation. Congress and some state legislatures have considered imposing taxes and other
burdens on 9




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Internet service providers and regulating content provided over the Internet. In addition, we
may be affected by certain statutes, regulations and court cases that assess liability against
Internet service providers and other on-line service providers for providing information or content
across their services or equipment that violates copyright, indecency, obscenity and other laws, or
is defamatory, fraudulent or tortious in nature. The FCC is now considering a variety of proposals
that could impose additional burdens on some services offered over the Internet, including
obligations on some or all providers of Internet access services to contribute to the cost of
federal universal service programs, and additional regulation of services that transmit voice
communications over the Internet. Future regulation may have a negative impact on our ability to
offer Internet services at competitive and profitable rates. Video and Other Services.Our video services are regulated to a far lesser extent than the
video services of traditional cable operators, which receive franchises from the municipalities
they serve and typically construct facilities across public rights of way. For example, our video
programming rates are not regulated and we are not subject to must carry obligations, which
require cable license franchisees to provide certain programming to customers. We are subject to
some technical requirements with regard to our provision of video services, such as requirements
that our facilities not cause harmful interference with certain other communications systems. We do not own or operate any direct broadcast satellites (DBS) or hold any similar types of
licenses. Rather, we resell the programming services of DBS providers, such as DirecTV, Inc.
Thus, our video services are regulated to a far lesser extent than the video services of
traditional DBS operators. Recent rulings of the FCC may help facilitate the provision of our video services. For
example, the FCC has ruled that under certain circumstances, a roof may be considered an area
controlled by a tenant upon which the owners of multiple unit premises cannot forbid the
installation of some communication devices, such as satellite dishes. We do not hold any cellular or similar types of radio licenses. To the extent that we provide
cellular or paging services, we rent or sell pagers and wireless phones and resell the services of
third party wireless providers. Consequently, while we do pay some regulatory fees, we generally
are not subject to federal regulation with respect to these services. 911 and Enhanced 911.The FCC requires telecommunications carriers to establish 911 service,
i.e.,three digit dialing access to public safety call centers for emergency services. Enhanced
911, or E911, service permits the public safety call center to identify a callers telephone number
and calling location for the dispatch of emergency personnel. 911 and E911 services are regulated
at the federal, state and local level. Some states have enacted, or are likely to enact,
legislation that will impose a penalty or surcharge on service providers whose telecommunications
equipment does not meet or exceed the E911 requirements for the applicable jurisdiction. We
currently offer, or are preparing to offer, 911 or E911 services in locations where the service is
technically feasible; however, our ability to provide emergency service may be impeded by failed
systems, systems that were not properly configured, systems that were not updated to reflect
changes in technology or public networks, and certain other technical problems. We may incur
penalties, surcharges, damages or other liabilities where, and to the extent that, we cannot
provide 911 or E911 service. Intellectual Property We regard certain aspects of our products, services and technology as proprietary; however,
because we are not currently prosecuting any patent, trademark or copyright applications before the
United States Patent and Trademark or Copyright Office, it may be possible for third parties to
copy or use some of our intellectual property without authorization. Notwithstanding the
foregoing, we regularly execute confidentiality, non-disclosure and non-competition agreements with
our carriers, vendors, employees and representatives, in addition to other precautions, to protect
our intellectual property. 10




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DISCONTINUANCE OF TELECOMMUNICATIONS RIGHTS BUSINESS Overview In our former telecommunications rights operations, we provided site access and usage rights,
which we call telecommunications rights, to telecommunications companies in Latin America. We
obtained telecommunications rights from property owners under long-term, master lease agreements.
Under the master leases, we received the rights to install communications infrastructure in a
property and/or to provide communications services to the propertys tenants. In exchange, we paid
the property owner a percentage of the revenues that we received from subleasing the
telecommunications rights to telecommunications companies. We conducted these operations only in
Argentina and Brazil. In March 2002, we liquidated our Latin American operations. HISTORY Cypress Holding was organized in January 1997 under the name AGILE, LLC. Cypress Holding
was incorporated in the State of Illinois under the name U.S. RealTel, Inc. in August 1997. In
November 1997, U.S. RealTel merged with and into Admiral Two Capital Corporation and the surviving
companys name was changed to U.S. RealTel, Inc. On May 8, 2000, U.S. RealTel reincorporated in
the State of Delaware. U.S. RealTel, Inc. established operations in Buenos Aires, Argentina in
December 1998 and in Sao Paolo, Brazil in February 2000. U.S. RealTel, Inc. conducted its Latin
American operations in Argentina through RealTel de Argentina, S.A., a majority owned Argentine
corporation, and in Brazil through RealTel do Brasil, S.A., a majority owned Brazilian corporation.
Both Latin American operations have been liquidated. On June 16, 2004, U.S. RealTel, Inc. amended
its certificate of incorporation to change its name to Cypress Communications Holding Co., Inc. In March 2002, Cypress Holding acquired Cypress Communications, a U.S. based operation that
provides a full range of telecommunications services to businesses in commercial office buildings
located in select major metropolitan markets within the United States. The acquisition of Cypress
Communications allowed Cypress Holding to concentrate its resources and expertise on providing
premium communications services to over 2,500 small and medium sized business customers in seven
major metropolitan U.S. markets: Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles and
Seattle. In July 2002, through Cypress Communications, Cypress Holding completed the purchase of
certain assets of Intermedia Advanced Building Networks, the shared tenant telecommunications
services business of WorldCom, Inc. (ABN/STS). The acquired assets included all customer
contracts, in-building networks and the associated building access rights, as well as the necessary
employees to support such assets. The acquisition of ABN/STS allowed Cypress Communications to
extend its telecommunications services operations to over 5,700 small and medium sized business
customers in 25 major metropolitan U.S. markets. In March 2003, Cypress Holding, through Cypress Communications, acquired the Southern
California building-centric voice and data services business of Eureka Broadband Corporation
(Eureka). These assets included customer contracts, as well as Eurekas in-building networks and
associated building access rights. The acquisition of the Eureka assets has allowed Cypress Holding
to expand its telecommunications services operations to include over 750 small and medium sized
business customers in the California market. In July 2003, Cypress Holding, through Cypress Communications, negotiated the surrender of
certain assets from E-Building Solutions, Inc. (E-Building) in California, a building-centric
data services business, to mitigate the loss resulting from E-Buildings default on a $450 note
receivable due to Cypress Communications. These assets included customer contracts, as well as
E-Buildings in-building networks and associated building access rights. 11




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Risk Factors That May Affect Future Results An investment in our common stock involves a high degree of risk. You should carefully
consider the factors described below, in addition to those discussed elsewhere in this report, in
analyzing an investment in our common stock. If any of the events described below occurs, or if any
risk not identified below negatively impacts us, our business, financial condition and results of
operations would likely suffer, the trading price of our common stock could fall and you could lose
all or part of the money you paid for our common stock. In addition, the following factors could cause our actual results to differ materially from
those projected in our forward-looking statements, whether made in this Form 10-K, our annual or
quarterly reports to shareholders, future press releases, SEC filings or orally, whether in
presentations, responses to questions or otherwise. See Special Cautionary Statement Regarding
Forward-Looking Statements. The pending acquisition of the Company might not be consummated. As mentioned elsewhere in this report, the Company has entered into, and the stockholders have
approved, an Agreement and Plan of Merger pursuant to which the Company will merge with and into a
wholly-owned subsidiary of TechInvest Holding Company, Inc., an affiliate of Arcapita, Inc., and
become a wholly-owned subsidiary of TechInvest Holding Company, Inc. The consummation of the
merger is subject to customary closing conditions and certain regulatory approvals, all of which
have not yet been completed. The failure to consummate the merger could have a material adverse
impact on our business. We may not be able to recover any of the telecommunications taxes and surcharges that were
overpaid. In September 2004, management determined that the Company made payments to telecommunications
service providers for federal, state and local taxes and surcharges on telecommunications services
for which it might be exempt. The Company is attempting to recover these taxes and surcharges
directly from the telecommunications service providers involved. Although management believes that
the amount of taxes and surcharges which the Company is entitled to recover is in the range of
$1,000 to $2,500, there is no assurance that any of the amounts will be recovered or when the
amounts will be recovered, if ever. Our short operating history makes it difficult to predict future operating results. Our business was founded in January 1997. We have only operated in the telecommunications
services business since February 2002. As such, we have a short operating history and limited
historical financial and operating data with respect to our business. We have incurred significant
cumulative operating losses and negative cash flows from operations since inception. We may incur operating losses in the foreseeable future. Although we have recently achieved profitability in our operations, there is no guarantee that
we can sustain this level of profitability. Since we entered into the telecommunications services
business, we have only recently reported our first operating profits from continuing operations.
As a result, we will need to continue to generate significant revenue to maintain profitability,
which may not occur. Our business model may not succeed. We are attempting to implement our business model in a highly competitive and fast-changing
telecommunications market which makes it impossible to predict the extent to which our business
model will succeed. We may continue to make substantial capital expenditures in deploying our
networks without knowing whether our business plan can be successfully executed. As a result,
there is a risk that our business will fail. Additionally, our limited operating history makes it
difficult to evaluate the execution of our business model thus far. 12




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To be successful, we must develope, market and implement the various components of our
business strategy at widely accepted prices that exceed our operating expenses. Even if we execute
our business model as we plan, we cannot be certain that we will ever achieve favorable operating
results, profitability or generate revenues sufficient to cover our capital and operating costs. We have substantial debt. We have incurred substantial debt to date for purposes of funding our acquisitions and
operations. We may use a substantial portion of our cash flow to pay principal and interest on our
debt, thereby reducing the funds available for working capital, capital expenditures and other
general corporate purposes, including executing our business strategy. In addition, a substantial
portion of this debt will become due in the next 12 months. We may not be able to generate adequate
cash flows from operations to repay this debt, or we may not be able to refinance this debt with a
long term debt facility. Our inability to repay or refinance this debt could have a material
negative impact on our operations. We must attract and retain key personnel in order to implement our business plan. The loss of the services of key personnel or the failure to attract additional qualified
personnel as required could have a material adverse effect on our ability to sustain our business
or grow. We believe that our future success will depend in large part on our ability to attract
and retain qualified managerial, technical and sales personnel. We may not be able to grow sufficiently and manage that growth in order to be successful. If we are successful in implementing our business plan, our operations may expand rapidly. We
believe we must grow our business in order to achieve sufficient economies of scale to operate
profitably. Because the communications industry is capital intensive, rapidly evolving and subject
to significant economies of scale, as a relatively small organization we are at a competitive
disadvantage. The growth we must achieve to reduce that disadvantage will put a significant strain
on all of our resources. We will require substantial additional capital beyond that which is
currently available to us in order to finance our growth according to our current business plan. If
we fail to grow rapidly or obtain additional capital, we may not be able to compete with larger,
more established companies Furthermore, rapid expansion could place a significant strain on our management, financial and
other resources. Our ability to manage future growth, if it occurs, will depend on, among other
things, our ability to: (1) control expenses related to our business plan; (2) maintain responsive
customer service; (3) improve existing, and implement new, billing and collections, operational
support and administrative systems; and (4) expand, train and manage our employee base, in
particular qualified sales, technical and managerial personnel. The failure to manage our growth
effectively would impair our business and operational performance. We may not be able to maintain
the quality of our operations, to control our costs, and to expand our internal management,
technical, information and accounting systems in order to support our desired growth. We rely upon information processing systems provided by others. Sophisticated information processing systems are vital to our growth and our ability to
achieve operating efficiencies. A failure of any of these systems would have a material adverse
effect on our operations and business. In addition, there may be other systems we have not
identified that are required or in need of improvement. We may also be unable to maintain and
upgrade these systems as necessary. We must purchase voice and data transmission capacity from third parties who may be unable or
unwilling to meet our requirements. We rely upon other communications carriers, such as local telephone companies, long distance
companies and Internet service providers, to provide transmission capacity from the buildings we
serve. 13




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Our failure to obtain adequate connections from other carriers on a timely and efficient basis
could delay or impede our ability to provide services and generate revenue. Sufficient capacity or
redundant capacity may not be readily available from third parties at commercially reasonable
rates, if at all. Our failure to obtain sufficient redundant connectivity could result in an
inability to provide service in certain buildings and service interruptions, which could in time
lead to loss of customers and damage to our reputation. Additionally, many of the communications
carriers we rely on for transmission capacity are also our direct competitors. The sector in which we operate is highly competitive, and we may not be able to compete
effectively. The numerous companies that may seek to enter our niche may expose us to greater price
competition for our services. Competition could also result in a diminution of our net revenue
margins. We face competition from many communications providers with significantly greater
financial resources, well-established brand names, larger customer bases and diverse strategic
plans and technologies. For example, we face competition from traditional and new communications
companies, including local, long distance, cable modem, Internet, digital subscriber line, fixed
and mobile wireless and satellite data service providers. Intense competition has led to declining
prices and margins for many communications services. We expect this trend to continue as
competition intensifies in the future. If our competitors successfully focus on our market, the intense competition could materially
harm our business. To the extent these competitors are successful, we may face difficulties in
building our networks and marketing our services within some of our target buildings. Because our
agreements to use utility shaft space within buildings are generally not exclusive, owners of such
buildings may give similar rights to our competitors. If a competitor installs a network in a
building in which we operate, there will likely be substantial price competition preventing us from
operating in that building profitably. In addition, we may also face severe price competition for
building access rights, which could result in higher sales and marketing expenses and lower profit
margins. We must continue to obtain license agreements with building owners and managers in order to be
successful. Our business depends upon our ability to continue to operate our in-building networks. The
failure of building owners or managers to grant or renew access rights on acceptable terms, or any
deterioration in our existing relationships with building owners or managers, could harm our
marketing efforts and could substantially reduce our potential customer base. Current federal and
state regulations do not require building owners to make space available to us, or to do so on
terms that are reasonable or nondiscriminatory. Building owners or managers may decide not to
permit us to install our networks in their buildings or may elect not to renew our license
agreements. Non-renewal of these agreements would reduce our revenues and we might not recover our
infrastructure costs. Alternative technologies pose competitive threats. The communications industry is subject to rapid and significant technological change, such as
continuing developments in digital subscriber line technology and alternative technologies for
providing high-speed data communications. In addition to fiber-optic technology, there are other
technologies, such as VoIP, DSL and wireless technology that provide more capacity and speed than
traditional copper wire transmission technology. Our success in improving and expanding our
operations and services will depend on our ability to anticipate or adapt to new technology on a
timely basis. The development of new technologies or the significant penetration of alternative
technologies into our target market may either reduce the demand for our services, require us to
devote important capital, and human and technical resources to upgrade, reconfigure or replace our
current or future technology or some combination of each of these, and consequently could have a
material adverse effect on our business. 14




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Retained control by our principal stockholders may create conflicts of interest. The concentration of ownership of our stock may have the effect of delaying, deferring or
preventing a change in control, merger, consolidation, or a tender offer which could involve a
premium over the price of our common stock. Currently, our executive officers, directors and
greater-than-five-percent stockholders and their affiliates, in the aggregate, beneficially own a
substantial percentage of the outstanding common stock (not including shares issuable upon the
conversion or exercise of warrants or options). If all of these stockholders were to vote together
as a group, they would have the ability to exert significant influence over our board of directors
and its policies as well as other significant corporate matters such as charter and bylaw
amendments and possible mergers or corporate control contests. Legislation and government regulation could adversely affect us. Many of our services are subject to federal, state and/or local regulation. If we fail to
comply with all applicable regulations or experience delays in obtaining required approvals, our
business could be harmed. For example, we must make regular filings in some of the states in which
we operate and could be fined if we do not timely make these filings. Additionally, compliance
with these regulatory requirements may be costly. We may experience delays in closing future
corporate transactions, including debt and equity financings and sales of any portion of our
regulated business, due to requirements to obtain regulatory approval of these transactions.
Regulations governing communications services also change from time to time in ways that are
difficult to predict. Such changes may harm our business by increasing competition, decreasing
revenue, increasing costs, impairing our ability to offer services or otherwise. For example, the
FCC could mandate that building owners give access to competitive providers of communications
services. If our interpretation of regulations applicable to our operations is incorrect, we may incur
additional expenses or become subject to more stringent regulation. If our interpretations of
these regulations and guidelines are incorrect, we may incur additional expenses to comply with
additional regulations applicable to our operations. We also may incur significant expenses to
defend ourselves against complaints by customers or other persons who claim we have violated
applicable regulations, even if our interpretation of the rules is ultimately upheld by the
regulatory agency. We have significant fixed costs. As of December 31, 2004, we have committed to pay approximately $10,449 for services from
other communications carriers through 2007. We will have to pay those carriers even if we do not
use their services. We operate in a market that requires high fixed costs to build out our
in-building networks and we therefore must have high utilization of our products and services with
each building in which we operate in order to be successful. We expect that the communications
needs will be in excess of the purchase requirements for the years ending December 31, 2005, 2006
and 2007. Our business could suffer from a reduction or interruption from our equipment suppliers. We purchase our equipment from various vendors. Any reduction in or interruption of
deliveries from our major equipment suppliers, such as Cisco Systems and Nortel Networks, could
delay our plans to install in-building networks, impair our ability to acquire or retain customers
and harm our business generally. In addition, the price of the equipment we purchase may
substantially increase over time, increasing the costs we pay in the future. It could take a
significant period of time to establish relationships with alternative suppliers for each of our
technologies and substitute their technologies into our networks. We must make capital expenditures before generating revenues, which may prove insufficient to
justify those expenditures. We typically install an in-building network before we have any customers in that building.
Since we generally do not solicit customers within a building until our network is in place we may
not be able to 15




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recoup all of our expenditures within any building. Prior to generating revenues in a
building, we must incur initial capital expenditures. Our expenditures will vary depending on the
size of the building and whether we encounter any construction-related difficulties. After initial
installation of our network, our capital expenditures continue to grow based on the extent to which
we add customers within a building. Any acquisitions or investments we make could disrupt our business and be dilutive to our existing
stockholders. We may consider acquisitions of, or investments in, complementary businesses, technologies,
services or products from time to time. Acquisitions and investments involve numerous risks,
including:  
    the diversion of management attention;
    difficulties in assimilating the acquired business;
    potential loss of key employees, particularly those of the acquired business;
    difficulties in transitioning key customer relationships;
    risks associated with entering markets in which we have no or limited prior
experience; and
    unanticipated costs. In addition, these acquisitions or investments may result in:  
    dilutive issuances of equity securities;
    the incurrence of debt or assumption of liabilities;
    large one-time expenses; and
    the creation of other intangible assets that result in significant amortization expense. Any of these factors could materially harm our business or our operating results. Our networks may be vulnerable to unauthorized access which could interfere with the provision of
our services. Our networks may be vulnerable to unauthorized access, computer viruses and other disruptive
problems. Remediating the effects of computer viruses and alleviating other security problems may
require interruptions, incurrence of costs and delays or cessation of service to our customers.
Unauthorized access could jeopardize the security of confidential information stored in our
computer systems or those of our customers, for which we could possibly be held liable. Any
unauthorized access could further damage our reputation and ultimately our ability to successfully
compete in our market. Impairment of our intellectual property rights could harm our business. We regard certain aspects of our products, services and technology as proprietary and attempt
to protect them with legal rights, contractual rights and other methods. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use our proprietary products,
services or technology without authorization, or to develop similar proprietary matter
independently. If a third party were to obtain our proprietary information and we were unable to
prevent them from disseminating that information or using it to our disadvantage, our business
could be harmed. The exercise of outstanding securities my have a dilutive effect. We have outstanding warrants and options with exercise prices ranging from $0.01 per share to
$10.00 per share. The exercise of these securities could have a dilutive effect with respect to
holders of our 16




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common stock. As of March 1, 2005, the total number of shares issuable by us under outstanding
warrants and options was approximately 15,103. 
 ITEM 2. PROPERTIES GENERAL
    
    SQUARE
    
    
    
    
    
    
    LEASELOCATION
    
    CITY
    
    CHARACTER
    
    FEET
    
    
    ANNUAL RENT
    
    
    EXPIRATIONPiedmont Center
    
    Atlanta, GA
    
    Principal Executive
    
    
    35,245
    
    
    $
    1,142
    
    
    2005-2007Office, CypressHeadquarters33 N. LaSalle
    
    Chicago, IL
    
    General Office
    
    
    14,283
    
    
    $
    438
    
    
    April 30, 2006160 Federal Street
    
    Boston, MA
    
    General Office
    
    
    7,292
    
    
    $
    332
    
    
    June 30, 20051555 Oakbrook
    
    Norcross, GA
    
    General Office /
    
    
    36,503
    
    
    $
    361
    
    
    January 1,2007Warehouse1525 Wilson Blvd.
    
    Arlington, VA
    
    General Office
    
    
    10,175
    
    
    $
    347
    
    
    July 31, 20071900 Avenue of the Stars
    
    Los Angeles, CA
    
    General Office
    
    
    7,065
    
    
    $
    284
    
    
    July 31, 20071650 Market Street
    
    Philadelphia, PE
    
    General Office
    
    
    5,898
    
    
    $
    150
    
    
    December 31, 20094851 LBJ Freeway
    
    Dallas, TX
    
    General Office
    
    
    7,742
    
    
    $
    219
    
    
    September 30, 2005222 W Colinas Boulevard
    
    Dallas, TX
    
    General Office
    
    
    7,928
    
    
    $
    219
    
    
    December 31, 20071600 Broadway
    
    Denver, CO
    
    General Office
    
    
    8,974
    
    
    $
    199
    
    
    July 31, 2007One Riverway
    
    Houston, TX
    
    General Office
    
    
    5,188
    
    
    $
    127
    
    
    August 20, 2005
 Cypress Holding has subleased all or part of the above offices with the exception of: 160
Federal Street, 1555 Oakbrook, 1650 Market Street, 222 W. Los Colinas and One Riverway, which
Cypress Holding leases directly from the landlord. We lease space in 30 additional commercial properties in the United States for general office
purposes, network facilities, storage and warehouses, in each instance under leases that do not
contain material financial obligations. 
 ITEM 3. LEGAL PROCEEDINGS We are a party to various legal proceedings that are ordinary and incidental to our business.
Except as set forth below, management does not expect that any currently pending legal proceedings
will have a material adverse effect on our results of operations or financial position. With respect to our ABN/STS acquisition, on or about January 23, 2003, we filed proofs of
claim in the bankruptcy cases of WorldCom, Inc. and certain of its debtor affiliates as a result of
such parties defaults under that certain Asset Purchase Agreement dated May 31, 2002 by and among
Intermedia Communications, Inc., Shared Technologies Fairchild, Inc., Shared Technologies Fairfield
Telecom, Inc., MCI Worldcom Communications, Inc., Worldcom, Inc., MCI-WORLDCOM Network Services,
Inc. and Cypress Communications, that certain Omnibus Post-Closing Agreement dated July 16, 2002,
by and among Intermedia Communications, Shared Technologies Fairchild, Shared Technologies
Fairfield Telecom, MCI Worldcom Communications, Worldcom, Inc., MCI-WORLDCOM Network Services and 17




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Cypress Communications and certain other related ancillary documents. We filed amendments to
these proofs of claim on January 29, 2004 to increase our claim to approximately $13,900 , which
amended proofs of claim to include damages caused to us as a result of certain fraudulent
accounting practices of the debtors (not, so far as we are aware, specific to Cypress
Communications) and failure to perform required actions and other breaches of the Transaction
Documents by the Debtors. On or about October 18, 2004, the Debtors objected to the Companys proofs of claim and a
hearing has been set for April 22, 2005. The Company expects that WorldCom will bring
counterclaims alleging breaches by Cypress of the agreements and related ancillary documents. The
Company expects such counterclaims may seek damages of approximately $2,300, of which the Company
has approximately $1,500 currently recorded in accrued expenses. The Company cannot express an
opinion as to whether a favorable or unfavorable outcome is either probable or remote or to
estimate the range of any possible loss or gain that may result from the settlement of these
claims. An unfavorable outcome could, under certain circumstances, result in a material adverse
effect on our business, financial condition and results of operations. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of fiscal 2004 to a vote of the security
holders. 
 PART II (All dollar and share amounts are presented in thousands, except per share amounts) 
  ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES Our common stock is quoted on the Nasdaq OTC Bulletin Board (OTCBB) under the symbol CYHI.
The following table sets forth, for the periods indicated, the high and low bid quotations for the
common stock, as reflected on the OTCBB. The following quotations represent inter-dealer prices
without adjustment for retail markups, markdowns or commissions and may not necessarily represent
actual transactions. PERIOD
    
    HIGH
    
    
    LOW2004Fourth Quarter
    
    $
    1.52
    
    
    $
    0.70Third Quarter
    
    
    1.35
    
    
    
    0.60Second Quarter
    
    
    0.90
    
    
    
    0.51First Quarter
    
    
    1.10
    
    
    
    0.722003Fourth Quarter
    
    $
    1.01
    
    
    $
    0.53Third Quarter
    
    
    1.40
    
    
    
    0.70Second Quarter
    
    
    2.00
    
    
    
    1.01First Quarter
    
    
    3.00
    
    
    
    1.50
 As of March 1, 2005, there were 109 holders of record of our common stock. We believe that
there are in excess of 300 beneficial owners of our common stock. To date, we have not declared or paid any dividends on our common stock. The payment of
dividends, if any, is within the discretion of our board of directors and will depend upon our
earnings, 18




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##### Table of Contents



capital requirements and financial condition and other relevant factors. We do not intend to
declare any dividends in the foreseeable future, but instead intend to retain future earnings, if
any, for use in our business operations. The following table describes the equity securities issuable as of December 31, 2004 pursuant
to our equity compensation plans. For a description of our equity compensation plans see Note 10
to our consolidated financial statements. Equity Compensation Plan Information (a)
    
    
    (b)
    
    
    (c)Number ofNumber of
    
    
    
    
    
    
    securities remainingsecurities to
    
    
    
    
    
    
    available for futurebe issued
    
    
    
    
    
    
    issuance underupon
    
    
    
    
    
    
    equity compensationexercise of
    
    
    Weighted-average
    
    
    plansoutstanding
    
    
    exercise price of
    
    
    (excludingoptions,
    
    
    outstanding
    
    
    securitieswarrants
    
    
    options, warrants
    
    
    reflected inPlan Category
    
    and rights
    
    
    and rights
    
    
    column (a))Equity compensation plans approved by
security holders
    
    
    3,462
    
    
    
    1.60
    
    
    
    1,539Equity compensation plans not approved by
security holders
    
    
    12,361
    
    
    
    1.22
    
    
    
    Total
    
    
    15,822
    
    
    
    1.30
    
    
    
    1,539
 
 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data presented below as of and for the years ended
December 31, 2004, 2003, 2002, 2001 and 2000 is derived from our audited consolidated financial
statements. In late 2001, we discontinued the business of our predecessor company, U.S. RealTel,
Inc. In March 2002, we liquidated the Latin America operations of U.S. RealTel, Inc. In February
2002, we completed the acquisition of Cypress Communications, and the results of our operations
from that time are reflective of that business that was acquired, along with subsequent
acquisitions in the same line of business. Certain expense items presented for 2000 and 2001 have
been reclassified to comply with the current presentation format. 19




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##### Table of Contents



(All dollar amounts are presented in thousands, except per share amounts) For the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Consolidated Statement of Operations Data:Revenues
    
    $
    78,982
    
    
    $
    84,626
    
    
    $
    51,717
    
    
    $
    282
    
    
    $
    1,720Direct Costs
    
    
    37,927
    
    
    
    44,447
    
    
    
    28,704
    
    
    
    165
    
    
    
    1,454Revenues  Net of Direct Costs
    
    
    41,055
    
    
    
    40,179
    
    
    
    23,013
    
    
    
    117
    
    
    
    266Operating ExpensesSales and marketing
    
    
    2,869
    
    
    
    5,342
    
    
    
    3,977
    
    
    
    
    
    
    
    General and administrative
    
    
    35,561
    
    
    
    37,694
    
    
    
    25,789
    
    
    
    3,699
    
    
    
    8,221Extinguishment of liabilities and other
credits
    
    
    (545
    )
    
    
    (1,995
    )
    
    
    
    
    
    
    
    
    
    
    Stock based compensation
    
    
    78
    
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    Impairment of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750
    
    
    
    Professional and investment banking fees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,948
    
    
    
    1,121Total Operating Expenses
    
    
    37,963
    
    
    
    41,479
    
    
    
    29,766
    
    
    
    6,397
    
    
    
    9,342Other income (expense), net *
    
    
    (2,669
    )
    
    
    (2,863
    )
    
    
    (4,791
    )
    
    
    (1,956
    )
    
    
    13,796Income (loss) From Continuing Operations
    
    
    423
    
    
    
    (4,163
    )
    
    
    (11,544
    )
    
    
    (8,236
    )
    
    
    4,720Gain (loss) From Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    2,032
    
    
    
    
    
    
    
    Income (loss) before income taxes,
extraordinary item and cumulative
effect of changes in accounting
principles
    
    
    423
    
    
    
    (4,163
    )
    
    
    (9,512
    )
    
    
    (8,236
    )
    
    
    4,720Income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Income (loss) before extraordinary item
and cumulative effect of changes in
accounting principles
    
    
    423
    
    
    
    (4,163
    )
    
    
    (9,512
    )
    
    
    (8,236
    )
    
    
    4,520Extraordinary Item  gain on acquisition
    
    
    
    
    
    
    
    
    
    
    7,783
    
    
    
    
    
    
    
    Extraordinary Item  loss on
extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    455Cumulative Effect of Changes in
Accounting Principles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,396Net Income (Loss)
    
    $
    423
    
    
    $
    (4,163
    )
    
    $
    (1,729
    )
    
    $
    (8,236
    )
    
    $
    2,669Net Income (Loss) Per Common ShareIncome (loss) from continuing operations
    
    $
    0.07
    
    
    $
    (0.71
    )
    
    $
    (1.95
    )
    
    $
    (1.32
    )
    
    $
    0.70Gain (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.34
    
    
    
    
    
    
    
    Extraordinary item
    
    
    
    
    
    
    
    
    
    
    1.32
    
    
    
    
    
    
    
    (0.07
    )Cumulative effect of changes in
accounting principles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.22
    )Net Income (Loss) Per Common Share 
Basic and diluted
    
    $
    0.07
    
    
    $
    (0.71
    )
    
    $
    (0.29
    )
    
    $
    (1.32
    )
    
    $
    0.41Weighted Average Common Shares
Outstanding
    
    
    5,874
    
    
    
    5,874
    
    
    
    5,894
    
    
    
    6,246
    
    
    
    6,462
 20




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December 31,
(In thousands) 2004
    
    
    
    2003
    
    
    
    2002
    
    
    
    2001
    
    
    
    2000Consolidated Balance Sheet Data:Cash and cash equivalents
    
    
    $
    215
    
    
    
    $
    1,900
    
    
    
    $
    8,258
    
    
    
    $
    2,061
    
    
    
    $
    9,425Working Capital (Deficit)
    
    
    $
    (14,213
    )
    
    
    $
    (9,347
    )
    
    
    $
    (5,498
    )
    
    
    $
    1,672
    
    
    
    $
    8,720Total Assets
    
    
    $
    31,939
    
    
    
    $
    35,595
    
    
    
    $
    41,463
    
    
    
    $
    2,382
    
    
    
    $
    10,008Total long-term lease obligations and debt
    
    
    $
    10,463
    
    
    
    $
    17,543
    
    
    
    $
    16,173
    
    
    
    $
    
    
    
    
    $
    Shareholders equity (deficit)
    
    
    $
    (1,926
    )
    
    
    $
    (2,433
    )
    
    
    $
    1,292
    
    
    
    $
    1,680
    
    
    
    $
    7,097
   * Other income (expense), net consists primarily of interest expense, interest income and gain or
loss from disposition of assets in the ordinary course of our business for the years ended December
31, 2004, 2003 and 2002. In addition to the above, other income (expense), net includes an exchange
loss of $2,145 and net gain on the sale of our North American operations of $15,533 for the years
ended December 31, 2001 and 2000 respectively. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All dollar and share amounts are presented in thousands, except per share amounts) The following Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, which involve risks and uncertainties. Actual
results could differ materially from those anticipated in these forward-looking statements as a
result of certain risk factors, including those set forth under Risk Factors That May Affect
Future Results below and elsewhere in this report. The following discussion also should be read in
conjunction with the information set forth in our consolidated financial statements and notes
thereto included in Item 8. Financial Statements of this Annual Report onForm 10-K. Beginning in February 2002 with Cypress Holdings acquisition of Cypress Communications, we
have provided a full range of reliable, feature rich, integrated telecommunications services to
businesses located in select major metropolitan markets within the United States. We are the
preferred communications provider in over 1,000 Class A commercial office buildings in such select
markets. Our telecommunications services include high speed Internet access and data services,
local and long-distance voice services, digital telephone systems, digital satellite business
television, voicemail, e-mail, web site hosting, security/monitoring services, and other advanced
communications services. We deliver these services over fiber optic, digital and broadband
networks that we design, construct, own or lease and operate inside large and medium-sized office
buildings. Additionally, during the three month period ended March 31, 2002, we provided, or
sought to provide, site access and usage rights to telecommunications companies in Latin America
through our 71%-owned Argentinean subsidiary and our 89%-owned Brazilian subsidiary. In March
2002, we liquidated our Latin American telecommunications rights operations. The year ended December 31, 2004 was the first year in which we reported net income from
continuing operations exclusive of one time gains. Otherwise, except for a net gain of
approximately $15,500 on the sale of our old North American telecommunications rights operations in
December 2000 and an extraordinary gain of approximately $7,900 on the acquisition of Cypress
Communications, under purchase accounting, we have incurred significant operating losses and
experienced negative cash flows from operations since inception. Net income for the fiscal year
ended December 31, 2004 was $423, compared with a net loss for the fiscal year ended December 31,
2003 of $4,163 and a net loss of $1,729 for the fiscal year ended December 31, 2002. As of December
31, 2004, we had cash and cash equivalents of $215. 21




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##### Table of Contents



The Consolidated Statements of Operations for the fiscal year ended December 31, 2002 include
operations of Cypress Communications from February 1, 2002, the date of its acquisition for
accounting purposes. Executive Summary In evaluating our financial condition, management focuses on several key themes and indicators
of both revenues and expense as described below: Revenue The key areas of management focus relative to our revenues revolve around the status of our
customer base. We provide our services generally to tenants resident within the approximately 1,300
office buildings in which we maintain access agreements. These tenants are generally operating
under the terms of multi-year lease agreements with the building landlord. To the extent tenants
who are our customers leave these buildings either during the term of or at the termination of
their lease agreements, they may cease to be our customer. We endeavor to replace these lost
customers with new tenants entering the buildings. We expend significant effort in determining the
status and intentions of our existing customers relative to their current lease agreements within
buildings we serve, as well as the status of prospective tenants who may be moving into these
buildings. In addition to move in  move out activity, the other key revenue focus area within our
customer base is the average number of users per customer. This factor is significant in
determining and forecasting the average revenue per customer, and is directly tied to overall
employment factors within the general economy. To the extent an existing customer hires additional
employees, our revenue from that customer should generally increase. Conversely, reductions in
employment totals of a customer would result in a reduction in revenue from the customer. During 2002, 2003 and 2004, we determined that, within our retained customer base, there was
an overall reduction in the number of contracted users of our services in excess of new customers
added, resulting in a reduction in the average revenue per customer for our services. The rate of
decline within the customer base appears to have decreased starting in the second half of 2004 with
the overall improvements in the general economy. Based on discussions with building owners in the markets we service and overall industry
reports, we expect an improvement in the occupancy rates for the types of buildings that we serve
in 2005. Improvement in occupancy rates in these buildings increases the number of potential sales
opportunities for our services. Management believes that recent stabilization in the general
employment picture in the United States will result in a stabilization or improvement in the
average revenue per customer over what we are now experiencing. Additionally, the addition during
2004 of our EZ Office IP Communications service offering allows us to expand our reach to customers
outside of our serviced buildings. We expect that offering to begin generating significant new
customer activity starting in 2005. Costs One of the most significant cost elements for us is the amounts paid to telecommunications
carriers for the provision of our voice and data network elements. These costs have both fixed and
variable components. A key focus of managements attention is the proper management of these cost
elements. Managements objectives in managing the voice and data network elements is to provide a cost
effective and highly reliable solution for our business. Achieving this objective involves
determining both the correct number of circuit elements necessary to provide an appropriate level
of customer service, along with determining the best cost provider for those circuit elements. 22




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##### Table of Contents



Starting in late 2002 and throughout 2003 and 2004, management expended considerable effort in
analyzing our network on a building by building basis to optimize the combination of service and
cost. We were successful in reducing our overall network costs as a percentage of revenues from
year to year, while continuing to provide an appropriate level of service to our customers. During 2003, we substantially completed a process of obtaining certification to be a CLEC in
most of the markets where we operate. CLEC certification allows us to enter into agreements with
the incumbent local exchange carriers (ILECs) to obtain network services at rates generally lower
than those we previously paid. Starting in late 2003, we began the process of converting our
network to the lower rate platforms with the various ILEC providers. This process was completed in
early 2004 and was a significant contributor to the overall reduction in the cost of network
elements during the year. The process of network analysis and re-grooming is ongoing. Management believes that there are
additional opportunities for reduction in network costs through either reduction in network
elements or transfer of elements to lower cost providers. Liquidity and Capital Resources Our primary sources of liquidity have been proceeds from the issuance of our common stock,
convertible debentures, lines of credit and bridge loans, as well as proceeds from the sale of our
former North American telecommunications rights operations in December 2000 and cash acquired
through our acquisition of Cypress Communications. The terms of certain of our indebtedness limit
our ability to incur additional indebtedness, pay dividends or undertake certain other
transactions. We have also pledged certain assets as security under our senior credit facility.
We must devote a substantial portion of our cash flow to service our indebtedness and cannot
utilize that cash flow for operations. Beginning in the first quarter of 2002 and continuing throughout 2003 and 2004, we initiated
certain actions intended to improve liquidity and operating results. As a result, we began to
realize improvement to our overall liquidity. As a result, our management believes that our cash position, net of short term
borrowings, should improve during the following quarters, however, there is no assurance this will
be the case. As noted in the accompanying financial statements, we have Bridge Loan debt and fees totaling
$8,480 which will come due in July 2005. At present, we have not initiated a process to refinance
this debt, pending the proposed acquisition of the Company as discussed below. If the acquisition
is not consummated prior to July 2005, we would be required to either renegotiate the terms of the
Bridge Loan with the current debt holders, or seek replacement financing. Our inability to
renegotiate the terms of the bridge loan, or find replacement financing would have a serious
negative financial impact on the Companys liquidity and ability to
finance its operations. As a result of the aforementioned factors and
related uncertainties, there is substantial doubt about the Companys
ability to continue as a going concern. Our liquidity and capital resources remain a focal point of our managements attention. Asset Acquisitions As part of our business strategy, we have acquired certain assets of other companies which
have had and are expected to continue to have an impact on our results of operations. In July 2002, through Cypress Communications, we acquired certain assets of Intermedia
Advanced Building Networks, the shared tenant telecommunications services business of WorldCom, Inc
(ABN/STS). The acquisition of ABN/STS has allowed us to extend our telecommunication services
operations to over 5,700 small and medium sized business customers in 25 major metropolitan U.S.
markets. 23




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##### Table of Contents



In March 2003, Cypress Holding, through Cypress Communications, acquired the Southern
California building-centric voice and data services business of Eureka Broadband Corporation
(Eureka). These assets included customer contracts, as well as Eurekas in-building networks and
associated building access rights. The acquisition of the Eureka assets has allowed Cypress Holding
to expand its telecommunications services operations to include over 750 small and medium sized
business customers in the California market. In July 2003, Cypress Holding, through Cypress Communications, negotiated the surrender of
certain assets from E-Building Solutions, Inc. (E-Building) in California, a building-centric
data services business, to mitigate the loss resulting from E-Buildings default on a $450 note
receivable due to Cypress Communications. These assets included customer contracts, as well as
E-Buildings in-building networks and associated building access rights. Recent Developments During the quarter ended September 30, 2004, management determined that we had made payments
to telecommunication service providers for federal, state and local taxes and surcharges on
telecommunications services for which we might be exempt. We have quantified the amount of taxes we
believe were erroneously billed and paid, and are attempting to recover these taxes and surcharges
directly from the telecommunications service providers involved. Although management believes that
the amount of taxes and surcharges which we are entitled to recover is in the range of $1,000 to
$2,500, there is no assurance that any amounts will be recovered or when any amounts will be
recovered, if ever. The recovery of these taxes and surcharges will be recorded in the financial
statements when the taxes and surcharges are actually recovered. On November 5, 2004, we entered into an Agreement and Plan of Merger (the Merger Agreement)
with TechInvest Holding Company, Inc., an affiliate of Arcapita, Inc. (Parent), and TechInvest
Acquisition, Inc., a wholly-owned subsidiary of Parent (Purchaser), pursuant to which Parent will
acquire our company by the merger of Purchaser with and into us, with our company surviving the
merger as a wholly-owned subsidiary of Parent. The total value of the transaction, at the time of
the execution of the Merger Agreement, was $39,350. The Merger Agreement contains provisions for
final merger consideration adjustments, upwards or downwards, based on the achievement of certain
conditions pertaining to changes in certain current assets and liabilities between the execution of
the Merger Agreement and closing of the transaction. On February 3, 2005, in recognition of the potential increase in working capital relating to
the telecommunications tax recovery, we agreed with Parent to amend the Merger Agreement (the
Amendment) to increase the merger consideration by $935, making the total value of the
transaction $40,285. The parties also agreed in the Amendment, among other things, that accounts
receivable attributable to the telecommunications tax recovery will be capped in light of the
increase in the merger consideration for purposes of calculating the final merger consideration
adjustment. The Merger Agreement provides that the merger consideration will first be used to repay
outstanding indebtedness. The remaining consideration, after transaction expenses, will be
distributed to stockholders, with an estimated price per share of $1.71, subject to final merger
consideration adjustments (The $1.71 per share cash consideration is estimated by us as of December
31, 2004 and is subject to adjustment upwards or downwards pursuant to the Merger Agreement). The closing of the transaction is subject to certain terms and conditions customary for
transactions of this type, including receipt of stockholder and regulatory approvals and other
conditions. We incurred $597 in expenses during 2004 related to the solicitation, negotiation and
completion of the sale transaction, which are recorded in general and administrative expense in the
consolidated statement of operations. 24




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##### Table of Contents



Results of Operations CYPRESS COMMUNICATIONS
HOLDING CO., INC. YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED
DECEMBER 31, 2003 The following table sets forth consolidated financial and operating data as well as the
percentage of total revenues represented by certain items in our Consolidated Statements of
Operations for the periods indicated: For the year ended December 31,% of
    
    
    
    
    
    
    % of2004
    
    
    Revenue
    
    
    2003
    
    
    RevenueREVENUES
    
    $
    78,982
    
    
    
    100
    %
    
    $
    84,626
    
    
    
    100
    %DIRECT COSTS
    
    
    37,927
    
    
    
    48
    %
    
    
    44,447
    
    
    
    53
    %REVENUES  NET OF DIRECT COSTS
    
    
    41,055
    
    
    
    52
    %
    
    
    40,179
    
    
    
    47
    %OPERATING EXPENSESSales and marketing
    
    
    2,869
    
    
    
    4
    %
    
    
    5,342
    
    
    
    6
    %General and administrative
    
    
    35,561
    
    
    
    45
    %
    
    
    37,694
    
    
    
    45
    %Stock based compensation
    
    
    78
    
    
    
    
    
    
    
    438
    
    
    
    1
    %Extinguishment of
liabilities and other
credits
    
    
    (545
    )
    
    
    (1
    )%
    
    
    (1,995
    )
    
    
    (2
    )%TOTAL OPERATING EXPENSES
    
    
    37,963
    
    
    
    48
    %
    
    
    41,479
    
    
    
    49
    %TOTAL OTHER INCOME / (EXPENSE)
    
    
    (2,669
    )
    
    
    (3
    )%
    
    
    (2,863
    )
    
    
    (3
    )%NET INCOME (LOSS)
    
    $
    423
    
    
    
    1
    %
    
    $
    (4,163
    )
    
    
    (5
    )%
 REVENUES. For the year ended December 31, 2004, revenues from our telecommunications services
business represented substantially all of our consolidated revenues. Revenues from this business
decreased to $78,982 for the year ended December 31, 2004 from $84,626 for the year ended December
31, 2003. The decrease in revenues was the result of several factors which began in late 2002 and
into 2003 as outlined below:  1.
    Over the period following the acquisition of the customer base from ABN/STS in mid 2002,
there was attrition in this customer base. This was attributable, in part, to the fact that a
number of the acquired ABN/STS customers did not fit our overall business model, and
terminated their service at the end of the term of their agreements. This customer attrition
resulted in the loss of several significant revenue generating customers during 2002 and 2003.
The 2004 results reflect the full year impact of this lost revenue.Management believes that the impact of this post acquisition customer attrition has been
substantially realized, and that the future revenue trends will be reflective of more
normal customer acquisition and attrition patterns.2.
    There was a negative trend in occupancy rates in the commercial real estate business.
Occupancy in the types of buildings in which we offer our services declined significantly in
the period after 2001. By some industry estimates, vacancy rates in these types of buildings
were as high as 30% in some markets. Vacancy rates in buildings we service have a direct
impact on our opportunity to add new customers and to retain existing customers.Based on discussions with building owners and overall industry reports, it appears that
occupancy rates began to stabilize during 2004 in the markets where we offer our service.
However, the improvement in occupancy rates during 2004 could not offset the full year
impact of increased vacancies during 2002 and 2003. Due to the monthly recurring nature of
our business and the 25




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relatively small average monthly revenue per customer, our revenue recovery will lag the
improvement in the overall trends in occupancy in the buildings we service.3.
    The average revenue per customer declined by approximately 3% during the period as a result
of the reduction in the average size of our customers combined with pricing reductions related
to contract renewals in a large portion of our customer base at rates lower than in previous
contracts. Management believes that the rate of decline in revenues has stabilized, and that projected
improvements in real estate occupancy rates in 2005, combined with stabilized employment in the
general U.S. economy and the introduction of our EZ Office IP Communications offering should have a
positive impact on revenue results going forward. REVENUES-NET. Revenues-net (after direct costs) increased to approximately $41,055 for the
year ended December 31, 2004 from approximately $40,179 for the year ended December 31, 2003.
Margins increased to approximately 52.0% of revenues in 2004 from approximately 47.5% in 2003,
primarily due to reduced network and real estate access related costs as a percentage of revenue. Management believes that further improvements in margins can be achieved in the future as a
result of the efforts expended to date relative to overall reduction in the cost of
telecommunications network elements. OPERATING EXPENSES. Operating expenses decreased to approximately $37,963 for the year ended
December 31, 2004 from approximately $41,479 for the year ended December 31, 2003. The decrease in
operating expenses is primarily due to cost and headcount reduction initiatives implemented
starting in late 2002 and into 2003. Included in operating expenses for 2004 is $597 of costs for
investment banking and other costs related to the pending sale of the Company, as described above.
Operating expenses decreased as a percentage of revenues to approximately 48% for the year ended
December 31, 2004 from approximately 49% for the year ended December 31, 2003 as a result of
operating efficiencies achieved through focused cost reduction efforts in all areas of our
business. Sales and marketing expenses decreased to $2,869 for the year ended December 31, 2004
from $5,342 for the year ended December 31, 2003 due to reductions in the level of bad debt expense
in 2004 as compared to 2003, and changes made to the makeup and compensation levels of our sales
organization initiated in early 2004. Sales and marketing expense declined as a percentage of
revenue to 4% for the year ended December 31, 2004 from approximately 6% for the year ended
December 31, 2003 for the reasons noted above. General and administrative expenses decreased to
$35,561 for the year ended December 31, 2004 from $37,694 for the year ended December 31, 2003
primarily due to the full year impact of cost and headcount reduction measures implemented during
2003. General and administrative expenses as a percentage of revenues was approximately 45% for
both years ended December 31, 2004 and 2003. General and administrative expenses for the year ended
December 31, 2004 included depreciation and amortization expense of $774 and expenses in connection
with the evaluation, negotiation and closing of the pending sale of the Company of $597 as
mentioned above. Depreciation and amortization expense included in general and administrative
expenses for the year ended December 31, 2003 was $712. EXTINGUISHMENT OF LIABILITIES AND OTHER CREDITS. The extinguishment of liabilities and other
credits for the year ended December 31, 2004 reflects credits of $545 from settlement and
extinguishment of certain liabilities assumed through our acquisition of Cypress Communications.
For the year ended December 31, 2003 the extinguishment of liabilities and other credits totaled
$1,995 and was comprised of credits of $1,019 resulting from negotiated settlements of certain
liabilities assumed through our acquisition of Cypress Communications, the recovery of certain
assets, originally valued at $0 for approximately $378, also acquired through our acquisition of
Cypress Communications and the reversal of a previously recorded charge for approximately $598
resulting from the reactivation of an office facility that had been previously shut-down by our
predecessor. OTHER INCOME AND (EXPENSE). Other income and (expense) was ($2,669) for the year ended
December 31, 2004 as compared with ($2,863) during year ended December 31, 2003. Interest expense
and financing costs were ($3,022) and ($2,684) for the years ended December 31, 2004 and 2003 26




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respectively, and consisted primarily of interest expense on debt incurred in 2002 and used in
connection with the acquisition of certain assets of ABN/STS, and interest expense incurred on our
revolving credit facility. INCOME TAXES. For the years ended December 31, 2004 and 2003, no income tax benefit from our
consolidated net operating losses was recognized because of uncertainty as to whether the benefit
from such net operating losses will be realized. NET INCOME (LOSS). Our net income for the year ended December 31, 2004 was $423. For the
year ended December 31, 2003, we reported a net loss of $4,163. The improvement in net income is a
direct result of the full year benefit of the cost reductions realized in both our
telecommunications and real estate network cost structures, along with reductions in total
operating expenses, which exceeded the net decrease in revenues realized. CYPRESS COMMUNICATIONS HOLDING CO., INC. YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED
DECEMBER 31, 2002 The following table sets forth consolidated financial and operating data as well as the
percentage of total revenues represented by certain items in our Consolidated Statements of
Operations for the periods indicated: For the year ended December 31,% of
    
    
    
    
    
    
    % of2003
    
    
    Revenue
    
    
    2002
    
    
    RevenueREVENUES
    
    $
    84,626
    
    
    
    100
    %
    
    $
    51,717
    
    
    
    100
    %DIRECT COSTS
    
    
    44,447
    
    
    
    53
    %
    
    
    28,704
    
    
    
    56
    %REVENUES  NET OF DIRECT COSTS
    
    
    40,179
    
    
    
    47
    %
    
    
    23,013
    
    
    

    44
    %OPERATING EXPENSESSales and marketing
    
    
    5,342
    
    
    
    6
    %
    
    
    3,977
    
    
    
    8
    %General and administrative
    
    
    37,694
    
    
    
    45
    %
    
    
    25,789
    
    
    
    50
    %Stock based compensation
    
    
    438
    
    
    
    1
    %Extinguishment of liabilities and other credits
    
    
    (1,995
    )
    
    
    (2
    )%TOTAL OPERATING EXPENSES
    
    
    41,479
    
    
    
    49
    %
    
    
    29,766
    
    
    
    58
    %TOTAL OTHER INCOME / (EXPENSE)
    
    
    (2,863
    )
    
    
    (3
    )%
    
    
    (4,791
    )
    
    
    (9
    )%LOSS FROM CONTINUING OPERATIONS
    
    
    (4,163
    )
    
    
    (5
    )%
    
    
    (11,544
    )
    
    
    (22
    )%DISCONTINUED OPERATIONS
    
    
    
    
    
    
    0
    %
    
    
    2,032
    
    
    
    4
    %LOSS BEFORE EXTRAORDINARY ITEM
    
    
    (4,163
    )
    
    
    (5
    )%
    
    
    (9,512
    )
    
    
    (19
    )%EXTRAORDINARY ITEM
    
    
    
    
    
    
    0
    %
    
    
    7,783
    
    
    
    15
    %NET LOSS
    
    $
    (4,163
    )
    
    
    (5
    )%
    
    $
    (1,729
    )
    
    
    (3
    )%
 REVENUES. For the year ended December 31, 2003, revenues from our telecommunications services
business represented substantially all of our consolidated revenues. Revenues from this business
increased to approximately $84,626 for the year ended December 31, 2003 from $51,717 for the year
ended December 31, 2002. The increase in revenues resulted from the full year of operations related
to the customer base we acquired in July 2002 from ABN/STS, as well as the acquisitions during 2003
of the Eureka and E-Building customer base. 27




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While overall revenues increased for the year ended December 31, 2003, as indicated above, our
quarterly revenues provided a downward trend. This trend was the result of several factors:  1.
    Over the period following the acquisition of the customer base from ABN/STS, there was
attrition in this customer base. This was attributable, in part, to the fact that a number of
the acquired ABN/STS customers did not fit our overall business model, and terminated their
service at the end of the term of their agreements.2.
    There was a negative trend in occupancy rates in the commercial real estate business.
Occupancy in the types of buildings in which we offer our services declined significantly in
the period after 2001. By some industry estimates, vacancy rates in these type buildings was
as high as 30% in some markets. Vacancy rates in buildings we service has a direct impact on
our opportunity to add new customers and to retain existing customers.3.
    The average revenue per customer declined during the period primarily as a result in
reductions in the overall employment within our customer base. As employment falls within our
customer base, the average number of users for which we can bill our services declines. REVENUES-NET. Revenues-net (after direct costs) increased to $40,179 for the year ended
December 31, 2003 from $23,013 for the year ended December 31, 2002. Margins increased to
approximately 47.5% of revenues in 2003 from approximately 44.5% in 2002, due to the increased
revenue volumes acquired since July 2002, and reduced network costs as a percentage of revenue.
Additionally, revenue from the customer bases acquired from Eureka and E-Buildings were
substantially for internet services, which results in a lower average margin than our overall
business. OPERATING EXPENSES. Operating expenses increased to $41,479 for the year ended December 31,
2003 from $29,766 for the year ended December 31, 2002. The increase in operating expenses is
primarily due to the full year of operations in 2003 of the ABN/STS business acquired in July 2002,
along with additional operating expenses related to the 2003 acquisitions of assets from Eureka and
E-Building. Operating expenses decreased as a percentage of revenues to approximately 49% for the
year ended December 31, 2003 from approximately 58% for the year ended December 31, 2002 as a
result of operating efficiencies achieved through focused cost reduction efforts in all areas of
our business. Sales and marketing expenses increased to $5,342 for the year ended December 31,
2003 from $3,977 for the year ended December 31, 2002 primarily due to the full year employment in
2003 of sales and marketing personnel we hired during 2002. Sales and marketing expense declined as
a percentage of revenue to 6% for the year ended December 31, 2003 from approximately 8% for the
year ended December 31, 2002 as a result of restructuring of the sales and marketing functions
during 2003 and the efficiencies achieved. General and administrative expenses increased to
$37,694 for the year ended December 31, 2003 from approximately $25,789 for the year ended December
31, 2002 primarily due to the full year operation of the ABN/STS business acquired in 2002. General
and administrative expenses decreased as a percentage of revenues to approximately 45% for the year
ended December 31, 2003 from approximately 50% for the year ended December 31, 2002 as a result of
efficiencies achieved through the acquisition consolidation. General and administrative expenses
for the year ended December 31, 2003 included depreciation and amortization expense of
approximately $712. Depreciation and amortization expense included in general and administrative
expenses for the year ended December 31, 2002 was approximately $146. EXTINGUISHMENT OF LIABILITIES AND OTHER CREDITS. The extinguishment of liabilities and other
charges for the year ended December 31, 2003 reflects credits for $1,019 resulting from negotiated
settlements of certain liabilities assumed through our acquisition of Cypress Communications, and
the recovery of certain assets, originally valued at $0 for approximately $378, also acquired
through our acquisition of Cypress Communications and the reversal of a previously recorded charge
for approximately $598 resulting from the reactivation of an office facility that had been
previously shut-down. OTHER INCOME AND (EXPENSE). Other income and (expense) was ($2,863) for the year ended
December 31, 2003 as compared with ($4,791) during year ended December 31, 2002. Interest expense
for the year ended December 31, 2003 was ($2,684) and consisted primarily of interest expense on 28




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debt incurred in 2002 and used in connection with acquisition of certain assets of ABN/STS.
Interest expense for the year ended December 31, 2002 was ($4,914) and consisted primarily of
interest and finance charges incurred by Cypress Holding in connection with the acquisition of
Cypress Communications in February 2002, and the acquisition of certain assets of ABN/STS in July
2002. DISCONTINUED OPERATIONS. There was no income or loss from discontinued operations for the
year ended December 31, 2003. Net results from our Latin American operations are included under
loss from discontinued operations for the year ended December 31, 2002. Income from discontinued
operations was $2,032 for the year ended December 31, 2002. The income resulted from the
recognition of currency exchange gains due to the devaluation of the Argentinean peso after the
Argentinean currency crashed in January 2002 and the liquidation of our Latin-American operations
in March 2002. EXTRAORDINARY GAIN. The year ended December 31, 2002 includes an extraordinary gain of $7,783
which resulted from the elimination of all of our long-term assets in an aggregate amount of
$26,840 (Note 4 to Consolidated Financial Statements). INCOME TAXES. For the years ended December 31, 2003 and 2002, no income tax benefit from our
consolidated net operating losses was recognized because of uncertainty as to whether the benefit
from such net operating losses will be realized. NET LOSS. Our net loss for the year ended December 31, 2003 was $4,163. For the year ended
December 31, 2002, the net loss was $1,729. The increase in net loss is a direct result of the
extraordinary gain of $7,783 million and income from discontinued operations of $2,032, both
realized in 2002. Without the benefit of the aforementioned gains, the net loss for the year ended
December 31, 2002 would have been $11,544. The network cost reductions and other cost control
initiatives implemented during 2002 and 2003 combined with the full year operation of ABN/STS
business acquired in 2002, resulted in a significant reduction in the operating loss from
continuing operations in 2003 as compared to 2002. Liquidity and Capital Resources Beginning in the first quarter of 2002 and continuing throughout 2003 and into early 2004, we
initiated certain actions intended to improve liquidity and operating results. Such actions
included, among other things, (i) completing the acquisition of Cypress Communications and making
certain adjustments to Cypress Communications staffing levels and cost structure, (ii) liquidation
of the operations in Argentina and Brazil, (iii) completing the purchase of certain assets of
ABN/STS, (iv) raising $28 million in connection with such asset acquisition and (v) implementing
an analysis and optimization project of our telecommunications network and real estate access costs
which have resulted in substantial reductions in these cost elements in both absolute terms and as
a percentage of revenue. Our primary sources of liquidity have been proceeds from the issuance of our common stock,
convertible debentures, lines of credit and bridge loans, as well as proceeds from the sale of our
former North American telecommunications rights operations in December 2000 and cash acquired
through our acquisition of Cypress Communications in February 2002. 29




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The following table shows information about our cash flows and liquidity positions as of and
for the fiscal years ended December 31, 2004 and 2003. You should read this table and the
discussion that follows in conjunction with our consolidated statements of cash flows contained in
Item 8 of this report. Year ended December 31,2004
    
    
    2003Net cash provided by (used in) operating activities
    
    $
    1,410
    
    
    $
    (1,397
    )Net cash used in investing activities
    
    
    (3,622
    )
    
    
    (5,257
    )Net cash provided by financing activities
    
    
    527
    
    
    
    296Net change in cash and cash equivalents
    
    $
    (1,685
    )
    
    $
    (6,358
    )
 For the year ended December 31, 2004, the increase in cash provided by operating activities is
primarily attributable to the fact that we recorded net income in 2004 versus a net loss in 2003.
The decrease in net cash used in investing activities is reflective of the fact that we acquired
business assets of both Eureka and E-Building during 2003, and had no comparable acquisition
activity during 2004 outside of capital expenditures to support our current business. Net cash
provided by financing activities increased slightly in 2004 as we financed some of our capital
expenditures with debt borrowings. Management believes that our cash position should stabilize during the following quarters as
actions initiated starting in 2002 and continuing through early 2004 to reduce our costs have
resulted in profitability which we believe is sustainable in the near term. We cannot, however,
give any assurance that we will be able to generate sufficient cash flows from operations or
financing activities to cover our future costs of operations or to operate on a profitable basis.
Likewise, no assurance can be given that we can generate sufficient cash flow from operations or
financing activities to support our debt service obligations, including debt raised in connection
with our acquisition of certain assets from ABN/STS. Moreover, the terms of the indebtedness we
incurred in connection with the acquisition of certain assets from ABN/STS contain restrictive
covenants that limit our ability to incur additional indebtedness, pay dividends or undertake
certain other transactions. We have also pledged certain assets as security under our Senior
Credit Facility. Therefore, we must devote a substantial portion of our cash flow to service our
indebtedness and cannot utilize that cash flow for operations. Accordingly, there can be no
assurance that we will have sufficient liquidity to implement our business plan. Likewise, there
can also be no assurance that we will be able to obtain cash through future financing activities on
acceptable terms, or at all, or that we will ever become profitable. As noted in the accompanying financial statements, we have Bridge Loan debt and fees totaling
$8,480 which will come due in July 2005. At present, we have not initiated a process to refinance
this debt, pending the proposed acquisition of the Company as discussed elsewhere in this report.
Should that acquisition fail to be completed as currently contemplated, we would be required to
either renegotiate the terms of the Bridge Loan with the current debt holders, or seek replacement
financing. Our inability to renegotiate the terms of the Bridge Loan, or find replacement financing
would have a serious negative financial impact on the Companys liquidity and ability to finance
its operations. As of December 31, 2004, we had cash and cash equivalents of $215 as compared to $1,900 at
December 31, 2003. In addition, at December 31, 2004 we had approximately $5,000 of borrowing
availability under the terms of our senior credit facility. Management attempts to balance cash
balances on-hand, and anticipated cash needs with the availability under the Senior Credit Facility
so as to minimize interest and finance charges incurred. Our business has some seasonality
primarily attributable to usage charges for voice services, which generally decline during holiday
periods such as Thanksgiving, Christmas and New Years and during the summer months; however, the
effects of such seasonality have not had, and are not expected to have, a material impact on our
liquidity. Assuming that we are able to either renegotiate the terms of the Bridge Loan, or find
replacement financing, cash generated from operations, 30




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along with the availability under our line of credit, is expected to be sufficient to fund our
operations for at least the next twelve months. Contractual Obligations and Commitments The following table contains information relating to our contractual obligations and
commitments for the five years subsequent to December 31, 2004 and thereafter. The amounts
represent the maximum future contractual obligations and are reported without giving effect to any
related discounts, premiums and other adjustments necessary to comply with accounting principles
generally accepted in the U.S. In addition, we have an unused line of credit outstanding totaling
approximately $7,400 at December 31, 2004 subject to certain borrowing base limitations. Payments Due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsLong-Term Debt Obligations
    
    
    20,576
    
    
    
    10,576
    (1)
    
    
    
    
    
    
    10,000
    (2)Interest Expense on Debt
    
    
    7,910
    
    
    
    1,087
    
    
    
    
    
    
    
    6,823Capital Leases
    
    
    35
    
    
    
    31
    
    
    
    4
    
    
    
    
    
    
    
    Operating Leases
    
    
    11,457
    
    
    
    4,718
    
    
    
    5,185
    
    
    
    1,392
    
    
    
    162Obligations under license
agreements
    
    
    4,492
    
    
    
    1,120
    
    
    
    1,767
    
    
    
    1,110
    
    
    
    495Obligations under communications
service agreements
    
    
    10,449
    
    
    
    10,311
    
    
    
    138Total contractual cash obligations
    
    $
    54,919
    
    
    $
    27,843
    
    
    $
    7,094
    
    
    $
    19,325
    
    
    $
    657
    (2) The Convertible Notes accrue interest at the rate of 7.5% per annum, compounded quarterly,
and payable at maturity of the notes, whether upon their stated maturity of July 1, 2009, or
earlier as a result of acceleration in the event of a default or upon redemption of the Convertible
Notes. The principal of and accrued interest on the Convertible Notes is convertible into our
common stock at $1.13 per share. The Convertible Notes are redeemable by us at any time by payment
of the outstanding principal balance and accrued interest. In the event that the Convertible Notes
are redeemed, the Purchasers have been issued warrants which will then be eligible for exercise to
purchase the number of shares of our common stock that the Convertible Notes were convertible into
on the redemption date at a conversion price of $1.13 per share. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures, or capital resources that are
material to investors. Critical Accounting Policies Managements Discussion and Analysis of Financial Condition and Results of Operations are
based upon our Consolidated Financial Statements and the notes thereto, which have been prepared in
accordance with generally accepted accounting principles. We are required to make, in the
preparation of 31




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the Consolidated Financial Statements, estimates and judgments that affect the reported
amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets
and liabilities. We have reviewed the accounting policies used in reporting our financial results
on a regular basis. Management has reviewed the accounting policies and related disclosures with
our Audit Committee. The following is not intended to be a comprehensive list of all of our accounting policies.
Our significant accounting policies are more fully described in Note 1 to the Consolidated
Financial Statements. In many cases, the accounting treatment of a particular transaction is
specifically dictated by accounting principles generally accepted in the United States of America,
with no need for managements judgment in their application. There are also areas in which
managements judgment in selecting an available alternative would not produce a materially
different result. We have identified the following as accounting policies critical to us: ACCOUNTING 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 that 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. CASH AND CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments that mature in three months
or less, which are readily convertible into cash. PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed over the estimated useful
lives of the assets (three to seven years) by straight-line methods for financial reporting
purposes. Depreciation of leasehold improvements is computed over the lesser of the estimated
useful lives of the assets or the term of the lease by the straight-line method for financial
reporting purposes. REVENUE RECOGNITION The Companys revenues include recurring charges for local access, long-distance, equipment
rental, Internet access, digital satellite business television, voicemail, inbound 800, and other
enhanced voice and data services, which are recognized as services provided. Revenues also include
nonrecurring charges for installations and moves, adds, and changes. Installation fees represent
the initial cost charged by Cypress Communications for installing voice phone lines, data lines,
and business class cable television in the tenants premises. Move, add, and change (MAC)
charges are for the Companys labor and materials related to moving, adding, or changing a
customers services. Installation and MAC charges are recognized when the services are provided as
they represent a separate earnings process. Revenues are net of
certain credits and discounts. Deferred revenue represents monthly
recurring charges received in advance. STOCK-BASED COMPENSATION The Company follows The Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), amended by SFAS No.
148, Accounting for Stock Based compensation  Transition and Disclosure. SFAS No. 123
encourages companies to recognize expense for stock options and other stock-based employee
compensation plans based on their fair value at the date of grant. As permitted by SFAS No. 123,
the Company has and will retain its prior accounting policy under APB Opinion Number 25,
Accounting for Stock Issued to Employees, and, accordingly, compensation expense for stock
options is measured as the excess, if any, of the fair value of the Companys stock at the date of
grant over the exercise price. FASB Statement 123, Accounting for Stock Based Compensation, requires the Company to provide
pro forma information regarding net income and earnings per share as if compensation cost for the
Companys stock option plan has been determined in accordance with the fair value based method
prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following assumptions used for
grants in both 2004, 2003 and 2002: no dividends yield for all years; expected volatility of 100%,
100% and 74%, respectively; risk-free
interest rate of 4.26%, 3.0% and 4.42%, respectively and expected life
of 7 years for all periods. FAIR VALUES OF FINANCIAL INSTRUMENTS The Companys financial instruments consist principally of cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities and notes. The carrying amounts of such
financial instruments as reflected in the balance sheet approximate their estimated fair value as
of December 31, 2004 and 2003 due to their short-term nature. The estimated fair value is not
necessarily indicative of the amounts the Company could realize in a current market exchange or of
future earnings or cash flows. VALUATION OF LONG-LIVED ASSETS On January 1, 2002, the Company adopted FASB Statement No. 144 Accounting for Impairment or
Disposal of Long-Lived Assets (FAS No. 144). Under FAS 144, the Company reviews long-lived
assets for impairment when circumstances indicate the carrying amount of an asset may not be
recoverable based on the undiscounted future cash flows of the asset. If the carrying amount of
the asset is determined not to be recoverable, a write-down to fair value is recorded. INCOME TAXES Income taxes are accounted for under FASB Statement No. 109, Accounting for Income Taxes
(FAS 109). FAS 109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been
recognized in our financial statements or tax returns. In estimating future tax consequences, FAS
109 generally considers all expected future events other than proposed changes in the tax laws or
rates. Valuation allowances are provided if it is more likely than not that a deferred tax asset
will not be realized. NET INCOME (LOSS) PER COMMON SHARE  BASIC AND DILUTED Basic earnings per share (EPS) is calculated by dividing the income (loss) available to
common shareholders by the weighted average number of common shares outstanding for the period,
without consideration for common stock equivalents. Diluted EPS gives effect to all dilutive
potential common shares outstanding for the period. Shares of common stock issuable upon the
exercise of options (3,462, 3,897 and 3,770 shares in 2004, 2003 and 2002, respectively) and
warrants (1,742, 2,346 and 3,143 shares 32




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in 2004, 2003 and 2002, respectively) and shares issued upon conversion of convertible notes
(10,619, 9,859 and 9,153 in 2004, 2003 and 2002, respectively) are antidilutive and are not
included in the computation of shares outstanding. COMPREHENSIVE INCOME (LOSS) The Company follows SFAS No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130
establishes standards for reporting comprehensive income or loss and its components in the
consolidated financial statements. Comprehensive income (loss), as defined, includes all changes
in equity (net assets) during a period from non-owner sources. To date, the Company has reported
other comprehensive income from the cumulative effect on exchange rates for the amount of $0 in
2004, $0 in 2003 and $(2,170) in 2002. The Company had no other material transactions that are
required to be reported in comprehensive income or loss. SEGMENT REPORTING The Company operates in one business segment  the provision of telecommunication services to
small and medium sized businesses on an integrated basis. RECENT ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the FASB issued Statement 123 (revised 2004) that will require
compensation costs related to share-based payment transactions to be recognized in the financial
statements. With limited exceptions, the amount of compensation cost will be measured based on the
grant-date fair value of the equity or liability instruments issued. In addition, liability awards
will be re measured each reporting period. Compensation cost will be recognized over the period
that an employee provides service in exchange for the award.
Statement 123(R) replaces FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. The effective date for this requirement is as of the
first interim or annual reporting period that begins after June 15, 2005. The company has not
estimated the impact of adopting this revised standard on the financial statements. In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials (or spoilage) should be recognized as current-period charges
and requires the allocation of fixed production overheads to inventory based on the normal capacity
of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15,
2005. It is not expected that the adoption of SFAS No. 151 to have any effect on the Companys
consolidated financial position or results of operations. In December 2003, the FASB issued a revision to FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46-R). FIN 46 is an Interpretation of Accounting Research
Bulletin 51, Consolidated Financial Statements and addresses consolidation by business
enterprises of variable interest entities (VIEs) that possess certain characteristics. The
revision clarifies the definition in the original release that potentially could have classified
any business as a VIE. The revision also delays the effective date of the Interpretation from the
first reporting following December 15, 2003 to the first reporting period ending after March 15,
2004. The revision was effective for the Company in the first quarter of fiscal 2004. NoVIEs have
been identified and, accordingly, the application of the Interpretation did not have an effect on
the Companys results of operations or financial position. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to interest rate changes, primarily as a result any borrowing
under our line of credit facility which has a variable interest rate equal to the prime rate, as
announced from time to time by Silicon Valley Bank, plus 2.0%. No action has been taken to cover
our interest rate market risk, and we are not a party to any interest rate market risk management
activities. Our long term debt at December 31, 2004, carries interest rates, which are fixed. Our line of
credit pursuant to our senior credit facility with Silicon Valley Bank carries interest rates,
which vary with the prime rate. Accordingly, any increases in the prime rate will reduce our
earnings. A 1% increase in the prime rate on the $2,576 million outstanding under our line of
credit at December 31, 2004 would result in an annual interest expense increase of $26. 33




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS TABLE CYPRESS COMMUNICATIONS HOLDING CO., INC.Report of Independent Registered Public Accounting Firm
    
    
    35Consolidated Balance
Sheet as of December 31, 2004 and 2003
    
    
    36Consolidated Statements of
Operations for the year ended December 31, 2004, 2003 and 2002
    
    
    37Consolidated Statements of Changes In Stockholders Equity (Deficit) for the
years ended December 31, 2004, 2003 and 2002
    
    
    38Consolidated Statements of
Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    40Notes to Consolidated Financial Statements
    
    
    42CYPRESS COMMUNICATIONS, INC. (Predecessor)
    
    
    62Independent Auditors Report
    
    
    62Consolidated Statement of Operations for the One-Month Period from January 1, 2002 to January 31, 2002
    
    
    63Consolidated Statement of Stockholders Equity for the One-Month Period from
January 1, 2002 to January 31, 2002
    
    
    64Consolidated Statement of Cash Flows for the One-Month Period from January 1, 2002 to January 31, 2002
    
    
    65Notes to Consolidated Financial Statements
    
    
    66
 34




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Cypress Communications Holding Company, Inc.: We have audited the accompanying consolidated balance sheets of Cypress Communications Holding
Company, Inc. and subsidiaries (the Company formerly U.S. RealTel, Inc.) as of December 31, 2004
and 2003 and the related consolidated statements of operations, changes in stockholders equity
(deficit) and cash flows for each of the three years in the period ended December 31, 2004. These
consolidated 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2004, 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 2 to the consolidated financial statements, the
Company has suffered recurring losses from operations and is in an unfavorable working capital and
uncertain liquidity position that raises substantial doubt about its ability to continue as a going
concern. Managements plans concerning these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern. /s/ Deloitte & Touche, LLP Atlanta, GA
April 15, 2005 35




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CYPRESS COMMUNICATIONS HOLDING CO., INC. 
 CONSOLIDATED BALANCE SHEET December 31, 2004 and 2003 (In thousands, except share data)2004
    
    
    2003ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    215
    
    
    $
    1,900Accounts receivable, net of allowance for doubtful
accounts of $257 and $412, respectively
    
    
    6,796
    
    
    
    7,652Prepaid expenses and other current assets
    
    
    1,208
    
    
    
    1,271TOTAL CURRENT ASSETS
    
    
    8,219
    
    
    
    10,823PROPERTY AND EQUIPMENT, NET (Note 5)
    
    $
    23,628
    
    
    $
    24,249INTANGIBLE ASSETS, NET
    
    
    92
    
    
    
    523$
    31,939
    
    
    $
    35,595LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable and accrued expenses (Note 7)
    
    $
    10,268
    
    
    $
    16,344Line of credit (Note 8)
    
    
    2,576
    
    
    
    2,016Deferred revenue
    
    
    1,077
    
    
    
    1,310Current portion of long term debt (Note 8)
    
    
    8,511
    
    
    
    494TOTAL CURRENT LIABILITIES
    
    
    22,432
    
    
    
    20,164Long term debt (Note 8)
    
    
    10,463
    
    
    
    17,543Accrued liabilities, long-term
    
    
    970
    
    
    
    315TOTAL LONG-TERM LIABILITIES
    
    
    11,433
    
    
    
    17,858COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)STOCKHOLDERS DEFICIT (Note 10)Preferred stock, $.001 par value; 5,000,000 shares
authorized; (100 Series A issued)
    
    
    
    
    
    
    Common stock, $.001 par value; 50,000,000 shares
authorized; 6,467,808 issued and outstanding
    
    
    6
    
    
    
    6Additional paid-in capital
    
    
    23,685
    
    
    
    23,607Accumulated deficit
    
    
    (24,757
    )
    
    
    (25,180
    )Less: Treasury Stock, at cost; 594,413 shares (Note 11)
    
    
    (860
    )
    
    
    (860
    )TOTAL STOCKHOLDERS DEFICIT
    
    
    (1,926
    )
    
    
    (2,427
    )$
    31,939
    
    
    $
    35,595
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36




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##### Table of Contents



CYPRESS COMMUNICATIONS HOLDING CO., INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2004, 2003 and 2002 (In thousands, except per share data)2004
    
    
    2003
    
    
    2002REVENUES, NET
    
    $
    78,982
    
    
    $
    84,626
    
    
    $
    51,717DIRECT COSTS
    
    
    37,927
    
    
    
    44,447
    
    
    
    28,704REVENUES  NET OF DIRECT COSTS
    
    
    41,055
    
    
    
    40,179
    
    
    
    23,013OPERATING EXPENSESSales and marketing
    
    
    2,869
    
    
    
    5,342
    
    
    
    3,977General and administrative
    
    
    35,561
    
    
    
    37,694
    
    
    
    25,789Extinguishment of liabilities and other credits
    
    
    (545
    )
    
    
    (1,995
    )
    
    
    Stock based compensation
    
    
    78
    
    
    
    438
    
    
    
    TOTAL OPERATING EXPENSES
    
    
    37,963
    
    
    
    41,479
    
    
    
    29,766OTHER INCOME (EXPENSE)Interest income
    
    
    
    
    
    
    17
    
    
    
    60Interest expense and financing costs (Notes 8)
    
    
    (3,022
    )
    
    
    (2,684
    )
    
    
    (4,914
    )Net gain (loss) on disposal of assets
    
    
    417
    
    
    
    61
    
    
    

    (22
    )Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    85Net gain (loss) on investment
    
    
    
    
    
    
    (149
    )
    
    
    Other
    
    
    (64
    )
    
    
    (108
    )
    
    
    TOTAL OTHER INCOME (EXPENSE)  NET
    
    
    (2,669
    )
    
    
    (2,863
    )
    
    
    (4,791
    )Income (loss) From Continuing Operations
    
    
    423
    
    
    
    (4,163
    )
    
    
    (11,544
    )GAIN (LOSS) FROM DISCONTINUED OPERATIONS
    
    
    
    
    
    
    
    
    
    
    2,032Income (loss) Before Extraordinary Item
    
    
    423
    
    
    
    (4,163
    )
    
    
    (9,512
    )Extraordinary Item  gain on acquisition (Note 4)
    
    
    
    
    
    
    
    
    
    
    7,783Net income (loss) before income taxes
    
    $
    423
    
    
    $
    (4,163
    )
    
    $
    (1,729
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    423
    
    
    $
    (4,163
    )
    
    $
    (1,729
    )Net Income (Loss) Per Common ShareIncome (loss) from continuing operations
    
    $
    0.07
    
    
    $
    (0.71
    )
    
    $
    (1.95
    )Gain (loss) from discontinued operations
    
    
    
    
    
    
    
    
    
    
    0.34Extraordinary item
    
    
    
    
    
    
    
    
    
    
    1.32Net Income (Loss) Per Common Share  Basic and Diluted
    
    $
    0.07
    
    
    $
    (0.71
    )
    
    $
    (0.29
    )Weighted Average Common Shares Outstanding
    
    
    5,874
    
    
    
    5,874
    
    
    
    5,894
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37




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CYPRESS COMMUNICATIONS HOLDING CO., INC. 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (All dollar and share amounts are presented in thousands, except per share amounts)  Accu-mulatedAddi-
    
    
    
    
    
    
    Compre-
    
    
    Othertional
    
    
    Accu-
    
    
    hensive
    
    
    Compre-Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    mulated
    
    
    Income
    
    
    hensive
    
    
    Treasury StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    (Loss)
    
    
    Income
    
    
    Shares
    
    
    Amount
    
    
    TotalBalance, at
December 31, 2001
    
    
    
    
    
    
    
    
    
    
    6,468
    
    
    $
    6
    
    
    $
    19,599
    
    
    $
    (19,288
    )
    
    
    
    
    
    $
    2,170
    
    
    
    533
    
    
    $
    (800
    )
    
    $
    1,687Stock Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,181
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,181Issuance of
Preferred Stock
    
    
    Beneficial
Conversion Feature
(Note 10)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,389,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,389Payment for
Treasury Stock
(Note 11)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    (60
    )
    
    
    (60
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,729
    )
    
    
    (1,729
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,729
    )Other Comprehensive
Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,170
    )
    
    
    (2,170
    )
    
    
    
    
    
    
    
    
    
    
    (2,170
    )Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (3,899
    )Balance, at
December 31, 2002
    
    
    
    
    
    
    
    
    
    
    6,468
    
    
    $
    6
    
    
    $
    23,169
    
    
    $
    (21,017
    )
    
    $
    
    
    
    $
    
    
    
    
    594
    
    
    $
    (860
    )
    
    $
    1,298Stock Based
Compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    438Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,163
    )
    
    
    (4,163
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,163
    )Comprehensive Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,163
    )Balance, at
December 31, 2003
    
    
    
    
    
    
    
    
    
    
    6,468
    
    
    $
    6
    
    
    $
    23,607
    
    
    $
    (25,180
    )
    
    
    
    
    
    $
    
    
    
    
    594
    
    
    $
    (860
    )
    
    $
    (2,427
    )Stock Based
Compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78
 38




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##### Table of Contents



Accu-mulatedAddi-
    
    
    
    
    
    
    Compre-
    
    
    Othertional
    
    
    Accu-
    
    
    hensive
    
    
    Compre-Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    mulated
    
    
    Income
    
    
    hensive
    
    
    Treasury StockShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    (Loss)
    
    
    Income
    
    
    Shares
    
    
    Amount
    
    
    TotalNet Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423
    
    
    
    423
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    423Balance, at
December 31, 2004
    
    
    
    
    
    
    
    
    
    
    6,468
    
    
    $
    6
    
    
    $
    23,685
    
    
    $
    (24,757
    )
    
    
    
    
    
    $
    
    
    
    
    594
    
    
    $
    (860
    )
    
    $
    (1,926
    )
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39




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##### Table of Contents



CYPRESS COMMUNICATIONS HOLDING CO., INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2004, 2003, and 2002 (In thousands) 2004
    
    
    
    2003
    
    
    
    2002Cash Flows From Operating ActivitiesNet income (loss)
    
    
    $
    423
    
    
    
    $
    (4,163
    )
    
    
    $
    (1,729
    )Adjustments to reconcile net income (loss) to net cash
used in operating activitiesDepreciation and amortization
    
    
    
    4,932
    
    
    
    
    4,246
    
    
    
    
    1,459Bad debt expense
    
    
    
    421
    
    
    
    
    1,697
    
    
    
    
    679Stock based compensation
    
    
    
    78
    
    
    
    
    438
    
    
    
    
    Stock warrants issued in connection with acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,181(Gain) Loss on disposal of assets and extinguishment
of debt
    
    
    
    (779
    )
    
    
    
    196
    
    
    
    
    Extraordinary gain
    
    
    
    
    
    
    
    
    
    
    
    

    
    (7,783
    )Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,207
    )Amortization of warrant cost as interest expense
    
    
    
    475
    
    
    
    
    608
    
    
    
    
    305Other non-cash items
    
    
    
    
    
    
    
    
    
    
    
    
    
    85Changes in assets and liabilities, net of dispositions(Increase) decrease in accounts receivable
    
    
    
    1,011
    
    
    
    
    (517
    )
    
    
    
    4,408(Increase) decrease in prepaid expenses and other
current assets
    
    
    
    63
    
    
    
    
    80
    
    
    
    
    (956
    )(Increase) decrease in other assets
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    (619
    )Increase (decrease) in accounts payable and
accrued expenses
    
    
    
    (4,981
    )
    
    
    
    (4,777
    )
    
    
    
    11,117Increase (decrease) in deferred revenue
    
    
    
    (233
    )
    
    
    
    840
    
    
    
    
    (794
    )Net cash
provided by (used in) operating activities
    
    
    
    1,410
    
    
    
    
    (1,397
    )
    
    
    
    5,146Cash Flows From Investing ActivitiesInvestment in subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,495
    )Capital expenditures
    
    
    
    (4,040
    )
    
    
    
    (1,941
    )
    
    
    
    (1,050
    )Purchase of assets related to Eureka and E-Building
acquisitions
    
    
    
    
    
    
    
    
    (3,543
    )
    
    
    
    Sale of property and equipment
    
    
    
    418
    
    
    
    
    227
    
    
    
    
    Cash acquired in acquisitions
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,023Net cash
used in investing activities
    
    
    
    (3,622
    )
    
    
    
    (5,257
    )
    
    
    
    (16,522
    )Cash Flows From Financing ActivitiesProceeds from note payable in connection to acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,436Repayment of note payable in connection with acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,436
    )Borrowings from credit facilities, net of repayments
    
    
    
    560
    
    
    
    
    2,016
    
    
    
    
    26,551Principal payments of long-term debt
    
    
    
    (33
    )
    
    
    
    (1,720
    )
    
    
    
    (8,918
    )Payment for acquisition of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60
    )Net cash provided by financing activities
    
    
    
    527
    
    
    
    
    296
    
    
    
    
    17,573
 40




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##### Table of Contents



2004
    
    
    
    2003
    
    
    
    2002Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    
    (1,685
    )
    
    
    
    (6,358
    )
    
    
    
    6,197Cash and Cash Equivalents, at beginning of year
    
    
    
    1,900
    
    
    
    
    8,258
    
    
    
    
    2,061Cash and Cash Equivalents, at end of year
    
    
    $
    215
    
    
    
    $
    1,900
    
    
    
    $
    8,258Supplemental Disclosure of Cash Flow InformationInterest paid
    
    
    $
    1,432
    
    
    
    $
    1,246
    
    
    
    $
    4,914Supplemental Disclosures of Noncash Investing and Financing
ActivitiesWarrants issued for financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,181
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 41




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##### Table of Contents



CYPRESS COMMUNICATIONS HOLDING CO., INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2004, 2003 and 2002 (All dollar and share amounts are presented in thousands, except per share amounts)  1. ORGANIZATION, BASIS OF PRESENTATION AND ACCOUNTING POLICIES ORGANIZATION Cypress Communications Holding Co., Inc. (together with its subsidiaries, Cypress Holding or
the Company) (formerly U.S. RealTel, Inc.), through its wholly owned operating subsidiary,
Cypress Communications, Inc. (Cypress Communications or Cypress) provides comprehensive data,
voice and video communications services to small and medium sized businesses located in
approximately 1,300 commercial office buildings in select major metropolitan markets within the
United States. The Company is incorporated under the laws of the State of Delaware. In July 2002, through Cypress Communications, we acquired certain assets of Intermedia
Advanced Building Networks, the shared tenant telecommunications services business of WorldCom, Inc
(ABN/STS). The acquisition of ABN/STS has allowed us to extend our telecommunications services
operations to over 5,700 small and medium sized business customers in 25 major metropolitan U.S.
markets. BASIS OF PRESENTATION The accompanying financial statements are presented on the accrual basis of accounting using
accounting principles generally accepted in the United States. PRINCIPLES OF CONSOLIDATION Cypress Holdings subsidiaries at December 31, 2004 are listed below: PercentLocation
    
    
    Owned
    
    
    DescriptionCypress Communications, Inc.
    
    Atlanta, GA
    
    
    100
    %
    
    Active subsidiaryCypress Communications
Operating Company, LLC
    
    Atlanta, GA
    
    
    100
    %
    
    Active subsidiaryCypress Communications
Holding Company of
Virginia, LLC
    
    Atlanta, GA
    
    
    100
    %
    
    Active subsidiaryCypress Communications
International, Inc.
    
    Atlanta, GA
    
    
    100
    %
    
    Inactive subsidiaryCypress Canada Inc.
    
    Canada
    
    
    100
    %
    
    Inactive subsidiary
 42




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##### Table of Contents



The consolidated financial statements include the accounts of Cypress Holding and its
subsidiaries that are more than 50% owned. All significant intercompany transactions and balances between the companies included in the
consolidation are eliminated. ACCOUNTING 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 that 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. CASH AND CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments that mature in three months
or less, which are readily convertible into cash. PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are stated at cost. Depreciation is computed over the estimated useful
lives of the assets (three to seven years) by straight-line methods for financial reporting
purposes. Depreciation of leasehold improvements is computed over the lesser of the estimated
useful lives of the assets or the term of the lease by the straight-line method for financial
reporting purposes. REVENUE RECOGNITION The Companys revenues include recurring charges for local access, long-distance, equipment
rental, Internet access, digital satellite business television, voicemail, inbound 800, and other
enhanced voice and data services, which are recognized as services provided. Revenues also include
nonrecurring charges for installations and moves, adds, and changes. Installation fees represent
the initial cost charged by Cypress Communications for installing voice phone lines, data lines,
and business class cable television in the tenants premises. Move, add, and change (MAC)
charges are for the Companys labor and materials related to moving, adding, or changing a
customers services. Installation and MAC charges are recognized when the services are provided as
they represent a separate earnings process. Revenues are net of
certain credits and discounts. STOCK-BASED COMPENSATION The Company follows The Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), amended by SFAS No.
148, Accounting for Stock Based compensation  Transition and Disclosure. SFAS No. 123
encourages companies to recognize expense for stock options and other stock-based employee
compensation plans based on their fair value at the date of grant. As permitted by SFAS No. 123,
the Company has and will retain its prior accounting policy under APB Opinion Number 25,
Accounting for Stock Issued to Employees, and, accordingly, compensation expense for stock
options is measured as the excess, if any, of the fair value of the Companys stock at the date of
grant over the exercise price. FASB Statement 123, Accounting for Stock Based Compensation, requires the Company to provide
pro forma information regarding net income and earnings per share as if compensation cost for the
Companys stock option plan has been determined in accordance with the fair value based method
prescribed in FASB Statement 123. The Company estimates the fair value of each stock option at the
grant date by using the Black-Scholes option-pricing model with the following assumptions used for
grants in both 2004, 2003 and 2002: no dividends yield for all years; expected volatility of 100%,
100% and 74%, 43




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respectively; risk-free
interest rate of 4.26%, 3.0% and 4.42%, respectively and expected life
of 7 years for all periods. The following table illustrates the effect on the loss and loss per share if Cypress Holding
had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation: Years Ended December 31,2004
    
    
    2003
    
    
    2002Net income (loss), as reported
    
    $
    423
    
    
    $
    (4,163
    )
    
    $
    (1,729
    )Add: Stock-based compensation, as reported
    
    
    78
    
    
    
    438
    
    
    
    Deduct: Total stock based compensation determined under
fair value based method for all awards, net of tax
    
    
    (1,269
    )
    
    
    (1,141
    )
    
    
    (4,960
    )Pro forma net loss
    
    $
    (768
    )
    
    $
    (4,866
    )
    
    $
    (2,225
    )Income (loss) per share:Basic and diluted income (loss) per share  as reported
    
    $
    0.07
    
    
    $
    (.71
    )
    
    $
    (0.29
    )Basic and diluted loss per share  as pro forma
    
    $
    (0.13
    )
    
    
    (.83
    )
    
    
    (0.38
    )
 ADVERTISING COSTS Advertising costs, aggregating $40 in 2004, $90 in 2003 and $60 in 2002, are expensed as
incurred. FAIR VALUES OF FINANCIAL INSTRUMENTS The Companys financial instruments consist principally of cash and cash equivalents, accounts
receivable, accounts payable, accrued liabilities and notes. The carrying amounts of such
financial instruments as reflected in the balance sheet approximate their estimated fair value as
of December 31, 2004 and 2003 due to their short-term nature. The estimated fair value is not
necessarily indicative of the amounts the Company could realize in a current market exchange or of
future earnings or cash flows. VALUATION OF LONG-LIVED ASSETS On January 1, 2002, the Company adopted FASB Statement No. 144 Accounting for Impairment or
Disposal of Long-Lived Assets (FAS No. 144). Under FAS 144, the Company reviews long-lived
assets for impairment when circumstances indicate the carrying amount of an asset may not be
recoverable based on the undiscounted future cash flows of the asset. If the carrying amount of
the asset is determined not to be recoverable, a write-down to fair value is recorded. INCOME TAXES Income taxes are accounted for under FASB Statement No. 109, Accounting for Income Taxes
(FAS 109). FAS 109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events that have been
recognized in our financial statements or tax returns. In estimating future tax consequences, FAS
109 generally considers all expected future events other than proposed changes in the tax laws or
rates. Valuation allowances are provided if it is more likely than not that a deferred tax asset
will not be realized. NET INCOME (LOSS) PER COMMON SHARE  BASIC AND DILUTED Basic earnings per share (EPS) is calculated by dividing the income (loss) available to
common shareholders by the weighted average number of common shares outstanding for the period,
without consideration for common stock equivalents. Diluted EPS gives effect to all dilutive
potential common shares outstanding for the period. Shares of common stock issuable upon the
exercise of options (3,462, 3,897 and 3,770 shares in 2004, 2003 and 2002, respectively) and
warrants (1,742, 2,346 and 3,143 shares 44




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in 2004, 2003 and 2002, respectively) and shares issued upon conversion of convertible notes
(10,619, 9,859 and 9,153 in 2004, 2003 and 2002, respectively) are antidilutive and are not
included in the computation of shares outstanding. COMPREHENSIVE INCOME (LOSS) The Company follows SFAS No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130
establishes standards for reporting comprehensive income or loss and its components in the
consolidated financial statements. Comprehensive income (loss), as defined, includes all changes
in equity (net assets) during a period from non-owner sources. To date, the Company has reported
other comprehensive income from the cumulative effect on exchange rates for the amount of $0 in
2004, $0 in 2003 and $(2,170) in 2002. The Company had no other material transactions that are
required to be reported in comprehensive income or loss. SEGMENT REPORTING The Company operates in one business segment  the provision of telecommunication services to
small and medium sized businesses on an integrated basis. RECENT ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the FASB issued Statement 123 (revised 2004) that will require
compensation costs related to share-based payment transactions to be recognized in the financial
statements. With limited exceptions, the amount of compensation cost will be measured based on the
grant-date fair value of the equity or liability instruments issued. In addition, liability awards
will be re measured each reporting period. Compensation cost will be recognized over the period
that an employee provides service in exchange for the award.
Statement 123(R) replaces FASB
Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. The effective date for this requirement is as of the
first interim or annual reporting period that begins after June 15, 2005. The company has not
estimated the impact of adopting this revised standard on the financial statements. In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials (or spoilage) should be recognized as current-period charges
and requires the allocation of fixed production overheads to inventory based on the normal capacity
of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15,
2005. It is not expected that the adoption of SFAS No. 151 to have any effect on the Companys
consolidated financial position or results of operations. In December 2003, the FASB issued a revision to FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46-R). FIN 46 is an Interpretation of Accounting Research
Bulletin 51, Consolidated Financial Statements and addresses consolidation by business
enterprises of variable interest entities (VIEs) that possess certain characteristics. The
revision clarifies the definition in the original release that potentially could have classified
any business as a VIE. The revision also delays the effective date of the Interpretation from the
first reporting following December 15, 2003 to the first reporting period ending after March 15,
2004. The revision was effective for the Company in the first quarter of fiscal 2004. NoVIEs have
been identified and, accordingly, the application of the Interpretation did not have an effect on
the Companys results of operations or financial position. 2. LIQUIDITY As reflected in the accompanying consolidated financial statements, the Company has cumulative
losses and, except for the years ended December 31, 2002 and 2004, also had negative cash flows
from operations. 45




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Beginning in the first quarter of 2002, the Company initiated certain actions intended to
improve liquidity and operating results. Such actions included, among other things, (i) completing
the acquisition of Cypress Communications and making certain adjustments to Cypress Communications
staffing levels and cost structure (Note 4), (ii) liquidation of the operations in Argentina and
Brazil (Note 3), (iii) completing the purchase of certain assets of Intermedia Advanced Building
Networks and the shared tenant telecommunications services business of WorldCom, Inc. (Note 4),
(iv) raising $28 million in connection with such asset acquisition and (v) implementing an
analysis and optimization project of our telecommunications network and real estate access costs
which have resulted in substantial reductions in these cost elements in both absolute terms and as
a percentage of revenue. Cypress Holdings cash position decreased during the year ended December 31, 2004 due to
one-time payments resulting from negotiated settlements on certain liabilities of Cypress Holding,
related to current accrued expense, also in relation to the settlement agreements and purchases of
capital equipment related to the acquisition of new customers. Management believes that Cypress
Holdings cash position should stabilize during the following quarters as actions initiated in 2002
and throughout 2003 to reduce Cypress Holdings costs began to materialize starting in 2004 and
resulted in the first net income from continuing operations in the Companys history. The Company
is currently generating positive cash flows from operations and management believes that this trend
will continue. Cypress Holding cannot, however, give any assurance that it will be able to
generate sufficient cash flows from operations or financing activities to cover its future costs of
operations or to operate on a profitable basis. Likewise, no assurance can be given that Cypress
Holding can generate sufficient cash flow from operations or financing activities to support the
debt service obligations, including debt raised in connection with its acquisition of certain
assets from ABN/STS. Moreover, the terms of the indebtedness Cypress Holding incurred in
connection with the acquisition of certain assets from ABN/STS contain restrictive covenants that
limit its ability to incur additional indebtedness, pay dividends or undertake certain other
transactions. Cypress Holding has also pledged certain assets as security under its Senior Credit
Facility. Therefore, Cypress Holding must devote a substantial portion of its cash flow to service
its indebtedness and cannot utilize that cash flow for operations. Accordingly, there can be no
assurance that Cypress Holding will have sufficient liquidity to implement its business plan.
Likewise, there can also be no assurance that Cypress Holding will be able to obtain cash through
future financing activities on acceptable terms, or at all, or that Cypress Holding will ever
become profitable. As further discussed in Note 8 to these consolidated financial statements, the Company has
Bridge Loan debt and fees totaling $8,480 which will come due in July 2005. At present, the process
to refinance this debt has not been initiated, pending the proposed acquisition of the Company as
discussed in Note 14. Should that acquisition fail to be completed as currently contemplated, the
Company would be required to either renegotiate the terms of the Bridge Loan with the current debt
holders, or seek replacement financing Failure to either renegotiate or refinance the Bridge Loan
could materially affect the Companys liquidity. As a result of the aforementioned factors and
related uncertainties, there is substantial doubt about the Companys ability to continue as a
going concern. 3. DISCONTINUED OPERATIONS Cypress Holding discontinued and liquidated its telecommunications rights operations in Latin
America during 2002. Discontinuing Cypress Holdings operations in Latin America helped Cypress
Holding preserve existing capital and dedicate its resources to its new telecommunications services
business in the U.S. In 2002, Cypress Holding recognized a gain from the discontinued operations
of $2,207 in connection with the discontinuation and liquidation of its Latin-American
operations. 4. ACQUISITIONS CYPRESS COMMUNICATIONS In February 2002, the Company completed the acquisition of Cypress Communications, a U.S.
based operation that provides a full range of telecommunications services to businesses in
multi-tenant office buildings located in selected major metropolitan markets within the United
States. The acquisition 46




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of Cypress Communications allowed the Company to concentrate its resources and expertise on
providing premium communications services to over 2,500 small and medium sized business customers
in seven major metropolitan U.S. markets: Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles
and Seattle. Cypress Communications prior investment in telecommunications and broadband
infrastructure is expected to enable the Company to provide bundled communications services to
businesses located in multi-tenant office buildings in a manner that is both reliable and cost
effective for its customers. The acquisition of Cypress Communications was completed through a tender offer for outstanding
Cypress Communications common stock and a short form merger of a new wholly-owned acquisition
subsidiary of Cypress Holding into Cypress Communications. The purchase price was $3.50 per share,
in cash, for a total purchase price of $18,688, which included cash paid for options to purchase
shares of Cypress Communications under option plans in the amount of $58 and expenses incurred in
connection with the acquisition of $1,447. As a result of such acquisition, the Company, at the
subsidiary level, acquired 100% of Cypress Communications assets, including cash and its
telecommunications services infrastructure, and succeeded to all of the liabilities of Cypress
Communications, including operating lease commitments, primarily related to former office space,
and license agreements with property owners and/or operators of several office buildings. The
Company obtained financing to purchase the Cypress Communications common stock and complete the
merger through a loan from the LaSalle Bank, which was facilitated by the Oliver Estate, a private
entity affiliated with Ross J. Mangano, a director of the Company. The loan was repaid in February
2002, with interest of approximately $3. In connection to the loan, the Company paid a commission
fee to the Oliver Estate of $875 and issued warrants to purchase up to 850 shares of the Companys
common stock at an exercise price of $1 per share. The warrants are exercisable through February
2005 and, based on the Black-Scholes pricing model, were valued by the Company at $646.
Assumptions used for the Black-Scholes option-pricing model included: no dividend yield for all
years, expected volatility of 120 percent, risk-free interest rate of 4.75 percent and expected
life of 5 years. The commission and the value of the warrants were treated as interest expense in
the accompanying Consolidated Statements of Operations. In addition, the Company paid bank fees
and interest of approximately $55, which also have been treated as interest expense. The acquisition of Cypress Communications was accounted for by the purchase method of
accounting and resulted in negative goodwill. The purchase price allocation, after the elimination
of all long-term assets of Cypress Communications in an aggregate amount of $26,840, resulted in an
extraordinary gain associated with the acquisition in the amount of $7,783. The consolidated
statements of operations include the operations of Cypress Communications from February 1, 2002. ACQUISITION COSTS
    
    
    
    
    
    $
    18,688FAIR VALUE OF CYPRESS COMMUNICATIONS
    
    
    
    
    
    
    53,311NEGATIVE GOODWILL  BEFORE ASSET REDUCTION
    
    
    
    
    
    
    (34,623
    )REDUCTION OF LONG TERM ASSETSProperty and equipment
    
    $
    26,771Other assets
    
    
    69
    
    
    
    26,840EXTRAORDINARY GAIN
    
    
    
    
    
    $
    7,783
 INTERMEDIA ADVANCED BUILDING NETWORKS In July 2002, the Company, through its wholly owned subsidiary, Cypress Communications,
completed the purchase of certain assets of Intermedia Advanced Building Networks, the shared
tenant telecommunications services business of WorldCom, Inc (ABN/STS). The acquired assets
included all customer contracts, in-building networks and the associated building access rights, as
well as the necessary employees to support these assets. The acquisition of ABN/STS has allowed
the Company to extend its telecommunication services operations to over 5,700 small and medium
sized business customers in 25 major metropolitan U.S. markets. Cypress Communications paid
$29,000 in cash at closing to the sellers, assumed various commitments arising out of the operation
of the business after the closing, assumed accrued but unpaid liabilities incurred by the sellers
in the operation of the business prior to the closing in an amount up to a maximum of $2,000,
assumed vehicle lease obligations of approximately $284 and paid 47




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##### Table of Contents



expenses incurred in connection with the acquisition of approximately $899. The consolidated
statements of operations include the operations of ABN/STS from July 17, 2002. The acquisition was accounted for as a purchase, and accordingly, the results of operations of
ABN/STS have been included since the date of acquisition in the accompanying statements of
operations. The allocation of the purchase price as of July 17, 2002 was as follows: ACQUISITION COSTS
    
    $
    32,183COST ALLOCATIONCURRENT ASSETS
    
    
    10,662PROPERTY AND EQUIPMENT
    
    
    22,703DEFERRED REVENUES
    
    
    (1,182
    )TOTAL
    
    $
    32,183
 The useful lives of the assets acquired from ABN/STS are as follows: Network Equipment
    
    Seven yearsVehicles
    
    One year
 Concurrently with the closing, Cypress Communications entered into an Omnibus Post-Closing
Services Agreement with the sellers and certain of their affiliates. Under the Omnibus Agreement,
the sellers and their affiliates agreed to provide Cypress Communications:  (i)
    specified transition services;(ii)
    specified wholesale international, interstate, intrastate and local
telecommunications services and Internet services (see refer to commitments under the
Omnibus Post-Closing Agreement described in Note 9);(iii)
    access to the sellers U.S. Internet collocation facilities and support
services;(iv)
    access to the sellers network collocation facilities; and(v)
    access to certain buildings of the sellers in which the purchased assets are
located pending the receipt of certain consents from building owners and federal and
state regulators. In connection with such acquisition, the Company and Cypress Communications raised $28,000 to
finance the acquisition. The $28,000 financing included:  (i)
    a $10,000 senior secured revolving credit facility from Silicon Valley Bank
(the Senior Credit Facility);(ii)
    an $8,000 bridge loan (the Bridge Loan) from the J. Oliver Cunningham Trust
(the JOC Trust), the Anne C. McClure Trust (the ACM Trust), the Jane C. Warriner
Trust (the JCW Trust), Noro-Moseley Partners V, L.P.(Noro-Moseley), and the
Wakefield Group III, LLC (Wakefield); and(iii)
    the sale of $10,000 of Fixed Rate Convertible Notes due July 1, 2009 (the
Convertible Notes) to the Dolphin Communications Fund II, L.P. (Dolphin
Communications), Dolphin Communications Parallel Fund II (Netherlands), L.P.
(Dolphin Netherlands), Noro-Moseley and Wakefield. 48




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The JOC Trust, the ACM Trust and the JCW Trust are affiliates of certain stockholders of the
Company and of Ross J. Mangano, a director and Chairman of the Board of the Company and of Cypress
Communications. EUREKA BROADBAND CORPORATION In March 2003, Cypress Holding, through Cypress Communications, acquired Eurekas Southern
California building-centric voice and data services business. These assets included customer
contracts, as well as Eurekas in-building networks and associated building access rights. The
acquisition of the Eureka assets has allowed Cypress Holding to expand its telecommunications
services operations to include over 750 small and medium sized business customers in the California
market. Cypress Holding paid $2,500 in cash at closing to Eureka, assumed a note payable for $500
payable six months after the acquisition based upon meeting certain operational covenants, assumed
various commitments arising out of the operation of the business after the closing, assumed
equipment lease obligations of approximately $107 and paid expenses incurred in connection with the
acquisition of approximately $70. The acquired business did not meet some of the operational
covenants and the Company was only required to pay $330. The consolidated statements of operations
include the operations of Eureka from April 1, 2003. ACQUISITION COSTS
    
    $
    3,007COST ALLOCATIONOTHER NON-CURRENT ASSETS
    
    
    393PROPERTY AND EQUIPMENT
    
    
    2,614TOTAL
    
    $
    3,007
 E-BUILDING SOLUTIONS, INC. In July 2003, Cypress Holding, through Cypress Communications, negotiated the surrender of
certain assets from E-Building Solutions, Inc. in California, a building-centric data services
business, to mitigate the loss resulting from E-Buildings default on a $450 note due to Cypress
Communications. These assets included customer contracts, as well as E-Buildings in-building
networks and associated building access rights. In addition to the $450 note, Cypress Holding,
assumed equipment lease obligations of approximately $43 and paid expenses incurred in connection
with the note of approximately $43. After valuing the assets surrendered, the Company recorded a
loss on investment in the amount of $149. The consolidated statements of operations include the
operations of E-Building from July 1, 2003. ACQUISITION COSTS
    
    $
    536COST ALLOCATIONOTHER NON-CURRENT ASSETS
    
    
    274PROPERTY AND EQUIPMENT
    
    
    113LOSS ON INVESTMENT
    
    
    149TOTAL
    
    $
    536
 49




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##### Table of Contents



5.
    PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31, 2004 and 2003: 2004
    
    
    2003System infrastructure
    
    $
    31,112
    
    
    $
    27,545Computer and office equipment
    
    
    1,684
    
    
    
    1,277Leasehold improvements
    
    
    554
    
    
    
    48733,350
    
    
    
    29,309Less accumulated depreciation and amortization
    
    
    9,722
    
    
    
    5,060$
    23,628
    
    
    $
    24,249
  6.
    INTANGIBLE ASSETS As part of the acquisitions of the assets of Eureka and E-Building, in March and July 2003
respectively, a portion of the acquisition costs were allocated to intangible assets. The combined
Gross Carrying Value for the Customer Contracts was $567. Net Carrying Value at December 31, 2004
and 2003 was $0 and $239 respectively. The combined Gross Carrying Value for the Non-Compete
Agreement is $100 and the Net Carrying Value was $42 and $75 at December 31, 2004 and 2003
respectively. Effective January 1, 2002, Cypress Holding adopted SFAS No. 142, Accounting for Goodwill and
Other Intangible Assets (SFAS No. 142), SFAS No. 142 requires that goodwill and certain
intangible assets will no longer be subject to amortization, but instead will be subject to
periodic impairment assessment by applying a fair value based test. Cypress Holding did not have
any goodwill as of December 31, 2002, 2003 or 2004. Summarized below are the carrying value and accumulated amortization of intangible assets that
are to be amortized under SFAS No. 142. The Company did not have any other intangible assets as of
December 31, 2002. December 31, 2004Gross Carrying Value
    
    
    Accumulated Amortization
    
    
    Net Carrying ValueCustomer Contracts
    
    $
    567
    
    
    $
    567
    
    
    $
    0Non-compete
agreement
    
    $
    100
    
    
    $
    58
    
    
    $
    42$
    667
    
    
    $
    625
    
    
    $
    42
 December 31, 2003Gross Carrying Value
    
    
    Accumulated Amortization
    
    
    Net Carrying ValueCustomer Contracts
    
    $
    567
    
    
    $
    328
    
    
    $
    239Non-compete
agreement
    
    $
    100
    
    
    $
    25
    
    
    $
    75$
    667
    
    
    $
    353
    
    
    $
    314
 The estimated aggregate amortization expense for the years ended December 31, 2005 and 2006 is
$33 and $9, respectively. 50




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7.
    ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31, 2004 and 2003 consist of: 2004
    
    
    2003Accounts payable
    
    $
    1,735
    
    
    $
    4,886Accrued circuits and connectivity costs
    
    
    3,569
    
    
    
    7,029Accrued termination charges
    
    
    676
    
    
    
    908Accrued professional fees
    
    
    340
    
    
    
    190Accrued compensation
    
    
    1,332
    
    
    
    495Other accrued expenses
    
    
    2,616
    
    
    
    2,836$
    10,268
    
    
    $
    16,344
 Included in the above totals for the years ended December 31, 2004 and 2003 are approximately
$1,464 and $2,700 respectively of accrued expenses which are currently in dispute with various
vendors. We cannot estimate at this time the amount, if any, of these expenses that may be reduced
through resolution of the various disputes. See Note 9 for further discussion of claims we made
related to certain of these disputed accrued expenses.  8.
    CONVERTIBLE NOTES AND DEBENTURES Long-term debt at December 31, 2004 and 2003 consisted of the following: 2004
    
    
    2003Bridge Loan, in the amount of $8,000, at
a rate of 14% interest payable quarterly
beginning September 30, 2002, with
principal and any unpaid interest due
July 16, 2005. (included in current
installments of long term debt at
December 31, 2004)
    
    
    0
    
    
    
    8,280Convertible Notes including accrued
interest and net of discount, with a face
value of $10,000, at a rate of 7.5%, with
interest and principal due July 1, 2009.
    
    
    10,463
    
    
    
    9,263$
    10,463
    
    
    $
    17,543
  (a)
    SENIOR CREDIT FACILITY The Senior Credit Facility, in the amount of a $10,000 revolving credit facility, was obtained
by Cypress Communications pursuant to a Loan and Security Agreement, dated July 12, 2002 and
amended in March and July of 2004 between Cypress Communications and Silicon Valley Bank. The
Senior Credit Facility accrues interest at the prime rate (with a floor of 4.75%) plus 2% (7.25% as
of December 31, 2004) per annum and matures on July 12, 2005, unless terminated earlier.
Borrowings under the Senior Credit Facility are collateralized by all of the assets of Cypress
Communications and are unconditionally guaranteed by the Company. As of December 31, 2004 and
2003, there was $2,576 and $2,016, respectively, outstanding under the Senior Credit Facility which
has been classified as a current liability in the accompanying consolidated balance sheet.  (b)
    BRIDGE LOAN The Bridge Loan, in the amount of $8,000 term loan, was obtained by the Company and Cypress
Communications pursuant to a Loan Agreement dated July 16, 2002 among the Company, Cypress 51




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Communications, the JOC Trust, the ACM Trust, the JCW Trust, Noro-Moseley and Wakefield (each,
acting in such capacity, a Bridge Lender and collectively, the Bridge Lenders). The Bridge
Loan accrues interest at 14% per annum, and matures on the earlier to occur of (i) one business day
following the maturity of the Senior Credit Facility and (ii) July 16, 2005. Each Bridge Lender
was entitled to receive an initial loan fee equal to 2.5% of that portion of the Bridge Loan that
was funded by such Bridge Lender. Because the Bridge Loan was outstanding 60 days after the
closing, the Company and Cypress Communications became obligated to pay each Bridge Lender an
additional loan fee equal to 1.25% of the then outstanding principal balance of such Bridge
Lenders share of the Bridge Loan. Because the Bridge Loan has been outstanding 90 days after the
closing, the Company and Cypress Communications became obligated subsequent to the end of the
quarterly period ended September 30, 2002 to pay each Bridge Lender an additional loan fee equal to
1.25% of the then outstanding principal balance of such Bridge Lenders share of the Bridge Loan.
Because the Bridge Loan has been outstanding 120 days after the closing, the Company and Cypress
Communications became obligated to pay to each Bridge Lender an additional loan fee equal to 1.00%
of the then outstanding principal balance of such Bridge Lenders share of the Bridge Loan. The
loan fees described above are cumulative and are payable on the earlier to occur of the maturity
date of the Bridge Loans or the date on which the Bridge Loans are paid in full. The Company has
accrued $480 for these fees, which were treated as interest expense in the accompanying
Consolidated Statements of Operations. The Bridge Loan, in the amount of $8,000, has been
classified as a long term liability at December 31, 2003 and as current installment of long term
debt at December 31, 2004 in the accompanying balance sheets as a result of the terms of the Bridge
Loan. At the closing of the Bridge Loan, the Company issued the Bridge Lenders warrants to purchase
an aggregate of 400 shares of the Companys common stock at an exercise price of $1.13 per share.
These warrants are exercisable for a term of 10 years and, based on the Black-Scholes pricing
model, were valued by the Company at $535. Assumptions used for the Black-Scholes option-pricing
model included: no dividend yield for all years, expected volatility of 159 percent, risk-free
interest rate of 5.08 percent and expected life of 10 years. The value of the warrants is being
amortized to interest expense over two years in the accompanying Consolidated Statements of
Operations. On March 25, 2004, we amended the terms of the Bridge Loan such that, the Bridge Loan will not
mature until the earlier to occur of (i) its original maturity date of July 15, 2005 or (ii) an
event whereby we substantially refinance our debt obligations. (c) CONVERTIBLE NOTES The Convertible Notes, in the amount of $10,000 , were issued by the Company and Cypress
Communications pursuant to a Purchase Agreement dated July 16, 2002 among the Company, Cypress
Communications, Dolphin Communications, Dolphin Netherlands, Noro-Moseley and Wakefield (each,
acting in such capacity, a Purchaser and collectively, the Purchasers). The Convertible Notes
accrue interest at the rate of 7.5% per annum, compounded quarterly, and payable at maturity of the
notes, whether upon their stated maturity of July 1, 2009, or earlier as a result of acceleration
in the event of a default or upon redemption of the Convertible Notes. The principal of and
accrued interest on the Convertible Notes is convertible into the Companys common stock at $1.13
per share. The Convertible Notes are redeemable by the Company or Cypress Communications at any
time by payment of the outstanding principal balance and accrued interest. In the event that the
Convertible Notes are redeemed, the Purchasers have been issued warrants which will then be
eligible for exercise to purchase the number of shares of common stock of the Issuer that the
Convertible Notes were convertible into on the redemption date at a conversion price of $1.13 per
share. In connection with the issuance of the Convertible Notes, the Company, the Purchasers and
the Bridge Lenders entered into a registration rights agreement, which provides for the
registration of the common stock issuable upon (i) the conversion of the Convertible Notes; (ii)
the exercise of the Warrants issued in connection with the Bridge Loan; and (iii) the exercise of
the Warrants exercisable upon the redemption of the Convertible Notes. In connection with the issuance of the Convertible Notes, the Purchasers were issued a total
of one hundred shares of the Companys Series A Preferred Stock (the Series A Preferred) without
additional consideration. The rights of the Series A Preferred are set forth in a Certificate of
Designations 52




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##### Table of Contents



adopted by the Companys board of directors. The holders of a majority of the Series A
Preferred are entitled to elect two members of the Companys board of directors and the holders of
the Series A Preferred are entitled to receive dividends and distributions equal to those payable
to the holders of an equivalent number of shares of the Companys common stock. In addition, the
Company may not, without the prior written consent of holders of a majority of the Series A
Preferred, (i) increase or decrease (other than by redemption or conversion) the authorized number
of shares of Series A Preferred; (ii) cancel or modify the voting rights of the holders of Series A
Preferred; (iii) cancel or modify the rights of the holders of Series A Preferred; or (iv) amend,
waive, alter, modify or repeal any provision of the Certificate of Incorporation or Bylaws of the
Corporation, if such amendment, alternation, modification or repeal would adversely affect the
Series A Preferred, including the issuance of preferred stock with voting rights senior to or pari
passu with the Series A Preferred. The Series A Preferred is redeemable by the Company in the event
that:  (i)
    at least 75% of the principal amount of the Convertible Notes is converted
into shares of common stock of the Company;(ii)
    at least 75% of the principal amount of the Convertible Notes is redeemed;(iii)
    the Company has submitted an application in good faith to apply for listing
on AMEX, NASDAQ or another national exchange to register its securities on such
exchange, the average daily trading price per share of the common stock as reported in
such application is at least $4.00 per share, and the Company subsequently receives a
comment from such exchange that its application for listing will not be accepted so
long as the Series A Preferred remains outstanding with the voting rights described
herein; or(iv)
    the outstanding principal and interest on the Convertible Notes are paid in
full on the maturity date of the Convertible Notes. The redemption price for the Series A Preferred is $0.001 per share. At the closing of the Convertible Notes, the Company issued the Convertible Note Lenders
warrants to purchase the number of shares of the Companys common stock in to which the Convertible
Notes would be convertible immediately prior to the redemption of such note at a price of $1.13 per
share. These warrants are exercisable if the Convertible Notes are redeemed and have a life of 7
years. The Company will not record any charge until the notes are redeemed. The Company has
estimated that based on the terms of the Convertible Notes that if the Company redeemed the
Convertible Notes it would redeem the entire amount. Therefore, based on the Black-Scholes pricing
model, the warrants were valued by the Company at $12,035. Assumptions used for the Black-Scholes
option-pricing model included: no dividend yield for all years, expected volatility of 159 percent,
risk-free interest rate of 4.81 percent and expected life of 7 years. The Bridge Lenders and the Purchasers entered into an Intercreditor (Subordination) Agreement,
which, among other things, provides that under certain limited circumstances, all amounts payable
by the Company and Cypress Communications under the Bridge Loan and the Convertible Notes will be
payable, pro rata among the Bridge Lenders and the Purchasers, on a pari passu basis. To induce
the JOC Trust, the ACM Trust and the JCW Trust to enter into the Intercreditor (Subordination)
Agreement, the Company and Cypress Communications entered into a Letter Agreement. Pursuant to the
Letter Agreement, the Company and Cypress Communications agreed to pay the Bridge Lenders and the
Purchasers, in proportion to the amounts lent by them under the Bridge Loan, a fee of $1,000 (the
Risk Allocation Fee). The Risk Allocation Fee was to be payable to certain Bridge Lenders and
the Purchasers upon the earlier to occur of the achievement of certain earnings milestones set
forth in the Letter Agreement or June 30, 2003. In December 2002, the Company agreed to accelerate
the payment terms for this Risk Allocation Fee, issuing a payment of $915 in settlement of the full
outstanding amount. The Company recognized the $85 difference in 2002 as an extraordinary gain on
extinguishment of debt. As the exercise price of the Convertible Notes of $1.13 was less than the relative fair market
value of the stock as of the consummation date, a beneficial conversion was created. The Company
has 53




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##### Table of Contents



calculated the beneficial conversion feature embedded in the Convertible Notes in accordance
with EITF No. 98-5 and EITF No. 00-27 and recorded approximately $2,389 as a debt discount. This
discount is being amortized over the seven-year life of the Convertible Notes. During the year
ended December 31,2004, 2003 and 2002, the Company recorded $341, $341 and $171 respectively, in
additional interest expense. FUTURE ANNUAL COMMITMENTS Future annual payments under capital leases and long-term debt as of December 31, 2004 are as
follows: 2005
    
    
    8,5112006
    
    
    42007
    
    
    2008
    
    
    2009
    
    
    12,000Total
    
    
    20,515Less current portion
    
    
    (8,511
    )Long-term portion
    
    $
    12,004
  9.
    COMMITMENTS AND CONTINGENCIES  (a)
    LEASES Cypress Holding is obligated under several operating lease agreements for office space,
including switch room space in the buildings where we have licenses to provide our services.
Future annual minimum rental payments under these leases as of December 31, 2004 are as follows: Gross minimum
    
    
    Cash due under
    
    
    Net minimum rentalrental payments
    
    
    subleases
    
    
    payments2005
    
    
    5,728
    
    
    
    1,010
    
    
    
    4,7182006
    
    
    3,731
    
    
    
    551
    
    
    
    3,1802007
    
    
    2,279
    
    
    
    274
    
    
    
    2,0052008
    
    
    921
    
    
    
    41
    
    
    
    8802009
    
    
    547
    
    
    
    35
    
    
    
    512Thereafter
    
    
    197
    
    
    
    35
    
    
    
    162Total
    
    $
    13,403
    
    
    $
    1,946
    
    
    $
    11,457
 Rent expense for 2004, 2003 and 2002 was approximately $6,318, $6,776, and $4,041,
respectively.  (b)
    OBLIGATIONS UNDER LICENSE AGREEMENTS Cypress Holding has entered into license agreements with property owners and/or operators of
several office buildings whereby Cypress Holding has the right to provide communications services
in these buildings. Under the terms of the agreements, Cypress Holding is generally obligated to
pay a commission based on the greater of a base fee or a percentage of revenue earned in the
related building or development. At December 31, 2004, Cypress Holdings aggregate minimum
obligations under these agreements were as follows: 54




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##### Table of Contents



2005
    
    
    1,1202006
    
    
    9432007
    
    
    8242008
    
    
    6442009
    
    
    466Thereafter
    
    
    495Total
    
    $
    4,492
 The commitments above exclude an estimated total of $1.2 million of potential obligations
under license agreements in buildings in which Cypress Holdings communications network has not
been constructed. In the opinion of management, such amounts will not be owed, as Cypress Holding
is not providing services in those buildings. License expense for 2004, 2003 and 2002 was approximately $4,126, $4,123 and $2,676
respectively, included in direct costs in the consolidated statement of operations.  (c)
    OBLIGATIONS UNDER COMMUNICATIONS SERVICE AGREEMENTS At December 31, 2004, Cypress Holding had contracts with some communications providers with
minimum purchase obligations for leased voice and data transport and other services. As of
December 31, 2004, approximate future minimum purchase commitments under these agreements were as
follows: 2005
    
    $
    10,3112006
    
    
    722007
    
    
    66Total
    
    $
    10,449
 Expense for leased voice and data transport under communications service agreements for 2004,
2003 and 2002 was approximately $24,985, $32,575 and $34,943 respectively, included in direct costs
in the consolidated statement of operations.  (d)
    LEGAL PROCEEDINGS Cypress Holding is subject to legal proceedings and claims, including employment and other
matters that arise in the ordinary course of business. Except as set forth below, there are no
pending legal proceedings to which Cypress Holding is a party that management believes will have a
material adverse effect on the financial position, results of operations, or cash flows of Cypress
Holding. With respect to the Companys ABN/STS acquisition referenced in Note 4, on or about January
23, 2003, the Company filed proofs of claim in the bankruptcy cases of WorldCom, Inc. and certain
of its debtor affiliates as a result of the Debtors defaults under that certain Asset Purchase
Agreement dated May 31, 2002 by and among Intermedia Communications, Inc., Shared Technologies
Fairchild, Inc., Shared Technologies Fairfield Telecom, Inc., MCI Worldcom Communications, Inc.,
Worldcom, Inc., MCI-WORLDCOM Network Services, Inc. (the Debtors) and Cypress Communications,
that certain Omnibus Post-Closing Agreement dated July 16, 2002, by and among the Debtors and
Cypress Communications and certain other related ancillary documents (collectively the Transaction
Documents). The Company filed amendments to these proofs of claim on January 29, 2004 to increase
our claim to $13,852, which amended proofs of claim include damages caused to us as a result of
certain fraudulent accounting practices of the Debtors (not, so far as the Company is aware,
specific to Cypress Communications) and failure to perform required actions and other breaches of
the Transaction Documents by the Debtors. On or about October 18, 2004, the Debtors objected to the Companys proofs of claim and a
hearing has been set for April 22, 2005. The Company expects that WorldCom will bring
counterclaims 55




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##### Table of Contents



alleging breaches by Cypress of the agreements and related ancillary documents. The Company
expects such counterclaims may seek damages of approximately $2,300, of which the Company has
$1,464 million currently recorded in accrued expenses. The Company cannot express an opinion as to
whether a favorable or unfavorable outcome is either probable or remote or to estimate the range of
any possible loss or gain that may result from the settlement of these claims. An unfavorable
outcome could, under certain circumstances, result in a material adverse effect on our business,
financial condition and results of operations.  (e)
    TELECOMMUNICATIONS TAXES PAID During the quarter ended September 30, 2004, management determined that the Company made
payments to telecommunications service providers for federal, state and local taxes and surcharges
on telecommunications services for which it might be exempt. The Company is attempting to
recover these taxes and surcharges directly from the telecommunications service providers involved.
Although management believes that the amount of taxes and surcharges which the Company is entitled
to recover is in the range of $1,000 to $2,500, there is no assurance that any amounts will be
recovered or when any amounts will be recovered, if ever. The recovery of these taxes and
surcharges will be recorded in the financial statements when the taxes and surcharges are actually
recovered. From December 31, 2004 to March 1, 2005, the Company has recovered approximately $200 in
telecommunications taxes from its vendors. 10. STOCKHOLDERS EQUITY  (a)
    EMPLOYEE EQUITY INCENTIVE PLAN In April 1999, the Companys Board of Directors approved a 10-year Employee Equity Incentive
Plan, subject to approval of its stockholders. The stockholders ratified the Plan in September
1999. In March 2002, the Companys board of directors approved an amendment to the 1999 Employee
Equity Incentive Plan (the Option Plan). By this amendment, the number of shares of common stock
reserved for issuance under the Option Plan was increased to 3,200 shares, subject to automatic
annual adjustment to an amount equal to 30% of our outstanding common stock on a fully diluted
basis, up to a maximum of 5,000. The amendment was approved by the Companys shareholders at the
Annual Meeting of Shareholders on June 26, 2002. In August 2002, the Companys board of directors approved a second amendment to the Option
Plan. By this amendment, the number of shares of common stock reserved for issuance under the
Option Plan was increased to 4,200 shares, subject to the existing automatic annual adjustment
contained in the Option Plan, and increasing to 1,500 the aggregate limit on the number of options
that may be granted to any one optionee during the term of the Option Plan. As of December 31,
2004, after giving effect to the issuance of additional options following adoption of the
amendment, options to purchase 3,462 shares were outstanding under such plan. 56




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##### Table of Contents



The following table summarizes the Companys employee stock option activity: ExercisableWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstanding at December 31, 2001
    
    
    537
    
    
    $
    6.87
    
    
    
    537
    
    
    $
    6.872002:Granted
    
    
    3,495
    
    
    $
    1.74Forfeited
    
    
    (207
    )
    
    $
    1.52Outstanding at December 31, 2002
    
    
    3,825
    
    
    $
    2.48
    
    
    
    537
    
    
    $
    6.872003:Granted
    
    
    487
    
    
    $
    1.38Forfeited
    
    
    (415
    )
    
    $
    3.39Outstanding at December 31, 2003
    
    
    3,897
    
    
    $
    2.24
    
    
    
    1,732
    
    
    $
    2.952004:Granted
    
    
    726
    
    
    $
    1.25Forfeited
    
    
    (1,161
    )
    
    $
    3.45Outstanding at December 31, 2004
    
    
    3,462
    
    
    $
    1.60
    
    
    
    1,821
    
    
    $
    1.72
 The following table summarizes information about the stock options outstanding at December 31,
2004: WeightedNumber of
    
    
    AverageOptions
    
    
    Remaining
    
    WeightedOutstanding at
    
    
    Contractual
    
    Average
    
    
    Exercisable as ofExercise Price
    
    December 31, 2004
    
    
    Life (in Years)
    
    Exercise Price
    
    
    December 31, 2004$1.25
    
    
    1,127
    
    
    9
    
    $
    1.25
    
    
    
    100$1.50  $1.60
    
    
    1,230
    
    
    5
    
    $
    1.50
    
    
    
    1,030$2.00
    
    
    1,095
    
    
    7
    
    $
    2.00
    
    
    
    681$10.00
    
    
    10
    
    
    1
    
    $
    10.00
    
    
    
    103,462
    
    
    7
    
    $
    1.72
    
    
    
    1,821
  (b)
    NON-CASH EQUITY TRANSACTIONS The Company valued warrants issued during the year ended December 31, 2002 in connection with
financing agreements at $1,181, using the Black-Scholes pricing model. Warrants issued to purchase
up to 850 shares of the Companys common stock at an exercise price of $1 per share, were valued at
$646, assuming: no dividend yield for all years, expected volatility of 120 percent, risk-free
interest rate of 4.75 percent and expected life of 5 years. Warrants to purchase 400 shares of the
Companys common stock at an exercise price of $1.13 per share were valuated at $535, assuming: no
dividend yield for all years, expected volatility of 159 percent, risk-free interest rate of 5.08
percent and expected life of 10 years. No such transactions were recorded during the years ended December 31, 2004 and 2003. The
$1,181 amount in 2002 was charged to interest expense.  (c)
    STOCK OPTIONS AND WARRANTS OUTSTANDING All stock options and warrants issued before 2001 are currently exercisable. Stock options
issued in 2001 vest ratably over three years, and stock options issued in 2002 and beyond vest
ratably over four 57




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##### Table of Contents



years, with the exception of 1,900 issued to the Companys current and former Chief Executive
Officers in 2002, which vest 50% upon the achievement by the Company of positive cash flow for 4
consecutive quarters on a cumulative basis, 25% on the first anniversary of the vesting of the
initial 50%, and 25% on the second anniversary of the vesting of the initial 50%. Certain members
of the executive management of the Company were awarded performance-based options on March 20, 2002
(the March Options) and August 6, 2002 (the August Options). The purpose of these
performance-based options was to better align executive managements compensation with growth of
the Company. Both the March Options and August Options vest (1) 50% upon the achievement of four
consecutive quarters of positive cash flow, on a cumulative basis, as defined in the option
agreements (the First Performance Date), (2) 25% upon the first anniversary of the First
Performance Date, and (3) 25% on the second anniversary of the First Performance Date. The options
have a ten-year life and were issued with an exercise price above the fair value of the underlying
stock on the date of the grant. The Company follows APB Opinion Number 25, Accounting for Stock
Issued to Employees, and, accordingly, compensation expense for stock options is measured as the
excess, if any, of the fair value of the Companys stock at the measurement date over the exercise
price. During the second quarter of 2003, the Company achieved the cash flow performance for the
March Options and established the First Performance Date for the March Options. Accordingly, the
first 50% of the March Options vested in accordance with the terms of the option agreement. The
Company has recorded compensation expense in 2004, 2003 and 2002 in the amount of $78, $438 and $0
in connection with the March Options, which includes the cost related to the 50% vested during the
period and a prorated amount for the 50% to be vested over the next two years according to the
agreement. During 2004, coincident with the Chief Executive Officer leaving the Company, the
amortization of compensation expense related to his portion of the March Options was halted. Upon
his departure, the Chief Executive Officer forfeited 550 unvested options granted in 2002. The
Company will expense the remaining compensation cost for the other executive over the vesting
period. In connection with the August Options, the Company has not recorded any stock compensation
expense, as the exercise price of the performance-based options is $2.00, which is currently in
excess of the fair market value of the stock. The stock options and warrants expire as follows: WeightedAverageYear Ending December 31, 2004
    
    Shares
    
    
    Exercise Price2005
    
    
    1,902
    
    
    $
    1.852006
    
    
    
    
    
    
    2007
    
    
    10
    
    
    $
    1.602008
    
    
    10
    
    
    $
    1.602009
    
    
    10,629
    
    
    $
    1.13Thereafter
    
    
    3,461
    
    
    $
    1.5216,012
    
    
    $
    1.30
 11. TREASURY STOCK In July 2001, the Company purchased for approximately $800 an aggregate of 533 shares of the
Companys common stock from a former Company director and members of his family. On April 1, 2002,
Cypress Holding announced that its Board of Directors had approved the use of up to $500 for
repurchase of its common stock. Under this stock repurchase program, as of December 31, 2004, the
Company had purchased approximately 61 shares of the Companys common stock at fair value for
approximately $60. The shares were accounted for as treasury stock and are shown separately as a
deduction from the total common stock. 58




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##### Table of Contents



12. RELATED PARTY TRANSACTIONS In February 2002, the Company entered into severance arrangements with certain officers and
employees of the Company. Under these arrangements, the Company paid out severance of
approximately $400 during the first quarter of 2002. See also Notes 8(b) and (c) for interim bridge financing and a convertible note payable with
related parties, equity securities issued to related parties and subsequent event, respectively. 13. INCOME TAXES The benefit/(provision) for income taxes from continuing operations consisted of the following
for the years ended December 31, 2004, 2003 and 2002: 2004
    
    
    2003
    
    
    2002Current
    
    $
    
    
    
    $
    
    
    
    $
    Deferred
    
    
    (3,462
    )
    
    
    1,602
    
    
    
    5,573(Increase)/Decrease in valuation allowance
    
    
    3,462
    
    
    
    (1,602
    )
    
    
    (5,573
    )Income tax benefit / (provision)
    
    $
    
    
    
    $
    
    
    
    $
    
 Deferred income taxes reflect the net tax effect of temporary differences between the carrying
amount of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The significant components of deferred tax assets and liabilities as of as of
December 31, 2004, 2003 and 2002 are as follows: 2004
    
    
    2003
    
    
    2002Non-current deferred tax assets:Net operating loss carryforwards
    
    $
    150,694
    
    
    $
    137,344
    
    
    $
    96,999Allowance for doubtful accounts
    
    
    83
    
    
    
    161
    
    
    
    411Acquired liabilities accrual
    
    
    271
    
    
    
    402
    
    
    
    8,371Real estate access rights
    
    
    32,306
    
    
    
    39,520
    
    
    
    46,734Property, plant & equipment
    
    
    10,367
    
    
    
    19,785
    
    
    
    15,395Stock Based compensation
    
    
    454
    
    
    
    423
    
    
    
    Other  Intangible assets
    
    
    19
    
    
    
    21
    
    
    
    311Total non-current deferred tax assets
    
    $
    194,194
    
    
    $
    197,656
    
    
    $
    168,249Net deferred income taxes:Valuation allowance
    
    
    (194,194
    )
    
    
    (197,656
    )
    
    
    (168,249
    )Net deferred income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
 At December 31, 2004, Cypress Communications had available federal net operating loss carry
forwards of approximately $386,000 that expire from 2012 to 2024. The utilization of $223,000 of
these loss carry forwards is subject to an annual limitation as a result of a change in ownership
of Cypress Communications, as defined in the Internal Revenue Code. The limitation does not reduce
the total amount of net operating losses that may be taken, but rather substantially limits the
amount that may be used during a particular year. Cypress Communications also had various state
net operating loss carry forwards that expire from 2012 to 2024. Management has reviewed the net
deferred tax assets as of December 31, 2004, and determined that it is more likely than not that
all of the deferred tax assets will not be realized. The amount of the valuation allowance has
decreased as of December 31, 2004, due to changes in deferred tax balances relative to real estate
access rights and property, plant and equipment. 59




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##### Table of Contents



A reconciliation of the income tax provision computed at statutory tax rates to the income tax
provision for the years ended December 31, 2004, 2003 and 2002 is as follows: 2004
    
    
    2003
    
    
    2002Income tax expense/(benefit)
at statutory rate
    
    $
    148
    
    
    
    35
    %
    
    $
    (1,438
    )
    
    
    (35
    )%
    
    $
    (3,998
    )
    
    
    (35
    )%State income taxes, net of
federal benefit
    
    
    17
    
    
    
    4
    %
    
    
    (164
    )
    
    
    (4
    )%
    
    
    (456
    )
    
    
    (4
    %)Reduction in
NOL Carryover
    
    
    3,258
    
    
    
    770
    %Meals &
Entertainment & Penalties
    
    
    39
    
    
    
    9
    %
    
    
    
    
    
    
    
    %
    
    
    (1,119
    )
    
    
    (1.85
    %)Increase/(decrease) in
valuation allowance
    
(3,462
    )
    
(818
    )%
    
1,602
    
    
39
    %
    
5,573
    
    

40.85
    %Income tax provision/(benefit)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 14. EMPLOYEE BENEFIT PLAN The Company has a 401(k) Profit Sharing Plan (the Plan) for the benefit of eligible
employees and their beneficiaries. All employees are eligible to participate on the first full
month following the date of employment. The Company did not make any matching contributions in
2004 or in any of the prior periods presented. 15. PENDING ACQUISITION OF THE COMPANY On November 5, 2004, Cypress Holding, TechInvest Holding Company, Inc., an affiliate of
Arcapita Inc. (Parent), and TechInvest Acquisition, Inc., a wholly-owned subsidiary of Parent
(Purchaser), entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to
which Parent will acquire Cypress Holding by the merger of Purchaser with and into Cypress Holding,
with Cypress Holding surviving the merger as a wholly-owned subsidiary of Parent. The total value
of the transaction, at the time of the execution of the Merger Agreement, was $39,350. The Merger
Agreement contains provisions for final merger consideration adjustments, upwards or downwards,
based on the achievement of certain conditions pertaining to changes in certain current assets and
liabilities between the execution of the Merger Agreement and closing of the transaction. On February 3, 2005, in recognition of the potential increase in working capital relating to
the telecommunications tax recovery, Cypress Holding and Parent agreed to amend the Merger
Agreement (the Amendment) to increase the merger consideration by $935, making the total value of
the transaction $40,285. The parties also agreed in the Amendment, among other things, that
accounts receivable attributable to the telecommunications tax recovery will be capped in light of
the increase in the merger consideration for purposes of calculating the final merger consideration
adjustment. The Merger Agreement provides that the merger consideration will first be used to repay
outstanding indebtedness. The remaining consideration, after transaction expenses, will be
distributed to stockholders, with an estimated price per share of $1.71, subject to final merger
consideration adjustments (The $1.71 per share cash consideration is estimated by Cypress Holding
as of December 31, 2004 and is subject to adjustment upwards or downwards pursuant to the merger
agreement). The closing of the transaction is subject to certain terms and conditions customary for
transactions of this type, including receipt of stockholder and regulatory approvals and other
conditions. On March 15, 2005, a majority of the shareholders of each class of the Companys voting stock
voted to approve the Merger Agreement 60




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##### Table of Contents



The Company incurred $597 in expenses during 2004 related to the solicitation, negotiation and
completion of the sale transaction, which are recorded in general and administrative expense in the
consolidated statement of operations. 16. SUBSEQUENT EVENTS In January 2005, a shareholder exercised outstanding warrants to purchase 850
shares of the Companys Common Stock through payment to the Company of $850. In March 2005, a former employee exercised options to purchase 400 shares of the
Companys Common Stock through payment to the Company of $600. 17. QUARTER-BY-QUARTER COMPARISON (UNAUDITED) (In thousands, except per share data) First
    
    
    Second
    
    
    Third
    
    
    Fourth2004Operating revenues
    
    $
    19,884
    
    
    $
    20,271
    
    
    $
    19,433
    
    
    $
    19,394Net Income (Loss)
    
    
    (631
    )
    
    
    664
    
    
    
    303
    
    
    
    87Basic Income (Loss) per share
    
    
    (0.11
    )
    
    
    0.11
    
    
    
    0.05
    
    
    
    0.01Diluted Income (Loss) per share
    
    
    (0.11
    )
    
    
    0.11
    
    
    
    0.05
    
    
    
    0.01Weighted Average Common Shares
Outstanding (basic)
    
    
    5,874
    
    
    
    5,874
    
    
    
    5,874
    
    
    
    5,874Weighted Average Common Shares
Outstanding (diluted)
    
    
    5,874
    
    
    
    5,874
    
    
    
    5,874
    
    
    
    7,810
 First
    
    
    Second
    
    
    Third
    
    
    Fourth2003Operating revenues
    
    $
    21,964
    
    
    $
    21,808
    
    
    $
    21,046
    
    
    $
    19,808Net Income (Loss)
    
    
    (1,148
    )
    
    
    (56
    )
    
    
    (1,830
    )
    
    
    (1,129
    )Per common share
Basic and DilutedBasic and
Diluted Loss per share
    
    
    (0.20
    )
    
    
    (0.01
    )
    
    
    (0.31
    )
    
    
    (0.19
    )Weighted Average Common Shares
Outstanding
    
    
    5,874
    
    
    
    5,874
    
    
    
    5,874
    
    
    
    5,874
 61




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Report of Independent
Registered Public Accounting Firm Cypress Communications, Inc. We have audited the accompanying consolidated statements of operations, changes in stockholders
equity and cash flows of Cypress Communications, Inc. and subsidiaries for the one-month period
from January 1, 2002 to January 31, 2002. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. We conducted our audit in
accordance with auditing standards of the Public Company Accounting
Oversight Board (United States) 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 consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the results of its operations and cash flows for the one-month period from
January 1, 2002 to January 31, 2002, in conformity with accounting principles generally accepted in
the United States of America. /s/ Deloitte & Touche, LLP Atlanta, Georgia
April 1, 2003 62




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CYPRESS COMMUNICATIONS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF OPERATIONS FOR THE ONE-MONTH PERIOD FROM JANUARY 1, 2002 TO JANUARY 31, 2002 REVENUES
    
    $
    1,565,000DIRECT COSTS
    
    
    1,318,000REVENUES  NET OF DIRECT COSTS
    
    
    247,000OPERATING EXPENSESSales and Marketing
    
    
    270,000General and administrative
    
    
    7,770,000TOTAL OPERATING EXPENSES
    
    
    8,020,000Loss from continuing operations
    
    
    (7,773,000
    )OTHER INCOME (EXPENSE)Interest income
    
    
    85,000Interest expense
    
    
    (17,000
    )TOTAL OTHER INCOME (EXPENSE)  NET
    
    
    68,000Loss before income taxes
    
    
    (7,705,000
    )Income tax
    
    
    Net Loss
    
    $
    (7,705,000
    )
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 63




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CYPRESS COMMUNICATIONS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY FOR THE ONE-MONTH PERIOD FROM JANUARY 1, 2002 TO JANUARY 31, 2002 OtherCompre-Additional
    
    
    Deferred
    
    
    hensive
    
    
    Accu-
    
    
    Stock-
    
    
    Compre-Paid-In
    
    
    Compen-
    
    
    Income
    
    
    mulated
    
    
    holders
    
    
    hensiveShares
    
    
    
    
    
    
    Capital
    
    
    sation
    
    
    (Loss)
    
    
    Deficit
    
    
    Equity
    
    
    LossBALANCE, January 1,
2002
    
    
    4,926,000
    
    
    $
    6,000
    
    
    $
    569,827,000
    
    
    $
    (6,312,000
    )
    
    $
    (47,000
    )
    
    $
    (508,739,000
    )
    
    $
    54,735,000
    
    
    $
    Write-off
of deferred
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,312,000
    
    
    
    
    
    
    
    
    
    
    
    6,312,000
    
    
    
    Unrealized loss on
short-term
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,000
    )
    
    
    
    
    
    
    (31,000
    )
    
    
    (31,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,705,000
    )
    
    
    (7,705,000
    )
    
    
    (7,705,000
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (7,736,000
    )BALANCE, January
31, 2002
    
    
    4,926,000
    
    
    $
    6,000
    
    
    $
    569,827,000
    
    
    $
    
    
    
    $
    (78,000
    )
    
    $
    (516,444,000
    )
    
    $
    54,735,000
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 64




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CYPRESS COMMUNICATIONS, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE ONE-MONTH PERIOD FROM JANUARY 1, 2002 TO JANUARY 31, 2002 CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (7,705,000
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    321,000Write-off of deferred compensation
    
    
    6,312,000Bad debt expense
    
    
    8,000Other non cash item
    
    
    (31,000
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (89,000
    )Prepaid expenses and other current assets
    
    
    (831,000
    )Other assets
    
    
    780,000Accounts payable and accrued expenses
    
    
    (908,000
    )Deferred revenues
    
    
    282,000Net cash used in operating activities
    
    
    (1,855,000
    )CASH FLOWS FROM INVESTING ACTIVITIES:Sale of property and equipment
    
    
    8,000Net cash provided by investing activities
    
    
    8,000CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on capital lease obligations
    
    
    Net cash used in financing activities
    
    
    DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,847,000
    )CASH AND CASH EQUIVALENTS, BEGINNING OF MONTH
    
    
    33,757,000CASH AND CASH EQUIVALENTS, END OF MONTH
    
    $
    33,910,000SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid for interest
    
    $
    17,000
 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 65




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CYPRESS COMMUNICATIONS, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE ONE-MONTH PERIOD FROM JANUARY 1, 2002 TO JANUARY 31, 2002 1. ORGANIZATION AND NATURE OF BUSINESS Cypress Communications, Inc. and its subsidiaries (Cypress Communications or the Company)
provide a full range of communications services to businesses in multi-tenant office buildings
located in select major metropolitan markets within the United States. In February 2002, the
Company was acquired by Cypress Communications Holding Co., Inc. (Cypress Holding). The
Companys communications services include high speed Internet access and data services, local and
long-distance voice services, feature-rich digital telephone systems, digital satellite business
television, voicemail, e-mail, web site hosting, security/monitoring services, and other advanced
communications services. The Company delivers these services over state-of-the-art fiber optic,
digital, and broadband networks that Cypress Communications designs, constructs, owns, and operates
inside large- and medium-sized office buildings. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying financial statements are presented on the accrual basis of accounting using
accounting principles generally accepted in the United States. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly owned. All significant intercompany transactions and
balances have been eliminated in consolidation. ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally
accepted in the United States 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 dates of the financial statements and the reported amounts of revenues and expenses during the
reporting periods. Actual amounts could differ from these estimates, and such differences could be
material. REVENUE RECOGNITION The Companys revenues include recurring charges for local access, long-distance, equipment
rental, Internet access, digital satellite business television, voicemail, inbound 800, and other
enhanced voice and data services, which are recognized as services are provided. Revenues also
include nonrecurring charges for installations and moves, adds, and changes. Installation fees
represent the initial cost charged by Cypress Communications for installing voice phone lines, data
lines, and Business TV in the tenants premises. Move, add, and change (MAC) charges are for the
Companys labor and materials related to moving, adding, or changing a customers services.
Installation and certain MAC charges are recognized when the services are provided as they
represent separate earnings process. Other MAC charges, which are not separate earnings process,
are generally deferred and amortized over 24 months. 66




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CASH AND CASH EQUIVALENTS The Company considers all highly liquid instruments with an original maturity of three months
or less to be cash equivalents. PROPERTY AND EQUIPMENT Depreciation is computed using the straight-line method over the estimated useful lives of the
assets (generally three to seven years). Leasehold improvements are depreciated over the lesser of
the average lease term (or the term of the related license agreement) or the assets useful lives.
Depreciation expense was $321,000 for the one-month period ended January 31, 2002. Maintenance and
repairs are charged to expense as incurred. Gains or losses on disposal of property and equipment
are recognized in operations in the year of disposition. DEFERRED COMPENSATION Deferred compensation has been expensed in the one-month period ended January 31, 2002 due to
the acceleration of vesting provision of the underlying equity instrument in connection with the
acquisition by Cypress Holding (note 5). SEGMENT REPORTING The Company provides an integrated package of communication products to small- and
medium-sized businesses and manages its business on an integrated basis. RECENT ACCOUNTING PRONOUNCEMENTS In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements SFAS 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical corrections. This Statement rescinded Statement
No. 4, Reporting Gains and Losses from Extinguishments of Debt, and an amendment of that Statement,
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This
Statement also rescinded FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers.
This Statement amended FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to sale-leaseback
transactions. This Statement also amended other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability under changed
conditions. The provision of this Statement related to the rescission of Statement No. 4 must be
applied in fiscal year beginning after May 15, 2002. The provisions of this Statement related to
Statement 13 will be applicable for transactions occurring after May 15, 2002. Early application
of the provisions of this Statement is encouraged. The Company does not expect the adoption of
SFAS 145 will have a significant impact on its consolidated results of operations, financial
position or cash flows. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. SFAS No. 146 requires the recording of costs associated with exit or disposal
activities at their fair values when a liability has been incurred. Under previous guidance,
certain exit costs were accrued upon managements commitment to an exit plan, which is generally
before an actual liability has been incurred. SFAS No. 146 is to be applied prospectively to exit
or disposal activities initiated after December 31, 2002. The Company does not expect the adoption
of SFAS 146 will have a significant impact on its consolidated results of operations, financial
position or cash flows. In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantors, Including Indirect Guarantees of Indebtedness of Others.
FIN No. 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for
the fair value of the obligation it assumes under the guarantee. Guarantors will also be required
to meet expanded 67




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disclosure obligations. The initial recognition and measurement provisions of FIN No. 45 are
effective for guarantees issued or modified after December 31, 2002. The disclosure requirements
are effective for annual and interim financial statements that end after December 15, 2002. The
Company does not believe the adoption of FIN 45 will have a material impact on its consolidated
financial statements. 3. COMMITMENTS AND CONTINGENCIES LEASES The Company is obligated under several operating and capital lease agreements, primarily for
office space and equipment. Future annual minimum rental payments assumed on December 31 year-end
under these leases as of January 31, 2002 are as follows: Operating
    
    
    Capital2002
    
    
    2,756,000
    
    
    $
    473,0002003
    
    
    3,124,000
    
    
    
    327,0002004
    
    
    3,224,000
    
    
    
    25,0002005
    
    
    2,836,000
    
    
    
    16,0002006
    
    
    1,662,000
    
    
    
    0Thereafter
    
    
    903,000
    
    
    
    0Total
    
    
    14,505,000
    
    
    
    841,000Less amount representing interest and taxes
    
    
    
    
    
    
    97,000Present value of future minimum capital lease payments
    
    

    
    
    
    
    744,000Less current portion
    
    
    
    
    
    
    (409,000
    )Long-term portion
    
    
    
    
    
    $
    335,000
 Minimum commitments under operating leases above are net of cash due to the Company under
subleases of $1,023,000, $ 772,000, $521,000, $438,000, $38,000, and $5,000 for 2002, 2003, 2004,
2005, 2006, and thereafter, respectively. Rental expense was $ ,000 for the one month period ended
January 31, 2002. Obligations Under License Agreements The Company has entered into license agreements with property owners and/or operators of
several office buildings whereby the Company has the right to provide communications services in
these buildings. Under the terms of the agreements, the Company is generally obligated to pay a
commission based on the greater of a base fee or a percentage of revenue earned in the related
building or development. At January 31, 2001, the Companys aggregate minimum obligation under
these agreements, assuming a December 31 year-end, were as follows: 2002
    
    $
    1,072,0002003
    
    
    1,164,0002004
    
    
    1,147,0002005
    
    
    539,0002006
    
    
    316,000Thereafter
    
    
    862,000$
    5,100,000
 The commitments above exclude an estimated total of $2.4 million of potential obligations
under license agreements in buildings in which the Companys communications network has not been
constructed. In the opinion of management, such amounts will not be owed as the Company is not
providing services in those buildings. 68




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OBLIGATIONS UNDER COMMUNICATIONS SERVICE AGREEMENTS At January 31, 2002, the Company had contracts with several communications providers with minimum
purchase obligations for leased voice and data transport, equipment collocation, and other
services. As of January 31, 2001, approximate future minimum purchase commitments, assuming a
December 31 year-end, under these agreements were as follows: 2002
    
    $
    1,933,0002003
    
    
    309,0002004
    
    
    189,0002005
    
    
    66,0002006
    
    
    4,000Thereafter
    
    
    9,000$
    2,510,000
 LEGAL PROCEEDINGS The Company is subject to legal proceedings and claims, including employment and other matters
that arise in the ordinary course of business. There are no pending legal proceedings to which the
Company is a party that management believes will have a material adverse effect on the financial
position, results of operations, or cash flows of the Company. 4. INCOME TAXES The Company has estimated net operating loss carryforwards of approximately $222 million. The
net operating loss carryforwards begin to expire in the year 2017 if not previously utilized.
Additionally, use of the Companys net operating losses is limited due to certain ownership changes
as defined in Section 382 of the Internal Revenue Code. Utilization of existing net operating loss
carryforward may be further limited in future years as a result of the purchase by Cypress Holding
(Note 5). 5. SUBSEQUENT EVENTS ACQUISITION OF THE COMPANY In January 2002, the Company entered into a definitive agreement providing for the sale of the
Company to Cypress Holding. Pursuant to the agreement, Cypress Holding initiated a tender offer for
all the outstanding shares of common stock of the Company, including the associated rights to
purchase preferred stock, at $3.50 per share net to the seller, in cash. The transaction, which was
subject to 90% of the shares outstanding being tendered and not withdrawn, as well as other
customary and legal closing conditions, was completed on February 25, 2002 with approximately 94%
of the shares tendered for cash payments of approximately $15 million. The acquisition of the
remaining shares was completed immediately after the closing of the tender through the short-form
merger of a wholly owned subsidiary of Cypress Holding with and into the Company, with Cypress
Communications surviving as a wholly owned subsidiary of Cypress Holding. The merger agreement provided that at the date of closing, each then-outstanding option to
purchase shares of Cypress Communications common stock under any option plan, program or
arrangement of Cypress Communications (Option), whether or not such Option is then exercisable or
vested, was converted into an obligation of Cypress Communications to pay to the option holder a
cash amount equal to the product of (i) the excess, if any, of the offer price over the applicable
per share exercise price of such Option and (ii) the number of shares subject to such Option. In connection with the merger and resulting change of control, the Company paid out severance
of $400,000 to the Companys former CEO under a severance and separation arrangements that existed
at December 31, 2001. Additionally, in February 2002, the Company entered into severance
arrangements 69




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with certain other officers and employees of the Company. Under these arrangements, the
Company paid out severance of approximately $400,000 upon the change of control resulting from the
acquisition of the Company by Cypress Holding. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures Pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934, as amended (the Exchange Act), Cypress Holding carried out an
evaluation, with the participation of Cypress Holdings management, including Cypress Holdings
Chief Executive Officer and Chief Financial Officer, of the effectiveness of Cypress Holdings
disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of
the end of the period covered by this report. Based upon that evaluation, Cypress Holdings Chief
Executive Officer and Chief Financial Officer concluded that Cypress Holdings disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act, 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 principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required disclosure. (b) Changes in internal controls
Cypress implemented additional
procedures designed to strengthen its existing internal controls that were not previously effective
in monitoring Cypresss exempt status for telecommunications taxes and surcharges, as more fully
described in Note 9(e) to Cypresss audited consolidated financial statements, there has been no
change in Cypress Holdings internal control over financial reporting during the quarter ended
December 31, 2004 that has materially affected, or is reasonably likely to materially affect,
Cypress Holdings internal control over financial reporting.
There were no other changes that are reasonably likely to materially
affect, Cypress Holdings internal control over financial
reporting. 
 ITEM 9B. OTHER INFORMATION None. 70




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PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Cypress Holdings executive officers and directors, and their ages are as follows: Name
    
    Age
    
    PositionGregory P. McGraw
    
    50
    
    Chief Executive Officer, President, Secretary and DirectorSalvatore W. Collura
    
    51
    
    Executive Vice President and Chief Operating OfficerNeal L. Miller
    
    45
    
    Executive Vice President, Chief
Financial Officer and TreasurerMichael A. Floyd
    
    46
    
    Senior Vice President and Chief Marketing OfficerRoss J. Mangano
    
    59
    
    Chairman of the BoardGerard H. Sweeney
    
    48
    
    DirectorSteve G. Nussrallah
    
    54
    
    DirectorMichael F. Elliott
    
    46
    
    Director
 Gregory P. McGrawhas served as chief executive officer since May 2004 and as president of
Cypress Holding since July 2002. Mr. McGraw also served as acting chief executive officer from
March 2004 to May 2004, as chief operating officer from July 2002 to June 2004, as chief financial
officer from July 2002 to November 2003 and as executive vice president from April 2002 to July
2002. Mr. McGraw has served as chief executive officer of Cypress Communications since May 2004
and as president of Cypress Communications since February 2002. Mr. McGraw has served as a
director of Cypress Holding since June 2004. Mr. McGraw served as president and chief operating
officer of Resurgence Communications, LLC from January 2001 to February 2002. Prior to that, he
was executive vice president and corporate development officer for Convergent Communications, Inc.
from August 1998 to January 2001. From July 1996 to August 1998, Mr. McGraw was a regulatory
consultant, vice president of marketing and served as interim chief financial officer for Tie
Communications, Inc. Mr. McGraw has a BS in Business Administration from George Mason University
in Virginia. Salvatore W. Collurahas served as chief operating officer since June 2004 and as executive
vice president of Cypress Holding since July 2002. Mr. Collura has served as chief operating
officer of Cypress Communications since June 2004 and as executive vice president of Cypress
Communications since February 2002. Mr. Collura has more than 25 years of sales and operations
management experience in the telecommunications industry and was most recently the executive vice
president of Convergent Communications Voice Division. During his 17 years at Tie Communications,
Mr. Collura held various regional and national positions in sales and general management and
consistently earned top sales honors and awards. Prior to Tie Communications acquisition by
Convergent, Mr. Collura was a regional VP/GM. Mr. Collura has a BS in Business Administration from
the University of Nebraska at Lincoln. Neal L. Millerhas served as executive vice president, chief financial officer and treasurer
of Cypress Holding and Cypress Communications since November 2003. Mr. Miller has extensive
experience building and managing financial business units and leading strategic planning and
corporate development programs in the telecommunications, cable and software industries. From
March 2003 to October 2003, Mr. Miller was an independent consultant providing financial and
operations management expertise to several companies in the cable TV, software and telecom
industries. From March 2000 to February 2003, Mr. Miller served as executive vice president and
chief financial officer of CES International Inc., a software provider for the electric utility
industry. Mr. Miller served as executive vice president and chief financial officer of Syntellect,
Inc. from December 1995 to July 1998 and as a division president of Syntellect Interactive
Services, Syntellects hosted services business unit, from February 1998 to February 2000. Mr.
Miller has a BBA in Accounting from Georgia State University in Atlanta, Georgia. Michael A. Floydhas served as senior vice president and chief marketing officer of Cypress
Communications since June 2004. From August 2003 to May 2004, Mr. Floyd served as an executive
consultant for Cypress Communications focused on optimizing the sales channel model and Voice over 71




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Internet Protocol (VoIP) initiatives. Mr. Floyd has extensive experience launching and
managing new organizations, creating winning business strategies, leading transformational change
and developing effective sales channel models in the telecommunications, data network, service
provider and software industries. From January 2001 to March 2003, Mr. Floyd served as Senior
Partner for Trilogy Software providing executive management consulting and custom software
solutions to optimize multi-channel sales organizations. From March 1998 to December 2001, Mr.
Floyd served as vice president and general manager of eBusiness for Bellsouth providing managed
services, internet solutions, e-commerce solutions, data network infrastructure and call center
solutions to Bellsouth business customers. Mr. Floyd has a BS in business administration from the
University of North Carolina at Chapel Hill, North Carolina. Ross J. Manganohas served as a director of Cypress Holding since October 1998 and chairman of
the board since February 2002. Mr. Mangano has also served as director and chairman of the board
of Cypress Communications since February 2002. Mr. Mangano has served as the president of Oliver
Estate, Inc., an investment management company located in South Bend, Indiana, since 1996. Prior
to that time, Mr. Mangano served in various management positions with Oliver Estate, Inc. since
1971. Mr. Mangano also is an investment analyst for Oliver Estate, Inc. Mr. Mangano has served on
the board of directors of BioSante Pharmaceuticals, Inc., a public company located in Lincolnshire,
Illinois, since July 1999 and Orchard Software Company, a privately held company which develops
software for the medical industry located in Carmel, Indiana, since August 1998. Gerard H. Sweeneyhas served as a director of Cypress Holding since January 2000 and as a
director of Cypress Communications since February 2002. Mr. Sweeney also serves as president,
chief executive officer and trustee of Brandywine Realty Trust. Mr. Sweeney has served as chief
executive officer of Brandywine since August 1994, as president since November 1988 and as a
trustee since February 1994. Brandywine Realty Trust is a public real estate investment trust
located in Newtown Square, Pennsylvania. Prior to August 1988, Mr. Sweeney served as vice
president of LCOR, Incorporated, a real estate development firm. Mr. Sweeney was employed by the
Linpro Company (a predecessor of LCOR) from 1983 to 1994, during which time he served in several
capacities, including financial vice president and general partner. Steve G. Nussrallahhas served as a director of Cypress Holding and Cypress Communications
since July 2002. Mr. Nussrallah has been a general partner of Noro-Moseley Partners, an
Atlanta-based venture capital firm, since January 2001. Mr. Nussrallah has also served as chairman
of the board of Concurrent Computer Corp., since October 2000. Before becoming chairman, Mr.
Nussrallah served as president and chief executive officer of Concurrent from January 2000 to
October 2000 and as president of its Xstreme division from January 1999 to December 1999. From
March 1996 to March 1998, Mr. Nussrallah served as president and chief operating officer of
Syntellect Inc. Michael F. Elliotthas served as a director of Cypress Holding and Cypress Communications
since July 2002. Mr. Elliott has served as a managing director of Wakefield Group, a North
Carolina-based venture capital firm, since March 1997. Mr. Elliott served as a managing director
of NationsBank Capital Investors from January 1994 through March 1997 and was a founding General
Partner of NCNB Venture Co., LP. Prior to joining NationsBank, Mr. Elliott was a member of Ernst &
Youngs Corporate Finance Group. Mr. Elliott serves as a director of several of the Wakefield
Groups portfolio companies. Audit Committee Financial Expert. The Board of Directors has determined that Gerard H.
Sweeney is an audit committee financial expert as such term is defined in the rules promulgated
by the SEC under the Sarbanes-Oxley Act of 2002. SECTION16(a)BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires Cypress Holdings directors and executive officers,
and persons who own more than 10% of Cypress Holdings outstanding common stock, to file with the
SEC initial reports of ownership and reports of changes in ownership of common stock. These
persons are required by SEC regulation to furnish us with copies of all such reports they file. 72




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To Cypress Holdings knowledge, based solely on a review of Forms 3 and 4 and amendments
thereto furnished to Cypress Holding under Exchange Act Rule 16a-3(e) during the year ended
December 31, 2003 and Form 5 and amendments thereto furnished to Cypress Holding with respect to
the year ended December 31, 2003, and any written representation that a Form 5 is not required to
be filed, Cypress Holding believes that all of its directors, executive officers, 10% stockholders
and other individuals designated as Section 16 filers by Cypress Holding complied during the year
ended December 31, 2004 with the reporting requirements of Section 16(a) of the Exchange Act. CODE OF ETHICS Cypress Holding has adopted a Code of Ethics for its chief executive officer and senior
financial officers. A copy of this code may be found at www.cypresscom.net. You will find the
Code of Ethics by clicking Investors then Corporate Governance. Cypress Holding will satisfy the
disclosure requirement under Item 5.05 of Form 8-K by posting such information on its website. The
information set forth on this website should not be deemed filed with, and is not incorporated by
reference into, this Form 10-K or any of Cypress Holdings other filings under the Securities Act
or the Exchange Act, except to the extent that Cypress Holding specifically so provides. 
 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth summary information concerning total compensation earned or
paid to (i) Cypress Holdings Chief Executive Officer during the year ended December 31, 2004, (ii)
the four most highly compensated executive officers who served in such capacities as of December
31, 2004, which includes one executive officer of Cypress Holdings wholly owned subsidiary,
Cypress Communications, and (iii) Cypress Holdings former Chief Executive Officer, collectively
referred to below as the named executive officers, for the fiscal years ended December 31, 2002,
2003 and 2004: 73




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##### Table of Contents



Long TermCompensationAnnual Compensation
    
    
    AwardsAwardsSecuritiesOther Annual
    
    
    Underlying
    
    
    All OtherName and Principal Position
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    Compensation
    
    
    Options (#)
    
    
    CompensationGregory P. McGraw
    
    
    2004
    
    
    $
    268,750
    
    
    $
    
    
    
    $
    
    
    
    
    150,000
    (1)
    
    
    Chief Executive Officer,
    
    
    2003
    
    
    $
    300,000
    
    
    $
    37,500
    
    
    $
    
    
    
    
    
    
    
    
    President and Secretary
    
    
    2002
    
    
    $
    230,556
    
    
    $
    
    
    
    $
    
    
    
    
    1,100,000
    (1)
    
    
    Salvatore W. Collura
    
    
    2004
    
    
    $
    220,000
    
    
    $
    34,022
    
    
    $
    
    
    
    
    100,000
    (1)Executive Vice President
    
    
    2003
    
    
    $
    220,000
    
    
    $
    17,000
    
    
    $
    
    
    
    
    100,000
    (1)and Chief Operating
Officer
    
    
    2002
    
    
    $
    160,243
    
    
    $
    
    
    
    $
    
    
    
    
    150,000
    (1)Neal L. Miller
    
    
    2004
    
    
    $
    200,000
    
    
    $
    17,293
    
    
    $
    
    
    
    
    100,000
    (1)Executive Vice President,
    
    
    2003
    
    
    $
    33,333
    
    
    $
    
    
    
    $
    
    
    
    
    300,000
    (1)Chief Financial Officer
and Treasurer
    
    
    2002
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Michael A. Floyd
    
    
    2004
    
    
    $
    97,500
    
    
    $
    11,117
    
    
    $
    
    
    
    
    75,000
    (1)
    
    
    Senior Vice President and
    
    
    2003
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Chief Marketing Officer
    
    
    2002
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Thomas J. Francis
    
    
    2004
    
    
    $
    150,000
    
    
    $
    12,264
    
    
    $
    
    
    
    
    10,000
    (1)
    
    
    Senior Vice President of
    
    
    2003
    
    
    $
    106,250
    
    
    $
    
    
    
    $
    
    
    
    
    50,000
    (1)
    
    
    Cypress Communications
    
    
    2002
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Charles B. McNamee
    
    
    2004
    
    
    $
    62,500
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    180,000
    (3)Former Chief Executive
    

    
    2003
    
    
    $
    300,000
    
    
    $
    37,500
    
    
    $
    
    
    
    
    
    
    
    
    Officer (2)
    
    
    2002
    
    
    $
    230,556
    
    
    $
    
    
    
    $
    
    
    
    
    1,100,000
    (1)(2)
    
    
    
   (1)
    
    Stock options issued pursuant to 1999 Employee Equity Incentive Plan.(2)
    
    Mr. McNamee left employment with Cypress Holding in March 2004 at which time he forfeited
550,000 unvested options granted in 2002.(3)
    
    Severance. 74




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Stock Option Grants in Fiscal 2004 % of TotalOptions/Number of
    
    
    SARS
    
    
    
    
    
    
    
    
    
    
    Potential Realizable Value atSecurities
    
    
    Granted to
    
    
    
    
    
    
    
    
    
    
    Assumed Annual Rates of StockUnderlying
    
    
    Employees
    
    
    Exercise or
    
    
    
    
    
    
    Price Appreciation for OptionOptions/SARS
    
    
    in Fiscal
    
    
    Base
    
    
    Expiration
    
    
    TermName
    
    Granted
    
    
    Year
    
    
    Price($/Sh)
    
    
    Date
    
    
    5%($)
    
    
    10%($)Charles B. McNamee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gregory P. McGraw
    
    
    150,000
    (1)
    
    
    20.65
    %
    
    
    1.25
    
    
    
    4/20/14
    
    
    $
    108,171
    
    
    $
    250,524Salvatore W. Collura
    
    
    100,000
    (1)
    
    
    13.76
    %
    
    
    1.25
    
    
    
    4/20/14
    
    
    
    72,114
    
    
    
    167,016Neal L. Miller
    
    
    100,000
    (1)
    
    
    13.76
    %
    
    
    1.25
    
    
    
    4/20/14
    
    
    
    72,114
    
    
    
    167,016Michael A. Floyd
    
    
    75,000
    (1)
    
    
    10.32
    %
    
    
    1.25
    
    
    
    6/15/14
    
    
    
    74,840
    
    
    
    142,457Thomas J. Francis
    
    
    10,000
    (1)
    
    
    1.38
    %
    
    
    1.25
    
    
    
    2/2/14
    
    
    
    6,750
    
    
    
    16,320
   (1)
    
    These incentive stock options vest 25% on each of the first four anniversaries of the grant date. Aggregated Stock Option Exercises and Values for Fiscal 2004 Number of Shares
    
    
    Value of UnexercisedShares
    
    
    
    
    
    
    Underlying Unexercised
    
    
    in-the-Money OptionsAcquired
    
    
    
    
    
    
    Options at Year Ended
    
    
    at Year EndedUpon
    
    
    Realized
    
    
    December 31, 2004
    
    
    December 31, 2004Name
    
    Exercise
    
    
    Value
    
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableCharles B. McNamee
    
    
    
    
    
    $
    
    
    
    
    550,000
    
    
    
    
    
    
    $
    
    
    
    $
    Gregory P. McGraw
    
    
    
    
    
    $
    
    
    
    
    825,000
    
    
    
    275,000
    
    
    $
    
    
    
    $
    Salvatore W. Collura
    
    
    
    
    
    $
    
    
    
    
    100,000
    
    
    
    250,000
    
    
    $
    
    
    
    $
    Neal L. Miller
    
    
    
    
    
    $
    
    
    
    
    75,000
    
    
    
    325,000
    
    
    $
    
    
    
    $
    Michael A. Floyd
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    75,000
    
    
    $
    
    
    
    $
    Thomas J. Francis
    
    
    
    
    
    $
    
    
    
    
    12,500
    
    
    
    47,500
    
    
    $
    
    
    
    $
    
 Director Compensation All directors are reimbursed for travel expenses incurred in connection with attending board
and committee meetings. Directors are not entitled to additional fees for serving on committees of
the board. From time to time, the Company may also grant to its non-employee directors options
after reviewing the level of compensation paid to non-employee directors by other similarly
situated companies. Employment Agreements and Retention Awards Charles B. McNamee.Charles B. McNamee, former chief executive officer of the Company and
Cypress Communications, entered into an employment agreement with Cypress Communications in
February 2002. The agreement continued until he left employment with us in March 2004. Pursuant
to the agreement, as amended, Mr. McNamee received an annualized salary of $300,000. Mr. McNamee
also received options to purchase 1,100,000 shares of Cypress Holding common stock. 75




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Gregory P. McGraw.Gregory P. McGraw, chief executive officer, president and director of
Cypress Holding and chief executive officer and president of Cypress Communications, entered into
an employment agreement with Cypress Communications in February 2002. This agreement was modified
by unanimous written consent of the board of directors in April 2004. The agreement is for a term
of one year and will continue year to year unless sooner terminated. Pursuant to the agreement, as
amended, Mr. McGraw will serve as the president and chief operating officer of Cypress
Communications and will receive an annualized salary of $250,000. Mr. McGraw is eligible for an
executive incentive bonus plan equal to $100,000.00 upon the completion of 100% of the performance
objectives set by the Board for fiscal year 2004. Mr. McGraw also received options to purchase
150,000 shares of Cypress Holding common stock. Under the agreement, Mr. McGraw is eligible to
participate in any bonus, incentive, profit-sharing, performance, discretionary pay or similar
agreement, plan, policy, program or arrangement adopted by the board of directors. In addition,
Mr. McGraw also receives other benefits generally available to Company employees, including paid
vacation, insurance benefits and other benefit plans. If Mr. McGraw is terminated without cause
or coincident with a change of control or terminates his own employment for good reason (as
defined in his agreement), he will continue to receive his base salary and benefits for 12 months
following the date of termination and the Company shall accelerate Mr. McGraws stock options. Neal L. Miller.Neal L. Miller, executive vice president, chief financial officer and
treasurer of Cypress Holding and the executive vice president and chief financial officer of
Cypress Communications, entered into an employment agreement with Cypress Communications in
November 2003. The agreement is for a term of one year and will continue year to year unless sooner
terminated. Pursuant to the agreement, Mr. Miller will serve as the executive vice president and
chief financial officer of Cypress Communications and will receive an annualized salary of
$200,000. Mr. Miller also received options to purchase 300,000 shares of Cypress Holding common
stock. Under the agreement, Mr. Miller is eligible to participate in any bonus, incentive,
profit-sharing, performance, discretionary pay or similar agreement, plan, policy, program or
arrangement adopted by the board of directors. In addition, Mr. Miller also receives other
benefits generally available to Company employees, including paid vacation, insurance benefits and
other benefit plans. If Mr. Miller is terminated without cause or coincident with a change of
control or terminates his own employment for good reason (as defined in his agreement), he will
continue to receive his base salary and benefits for 6 months following the date of termination.
In certain termination situations, including a change of control, the Company shall accelerate Mr.
Millers stock options. Salvatore W. Collura. Salvatore W. Collura, executive vice president and chief operating
officer of Cypress Holding, entered into an employment agreement with Cypress Holding in May 2004.
The agreement is for a term of one year and will continue year to year unless sooner terminated.
Pursuant to the agreement Mr. Collura will serve as the executive vice president and chief
operating officer of Cypress Holding and will receive an annualized salary of $220,000. Mr.
Collura also received options to purchase 100,000 shares of Cypress Holding common stock. Under
the agreement, Mr. Collura is eligible to participate in any bonus, incentive, profit-sharing,
performance, discretionary pay or similar agreement, plan, policy, program or arrangement adopted
by the board of directors. In addition, Mr. Collura also receives other benefits generally
available to Company employees, including paid vacation, insurance benefits and other benefit
plans. If Mr. Collura is terminated without cause or coincident with a change of control or
terminates his own employment for good reason (as defined in his agreement), he will continue to
receive his base salary and benefits for 6 months following the date of termination. In certain
termination situations, including a change of control, the Company shall accelerate Mr. Colluras
stock options. Key Executive Officer Retention Plan. In connection with our board of directors consideration
of a change in control event, the board adopted the Cypress Communications, Inc. Key Executive
Officer Retention Plan, or KEORP, in August 2004 and amended the KEORP with respect to the
President and Chief Executive Officer in November 2004. The key executive officer participants in
the KEORP are Gregory P. McGraw, Salvatore W. Collura and Neal L. Miller. Pursuant to the KEORP,
the executive officers were granted retention awards payable following a change in control event if
within twelve months of the change of control the executive officers employment is terminated
without cause or the executive 76




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officer resigns for good reason. In addition, the employment agreement for each of these executive
officers includes a severance award, pursuant to which each executive officer would be entitled to
receive payment over 6 or 12 months in the event that, coincident with a change in control event,
the executive officers employment is terminated at employees direction or otherwise. Upon
termination in connection with a change in control event, the executive officers are entitled to
severance and retention awards as follows: Executive Officer
    
    Severance Award
    
    
    Retention AwardGreg McGraw, President and Chief Executive Officer
    
    $
    300,000
    
    
    $
    375,000Salvatore W. Collura, Executive Vice-President and
Chief Operating Officer
    
    $
    110,000
    
    
    $
    100,000Neal L. Miller, Executive Vice-President, Chief
Financial Officer and Treasurer
    
    $
    100,000
    
    
    $
    100,000
 
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 As of March 1, 2005, we had 6,723,395 issued and outstanding shares of common stock. The
following table presents information about the beneficial ownership of our common stock, as of
March 1, 2005 by each person or group we know to own more the 5% of the common stock, by each of
our directors and executive officers, and by all of our directors and executive officers as a
group. The beneficial ownership table includes warrants and options exercisable within 60 days. Number of
    
    
    Percent of
    
    
    Number of
    
    
    Percent ofShares
    
    
    Shares
    
    
    Shares
    
    
    SharesCommon Stock
    
    
    of Common
    
    
    Preferred Stock
    
    
    of PreferredBeneficially
    
    
    Stock
    
    
    Beneficially
    
    
    StockName of Beneficial Owner
    
    Owned
    
    
    Outstanding
    
    
    Owned
    
    
    Outstanding5% StockholdersBrandywine Operating Partnership, L.P.
(1)
    
    
    532,692
    
    
    
    7.75
    %
    
    
    
    
    
    
    
    %Noro-Moseley V, LLP (2)
    
    
    8,007,390
    
    
    
    54.35
    %
    
    
    72.9
    
    
    
    72.9
    %Wakefield Group III, LLC (3)
    
    
    1,834,117
    
    
    
    21.43
    %
    
    
    16.7
    
    
    
    16.7
    %Dolphin Equity Partners (4)
    
    
    1,131,930
    
    
    
    14.41
    %
    
    
    10.4
    
    
    
    10.4
    %Jo & Co. (5)
    
    
    1,257,232
    
    
    
    18.70
    %
    
    
    
    
    
    
    
    %Troon & Co. (6)
    
    
    551,615
    
    
    
    7.91
    %
    
    
    
    
    
    
    
    %Jordan E. Glazov (7)
    
    
    667,344
    
    
    
    9.90
    %
    
    
    
    
    
    
    
    %Charles B. McNamee(8)
    
    
    550,000
    
    
    
    7.56
    %
    
    
    
    
    
    
    
    %Directors and Executive OfficersRoss J. Mangano (9)
    
    
    2,766,593
    
    
    
    37.86
    %
    
    
    
    
    
    
    
    %Gerard H. Sweeney (10)
    
    
    577,692
    
    
    
    8.38
    %
    
    
    
    
    
    
    
    %
 77




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Number of
    
    
    Percent of
    
    
    Number of
    
    
    Percent ofShares
    
    
    Shares
    
    
    Shares
    
    
    SharesCommon Stock
    
    
    of Common
    
    
    Preferred Stock
    
    
    of PreferredBeneficially
    
    
    Stock
    
    
    Beneficially
    
    
    StockName of Beneficial Owner
    
    Owned
    
    
    Outstanding
    
    
    Owned
    
    
    OutstandingSteve G. Nussrallah (11)
    
    
    8,007,390
    
    
    
    54.35
    %
    
    
    
    
    
    
    
    %Michael F. Elliott (12)
    
    
    1,834,117
    
    
    
    21.43
    %
    
    
    
    
    
    
    
    %Gregory P. McGraw (13)
    
    
    1,137,500
    
    
    
    14.47
    %
    
    
    
    
    
    
    
    %Salvatore C. Collura (14)
    
    
    125,000
    
    
    
    1.83
    %
    
    
    
    
    
    
    
    %Neal L. Miller(15)
    
    
    100,000
    
    
    
    1.46
    %
    
    
    
    
    
    
    
    %Michael A. Floyd
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Thomas J. Francis(16)
    
    
    27,500
    
    
    
    0.40
    %
    
    
    
    
    
    
    All Current Directors and Executive
Officers as a Group (9 persons)
(17)
    
    
    14,575,792
    
    
    
    68.43
    %
    
    
    100
    
    
    
    100
    %
   (1)
    
    The address of Brandywine Operating Partnership, L.P. is 401 Plymouth Road, Suite 500,
Plymouth Meeting, Pennsylvania 19462. Includes 148,077 shares subject to warrants exercisable
within 60 days of March 1, 2005.(2)
    
    The address of Noro-Moseley V, LLP is 9 North Parkway Square, 4200 Northside Parkway,
Atlanta, Georgia 30327. Includes 8,007,390 shares subject to warrants exercisable within 60
days of March 1, 2005.(3)
    
    The address of Wakefield Group III, LLC is 1110 East Morehead Street, Charlotte, North
Carolina 28204. Includes 1,834,117 shares subject to warrants exercisable within 60 days of
March 1, 2005.(4)
    
    The address of Dolphin Equity partners is 750 Lexington Avenue, New York, New York 10022.
Includes 1,131,930 shares subject to warrants exercisable within 60 days of March 1, 2005.(5)
    
    The address of Jo & Co. is 112 W. Jefferson Blvd., Suite 613, South Bend, Indiana 46601.(6)
    
    The address of Troon & Co. is 112 W. Jefferson Blvd., Suite 613, South Bend, Indiana 46601.
Includes 247,692 shares subject to warrants exercisable within 60 days of March 1, 2005.(7)
    
    Includes 15,384 shares subject to warrants exercisable within 60 days of March 1, 2005. The
remaining 651,960 shares are held in joint tenancy with Mr. Glazovs wife. Does not include
3,568 shares held by one of Mr. Glazovs sons, 3,568 shares held by another of Mr. Glazovs
sons and 2,318 shares held by Mr. Glazovs daughter. Mr. Glazov disclaims beneficial
ownership of such shares.(8)
    
    Includes 550,000 shares subject to options exercisable within 60 days of March 1, 2005.(9)
    
    Includes 25,000 shares of Cypress common stock subject to warrants exercisable within 60 days
of March 1, 2005. Includes 404,652 shares held by trusts of which Mr. Mangano serves as
trustee, as follows: Joseph D. Oliver Trust  GO Cunningham Fund (98,288), Joseph D. Oliver
Trust  James Oliver II Fund (98,288), Joseph D. Oliver Trust  Joseph D. Oliver, Jr. Fund
(98,288), Joseph D. Oliver Trust  Susan C. Oliver Fund (98,288), J. Oliver Cunningham Jr.
Revoc Trust (11,500). Also includes the following: warrants to purchase 103,500 shares held
by the J. Oliver Cunningham Trust; warrants to purchase 103,500 shares held by the Anne C.
McClure Trust; warrants to purchase 103,500 shares held by the Jane C. Warriner Trust;
1,257,232 shares held by Jo & Co., a corporation for which Mr. Mangano serves as President;
68,973 shares held by James Hart over which Mr. Mangano has voting and/or dispositive control.
Also includes 303,923 shares and warrants to purchase 247,692 shares held by Troon & Co.(10)
    
    Includes 25,000 shares subject to warrants exercisable within 60 days of March 1, 2005.
Includes 384,615 shares held by Brandywine Operating Partnership, L.P. and 148,077 shares
subject to warrants held by Brandywine Operating Partnership, L.P., of which Mr. Sweeney
disclaims any beneficial ownership. Mr. Sweeney is the President and Chief Executive Officer
of Brandywine Realty Trust, the general partner of Brandywine Operating Partnership, L.P.(11)
    
    Includes 8,007,390 shares subject to warrants exercisable within 60 days of March 1, 2005.(12)
    
    Includes 1,834,117 shares subject to warrants exercisable within 60 days of March 1, 2005.(13)
    
    Includes 1,137,500 shares subject to options exercisable within 60 days of March 1, 2005. 78




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(14)
    
    Includes 125,000 shares subject to options exercisable within 60 days of March 1, 2005.(15)
    
    Includes 100,000 shares subject to options exercisable within 60 days of March 1, 2005.(16)
    
    Includes 27,500 shares subject to options exercisable within 60 days of March 1, 2005.(17)
    
    See footnotes (8) through (16) above. Equity Compensation Plans For information on our equity compensation plans, see Item 5 and Note 10 to our consolidated
financial statements. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In July 2002, Cypress Holding, through its wholly owned subsidiary, Cypress Communications,
completed the purchase of certain assets of Intermedia Advanced Building Networks, the shared
tenant telecommunications services business of WorldCom, Inc (ABN/STS). Cypress Holding and
Cypress Communications raised $28 million to finance the acquisition. The $28 million financing
included:  (i)
    a $10 million senior secured revolving credit facility from Silicon Valley
Bank (as amended, the Senior Credit Facility);(ii)
    an $8 million bridge loan (the Bridge Loan) from the J. Oliver Cunningham
Trust (the JOC Trust), the Anne C. McClure Trust (the ACM Trust), the Jane C.
Warriner Trust (the JCW Trust), Noro-Moseley Partners V, L.P.(Noro-Mosley), and
the Wakefield Group III, LLC (Wakefield and together with the JOC Trust, the ACM
Trust, the JCW Trust and Noro-Mosley, the Bridge Lenders); and(iii)
    the sale of $10 million of Fixed Rate Convertible Notes due July 1, 2009
(the Convertible Notes) to Dolphin Communications, Dolphin Netherlands, Noro-Moseley
and Wakefield (collectively, the Purchasers). The JOC Trust, the ACM Trust and the JCW Trust are affiliates of certain stockholders of
Cypress Holding and of Mr. Mangano. Mr. Michael F. Elliot is the managing director of Wakefield.

Mr. Steve G. Nussrallah is the general partner of Noro-Moseley. The Bridge Loan was obtained by Cypress Holding and Cypress Communications pursuant to a Loan
Agreement dated July 16, 2002 among Cypress Holding, Cypress Communications and the Bridge Lenders
and was amended on March 24, 2004. The Bridge Loan accrues interest at 14% per annum and matures
on (A) the earlier to occur of, if the maturity date of the Senior Credit Facility is extended
beyond July 16, 2004, (i) one business day following the maturity, acceleration or termination of
the Senior Credit Facility and (ii) July 16, 2005 or (B) the earlier to occur of, if the maturity
date of the Senior Credit Facility is not extended beyond July 16, 2004, (i) one business day
following the refinancing of the Senior Credit Facility with funds sufficient to satisfy Cypress
Holdings obligations to the Bridge Lenders and (ii) July 16, 2005 . Each Bridge Lender was
entitled to receive an initial loan fee equal to 2.5% of that portion of the Bridge Loan that was
funded by such Bridge Lender. Because the Bridge Loan was outstanding 60 days after the closing,
Cypress Holding and Cypress Communications became obligated to pay each Bridge Lender an additional
loan fee equal to 1.25% of the then outstanding principal balance of such Bridge Lenders share of
the Bridge Loan. Because the Bridge Loan was outstanding 90 days after the closing of the Bridge
Loan, Cypress Holding and Cypress Communications became obligated subsequent to the end of the
quarterly period ended September 30, 2002 to pay each Bridge Lender an additional loan fee equal to
1.25% of the then outstanding principal balance of such Bridge Lenders share of the Bridge Loan.
Additionally, as the Bridge Loan was outstanding 120 days after the closing of the Bridge Loan,
Cypress Holding and Cypress Communications became obligated to pay to each Bridge Lender an
additional loan fee equal to 1.00% of the then outstanding principal balance of such Bridge
Lenders share of the Bridge Loan. The loan fees described above are cumulative and are payable on
the earlier to occur of the maturity
date of the Bridge Loans or the date on which the Bridge Loans are paid in full. At the
closing of the 79




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Bridge Loan, Cypress Holding issued the Bridge Lenders warrants to purchase an
aggregate of 400,000 shares of Cypress Holdings common stock at an exercise price of $1.13 per
share. These warrants are exercisable for a term of 10 years. The Convertible Notes were issued by Cypress Holding and Cypress Communications pursuant to a
Purchase Agreement dated July 16, 2002 among Cypress Holding, Cypress Communications and the
Purchasers. The Convertible Notes accrue interest at the rate of 7.5% per annum, compounded
quarterly, and payable at maturity of the notes, whether upon their stated maturity of July 1,
2009, or earlier as a result of acceleration in the event of a default or upon redemption of the
Convertible Notes. The principal of and accrued interest on the Convertible Notes is convertible
into Cypress Holdings common stock at $1.13 per share. The Convertible Notes are redeemable by
Cypress Holding or Cypress Communications at any time by payment of the outstanding principal
balance and accrued interest. In the event that the Convertible Notes are redeemed, the Purchasers
have been issued warrants which will then be eligible for exercise to purchase the number of shares
of common stock of Cypress Holding that the Convertible Notes were convertible into on the
redemption date at a conversion price of $1.13 per share. In connection with the issuance of the
Convertible Notes, Cypress Holding, the Purchasers and the Bridge Lenders entered into a
registration rights agreement, which provides for the registration of the common stock issuable
upon (i) the conversion of the Convertible Notes; (ii) the exercise of the Warrants issued in
connection with the Bridge Loan; and (iii) the exercise of the Warrants exercisable upon the
redemption of the Convertible Notes. In connection with the issuance of the Convertible Notes, the Purchasers were issued a total
of 100 shares of Cypress Holdings Preferred Stock without additional consideration. The rights of
the Preferred Stock are set forth in a Certificate of Designations adopted by the Board of
Directors. The holders of a majority of the Preferred Stock are entitled to elect two members of
the Board of Directors and the holders of the Preferred Stock are entitled to receive dividends and
distributions equal to those payable to the holders of an equivalent number of shares of Cypress
Holdings common stock. In addition, Cypress Holding may not, without the prior written consent of
holders of a majority of the Preferred Stock, (i) increase or decrease (other than by redemption or
conversion) the authorized number of shares of Preferred Stock; (ii) cancel or modify the voting
rights of the holders of Preferred Stock; cancel or modify the rights of the holders of Preferred
Stock; or (iii) amend, waive, alter, modify or repeal any provision of the Certificate of
Incorporation or Bylaws of Cypress Holding, if such amendment, alternation, modification or repeal
would adversely affect the Preferred Stock, including the issuance of preferred stock with voting
rights senior to or pari passu with the Preferred Stock. The Preferred Stock is redeemable by
Cypress Holding in the event that:  (a)
    at least 75% of the principal amount of the Convertible Notes is converted
into shares of common stock of Cypress Holding;(b)
    at least 75% of the principal amount of the Convertible Notes is redeemed;(c)
    Cypress Holding has submitted an application in good faith to apply for
listing on AMEX, NASDAQ or another national exchange to register its securities on
such exchange, the average daily trading price per share of the common stock as
reported in such application is at least $4.00 per share, and Cypress Holding
subsequently receives a comment from such exchange that its application for listing
will not be accepted so long as the Series A Preferred remains outstanding with the
voting rights described herein; or(d)
    the outstanding principal and interest on the Convertible Notes are paid in
full on the maturity date of the Convertible Notes. The redemption price for the Preferred Stock is $0.001 per share. Cypress Holding believes that all transactions between it and the related parties are on terms
no less favorable to us than those terms Cypress Holding could have obtained from unaffiliated
third parties. 80




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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES During the years ended December 31, 2004 and 2003, Deloitte & Touche billed Cypress Holding
the fees set forth below in connection with services rendered by those firms to Cypress Holding. 2004
    
    
    
    2003Audit Fees
    
    
    $
    183
    
    
    
    $
    190Audit Related Fees
    
    
    
    35
    
    
    
    
    9Tax Fees
    
    
    
    53
    
    
    
    
    54All Other Fees
    
    
    
    0
    
    
    
    
    0Total Fees
    
    
    $
    271
    
    
    
    $
    253
 Audit Fees include fees for services performed to comply with generally accepted auditing
standards, including the recurring audit of Cypress Holdings financial statements. This category
also includes fees for audits provided in connection with statutory filings or services that
generally only the principal accountant reasonably can provide to a client, such as procedures
related to audit of income tax provisions and related reserves, comfort letters, statutory audits,
attest services, consents and assistance with and review of documents filed with the SEC. Audit-Related Fees include fees associated with assurance and related services that are
reasonably related to the performance of the audit or review of Cypress Holdings financial
statements. This category includes fees related to assistance in financial due diligence related
to mergers and acquisitions, consultations regarding generally accepted accounting principles,
reviews and evaluations of the impact of new regulatory pronouncements, general assistance with
implementation of the new SEC and Sarbanes-Oxley Act of 2002 requirements and audit services not
required by statute or regulation. Audit-related fees also include audits of pension and other
employee benefit plans, as well as the review of information systems and general internal controls
unrelated to the audit of the financial statements. Tax fees primarily include fees associated with tax audits, tax compliance, tax consulting, as
well as domestic and international tax planning. This category also includes tax planning on
mergers and acquisitions, restructurings, as well as other services related to tax disclosure and
filing requirements. All other fees primarily include fees associated with products and services provided by the
principal accountant, other than those that are included in audit fees, audit-related fees and
tax fees. None of the fees paid to the independent auditors were approved by the Audit Committee after
the services were rendered pursuant to the de minimis exception established by the SEC for the
provision of non-audit services. The Audit Committee has considered whether the provision of services described above under
Audit Related Fees, Tax Fees, and All Other Fees is compatible with maintaining the
independence of Deloitte & Touche, and has concluded that it is so compatible. Pre-Approval Policy The Audit Committee Charter provides that the Audit Committee shall pre-approve all audit
services and permitted non-audit services (including the fees and terms thereof) to be performed
for Cypress Holding by its independent auditors; provided that the Chairman of the Audit Committee
may pre-approve all auditing and permitted non-audit services that do not exceed $25,000 and the
Chairman shall report any approval given at the next Audit Committee meeting. The Audit Committee
pre-approved all audit fees in 2004. 81




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PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES a) Exhibits EXHIBITS
    
    DESCRIPTION2.1
    
    Form of Certificate of Merger (1)2.2
    
    Plan and Agreement of Merger (1)2.3
    
    Agreement and Plan of Merger, dated January 10, 2002 by and among Cypress
Communications, Inc., Cypress Communications Holding Co., Inc. and Cypress
Merger Sub, Inc. (2)2.3.1
    
    Amendment No. 1 to the Merger Agreement, dated January 17, 2002 (2)2.4
    
    Agreement and Plan of Merger, dated November 5, 2004 by and among Cypress
Communications Holding Co., Inc., TechInvest Holing Company, Inc. and
TechInvest Acquisition, Inc. (13)2.4.1
    
    Amendment No. 1 to Agreement and Plan of Merger, dated February 3, 2005 by
and among Cypress Communications Holding Co., Inc., TechInvest Holing
Company, Inc. and TechInvest Acquisition, Inc. (15)2.5
    
    Voting Agreement, dated November 5, 2004 by and among TechInvest Holding
Company, Inc. and the preferred stockholders listed therein. (13)2.6
    
    Voting Agreement, dated November 5, 2004 by and among TechInvest Holding
Company, Inc. and the common stockholders listed therein. (13)3.1
    
    Certificate of Incorporation (1)3.1.1
    
    Amendment to Certificate of Incorporation (11)3.2
    
    Bylaws (3)4.1
    
    Form of Common Stock Certificate (1)4.2
    
    Registration Rights Agreement dated October 2, 1998 (1)4.2.1
    
    Amendment dated September 24, 1999 to Registration Rights Agreement dated
October 2, 1998 (1)4.3
    
    Registration Rights Agreement, dated July 16, 2002, by and among Cypress
Communications Holding Co., Inc. and the purchasers listed therein (12)4.4
    
    Intercreditor (Subordination) Agreement, dated July 16, 2002, J. Oliver
Cunningham Trust dated February 26, 1971, the Anne C. McClure Trust dated
February 26, 1971, the Jane C. Warriner Trust dated February 26, 1971,
Noro-Moseley Partners V, L.P., Wakefield Group III and the Noteholders
signatories thereto (12)10.1
    
    Employment Agreement dated as of February 21, 2002 between Cypress
Communications, Inc. and Gregory P. McGraw (4)10.1.1
    
    Unanimous Written Consent In Lieu of a Special Meeting of the Board of
Directors of Cypress Communications Holding Co., Inc. modifying the
employment agreement of Gregory P. McGraw, Chief Executive Officer and
President (14)10.2
    
    Employment Agreement dated as of November 1, 2003 between Cypress
Communications and Neal L. Miller (12)10.3
    
    1999 Employee Equity Incentive Plan (1)10.3.1
    
    First Amendment to Cypress Holdings 1999 Employee Equity Incentive Plan (5)10.3.2
    
    Second Amendment to Cypress Holdings 1999 Employee Equity Incentive Plan (6)10.4
    
    Asset Purchase Agreement dated as of October 18, 2000 between Cypress
Holding and Apex Site
Management, Inc. (7)10.5
    
    Stock Purchase Agreement dated July 26, 2001 between Cypress Holding and
Craig M. Siegler (8)10.6
    
    Amended and Restated Loan and Security Agreement dated March 17, 2004
between Cypress Communications, Inc., Cypress Communications Operating
Company, Inc. and Silicon Valley Bank (9)10.7
    
    Asset Purchase Agreement, dated May 31, 2002 by and among Intermedia
Communications, Inc., Shared Technologies Fairchild, Inc., Share
Technologies Fairchild
 82




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EXHIBITS

    
    DESCRIPTIONTelcom, Inc., MCI Worldcom Communications, Inc.,
Worldcom, Inc. and Cypress Communications, Inc. (10)10.8.1
    
    Amendment No. 1 to Asset Purchase Agreement and Waiver, dated July 17, 2002,
by and among Intermedia Communications, Inc., Shared Technologies Fairchild,
Inc., Share Technologies Fairchild Telcom, Inc., MCI Worldcom
Communications, Inc., Worldcom, Inc. and Cypress Communications, Inc. (10)10.9
    
    Omnibus Post-Closing Agreement, dated July 17, 2002, by and among Intermedia
Communications, Inc., Shared Technologies Fairchild, Inc., Share
Technologies Fairchild Telcom, Inc., MCI Worldcom Communications, Inc.,
Worldcom, Inc. and Cypress Communications, Inc. (10)10.10
    
    Loan Agreement, dated as of July 16, 2002, by and among J. Oliver Cunningham
Trust dated February 26, 1971, the Anne C. McClure Trust dated February 26,
1971, the Jane C. Warriner Trust dated February 26, 1971, Noro-Moseley
Partners V, L.P., Wakefield Group III, LLC, Cypress Communications Holding
Co., Inc. and Cypress Communications, Inc. (12)10.11
    
    First Amendment to the Loan Agreement, dated March 25, 2004, by and among J.
Oliver Cunningham Trust dated February 26, 1971, the Anne C. McClure Trust
dated February 26, 1971, the Jane C. Warriner Trust dated February 26, 1971,
Noro-Moseley Partners V, L.P., Wakefield Group III, LLC, Cypress
Communications Holding Co., Inc. and Cypress Communications, Inc. (12)10.12
    
    Purchase Agreement, dated July 16, 2002, by and among Cypress Communications
Holding Co., Inc. and the parties listed therein (12)10.13
    
    Loan Modification Agreement by and among Cypress Communications, Inc.,
Cypress Communications Operating Company, Inc. and Silicon Valley Bank,
dated July 12, 2004 (9)10.14
    
    Executive Employment Agreement dated as of May 15, 2004 between cypress
Communications Holding Co., Inc. and Salvatore W. Collura (11)10.15
    
    Key Executive Officer Retention Plan, adopted August 16, 2004 (14)10.15.1
    
    First Amendment to the Key Executive Officer Retention Plan, dated November
4, 2004 (14)10.16
    
    Executive Compensation Arrangements *10.17
    
    Director Compensation Arrangements *21.1
    
    List of Cypress Holdings Subsidiaries (6)31.1
    
    Certificate of Gregory P. McGraw, Chief Executive Officer pursuant to
Rule 13a-14(a)*31.2
    
    Certificate of Neal L. Miller, Executive Vice President and Chief Financial
Officer pursuant to Rule 13a-14(a)*32.1
    
    Certificate of Gregory P. McGraw, Chief Executive Officer pursuant to
18 U.S.C., Section 1350, as adopted pursuant to Section 906 of the Sarbanes
Oxley Act of 2002 *32.2
    
    Certificate of Neal L. Miller, Executive Vice President and Chief Financial
Officer pursuant to 18 U.S.C., Section 1350, as adopted pursuant to Section
906 of the Sarbanes Oxley Act of 2002 *
   *
    
    Filed herewith  (1)
    Incorporated by reference to Cypress Holdings Registration Statement on Form
10-SB12G/A filed on June 8, 2000 (Registration No. 000-30401).(2)
    Incorporated by reference to Cypress Holdings Schedule TO filed on January
22, 2002.(3)
    Incorporated by reference to Cypress Holdings Form 10-QSB filed on August
14, 2002.(4)
    Incorporated by reference to Cypress Holdings Form 10-KSB filed April 16,
2002. 83




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(5)
    Incorporated by reference to Cypress Holdings Definitive Information
Statement on Schedule 14A filed May 21, 2002.(6)
    Incorporated by reference to Cypress Holdings Form 10-KSB filed on April 7,
2003.(7)
    Incorporated by reference to Cypress Holdings Definitive Information
Statement on Schedule 14C filed November 7, 2000.(8)
    Incorporated by reference to Cypress Holdings Form 10-QSB filed on November
14, 2001.(9)
    Incorporated by reference to Cypress Holdings Form 8-K filed on July 19,
2004.(10)
    Incorporated by reference to Cypress Holdings Form 8-K filed on July 31,
2002.(11)
    Incorporated by reference to Cypress Holdings Form 10-Q filed on August 10,
2004.(12)
    Incorporated by reference to Cypress Holdings Form 10-KSB filed on March 30,
2004.(13)
    Incorporated by reference to Cypress Holdings Form 8-K filed on November 8,
2004.(14)
    Incorporated by reference to Cypress Holdings Form 10-Q filed on February 4,
2005.(15)
    Incorporated by reference to Cypress Holdings Form 8-K filed on February 7,
2005. 84




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SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 15, 2005. CYPRESS COMMUNICATIONS HOLDING CO., INC.Dated:
April 15, 2005
    
    By:
    
    /s/ Gregory P. McGrawGregory P. McGrawPresident and Chief Executive OfficerDated:
April 15, 2005By:
    
    /s/ Neal L. MillerNeal L. MillerExecutive Vice President and Chief Executive Officer
 POWER OF ATTORNEY Each person whose signature appears below on this Annual Report on Form 10-K hereby
constitutes and appoints Gregory P. McGraw and Neal L. Miller, and each of them, his true and
lawful attorney-in-fact, acting alone, with full powers of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities (until revoked in writing), to sign any
or all amendments to this Annual Report on Form 10-K of Cypress Communications Holding Co., Inc.,
and to file the same, with exhibits thereto, and other documents to be filed in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact or his substitute, acting alone, may lawfully do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons in the capacities and on the dates indicated. SIGNATURE
    
    TITLE
    
    DATE/s/ Gregory P. McGraw
    
    Director, Chief Executive Officer, President and Secretary
    
    April 15, 2005Gregory P. McGraw/s/ Neal L. Miller
    
    Executive Vice President and Chief Financial Officer
    
    April 15, 2005Neal L. Miller/s/ Ross J. Mangano
    
    Director
    
    April 15, 2005(Non-Executive Chairman of the Board)Ross J. Mangano/s/ Steve G. Nussrallah
    
    Director
    
    April 15, 2005Steve G. Nussrallah/s/ Michael F. Elliott
    
    Director
    
    April 15, 2005Michael F. Elliott/s/ Gerard H. Sweeney
    
    Director
    
    April 15, 2005Gerard H. Sweeney
 85