OMB APPROVAL
OMB Number: 3235-0420
Expires: May 31, 2000
Estimated average burden
hours per response: 3225
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
United States Securities and Exchange Commission
Washington D.C.
Form 10-KSB
Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended September 30, 1998
Commission File Number 0-27842
Colmena Corp.
(Name of Small Business Registrant in its charter)
Delaware: (State or other jurisdiction of incorporation or organization)
54-1778587: (I.R.S. Employer Identification Number)
2500 North Military Trail, Suite 225-D; Boca Raton,
Florida 33431 (Address of principal executive
offices including zip code)
(561) 998-2031 (Registrant's telephone number)
3896 North Federal Highway; Lighthouse Point, Florida 33064
(Former address of the Registrant)
Securities registered under Section 12(b) of the Act: None
Title of each class: None Name of each exchange on which registered: None
Securities Registered under Section 12(g) of the Act:
Common Stock, $0.01 par value (Title of Class)
Check whether the Registrant (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended,
during the past twelve months (or for such shorter period that the Registrant
was required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days: Yes [_] No [x]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference, in Part III of this Form
10-KSB or any amendment to this Form 10-KSB: [x]
State Registrant's revenues for its most recent fiscal year: $10,344,480
(for year ended September 30, 1998)
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days: $278,467.95 based on a last transaction price of $0.03 as of
June 30, 2000, there being 9,282,265 shares of common stock held by persons
other than officers, directors or control persons of the Registrant on such
date.
State the number of shares outstanding of each of the Registrant's
classes of equity, as of the latest practicable date: 15,572,265 shares of
common stock, as of June 30, 2000.
Page 1
<PAGE>
Available Information.
The public may read and copy any materials filed by the Registrant with
the Commission at the Commission's Public Reference Room at 450 Fifth Street,
Northwest, Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains an Internet site that contains reports,
proxy and information statements, and other information regarding the Registrant
and other issuers that file reports electronically with the Commission, at
http://www.sec.gov.
Documents Incorporated by Reference
Portions of the following documents previously filed by the Registrant
with the Commission are incorporated by reference in this report, as permitted
by Commission Rule 12b-23.
1. Form 10-KSB for the year ended September 30, 1997, in its entirety.
2. Forms 8-K for report dates:
A. January 29, 1999 [Items 1, 2, 4, 5, 7 and by amendment on
February 12, 1999, Item 4 and 7(c)];
B. March 22, 1999, [Items 2 and 5(c)]; and
C. May 18, 1999 (Item 1).
3. Forms 10-QSB for the calendar quarters ended December 31, 1997, March
31, 1998 and June 30, 1998.
4. Registration statement on Form S-8 filed with the Commission on March
16, 1998.
Caveat Pertaining to Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain of the statements contained
herein, which are not historical facts, are forward-looking statements with
respect to events, the occurrence of which involve risks and uncertainties.
These forward-looking statements may be impacted, either positively or
negatively, by various factors. Information concerning potential factors that
could affect the Registrant is detailed from time to time in the Registrant's
reports filed with the Commission. This report contains "forward looking
statements" relating to the Registrant's current expectations and beliefs. These
include statements concerning operations, performance, financial condition and
anticipated growth. For this purpose, any statements contained in this Annual
Report and Form 10-KSB that are not statements of historical fact are
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "will", "expect", "believe", "anticipate", "intend",
"could", "estimate", or "continue", or the negative or other variation thereof
or comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties
which are beyond the Registrant's control. Should one or more of these risks or
uncertainties materialize or should the Registrant's underlying assumptions
prove incorrect, actual outcomes and results could differ materially from those
indicated in the forward looking statements.
Context
The information in this report is qualified in its entirety by
reference to the entire report; consequently, this report must be read in its
entirety. This is especially important in light of material subsequent events
disclosed. Information may not be considered or quoted out of context or without
referencing other information contained in this report necessary to make the
information considered, not misleading.
Page 2
<PAGE>
Table of Contents
Part Item Page
Number Number Number Caption
I 1 3 Description of Business
2 17 Description of Property
3 18 Legal Proceedings
4 22 Submission of Matters to Security Holders
II 5 22 Market for Common Equity and Related Stockholder
Matters
6 37 Management's Discussion and Analysis and Plan of
Operation
7 40 Financial Statements
8 67 Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
III 9 68 Directors, Executive Officers, Promoters and Control
Persons
9 73 Compliance With Section 16(a) of the Exchange Act
10 73 Executive Compensation
11 83 Security Ownership of Certain Beneficial Owners and
Management
12 87 Certain Relationships and Related Transactions
13 89 Exhibits and Reports on Form 8-K
Signatures 94
Additional
Information 95
Exhibits 96
This document incorporates into a single document the requirements of
the Securities and Exchange Commission for the Annual Report to Stockholders and
the Form 10-KSB.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Organization & Initial Operations
Colmena Corp., a Delaware corporation, (the "Registrant") was originally
incorporated in the State of Virginia on July 11, 1994 under the name
Sports-Guard, Inc.; however, its corporate domicile was changed to the state of
Delaware on July 26, 1995 ("Sports-Guard"). On February 2, 1996, the Registrant
completed the acquisition by merger of Skate Publishing Corp., a Delaware
corporation ("Skate"). Skate had limited assets and approximately 400
shareholders of record and was acquired by the Registrant in order to increase
its shareholder base. Skate had no active operations at the time of the merger
with the Registrant.
The Registrant was organized to engage in the design and distribution of
sports-safety equipment. The Registrant's first product, known as the
Fielders-Guard, was a polycarbonate face guard for use primarily by defensive
players in the sports of baseball and softball. The Registrant was unsuccessful
in attaining market acceptance for the Fielders-Guard, and was unable to
generate any meaningful level of sales of the product.
Page 3
<PAGE>
On October 21, 1997, Norman O. Milligan, Sr. ('Mr. Milligan") sold his
controlling interest in the Registrant to Invest L'Inc. Partners, LLC, a
creditor and shareholder of the Registrant and resigned as an officer and
director. Concurrently with the sale Mr. Milligan acquired certain operating
assets and assumed certain liabilities of the Registrant, and the Registrant
released the exclusive license rights to the patent for the Fielders-Guard
product previously distributed by the Registrant to Mr. Milligan. On October 31,
1997, Troy D. Wiseman who had been elected as a member of the Registrant's board
of directors on October 21, 1997, was elected as the Registrant's president,
secretary, treasurer and chief financial officer.
Peplin Related Operations
Background
On November 10, 1997, the Registrant:
* Changed its name from Sports-Guard, Inc. to Colmena Corp. and effected
a one-for-ten reverse split of its outstanding common stock. As a
result of the reverse split, the outstanding shares of the
Registrant's common stock were reduced to approximately 645,000;
* Consummated the acquisition of RCP Enterprises Group, LLC, an Ohio
limited liability company ("RCP- Ohio"), through the merger of RCP-
Ohio with and into RCP Enterprises Group, Inc., a Delaware corporation
("RCP-Delaware") formed as a wholly-owned subsidiary of the Registrant
for purposes of the acquisition. In exchange for all of the outstanding
membership interests in RCP-Ohio, the members of RCP- Ohio received an
aggregate of 3,000,000 shares of the Registrant's common stock. A copy
of the Registrant's agreement with RCP was filed with the Commission as
an exhibit to Form 10-KSB for period ended September 31, 1997.
* Consummated the acquisition of Tio Cigars, Inc., an Ohio corporation
("Tio-Ohio"), through the merger of Tio-Ohio with and into Tio Mariano
Cigar Corp., a Delaware corporation ("Tio-Delaware") formed as a
wholly-owned subsidiary of the Registrant for purposes of the
acquisition. In exchange for all of the outstanding capital stock of
Tio-Ohio, the stockholders of Tio-Ohio received an aggregate of
1,310,000 shares of the Registrant's common stock. A copy of the
Registrant's agreement with Tio was filed with the Commission as an
exhibit to Form 10-KSB for period ended September 31, 1997.
* Richard C. Peplin, Jr., who founded and controlled both RCP Ohio and
Tio Ohio, was elected as the Registrant's sole director, president,
chief executive officer, secretary, treasurer and chief financial
officer concurrently with Mr. Wiseman's resignation from all such
positions.
As a result of the acquisition of RCP Ohio and Tio Ohio, the Registrant
changed its line of business and became a holding company for its resulting
wholly-owned operating subsidiaries: RCP Enterprises Group, Inc. ("RCP"), which
was engaged in the marketing and distribution of long-distance telephone service
calling cards; and, Tio Mariano Cigar Corp. ("Tio"), which was engaged in the
manufacture and distribution of premium hand-rolled cigars. The RCP-Ohio and
Tio-Ohio acquisitions were treated, for accounting purposes, as a
recapitalization of RCP- Ohio and Tio-Ohio, which were under the common control
of Mr. Peplin, and were treated as one accounting acquisition. As of the
acquisition date, November 10, 1997, the Registrant had no assets, liabilities
of approximately $118,880 and an accumulated deficit of approximately
$(721,000). As of November 10, 1997, RCP-Ohio and Tio-Ohio had combined assets
of approximately $909,216 and total shareholders' interest of approximately
$213,156.
Page 4
<PAGE>
In conjunction with the change in business, the Registrant's principal
executive office was moved to 25100 Detroit Road, Westlake, Ohio 44145 (where it
remained until January of 1999), and its telephone number was changed to (440)
871-5000.
The Operating Subsidiaries
RCP was engaged in the creation, distribution, marketing and management of
long-distance telephone services. RCP's principal products were telephone
network access products, commonly referred to as prepaid calling cards, that
allow users to access domestic long-distance, international long-distance, and
local telephone services from any touch tone telephone in the United States.
Users purchased the phone cards for $9.95 per month through direct mail
solicitation. The customer was billed on his or her phone bill monthly until
such time as he or she decided to terminate the service. The card provides 40
minutes per month of service in the United States. Any unused minutes at the end
of the month expired and the account was replenished with an additional 40
minutes. A toll-free access number (1-800 or 1-888) and a unique personal
identification number ("PIN") were printed on the back of each phone card. When
the toll-free access number was entered, the user is connected to a debit or
prepaid card platform switch in the telephone network that provided interactive
voice prompts throughout the call process. After entering the PIN, the user
could dial one or more destination telephone numbers in the same manner as a
normal telephone call. The interactive voice prompts in the platform advised the
user of the minutes remaining on that card. The prepaid account balance
associated with each card was managed by the platform which automatically
deducted for usage. Upon use of all the minutes stored in the card's account for
the month, the debit card database automatically instructed the debit platform
to terminate the active status of the card. The card was automatically
recharged, and the customer was billed, every month until the customer canceled
the service. As a material subsequent event, on March 17, 1998, RCP changed its
name to T2U Co.
Tio owned all of the assets and assumed specific liabilities of Five-Star
Cigar Corp. The Registrant originally intended to establish Tio as a vertically
integrated cigar manufacturer, distributor and retailer of private label, hand-
rolled premium brand cigars. On February 8, 1998, the Registrant's management
determined that the best interests of the Registrant would be served by selling
the operating assets of Tio to Dominican Cigar Company, thus permitting
management to focus its efforts on development of the Registrant's
communications business.
On or about February 19, 1998, the Registrant and its wholly-owned
subsidiary, RCP entered into an agreement with Business Technology Systems, Inc.
to acquire the assets and assume the liabilities of Business Technology Systems,
Inc. As consideration for the purchase, RCP agreed to pay $100,000 in cash and
the Registrant agreed to issue 100,000 restricted shares of its common stock.
The agreement was later amended to lower the cash portion of the purchase price
to $50,000. For financial reporting purposes, the Registrant's common stock
issued was valued at $306,250. On March 15, 1998, the Registrant organized a new
Florida corporation to which all assets and liabilities of Business Technology
Systems, Inc., were pushed down using push-down accounting. The new Florida
corporation ("BTSF") also assumed the name "Business Technology Systems, Inc."
The purchase was recorded under the purchase method of accounting. Accordingly,
the purchase price was allocated to assets acquired and liabilities assumed
based on the estimated fair market values at the date of acquisition. The fair
market value of the net assets acquired was a net liability of $57,412 resulting
in the recording of goodwill totaling $413,662. As of September 30, 1998, the
Registrant discontinued operations of BTSF and wrote down any unamortized
goodwill to its net realizable value of zero. A copy of the agreement is filed
as an exhibit to this report, see "Part III, Item 13(a), Exhibits Required by
Item 601 of Regulation SB."
Page 5
<PAGE>
On or about April 22, 1998, the Registrant formed TechTel Communications,
Inc. ("TechTel"), a wholly- owned Delaware subsidiary headquartered in the State
of Florida. TechTel was a competitive local exchange carrier licensed by
BellSouth, Southwestern Bell, Bell Atlantic and Pacific Bell to provide local
and long distance services to customers on a prepaid basis.
Purchase of Telecommunications Equipment
On or about May 19, 1998, the Registrant entered into an agreement with
Arnold A. Semler, Inc. dba Associated Industries, a California corporation, to
purchase telecommunications switching equipment for $375,000 and the issuance of
300,000 shares of the Registrant's common stock. Of the $375,000, the Registrant
paid $100,000 in cash and the balance through issuance of 24 month secured
promissory note for $275,000, payable and due on August 14, 1999 and yielding
interest at an annual interest rate of 9%. The equipment was recorded under the
purchase method of accounting for an aggregate $685,935 consisting of the common
stock issued with a value of $310,935 based upon the discounted trading price of
the Registrant's common stock on the transaction date, a note payable of
$275,000 and a cash payment of $100,000. A copy of the agreement is filed as an
exhibit to this report, see "Part III, Item 13(a), Exhibits Required by Item 601
of Regulation SB."
The equipment was written down to its net realizable value of $275,000 at
September 30, 1998. On October 1, 1999 the Registrant received Notice to Retain
Collateral regarding this equipment in full satisfaction of the $275,000 of
related debt. As a result, the Registrant lost its $100,000 cash investment.
Advances to World Long Distance, Inc., Telenet International, Inc. and Telecuba,
Inc. Pursuant to Stock Purchase Agreement
Pursuant to a stock purchase agreement dated May 8, 1998, whereby the
Registrant was to acquire 100% of the issued and outstanding common stock of
World Long Distance, Inc., Telenet International, Inc. and Telecuba, Inc., the
Registrant advanced the sellers the sum of $304,000. The agreement was never
consummated and the Registrant has been unable to collect the $304,000.
Accordingly, an allowance for non-collect ability was established for $304,000
as of September 30, 1998, resulting in a provision for bad debts in 1998 for the
same amount.
Material Agreements
Consulting Agreement with SBV
On February 25, 1998, the Registrant entered into a twelve month consulting
agreement with SBV Corporation a/k/a SBV Holdings, Inc. ("SBV"). The services
provided primarily comprised the review of business operations of potential
transaction candidates, initiation and negotiation on behalf of the Registrant
to explore potential transactions, analysis and evaluation of the projected
financial performance of the Registrant and assistance in the negotiation of
definitive purchase or financing agreements with any interest parties. As
consideration for the services provided, the Registrant granted SBV an option to
purchase 1,500,000 shares of the Registrant's common stock at an exercise price
of $2.00 per share. On or about March 16, 1998, the option and the underlying
shares were registered with the Commission under the Securities Act pursuant to
a Registration Statement on Commission Form S-8. The options vested and became
exercisable over a period of approximately 10 months with 250,000 of the options
vesting after the September 30, 1998 balance sheet date on December 1, 1998. The
option period terminated on February 25, 2000. As of September 30, 1998, the
Consultant had exercised the option as to 640,000 shares. A copy of the
consulting agreement is filed as an exhibit to this report, see "Part III, Item
13(a), Exhibits Required by Item 601 of Regulation SB."
Page 6
<PAGE>
Consulting Agreements with Various Consultants
On November 10, 1997, the Registrant entered into five consulting
agreements with various consultants. The agreements were established for terms
ranging from twelve to thirty-six months. One of the agreements was terminated
as of April 24, 1998. One of the remaining consultants was engaged to perform
marketing consulting services. The services provided by the other consultants
mainly comprised the review of business operations of potential transaction
candidates, initiation and negotiation on behalf of the Registrant to explore
potential transactions, analysis and evaluation of the projected financial
performance of the Registrant and assistance in the negotiation of definitive
purchase or financing agreements with any interested parties. As consideration
for the services provided, the Registrant agreed to issue to the consultants an
aggregate of 800,000 shares of the Registrant's common stock. On or about March
16, 1998, the shares were registered with the Commission under the Securities
Act pursuant to a Registration Statement on Commission Form S-8. As of September
30, 1998, the Registrant has issued 700,000 shares. A copy of the five various
consulting agreements and termination agreement are filed as exhibits to this
report, see "Part III, Item 13(a), Exhibits Required by Item 601 of Regulation
SB."
Investment Banking and Advisory Services Agreement
On May 7, 1998, the Registrant entered into an Investment Banking and
Advisory Services Agreement with Strategica Services Corporation ("Services
Corp.") and Strategica Financial Corporation ("Financial Corp.") for a term
ending on April 30, 2003. The services to have been provided by Services Corp.,
or at it's option, by Financial Corp., primarily consists of (i) providing
advice to the Registrant and assisting the Registrant with contract
negotiations, business strategies, and, if applicable, required regulatory
filings, (ii) providing the Registrant with advice relating to financing
options, (iii) advising the Registrant with respect to potential public
offerings and private placements of equity or debt securities, (iv) assisting
the Registrant in preparing the required offering documents, (v) assisting the
Registrant in identifying potential equity and/or debt investors, (vi) providing
advice to the Registrant with respect to potential marketing strategies,
mergers, other acquisitions, reorganizations, recapitalizations or sales of
assets, and (vii) providing advice in the structure of all business strategies
and agreements. As consideration for the services to have been provided, the
Registrant agreed to pay a non-refundable due diligence review fee of $100,000
and a monthly fee to Services Corp. of $5,000 for the month of May 1998, $10,000
from June 1998 to May 1999, and $5,000 until April 30, 2003. In addition, the
Registrant agreed to pay to Financial Corp. 5% and 3%, respectively, of the
gross proceeds committed to the Registrant for equity sold and debt issued,
respectively, and to Services Corp. 5% of the gross purchase price received in
the event of the sale of the Registrant, its subsidiaries, or affiliates and a
debt restructuring fee of 10% of all debt restructured, converted to equity, or
extended. Furthermore, the Registrant agreed to reimburse Services Corp. and
Financial Corp. for reasonable expenses paid. In addition, the Registrant agreed
to provide Services Corp. and Financial Corp. with warrants for 25% of the
common stock of the Registrant with full anti-dilution and registration rights.
The services were never provided and the Registrant discontinued payments, in an
effort to avoid litigation. The Registrant is currently negotiating with
Services Corp., Financial Corp. and their affiliates (collectively referred to
as the "Strategica Group") for a settlement of all outstanding obligations and
anticipates that a settlement will be concluded, calling for the issuance to the
Strategica Group of shares equal to 2.5% of the Registrant's outstanding common
stock, with anti-dilutive rights. A copy of the agreement is filed as an exhibit
to this report, see "Part III, Item 13(a), Exhibits Required by Item 601 of
Regulation SB."
Page 7
<PAGE>
Billing and Collection Contract
On June 20, 1997 the Registrant entered into a 12 month Customer Billing
and Collection Contract with International Telemedia Associates, Inc., a Georgia
corporation, whereby ITA was to provide processing billing and collection
services relating to the Registrant's long distance telephone services. As
stipulated in the contract, ITA had the right to reject, adjust or reserve for
any submitted billings. ITA charged the Registrant fees based upon a per
transaction schedule as stipulated in the contract. In September 1998, ITA
defaulted in its payments to the Registrant and subsequently entered into
Chapter 7 bankruptcy see "Material Subsequent Events: ITA Default" below. A copy
of the agreement is filed as an exhibit to this report, see "Part III, Item
13(a), Exhibits Required by Item 601 of Regulation SB."
Wholesale Independent Contractor Agreement
On August 8, 1997, RCP Enterprises Group, LLC entered into a wholesale
independent contract agreement with Coronado Telecom. The Agreement was
established on a month to month basis until terminated by either party upon at
least thirty days prior written notice.
Operations Discontinued During Reporting Period
Tio
On February 8, 1998, the Registrant's management decided to discontinue
operations of the Registrant's subsidiary, Tio, which was in the business of
manufacturing and distributing premium hand-rolled cigars. Effective March 1,
1998, the Registrant sold the inventory and fixed assets of Tio to Dominican
Cigar Corporation, ("Dominican") a publicly held corporation, in exchange for
10,000 restricted shares (300,000 restricted pre-split shares) of Dominican's
common stock. At the time of the exchange the Dominican shares had a market
value of $77,010. The book value of the assets exchanged exceeded the value of
the stock. Accordingly, a loss on disposal under discontinued operations of
$85,176 was recorded. In addition, an operating loss was incurred from the date
of the acquisition until the date of its disposition totaling $172,599.
The following schedule reflects notes payable to related parties as of
September 30, 1998, in the then current portion amount of $168,333, related to
Tio:
* Unsecured note payable to Alexandria Peplin in the principal amount of
$10,000, with interest at 10% per annum, due on demand.
* Unsecured note payable to Dustin A. Peplin in the principal amount of
$10,000, with interest at 10% per annum, due on demand.
*
Unsecured note payable to Richard C. Peplin, III in the principal amount of
$10,000, with interest at 10% per annum, due on demand.
Page 8
<PAGE>
* Unsecured note payable to Jeff Outcalt in the principal amount of $15,000,
with interest at 10% per annum, due on demand.
* Unsecured note payable to Patrick V. Graham in the principal amount of
$40,000, with interest at 10% per annum, due on demand.
* Unsecured note payable to Lakewood Manufacturing Company in the principal
amount of $50,000, with interest at 10% per annum, due on demand.
* Unsecured note payable to Ronald Denne in the principal amount of $33,333,
with interest at 10% per annum, due on demand.
Business Technology Systems, Inc.
On September 30, 1998, the Registrant's management decided to discontinue
operations of its subsidiary, BTSF, incurring a loss from operations in fiscal
year 1998 of $1,206,948. Because of the discontinuance of BTSF's operations, its
inventory as of September 30, 1998 totaling $34,094 had no current use to the
Registrant and therefore had no market value. Accordingly, the Registrant wrote
down the inventory to its net realizable value of zero and included the loss in
the loss from operations under discontinued operations.
The following schedule reflects $287,131 in notes payable to related
parties as of September 30, 1998, pertaining to the BTSF termination:
* $82,500 note payable to SBV, yielding interest at 10% per annum, due and
payable on July 30, 1999, convertible into shares of the Registrant's
common stock at a conversion price of $0.40 per share. The note which was
increased to $100,000 on October 1, 1998 has been in default since August
1, 1999. (See new Strategic Plans and Change of Controls, below);
* $34,177 note payable to Wiseman Family Trust (original principal $50,000),
yielding interest at 30% per annum, maturing October 17, 1999, payable in
monthly principal and interest installments of $2,805, secured by all of
RCP's present and future accounts receivable and related rights, guaranteed
by Mr. Peplin. (See New Strategic Plans and Change of Controls, below);
* $26,147 note payable to Richard C. Peplin, Sr. (original principal
$40,000), yielding interest at 30% per annum, maturing October 17, 1997,
payable in monthly principal and interest installments of $2,237 secured by
all of RCP's present and future accounts receivable and related rights,
guaranteed by Mr. Peplin (See New Strategic Plans and Change of Control,
below);
* $53,628 note payable to Van C. Peplin (original principal $80,000),
yielding interest at 30% per annum, maturing October 17, 1999, payable in
monthly principal and interest installments of $4,883, secured by all of
RCP's present and future accounts receivable and related rights, guaranteed
by Mr. Peplin;.
* $78,517 note payable to Lakewood Manufacturing Company, original principal
$100,000, interest at 30% per annum, maturing October 17, 1999, payable in
monthly principal and interest installments of $5,945, secured by all RCP
present and future accounts receivable, guaranteed by Mr. Peplin. In
default and due immediately.
* $12,162 note payable to R.C. Rosen, original principal $20,000, interest at
30% per annum, maturing October 19, 1999, payable in monthly principal and
interest installments of $1,107, secured by all RCP present and future
accounts receivable and related rights, guaranteed by Mr. Peplin.
Page 9
<PAGE>
Material Subsequent Events
ITA Default
On September 15, 1998, ITA defaulted in its obligation to pay the
Registrant's wholly owned subsidiary, RCP, $5,600,710 for services rendered to
third parties which was collected by ITA. ITA was responsible for the billing
and collections of the net receivables from the local exchange carriers under a
retrospective payment system. The Registrant recorded a third party settlement
receivable for its estimates of amounts to be received from ITA as it settled
with the local exchange carriers in future months. Final settlements were
usually made six to eight months subsequent to original billing, were subject to
reasonable estimates by management and were reported in the financial statements
in the period in which the phone services were rendered. Differences between the
estimates originally reported in the financial statements and final settlements
were included in the statement
As of September 30, 1998, approximately 95% of the Registrant's accounts
receivable were due from ITA. Of that amount, $1,298,933 was a hold back
receivable to cover charge backs. In September of 1998, ITA was placed in
involuntary bankruptcy pursuant to Chapter 7 of the United States Bankruptcy
Code. As a result of ITA's failure to pay the Registrant the $5,600,710 owed,
the Registrant's and its subsidiaries were forced to discontinue their own
business operations.
Material Subsequent Divestitures
As a material subsequent event, on or about March 3, 1999, the Registrant's
Board of Directors determined that because of pending and probable litigation
(including possible regulatory actions against) its subsidiaries based on
actions of former personnel, it was in the best interests of the Registrant's
stockholders to divest itself of all ownership in its operating subsidiaries. On
March 25, 1999, the Registrant entered into an agreement with Mr. Peplin, the
principal stockholder and former president of the Registrant, pursuant to which
the three subsidiaries then owned by the Registrant were disposed of, as
follows:
TechTel Communications, Inc.:
20% of TechTel's common stock was retained by the Registrant with the
intent of distributing it to its stockholders pursuant to the Commission's
Division of Corporate Finance's Staff Legal Bulletin Number 5, after completion
of the Registrant's audit for 1998, filing of all the Registrant's delinquent
reports with the Commission and the filing and effectiveness of a registration
statement on Commission Form 10-SB for TechTel. The balance was used to
compromise or settle outstanding liabilities of TechTel, including liabilities
to Mr. Peplin and to a principal of Yankees, the Registrant's strategic
consultant and then a major stockholder. The 20% spin off was never effected
because, as a result of continuing losses, TechTel was faced with the
termination of all operations unless it obtained required financing to pay
telephone bills and, rather than close TechTel, the Registrant and TechTel's
other stockholders agreed to exchange all of their TechTel common stock for
50,000 shares of the common stock of FON Digital Network, Inc., a non-reporting
public company with securities then traded on the over the counter electronic
bulletin board operated by the NASD under the symbol FDNI. The Registrant
received 5,000 of such shares. A copy of the Acquisition Memorandum is filed as
an exhibit to this report, see "Part III, Item 13(a), Exhibits Required by Item
601 of Regulation SB."
Page 10
<PAGE>
T2U Co. and Business Technolgy Systems, Inc.
Business Technology Systems, Inc.: All of the common stock owned by the
Registrant in T2U Co.(formerly known as RCP Enterprises, Inc.), a Delaware
corporation doing business as RCP Communications Group, Inc. ("T2U"); and
Business Technology Systems, Inc., a Florida corporation ("BTSF") was
transferred to Mr. Peplin, with the intent that Mr. Peplin would, at the
Registrant's expense, file for protection from creditors pursuant to Chapter 7
of the United States Bankruptcy Code. Any proceeds remaining after completion of
such proceeding were to be used to discharge obligations of TechTel or the
Registrant and proceeds remaining after such payments (an unlikely event), were
to be paid to the Registrant. Instead, all such assets were assigned by Mr.
Peplin to regulatory authorities in conjunction with settlement of
administrative actions against him and them and the Registrant has not provided
any assistance to Mr. Peplin in conjunction with their liquidation or
bankruptcy.
The divestiture of the Registrant's subsidiaries was undertaken by the
Registrant at the recommendation of the Yankee Companies, Inc., a Florida
corporation ("Yankees"), based on Yankees determination that litigation and
regulatory proceedings involving the Registrant's subsidiaries was, in the
aggregate, detrimental to any prospects for the Registrant to raise required
capital or acquire any promising business ventures. As a result of such
divestitures, the Registrant avoided material financial and regulatory exposure.
A copy of the Registrant's agreement with Mr. Peplin was filed with the
Commission as an exhibit to a Form 8-K on or about March 22, 1999 In conjunction
with such divestitures, Mr. Peplin, the Registrant's president, chief executive
officer and the chairman of its board of directors resigned from all positions
with the Registrant on May 4, 1999.
As of September 30, 1998, the assets and liabilities of RCP, BTSF and
TechTel were $41,597 and $1,570,944, respectively. During 1999, pursuant to the
sale of the subsidiaries the Registrant recognized a gain on sale because the
reorganizations did not qualify as tax-free reorganizations. However, no taxes
will be payable, as the income generated by the Registrant, as a result of its
reorganizations, is from the relief of liabilities which is fully excludable
under the insolvency/bankruptcy exception. Under such exception, the net
operating loss and other tax attributes are reduced in lieu of reporting income.
Consulting Agreement between the Registrant and the Yankee Companies, Inc.
On January 5, 1999 , the Registrant entered into a consulting agreement
with Yankees, a copy of which was filed with the Commission as an exhibit to a
current report on Form 8-K on or about January 29, 1999. The agreement has an
initial term of 365 days but will be renewed automatically, on a continuing
annual basis, unless terminated by one of the parties 30 days prior to the
termination of the then current term. The services to be provided by Yankees
were agreed to be the services, on a reasonable, as required, basis, consistent
with Yankees's other business activities. Yankees's areas of expertise mainly
comprise corporate structure, organization and reorganization, mergers,
acquisitions and divestitures, strategic corporate development, corporate
financial and equity analysis, and other corporate matters. Furthermore, Yankees
agreed to be responsible for administering the expenditure of the proceeds
derived by the Registrant from the exercise of the options that were granted to
Yankees as part of its compensation for the services rendered in order to
implement the strategic plans developed by Yankees and to settle and discharge
the corporate obligations of the Registrant. In this role, Yankees agreed to
establish and operate bank accounts for the Registrant, using such signatories
as Yankees deemed appropriate.
Page 11
<PAGE>
As consideration for the first 200 hours of services provided (in lieu of
document license fees and required cash payments valued at $20,000), the
Registrant agreed to grant Yankees within the first 365 days of the agreement, a
Class A Option to purchase 8,066,326 shares of the Registrant's outstanding or
reserved common stock (measured at the time exercise was completed) at an
exercise price of $0.005 per share, under the assumption that 7,750,000 common
shares were outstanding or reserved for future issuance, and, therefore
resulting in Yankees owning 51% of the Registrant's common stock. Any increase
or decrease in the outstanding or reserved shares would result in a
corresponding adjustment of the options' quantity and prices. The options may be
executed from the 10th day until the 365th day following January 5, 1999. At the
request of the Registrant due to pressing requirement for funds in order to
complete the audits required for it to attain currency in its filings with the
Commission, the Class A Options were modified by increasing the amount of common
stock issuable to 75% of the Registrant's outstanding or reserved capital stock,
measured as of the time exercise is complete, and the exercise price was
increased to $80,000. A copy of the original and amended warrant agreement is
filed as an exhibit to this report, see "Part III, Item 13(a), Exhibits Required
by Item 601 of Regulation SB."
As of the date of this report, Yankees has paid $30,000.00 pursuant to its
exercise of its Class A Option on approximately 6,000,000 shares of the
Registrant's common stock. Yankees has also loaned the Registrant $29,120.59,
pursuant to its Consulting Agreement with the Registrant.
For additional services provided, during the initial term, the Registrant
agreed to pay Yankees the following consideration:
* If Yankees arranges or provides funding for the Registrant on more
beneficial terms than those currently reflected in the Registrant's current
principal financing agreements, Yankees shall be entitled, at its election,
to either
* a fee of 25% of the savings achieved, or
* if equity funding is provided through consultants or its
affiliates, a discount of 10% from the market price for the
subject equity securities based on the latest comparable
transactions, if issuable as free trading securities, or a
discount of 50%, if issuable as restricted securities, or
* an introduction fee of 5% of the aggregate proceeds obtained
if funding is provided by any persons introduced to the
Registrant by Yankees;
* If Yankees generates business for the Registrant, Yankees shall be entitled
to a commission of 10% of the gross income derived by the Registrant
therefrom on a continuing basis.
* If Yankees arranges for an acquisition by the Registrant, Yankees shall be
entitled to 10% of the compensation paid for such acquisition.
In addition, the Registrant will be responsible for the payment of all
costs and disbursements associated with Yankees's services subject to certain
limitations and/or approvals, as stipulated in the Agreement. A copy of the
second amendment to the consulting agreement is filed as an exhibit to this
report, see "Part III, Item 13(a), Exhibits Required by Item 601 of Regulation
SB."
Page 12
<PAGE>
BellSouth Agreement
As a result of the reorganizations described above, the Registrant has no
operations except for a resale agreement for the purchase of telecommunications
services for the purpose of resale to end users from BellSouth
Telecommunications, Inc. ("BellSouth"), pursuant to Sections 251 and 252 of the
Telecommunications Act of 1996, as an alternative local exchange
telecommunications company in the States of Alabama, Florida, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.
The agreement was executed on November 22, 1999, for a term of two years,
with the relation continuing on a month to month basis thereafter, and provides
for the Registrant to resell BellSouth's telecommunications services,
interconnect with BellSouth facilities, purchase network elements and other
services from BellSouth, and exchange traffic specifically for the purpose of
fulfilling the obligations of the Registrant and BellSouth under the
Telecommunications Act of 1996. In addition, the Registrant may also provide its
customers with the following optional services through BellSouth: optional daily
usage file; enhanced optional daily usage file; access daily usage file; line
information database storage; centralized message distribution service and
calling name.
The agreement permits the Registrant to provide competing telephone
exchange services to residential and business subscribers within territories
where BellSouth operates. Services provided by the Registrant under the
agreement will be on a par with services provided by BellSouth directly to its
residential and business subscribers. BellSouth must also provide the
Registrant's customers with white page directory listings (for which neither
party may charge subscribers), inclusion in directory assistance databases and
copies of white page books. Neither BellSouth nor the Registrant are granted any
intellectual property rights by the agreement and each has agreed to protect the
confidential or proprietary information of the other.
The Registrant would derive income under the agreement by purchasing the
services from BellSouth at a discount from the retail rates charged by BellSouth
for such services, reflecting costs avoided by BellSouth when selling such
services for wholesale services. The discounts vary by state as set forth in the
following table:
Discounts * Carrier
State Residential Business Service Areas***
----- ----------- -------- ----------------
Alabama 16.3% 16.3%
Florida 21.83% 16.81%
Georgia 20.3% 17.3%
Kentucky 16.79% 15.54%
Louisiana 20.72% 20.72% 9.05%
Mississippi 15.75% 15.75%
North Carolina 21.5% 17.6%
South Carolina 14.8% 14.8% 8.98%
Tennessee ** 16% 16%
* When the Registrant provides resale service in a cross boundary area (areas
that are part of the local serving area of another state's exchange) the
rates, regulations and discounts for the state imposing the tariff will be
from the serving state.
** In Tennessee, if the Registrant provides its own operator services and
directory services, the discount will be 21.56%. The Registrant must
provide written notification to BellSouth within 30 days prior to providing
its own operator services and directory services to qualify for the higher
discount rate of 21.56%.
*** Unless noted in this column, the discount for business will be the
applicable discount rate for carrier service areas.
Page 13
<PAGE>
The Registrant has no current customers and is not conducting any business
under its agreement with BellSouth because it lacks the operating capital
required. The Registrant's board of directors declined to engage in public
capital raising ventures during the period since it filed its last quarterly
report with the Commission because it was the opinion of management that due to
problems in preparing the audit required for this report, adequate information
to comply with the requirements of the Securities Act was not available. At such
time as the Registrant becomes current in its reporting obligations under the
Exchange Act, it will reevaluate its options and may, if required capital
becomes available, resume business under the BellSouth agreement, a copy of the
agreement is filed as an exhibit to this report, see "Part III, Item 13(a),
Exhibits Required by Item 601 of Regulation SB."
Post Reporting Period Strategic Plans & Change of Control
During January of 1999, Yankees was retained by the Registrant to assist in
development and implementation of new strategic plans. As a result of the
compensation due to Yankees for its services (as reflected in the consulting
agreement described above, see "Consulting Agreement between the Registrant and
the Yankee Companies, Inc."), originally an option to purchase 51% of the
Registrant's common stock subsequently increased to 75%, when aggregated with
800,000 shares which affiliates of Yankees had purchased for an aggregate of
$200,000 prior to Yankees' association with the Registrant, Yankees effectively
controls the Registrant (See Part III, Item 11, Security Ownership of Certain
Beneficial Owners and Management"). Immediately following its engagement,
Yankees provided the Registrant with funds to pay for the audit of its financial
statements for the fiscal year ended September 30, 1998 (the "1998 Audit") and
recruited additional officers and directors, all of whom agreed to serve in
consideration for receipt of stock options (see "Part III, Item 9, Directors,
Executive Officers, Promoters and Control Persons").
After its evaluation of the Registrant's prospects, Yankees recommended
that the Registrant first priority be the preparation and filing of reports to
the Commission required under the Exchange Act, and that it first concentrate on
completing the audit of its financial statements for the fiscal year ended
September 30, 1998. That audit was not completed until June of 2000 due to
difficulties in reconstructing poorly documented corporate transactions and
locating records from discontinued operations. Until Yankees was retained, the
Registrant lacked funds to either pay for such audit or to pay corporate
personnel to assist the auditors. Immediately following completion of the 1998
Audit, the Registrant started preparation of this report and of the quarterly
unaudited financial statements required in order to complete and file its
delinquent reports on Commission Form 10-QSB for the calendar quarters ended
December 31, 1998, March 31, 1999 and June 30, 1999, the audit for its fiscal
year ended September 30, 1999 (during which there was virtually no activity);
and, the Registrant's delinquent reports on Commission Form 10-QSB for the
calendar quarters ended December 31, 1999, March 31, 2000 and June 30, 2000. The
Registrant expects to have all such financial statements and reports filed with
the Commission prior to December 31, 2000.
Concurrently with activities pertaining to the 1998 Audit, Yankees assisted
the Registrant to identify persons with claims or potential claims against the
Registrant and to negotiate to amicably resolve such claims. In almost all
cases, Yankees communicated with the claimants and potential claimants under
cover of letters that stated substantially as follows:
"Please be advised that the Yankee Companies, Inc., a Florida corporation
("Yankees") serves as the strategic consultant to Colmena Corp., a publicly
held Delaware corporation ("Colmena"), and in conjunction with such role,
is responsible for liquidation of its current operations, negotiations with
creditors and, if possible, development of new business opportunities.
Page 14
<PAGE>
We are contacting your company, as a creditor of Colmena, to discuss
Colmena's current financial condition and to see if there is a basis for a
settlement that will permit Colmena to avoid recourse to protection under
federal bankruptcy laws and preserve for both creditors and stockholders
the possibility of a reasonable return on their respective interests.
A review of the preliminary draft audit for Colmena's year ended September
30, 1998, discloses that Colmena has suffered losses in excess of
$5,000,000 due to the bankruptcy of International Telemedia Associates,
Inc., a Georgia corporation ("ITA"), which in turn led to additional
material losses as Colmena's business operations and investments were faced
with the absence of cash flow required to support them. Consequently,
Colmena now has no ongoing operations, no assets, liabilities in the range
of $2,242,890 and an apparent tax loss carryforward of approximately
$11,597,587.1
Yankees has had substantial success in negotiating with insiders to
eliminate a large portion of the current debt and believes that Colmena has
legitimate defenses to a number of the larger independent liabilities, as
well as potential material causes of action against very solvent potential
defendant- creditors. However, Yankees believes that everyone's best
interests would be served if Colmena and its creditors could enter into
arrangements that would eliminate the liabilities without recourse to
expensive litigation, permitting Yankees to seek a potential acquisition or
reverse acquisition candidate that would find Colmena's tax loss carry
forwards and absence of liabilities attractive.
I would very much appreciate the opportunity of meeting with a
representative of your company to discuss details of Colmena's current
status and prospects, in order to help your company make an informed
decision as to its relationship with Colmena and to discuss potential
settlement terms. Please have an appropriately authorized representative of
your company contact me directly at our Boca Raton offices to make mutually
convenient arrangements."
Some claims have been amicably resolved as follows:
Basis Amount
for of
Claimant Claim Claim Agreed to
Lawrence R. Van Etten (1) $18,152.93 136,147 Shares of Common Stock
Madhu & Ila Sethi (2) $24,068.69 250,000 Shares of Common Stock
Jack Levine (3) $2,550.00 34,000 Shares of Common Stock
Oppenheimer,
Wolff & Donnelly (4) $50,781.50 677,087 Shares of Common Stock
Wiseman Family Trust (5) $51,000.00 533,333 Shares of Common stock
Patrick V. Graham (6) $40,000.00 100,000 shares of common
--------
[FN]
1 The information provided is confidential, for settlement purposes
only, and subject to the restrictions against trading on material
inside information, or transmitting material inside information,
imposed under federal and state securities laws, regulations and
rules.
</FN>
Page 15
<PAGE>
(1) Salary and out of pocket expenses owed by TechTel. A copy of the
settlement is filed as an exhibit to this report, see "Part III, Item
13(a), Exhibits Required by Item 601 of Regulation SB."
(2) See Part I, Item 3-Legal Proceedings of this report. A copy of the
settlement agreement is filed as an exhibit to this report, see "Part
III, Item 13(a), Exhibits Required by Item 601 of Regulation SB."
(3) Accounting fees. A copy of the settlement agreement is filed as an
exhibit to this report, see "Part III, Item 13(a), Exhibits Required
by Item 601 of Regulation SB."
(4) Legal fees.
(5) Mr. Peplin, personally guaranteed funds loaned by the Wiseman Family
Trust to RCP. Troy D. Wiseman, as Trustee, brought suit against Mr.
Peplin in the Circuit Court of Cook County, Illinois, to enforce
payment on the guaranty. The Registrant was not a party to the suit.
However, as an accommodation to Mr. Peplin, the Registrant has become
a party to a settlement agreement between the litigants in which it
promises to transfer 533,333 shares of its stock to Mr. Wiseman,
without assuming any liability for Mr. Peplin's obligations under the
settlement agreement. A copy of the loan agreement and settlement
agreement is filed as an exhibit to this report, see "Part III, Item
13(a), Exhibits Required by Item 601 of Regulation SB."
(6) See Part 1, Item 3-Legal Proceedings. An oral agreement has been
reached and the necessary documents are being prepared to complete
this settlement.
Yankees is currently conducting negotiations with other claimants and the
Registrant has ratified the offers of settlement negotiated by Yankees. While
the Registrant's management feels that there is a reasonable likelihood that
such offers will be accepted, no assurances to that effect can be provided. The
claims and settlement offers are as follows:
Basis for Amount Compromise Offering
Claimant Claim of Claim Offered Date
-------- ----- -------- -------
Strategica Group (1) (Unknown) stock 1999
Diners Club (2) $ 18,265.68 stock August 2, 1999
Federal Express (3) $ 5,295.11 stock August 30, 1999
Arent Fox, et. al. (4) $ 31,234.87 stock January 18, 2000
SBV Holdings (5) $ 82,500.00 stock 1999
MCI (6) $ 21,863.48 stock 1999
-------
(1) See proceeding discussion under "Investment Banking and Advisory Services
Agreement."
(2) Expenses related to services by Madhu Sethi, See Part 1, Item 3-Legal
Proceedings.
(3) Overnight shipping costs.
(4) Legal fees.
(5) See proceeding discussion under "Business Technology Systems, Inc." A copy
of the promissory note is filed as an exhibit to this report, see "Part
III, Item 13(a), Exhibits Required by Item 601 of Regulation SB."
(6) Telephone service.
Page 16
<PAGE>
The following creditors have currently declined to participate in
negotiations:
Basis for Amount
Claimant Claim of Claim
-------- ----- --------
Seymour Brown (1) $ 250.00
AT&T (2) $ 4,435.61
Omnipoint Comm. (2) $ 771.68
Air Touch Cellular (2) $ 539.81
American Arbitration Association (3) $ 800.00
Deutsche Financial Services Corporation (3) $348,858.39
-------
(1) Accounting fees
(2) Telephone service.
(3) See Part 1, Item 3-Legal Proceedings.
Yankees has also suggested to the Registrant that if the Deutsche Financial
Services Corp. claim is not resolved, it should file for reorganization pursuant
to Chapter 11 of the United States Bankruptcy Code, and aggressively pursue any
and all claims and counterclaims available to the Registrant in such forum (see
"Part I, Item 3, Legal Proceedings").
At such time as the Registrant has become current in its reporting
obligations to the Commission and resolves claims by creditors and others (as
disclosed above), Yankees has indicated that it will assist the Registrant to
either obtain capital required to resume business operations pursuant to the
BellSouth agreement, or will assist it to acquire complimentary businesses in
exchange for shares of the Registrant's common stock and a commitment by the
Registrant, with the assistance of Yankees, to provide required expansion
capital. However, no assurances can be provided that such business plans can be
attained.
Additional Information
The foregoing information is hereby supplemented by reference to the
comparable item in the Registrant's report on Form 10-KSB for the year ended
September 30, 1997, the information reflected in the Registrant's reports on
Form 10-QSB for fiscal quarters ended December 31, 1997, March 31, 1998 and June
30, 1998; the reports of current event on Form 8-K filed with the Commission on
or about January 29, 1999, (Items 1, 2, 4, 5 and 7) by amendment on February 12,
1999 (Item 4 and 7(c), March 22, 1999 (Items 2 and 5(c)); and, May 18, 1999
(Item 1); and, the registration statement on Form S-8 filed with the Commission
on March 16, 1998, all as permitted by Rule 12b-23 promulgated under authority
of the Securities Exchange Act of 1934, as amended ("Commission Rule 12b-23").
ITEM 2. DESCRIPTION OF PROPERTY.
Until January of 1999, the Registrant maintained its principal office in
Westlake, Ohio at the offices of Lakewood Mfg. Co., an entity under common
control with the Registrant. Lakewood Mfg. Co. was, and remains the owner of the
property where the Registrant maintained its principal office, and provided the
office space at no charge. Tio also leased a manufacturing facility in Santo
Domingo in the Dominican Republic. The facility had a floor area of
approximately 10,000 square feet and included multiple production stations, a
humidor large enough to hold more than 300,000 cigars and a drying room. The
monthly rent for the property was $1,604.00 and the lease expired in May of
1998.
Page 17
<PAGE>
Material Subsequent Events
Since January of 1999, all of the Registrant's offices have been closed and
office facilities, equipment and clerical personnel at the following addresses
(all located in the State of Florida) have been made available to the Registrant
by Anthony Q. Joffe, the Registrant's current president, and Yankees:
Lighthouse Point: 3896 North Federal Highway; Lighthouse point, Florida 33064
(Anthony Q. Joffe who serves as the Registrant's president
has made this facility available without charge).
Ocala: 1941 Southeast 51st Terrace, Suite 800; Ocala, Florida 34471
(where G. Richard Chamberlin, Esquire, served as the
Registrant's general counsel until March 31, 2000, Vanessa
H. Lindsey, serves as the Registrant's secretary, chief
administrative officer and a member of the Registrant's
board of directors).
Boca Raton: 902 Clint Moore Road, Suite 136-D; Boca Raton, Florida 33487
until December 1, 1999 and then at the Crystal Corporate
Center; 2500 North Military Trail, Suite 225-D; Boca Raton,
Florida 33431.
The Registrant anticipates that these facilities will be adequate for its
needs unless it resumes business operations under the BellSouth Agreement, at
which point required facilities would be obtained, or it engages in a material
acquisition, in which case it is anticipated that adequate facilities would be
included as a component of such acquisition or would be obtained.
ITEM 3. LEGAL PROCEEDINGS.
Legal Proceedings as of September 30, 1998
The response to this item is incorporated by reference to the report of
current events on Form 8-K filed with the Commission on or about January 29,
1999, as permitted by Commission Rule 12b-23.
Material Subsequent Events
Madhu Sethi vs. Colmena Corp., TechTel Communications, Inc., and T2U Co.
On January 7, 1999, Madhu Sethi ("Mr. Sethi") filed a complaint in the
Circuit Court for Broward County, Florida, captioned Madhu Sethi vs. Colmena
Corp., TechTel Communications, Inc., and T2U Co., seeking the recovery of
$24,069 for expenses and interest and future wages for alleged breach of an
employment agreement entered into with the Registrant on February 18, 1998. The
employment agreement was for a term of 5 years and provided for compensation of
$100,000 per year exclusive of fringe benefits, payable in weekly installments.
In addition, Mr. Sethi was to receive an annual bonus based upon profits of the
Registrant. A copy of the employment agreement is filed as an exhibit to this
report, see "Part III, Item 13(a), Exhibits Required by Item 601 of Regulation
SB."
On June 3, 1999, a settlement agreement (the "Agreement") was entered into
by the Registrant, Mr. Sethi, and Ila Sethi ("Mrs. Sethi"), Mr. Sethi's spouse.
The Parties agreed to an accord and satisfaction of all of their rights,
obligations and liabilities. Mr. and Mrs. Sethi agreed to relinquish all rights,
whether accrued or inchoate, under any agreements between them or their
affiliates and the Registrant and its affiliates, other than those established
by the Agreement. Mr. and Mrs. Sethi agreed to cooperate with the Registrant in
its dispute with Deutsche Financial Services Corporation (discussed below) and
the Registrant agreed to use its best efforts to include Mr. and Mrs. Sethi in
any settlements of the dispute with Deutsche Financial Services Corporation. The
Registrant further agreed to issue to Mr. and Mrs. Sethi, 250,000 shares of the
Registrant's common stock, in reliance on the exemption from registration
requirements under the Securities Act of 1933, as amended. A copy of the
settlement agreement is filed as an exhibit to this report, see "Part III, Item
13(a), Exhibits Required by Item 601 of Regulation SB."
Page 18
<PAGE>
Immediately after execution of such settlement agreement, the Registrant
was advised that Mr. and Mrs. Sethi, rather than cooperate with the Registrant
in settling the Registrant's dispute with Deutsche Financial Services
Corporation, had instead executed the Extension Agreement dated as of August
19,1998 with Deutsche Financial Services Corporation, evidently based on an
independent settlement. The Registrant will incorporate its response to such
apparent violation of the settlement agreement in any action it takes in
conjunction with the Deutsche Financial Services Corporation arbitration award
discussed below.
Loan Agreement and Extension Agreement with Deutsche Financial Services
Corporation
On or about February 26, 1997, a loan agreement for wholesale financing
(the "Deutsche Financing Agreement") was entered into between Deutsche Financial
Services Corporation and Business Technology Systems, Inc., a corporation then
owned by Mr. Sethi. The Deutsche Financing Agreement provided for inventory
financing for Business Technology Systems, Inc., secured by a first priority
perfected lien and security interest in all of its assets, rights, and proceeds
thereof, owned on February 26, 1997 or thereafter acquired. On or about February
19, 1998, the Registrant agreed to purchase all of the assets and assumed the
liabilities of Business Technology Systems, Inc., and on March 15, 1998, it
formed Business Technology Systems, Inc., a Florida corporation ("BTSF") to
which all such assets were assigned and which assumed the related obligations.
The obligations of Business Technology Systems, Inc., under the Deutsche
Financing Agreement were guaranteed by Mr. and Mrs. Sethi on or about August 5,
1997. As of August 19, 1998, BTSF, as the successor in interest to Business
Technology Systems, Inc., was in default under the Deutsche Financing Agreement,
with past due obligations totaling approximately $112,000 and total
indebtedness, including accrued interest, totaling approximately $350,000. A
copy of the financing and amended financing agreement is filed as an exhibit to
this report, see "Part III, Item 13(a), Exhibits Required by Item 601 of
Regulation SB."
An extension of the Deutsche Financing Agreement (the "Extension
Agreement") was entered into by BTSF and Deutsche Financial Services Corporation
on or about August 26, 1998, extending the time for payment of the debt,
including past due obligations. Under the terms of the Extension Agreement, BTSF
acknowledged and agreed to pay Deutsche Financial Services Corporation the sum
of $348,858 on or before September 15, representing the principal as of August
14, 1998 of $345,474, interest charges of $3,384 through July 31, 1998,
additional interest charges from August 1, 1998 at the annual rate of prime plus
6.5%, and fees and expenses incurred by Deutsche Financial Services Corporation.
In addition, BTSF agreed to surrender its inventory to Deutsche Financial
Services Corporation for the purpose of its liquidation and application to the
debt as of the date of the extension. Furthermore, the Extension Agreement
called for guarantees by the Registrant, Mr. Peplin, Mr. and Mrs. Sethi and BTSF
and the guarantors to enter into a consent arbitration award. A copy of the
extension agreement and consent arbitration award is filed as an exhibit to this
report, see "Part III, Item 13(a), Exhibits Required by Item 601 of Regulation
SB."
The Extension Agreement and the consent arbitration award were executed by
Mr. Peplin, then the president of BTSF and the Registrant, on or about August
26, 1998, as the president of BTSF, the Registrant and on his own behalf;
however, Mr. and Mrs. Sethi did not join in the required guarantee or the
consent arbitration award, as a result of which, the Registrant and Mr. Peplin
repudiated their guarantees and consents on or before October 20, 1998.
Page 19
<PAGE>
As of September 30, 1998, BTSF had failed to pay the remaining debt
totaling approximately $331,000. On October 6, 1998, Deutsche Financial Services
Corporation initiated an American Arbitration Association proceeding in Dallas,
Texas, entitled Deutsche Financial Services Corporation vs. Business Technology
Systems, Inc., Richard C. Peplin, Jr., and Colmena Corporation. On or about June
1, 1999, Mr. and Mrs. Sethi, without advising the Registrant, executed the
Extension Agreement as guarantors and the related consent arbitration award
pursuant to an undisclosed settlement agreement with Deutsche Financial Services
Corporation. On or about October 8, 1999, the repudiated Consent Arbitration
Award was reduced to a" Consent Arbitrator Award," which provided as follows:
"Respondents consent to the entry of an Award in favor of Deutsche
Financial Services Corporation and against Respondents in the amount of
$348,858.39, plus interest at the per annum rate of prime plus 6.5% from
August 1, 1998 less such sums received by Deutsche Financial Services
Corporation pursuant to the Extension Agreement dated as of August 19,1998.
All funds received by Deutsche Financial Services Corporation from the
liquidation of the Collateral and from the Respondents will be credited
against the Debt."
The Registrant has not paid any portion of the award and is not aware of
the commencement of any proceedings to enforce the award. Should such proceeding
be commenced, the Registrant will seek to have the award vacated on the grounds
that the Registrant repudiated its guarantee and consent to the consent
arbitration award prior to its execution by Mr. and Mrs. Sethi, and
consequently, the arbitrators were without jurisdiction to entertain the
proceeding. In the event the award is reduced to a judgement, the Registrant
anticipates that it would avail itself of protection under Chapter 11 of the
United States Bankruptcy Code and seek to litigate the entire matter.
Ziff Davis, Inc. vs. BTS
On February 12, 1999, Ziff-Davis, Inc. filed an action for damages against
BTSF. A material judgement was entered against BTSF on July 26, 1999. At the
time of the judgement, BTSF was no longer a subsidiary of the Registrant.
Management of the Registrant and its counsel believe that, absent the ability to
"pierce the corporate veil," no liabilities attributable to BTSF should affect
the Registrant.
Patrick Graham vs. Five Star, Tio, the Registrant and Mr. Peplin
On July 9, 1999 the matter of Patrick V. Graham vs. Five Star Cigar, Inc.,
a Delaware corporation; Mariano Cigar Corporation f/k/a Tio Cigar Corporation, a
Delaware corporation; Colmena Corp., a Delaware corporation; and Richard Peplin,
was filed in the Circuit Court of Broward County, case no. 99-012194. This was
an action for compensatory damages and money lent claiming that on March 16,
1997, Five Star executed a promissory note to Patrick V. Graham and that Five
Star failed to pay the note in the amount of $40,000.00 and is in default and
that on March 31, 1997, Tio Cigars executed a promissory note to Mr. Graham in
the amount of $40,000.00 and is now in default on that note. Mr. Graham has
taken the position that the Registrant is the successor by merger of Tio Cigar
and Five Star and as its successor is liable for the indebtedness of Five Star
for the amount of $40,000.00 plus prejudgement interest, costs and attorney's
fees. In response to the filing of the complaint, on October 6, 1999 the
Registrant filed an omnibus motion to dismiss and motion for summary judgement
and motion for attorney's fees, challenging jurisdiction and venue as well as
arguing that Five Star Cigar, Inc. is a separate legal entity from the
Registrant that was sold in late 1997 and was never merged into the Registrant
or Tio Cigar, Inc., or Tio Mariano Cigar Corp. As of August 4, 2000, the Parties
have orally agreed to settle Patrick V. Graham vs. Colmena Corp., et al, as
follows: in consideration for the plaintiff's dismissing the above mentioned
case with prejudice against the Registrant and other named Defendants, the
transfer agent will issue to Patrick V. Graham, his designees or assigns,
100,000 restricted shares of the Registrant's common stock.
Page 20
<PAGE>
Investigation by the Federal Trade Commission ("FTC") of T2U Co.
On December 9 and 10, 1998, the president and regulatory affairs manager of
T2U Co. were asked to testify in a confidential, non-public hearing before staff
of the FTC "to determine whether various entities may be engaging or have
engaged in unfair or deceptive action, acts or practices in or affecting
commerce in violation of Section 5 of the Federal Trade Commission Act, 15
U.S.C. Section 45, or the Commission's [FTC] Trade Regulation Rule pursuant to
the Telephone Disclosure and Dispute Resolution Act of 1992, 16 CFR part 308."
As monetary relief for any such violations the FTC is seeking consumer redress
and disgorgement for the United States Treasury of up to the full amount of
income generated by RCP. A proposed Stipulated Final Judgement and Order for
Permanent Injunction and Consumer Redress ("Consent Decree") was signed by T2U
and Mr. Peplin on November 23, 1999, and sent to the Division of Marketing
Practices, FTC. The Consent Decree, if signed by the FTC will result in certain
injunctions and a judgement against T2U and Mr. Peplin in an amount of
$3,200,000. Based upon representations made by Mr. Peplin to the FTC regarding
the financial insolvency of Mr. Peplin and T2U, in lieu of payment of the
foregoing amount, T2U and Mr. Peplin are to assign to the FTC all rights, title
and interest they may have in their proceedings in bankruptcy against ITA. The
Registrant's management and legal counsel believe that since T2U is no longer a
subsidiary of the Registrant, absent the ability to "pierce the corporate veil,"
no liabilities attributable to T2U should effect the Registrant. However, this
matter is likely to have a material adverse impact on T2U and its former
president.
Louisiana Public Service Commission vs. RCP
Although no formal complaint has been filed, RCP personnel have been
requested to appear at an unspecified date before the Louisiana Public Service
Commission by notice dated January 7, 1999. Management of the Registrant and its
counsel believe that absent the ability to "pierce the corporate veil" no
liabilities attributable to this matter should effect the Registrant.
People of the State of Illinois vs. RCP
On March 19, 1998, the State of Illinois filed a complaint for injunctive
relief and civil money penalties against RCP doing business as RCP
Communications Group, Inc. The complaint alleges that RCP and its co-defendant,
ITA, violated the Illinois Consumer Fraud and Deceptive Business Practices Act
in connection with the sale of prepaid calling cards to Illinois consumers by
committing unfair or deceptive acts or practices. RCP was accused of having
"purportedly advertised, solicited, offered for sale, sold, and distributed
enhanced services to, among others, residents of Sangamon County, Illinois, and
billed or caused Illinois consumers to be billed for such services." A final
judgment and consent decree was executed by RCP and submitted to the Attorney
General's Office for signature. The Registrant's counsel anticipates that the
Attorney General's Office will present the Decree to the Court in the near
future for entry. The Consent Decree essentially requires RCP, to follow proper
state rules and regulations regarding business practices for telephone service
providers and does not impose any monetary penalties or restitution by RCP based
on RCP's statements that it is financially insolvent.
Page 21
<PAGE>
The Registrant vs. ITA
In September 1998, ITA, defaulted in payments to T2U Co., doing business as
RCP, for services rendered to third parties and collected by ITA (See "Part I,
Item 1, ITA Default"). Thereafter, RCP and two other corporations, Psychic
Discovery Network, Inc.,("PDN") a Delaware corporation affiliated with the
Registrant through common ownership by the principal shareholder of PDN's
parent, Viatech Communications Group, Inc., and BLJ Communications, Inc., a
Florida corporation, all creditors of ITA, filed a petition seeking ITA's
involuntary bankruptcy pursuant to Chapter 7 of the United States Bankruptcy
Code. It is management's assumption that a favorable outcome for the Registrant
is not likely. Accordingly, a 100% allowance of the accounts receivable due from
ITA has been recorded.
Various Creditor Claims
The Registrant has been negotiating with several creditors who have made
claims against the Registrant aggregating approximately $66,000. Management and
its counsel have not been able to assess the probable outcome of such claims.
All known amounts have been accrued by the Registrant at September 30, 1998.
ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS.
The Registrant did not submit any matter to a vote of security holders
during its fiscal year ended September 30, 1998 and does not anticipate
submitting any matters to a vote of securities holders until it becomes current
in filing its periodic reports with the Commission (currently expected to be
completed on or about December 31, 2000).
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Market Information.
1996, 1997 and 1998
Prior to July 1996, there was no trading activity in the Registrant's
common stock. During the report period (the fiscal year ended September 30,
1998) the Registrant's common stock was traded in the over-the-counter market
and quoted in what are commonly referred to as on the "pink sheets", which
reports quotations by brokers or dealers in particular securities. The
Registrant's common stock was also quoted and listed on the over the counter
electronic bulletin board operated by NASDAQ (the "OTC Bulletin Board"). Trading
in the Registrant's stock was originally reported under the symbol SPGU but is
now reported under the symbol CLME. Because of the lack of readily available
quotations and the limited trading volume frequently associated with over the
counter securities, there is a greater risk of market volatility of such
securities than for securities traded on national exchanges. The following table
sets forth the quarterly high and low bid prices (to the nearest $0.125) of the
Registrant's common stock from July 29, 1996 (the date for which quotations are
first available) through September 30, 1998. All quotations are in pre-reverse
split prices.
Year Ended September 30, 1996 High Low
First Quarter None None
Second Quarter None None
Third Quarter None None
Fourth Quarter $2.625 $1.00
Year Ended September 30, 1997 High Low
First Quarter $0.75 $0.125
Second Quarter $0.50 $0.50
Third Quarter None None
Fourth Quarter None None
Page 22
<PAGE>
Year Ended September 30, 1998 High Low
First Quarter $5.75 $4.75
Second Quarter $7.00 $4.25
Third Quarter $7.00 $4.50
Fourth Quarter $5.75 $0.84375
The quotations represent inter-dealer quotations without adjustment for
retail markups, markdowns or commissions and does not necessarily represent
actual transactions.
Material Subsequent Event
Bid, offer and transaction report prices for the Registrant's common stock
were available through the OTC Bulletin Board under the symbol CLME until the
fiscal calendar quarter that started on October 1, 1999. On October 29, 1999,
due to the failure of the Registrant to file periodic reports with the
Commission on a timely basis, the NASD precluded broker dealers in securities
from using the OTC Bulletin Board to publish quotes for the Registrant's
securities. Having anticipated such development, the Registrant's management had
qualified the Registrant's securities for quotation of offering, bid and
transactional reporting on the National Daily Quotation System, Inc.'s
Electronic Pink Sheets, where such information concerning the Registrant's
securities has been available since December 5, 1997. The Registrant anticipates
that quotations for its common stock will resume on the OTC Bulletin Board soon
after it completes updating its periodic reports on Commission Forms 10-QSB and
10-KSB.
The following table indicates the average high and low bid prices as quoted
for the Registrant's common stock at the end of each calendar quarter from
December 31, 1998 until June 30, 2000. The following over-the-counter quotations
reflect inter-dealer prices, without retail mark-up, mark-down, or commission,
and may not necessarily represent actual transactions. The range of the reported
high and low bid quotations have been derived primarily from information quoted
on the OTC Bulletin Board and the Electronic Pink Sheets.
Quarter Ended High Low Last Price
------------- ---- --- ----------
December 31, 1998 $1.375 $0.125 $0.25
March 31, 1999 $0.3125 $0.09375 $0.125
June 30, 1999 $ 0.140 $0.070 $0.09
September 30, 1999 $ 0.130 $0.080 $0.105
December 31, 1999 $ 0.120 $0.010 $0.015
March 31, 2000 $ 0.090 $0.010 $0.09
June 30, 2000 $ 0.090 $0.015 $0.562
As of June 30, 2000, six NASD member firms were listed as market makers in
the Registrant's common stock: Knight Trimark, Inc.; Sharpe Capital, Inc.; Hill,
Thompson Magid & Co., Inc.; Wien, Inc.; Paragon Capital Corp.; M.H. Meyerson &
Co. The Transfer Agent for the Registrant's common stock is American Stock
Transfer & Trust Company, 40 Wall Street, 46th Floor; New York, New York 10005.
Penny Stock Rules
Exchange Act Section 15(g) requires brokers and dealers to make risk
disclosures to customers before effecting any transactions in "penny stocks". It
also directs the Securities and Exchange Commission to adopt rules setting forth
additional standards for disclosure of information concerning transactions in
penny stocks.
Penny stocks are low-priced, over-the-counter securities that are prone to
manipulation because of their price and a lack of reliable market information
regarding them. Under Section 3(a)(51)(A) of the Exchange Act, any equity
security is considered to be a "penny stock," unless that security is:
Page 23
<PAGE>
(i) registered and traded on a national securities exchange meeting
specified Securities and Exchange Commission criteria:
(ii) authorized for quotation on the National Association of
Securities Dealers, Inc.'s ("NASD") automated inter-dealer
quotation system ("NASDAQ"):
(iii) issued by a registered investment company:
(iv) excluded, on the basis of price or the issuer's net tangible
assets, from the definition of the term by Securities and
Exchange Commission rule: or
(v) excluded from the definition by the Securities and Exchange
Commission.
Pursuant to Section 3(a)(51)(B), securities that normally would not be
considered penny stocks because they are registered on an exchange or authorized
for quotation on NASDAQ may be designated as penny stocks by the Securities and
Exchange Commission if the securities are traded off the exchange or if
transactions in the securities are effected by market makers that are not
entering quotations in NASDAQ.
Rule 3a51-1 was adopted by the Securities and Exchange Commission for the
purpose of implementing the provisions of Section 3(a)(51). Like Section
3(a)(51), it defines penny stocks by what they are not. Thus, the rule excludes
from the definition of penny stock any equity security that is:
(A) a "reported" security:
(B) issued by an investment company registered under the 1940 Act:
(C) a put or call option issued by the Options Clearing Corporation:
(D) priced at five dollars or more:
(E) subject to last sale reporting: or
(F) whose issuer has assets above a specified amount.
Rule 3a51-1(a) excludes from the definition of penny stock any equity
security that is a "reported security" as defined in Rule 11Aa3-1(a). A reported
security is any exchange-listed or NASDAQ security for which transaction reports
are required to be made on a real-time basis pursuant to an effective
transaction reporting plan. Securities listed on the New York Stock Exchange
(the "NYSE"), certain regional exchange-listed securities that meet NYSE or Amex
criteria, and NASDAQ National Market System ("NMS") securities are not
considered penny stocks. (Release No. 30608, Part III.A.1). Generally,
securities listed on the American Stock Exchange (the "Amex") pursuant to the
Amex's original and junior tier or its "Emerging Company Marketplace" listing
criteria, are not considered penny stocks. Securities listed on the Amex
pursuant to its Emerging Companies Market ("ECM") criteria, however, are
considered to be "penny stock" solely for purposes of Exchange Act 15(b)(6).
Page 24
<PAGE>
Rule 3a51-1(d) excludes securities that are priced at five dollars or more.
Price, in most cases, will be the price at which a security is purchased or sold
in a particular transaction, excluding any broker commission, commission
equivalent, mark-up, or mark-down. In the absence of a particular transaction,
the five dollar price may be based on the inside bid quotation for the security
as displayed on a Qualifying Electronic Quotation System [i.e., an automated
inter-dealer quotation system as set forth in Exchange Act Section 17B(b)(2)].
"Inside bid quotation" is the highest bid quotation for the security displayed
by a market maker in the security on such a system. If there is no inside bid
quotation, the average of at least three inter-dealer bid quotations displayed
by three or more market makers in the security must meet the five dollar
requirement. Broker-dealers may not rely on quotations if they know that the
quotations have been entered for the purpose of circumventing the rule. An
inter-dealer quotation system is defined in Rule 15c2-7(c)(1) as any system of
general circulation to brokers and dealers that regularly disseminates
quotations of identified brokers or dealers.
In the case of a unit composed of one or more securities, the price divided
by the number of shares of the unit that are not warrants, options, or rights
must be five dollars or more. Furthermore, the exercise price of any warrant,
option, or right, or of the conversion price of any convertible security,
included in the unit must meet the five dollar requirement. For example: a unit
composed of five shares of common stock and five warrants would satisfy the
requirements of the rule only if the unit price was twenty-five dollars or more,
and the warrant exercise price was five dollars or more. Once the components of
the unit begin trading separately on the secondary market, they must each be
separately priced at five dollars or more.
Securities that are registered, or approved for registration upon notice of
issuance, on a national securities exchange are also excluded from the
definition of penny stock [Rule 3a51-1(e)]. The exchange must make transaction
reports available pursuant to Rule 11Aa3-1 for the exclusion to work. The
exclusion is further conditioned on the current price and volume information
with respect to transactions in that security being reported on a current and
continuing basis and made available to vendors of market information. In
addition, the exclusion is limited to exchange-listed securities that actually
are purchased or sold through the facilities of the exchange, or as part of a
distribution. Exchange-listed securities satisfying Rule 3a51-1(e), but which
are not otherwise excluded under Rule 3a51-1(a)-(d), continue to be deemed penny
stocks for purposes of Exchange Act Section 15(b)(6).
Securities that are registered, or approved for registration upon notice of
issuance, on NASDAQ are excluded from the definition of penny stock [Rule
3a51-1(f)]. Similar to the exchange-registered exclusion of Rule 3a51-1(e), the
NASDAQ exclusion is conditioned on the current price and volume information with
respect to transactions in that security being reported on a current and
continuing basis and made available to vendors of market information pursuant to
the rules of NASD. NASDAQ securities satisfying Rule 3a51-1(e), but which are
not otherwise excluded under Rule 3a51-1(a)-(d), continue to be deemed penny
stocks for purposes of Exchange Act Section 15(b)(6).
An exclusion is available for the securities of issuers that meet certain
financial standards. This exclusion pertains to:
(i) issuers that have been in continuous operation for at least three
years having net tangible assets in excess of $2 million [Rule
3a51-1(g)(1)]:
(ii) issuers that have been in continuous operation for less than
three years having net tangible assets in excess of $5 million
[Rule 3a51-1(g)(1)]:
(iii) issuers that have an average revenue of at least $6 million for
the last three years [Rule 3a51- 1(g)(2)].
Page 25
<PAGE>
To satisfy this requirement, an issuer must have had total revenues of $18
million by the end of a three-year period. For domestic issuers, net tangible
assets or revenues must be demonstrated by financial statements that are dated
no less than fifteen months prior to the date of the related transaction. The
statements must have been audited and reported on by an independent accountant
in accordance with Regulation S-X. For foreign private issuers, net tangible
assets or revenues must be demonstrated by financial statements that are dated
no less than fifteen months prior to the date of the related transaction. The
statements must be filed with the Securities and Exchange Commission pursuant to
Rule 12g3-2(b). If the issuer has not been required to furnish financial
statements during the previous fifteen months, the statements may be prepared
and audited in compliance with generally accepted accounting principles of the
country of incorporation.
Whether the issuer is domestic or foreign, in all cases a broker or dealer
must review the financial statements and have a reasonable basis for believing
that they were accurate as of the date they were made (Rule 3a51-1[g][3]). In
most cases a broker-dealer need not inquire about or independently verify
information contained in the statements. Brokers and dealers must keep copies of
the domestic or foreign issuer's financial statements for at least three years
following the date of the related transaction.
The Registrant's securities are, as of the date of this report, subject to
the foregoing regulations as "Penny Stocks". The Registrant hopes that its
acquisition program and funds from the sale of its securities will remove its
shares from such category prior to December 31, 2000; however, it can provide no
assurances that its efforts will prove successful.
The Registrant's Common Stock
The authorized capital stock of the Registrant consists of 20,000,000
shares of common stock, $.01 par value. As of the close of business on September
31, 1998, the Registrant had 7,741,697 shares of common stock outstanding and
held of record by approximately 470 persons. As a material subsequent event,
since December 31, 1998, the Registrant has funded all of its operations and
paid all of its debts through issuance of its securities; consequently, as of
June 30, 2000, 15,572,265 shares of the Registrant's common stock were
outstanding. The number of record holders of the Registrant's common stock as of
the close of business on June 30, 2000, was approximately 497. Of those,
approximately 31 were holding such securities pursuant to depository
arrangements with the actual beneficial owners (e.g., securities held in street
name for their clients by securities brokers and dealers), and the Registrant
has been advised that approximately 294 additional persons were beneficial
owners under such arrangements. Consequently, the total number of beneficial
owners is 791.
Page 26
<PAGE>
Each holder of shares of the Registrant's common stock is entitled to one
vote for each share held on all matters to be voted upon by the stockholders
generally. The shares do not have cumulative voting rights which means that
holders of more than 50% of the shares of the Registrant's common stock voting
for the election of directors can elect all the directors, and that in such an
event the holders of the remaining shares would not be able to elect a single
director. The approval of proposals submitted to stockholders at a meeting
requires the favorable vote of a majority of the shares voting, except in the
case of certain fundamental matters where Delaware law requires the favorable
vote of at least a majority of all outstanding shares. Shareholders are entitled
to receive such dividends as may be declared from time to time by the board of
directors out of funds legally available therefor, and in the event of
liquidation, dissolution or winding up of the Registrant to share ratably in all
assets remaining after payment of liabilities. The holders of shares of the
Registrant's common stock have no preemptive, conversion or subscription rights.
The Registrant has not declared any dividends on its common stock and does
not expect to do so at any time in the foreseeable future. There are currently
no restrictions on the Registrant's ability to declare dividends in the future,
other than restrictions applicable to all Delaware corporations involving the
source of funds for payment of dividends and their effects on the Registrant's
solvency. In the future, the Registrant expects that a portion of its expansion
and development capital may be in the form of loans from financial institutions,
in which case it is likely that such institutions would require restrictions on
the payment of dividends based on traditional financial ratios designed to
predict the Registrant's ability to repay such loans. However, no specific
predictions as to any such restrictions can be made at this time.
Amounts of Common Equity Subject to Outstanding Options or Warrants to Purchase,
or Securities Convertible Into Common Equity of the Registrant
Common Stock Purchase Warrants
Since January 1, 1999, the Registrant has issued common stock purchase
warrants to Yankees and to its officers and directors, in lieu of cash
compensation for their services. Current details concerning such warrants are
provided below. As of June 30, 2000, 4,370,000 shares of the Registrant's common
stock were reserved for issuance pursuant to existing obligations, including
common stock purchase warrants held by its officers and directors in lieu of
cash compensation for their services, but excluding shares issuable to Yankees
pursuant to its current warrant. Yankees recognizes that the total number of
authorized shares is not sufficient to allow for reservation of the shares
subject to its warrant but believes that it can obtain sufficient director and
stockholders votes to increase the authorized capital stock of the Registrant,
as required to permit exercise of its warrant. Consequently, Yankees has
consented to the issuance and reservation of the Registrant's common stock which
would otherwise have been subject to the warrant.
Page 27
<PAGE>
Stock Options
On February 25, 1998, the Registrant granted an option to purchase
1,500,000 shares of its common stock at an exercise price of $2.00 per share to
SBV as consideration for services. The option vested and became exercisable over
a period of 10 months. The option period terminated on February 25, 2000. As of
September 30, 1998, the consultant had exercised the option as to 640,000
shares. The Registrant applies the fair market value method of Statement of
Financial Accounting Standards 123 in accounting for stock options issued to
consultants. Accordingly, a consulting expense of $4,770,000 was recognized
during 1998 for the option granted.
On February 27, 1998 the Registrant's board of directors adopted the 1998
stock option plan (the "Plan") to provide added incentive for high levels of
performance to its officers, directors, employees, consultants, and independent
contractors. Options granted under the Plan were designed either as incentive
stock options or as non- qualified stock options. The plan will terminate on
February 27, 2008, unless previously terminated. The Plan authorizes the
Registrant to grant options to purchase up to an aggregate of 600,000 shares of
the Registrant's common stock. Non-qualified options may be granted to officers,
employees, directors, consultants, independent contractors or other service
providers of the Registrant at an exercise price determined by the Registrant's
Board of Directors at least equal to 85% of the fair market value of the common
stock at the date of the grant. Incentive stock options may only be granted to
officers, employees, and directors, who are also employees of the Registrant, at
an exercise price determined by the Registrant's board of directors which shall
not be less than 100% of the fair market value of the common stock at the date
of grant and may not be less than 110% of the fair market value of the common
stock at the date of grant if granted to an individual owning more than ten
percent of the total combined voting power. Options are exercisable at dates and
conditions determined by the Registrant's board of directors at the time of
grant, consistent with applicable tax laws. However, an option may not be
exercisable after the expiration of 10 years from the date it is granted, or, in
the case of incentive stock options, the term may not exceed five years if
granted to an option holder owning more than ten percent of the total combined
voting power. Through the date of this report no stock options have been granted
pursuant to the Plan. The Plan was filed as an exhibit to a registration
statement on Form S-8, filed March 16, 1998.
On March 16, 1998, a total of 2,900,000 shares of common stock were
registered under the Securities Act of 1933, as amended, pursuant to a
Registration Statement on Form S-8. The aggregate 2,900,000 shares comprised a
total of 600,000 shares for stock options authorized under the Plan, 1,500,000
shares for stock options issued to SBV as of February 25, 1998, and 800,000
shares as agreed per five various consulting agreements as of November 10, 1997.
On June 1, 1998, the Registrant granted an option to purchase 1,000,000
shares of its common stock to the President and Chief Executive Officer of the
Registrant under an employment agreement effective as of the same date. The
options vest at a rate of 200,000 shares per year on each anniversary date of
the employment agreement, and are exercisable at $6.00 per share for six years
following their grant. As of September 30, 1998, none of the stock options had
been exercised. A copy of the employment agreement is filed as an exhibit to
this report, see "Part III, Item 13(a), Exhibits Required by Item 601 of
Regulation SB."
Page 28
<PAGE>
Tabular Information
As of June 30, 2000, the Registrant had 4,370,000 shares of its authorized
common stock reserved for issuance (excluding the number of shares to be
reserved for Yankees warrants) in conjunction with current obligations to issue
additional shares or in the event that currently outstanding options or warrants
are exercised. The following table provides summary data concerning such options
and warrants:
Designation Nature of Exercise or Number of Shares
or Holder The Security Conversion Price Currently Reserved
--------- ------------ ---------------- ------------------
Yankees Option $80,000 in total (1)
(2) Warrant $18,500 in total 370,000
(3) (3) (3) 2,000,000
(4) (4) (4) 1,600,000
Bell Entertainment (5) (5) 200,000
Anthony Q. Joffe (6) (6) 200,000
------
(1) The number of shares cannot be determined with certainty, rather,
Yankees has the right, for an aggregate of $80,000, to purchase shares
of the Registrant's common stock equal to 75% of the Registrant's
outstanding and reserved shares of common stock, measured immediately
after exercise is completed. See Notes to financial statements. For
purposes of the Table, the computation was made assuming that only the
shares currently outstanding or reserved would be outstanding or
reserved at the time of exercise (an improbable scenario). The actual
formula for determining the total number of Yankees' option shares
issuable is: [the total shares outstanding at the time the final option
exercise payment is made + the shares then reserved other than for the
Yankees' option] multiplied by 3 and rounded up or down based on
proximity to the next whole number.
(2) Represents the shares issuable to members of the Registrant's board of
directors, as disclosed in Part III, Item 10, Executive Compensation,
and such disclosure is incorporated by reference herein, as permitted
by Commission Rule 12b-23.
(3) Represents shares reserved for issuance in the event offers of
settlement by the Registrant are accepted by certain current creditors,
as disclosed at Part I, Item 1, Description of Business - New Strategic
Plans & Change in Control, and such disclosure is incorporated by
reference herein, as permitted by Commission Rule 12b-23.
(4) Represents the shares issuable pursuant to the Registrant's 1998 and
2000 stock option plans, as disclosed at Part III, Item 10, Executive
Compensation and the Notes to Financials, and such disclosure is
incorporated by reference herein, as permitted by Commission Rule
12b-23.
(5) Represents the shares issuable pursuant to the Supplemental Services
Agreement between Yankees and the Registrant, a copy of which is filed
as an exhibit to this report, see "Part III, Item 13(a), Exhibits
Required by Item 601 of Regulation SB."
(6) Represents the shares issuable to Mr. Joffe as compensation as
President, as disclosed in Part III, Item 10, Executive Compensation,
and such disclosure is incorporated by reference herein, as permitted
by Commission Rule 12b-23.
Page 29
<PAGE>
Amounts of Common Equity That Could Be Sold Pursuant to Rule 144 under the
Securities Act
Reporting Period
As of September 30, 1998, 7,741,697 shares of the Registrant's common
stock were outstanding, of which:
* 3,843,395 are recognized as free trading by the Registrant;
* 3,898,302 have been issued over the years pursuant to exemptions
from registration and are thus restricted securities, some of
which are eligible for resale under Commission Rule 144 ("Rule
144").
Of the shares that the Registrant has instructed its transfer agent to
treat as restricted:
* 497,929 were issued prior to June 30, 1997, and consequently,
could have been sold under Rule 144, subject to Rule 144's volume
limitations, notice, public information and manner of sale
conditions. The volume limitations restricted quantities sold
over 90 day periods to the greater of 1% of the total outstanding
common stock, or the average weekly trading volume during the
four week period preceding the sale;
* 486,919 were issued to persons that do not appear to be
affiliates of the Registrant prior to June 30, 1996, and
consequently may be sold by holders that have not been affiliates
of the Registrant for a period of at least 90 days, under the
more liberal provisions of Commission Rule 144(k) ("Rule
144[k]"), which dispense with the volume, public information and
manner of sale conditions.
Material Subsequent Events
As of September 7, 2000, 15,572,265 shares of the Registrant's common stock
were outstanding, of which:
* 14,443,003 are recognized as free trading by the Registrant;
* 1,129,262 have been issued over the years pursuant to exemptions
from registration and are thus restricted securities, some of
which are eligible for resale under Commission Rule 144 ("Rule
144").
Of the shares that the Registrant has instructed its transfer agent to
treat as restricted:
* 16,556,737 were issued prior to June 30,2000, and consequently,
may currently be sold under Rule 144, subject to Rule 144's
volume limitations, notice, public information and manner of sale
conditions. The volume limitations restrict quantities sold over
90 day periods to the greater of 1% of the total outstanding
common stock, or the average weekly trading volume during the
four week period preceding the sale;
* 10,556,737 were issued to persons that do not appear to be
affiliates of the Registrant prior to June 30, 2000, and
consequently may be sold by holders that have not been affiliates
of the Registrant for a period of at least 90 days, under the
more liberal provisions of Commission Rule 144(k) ("Rule
144[k]"), which dispense with the volume, public information and
manner of sale conditions.
Page 30
<PAGE>
Rule 144
Pursuant to the provisions of Rule 144(e), permissible sales of
securities thereunder are determined as follows:
Sales by affiliates: If restricted or other securities are sold for the
account of an affiliate of the Registrant (officers,
directors, other control persons or their affiliates, and
persons who have been affiliates within the preceding 90
days), the amount of securities sold, together with all
sales of restricted and other securities of the same class
for the account of such person within the preceding three
months, shall not exceed the greater of:
* one percent of the shares or other units of the class
outstanding as shown by the most recent report or statement
published by the Registrant, or
* the average weekly reported volume of trading in such
securities on all national securities exchanges and/or
reported through the automated quotation system of a
registered securities association during the four calendar
weeks preceding the filing of notice required by Rule 144
(h), or if no such notice is required the date of receipt of
the order to execute the transaction by the broker or the
date of execution of the transaction directly with a market
maker, or
* the average weekly volume of trading in such securities
reported through the consolidated transaction reporting
system contemplated by Rule 11Aa3-1 under the Securities
Exchange Act of 1934 during the four- week period specified
above.
Sales by
non-affiliates: The amount of restricted securities sold for the
account of any person other than an affiliate of the
Registrant, together with all other sales of restricted
securities of the same class for the account of such person
within the preceding three months, shall not exceed the
amount specified in paragraphs above for affiliates, unless
the conditions in Rule 144 (k) are satisfied (two, rather
than a one year holding period).
Determination
of Amount: For the purpose of determining the amount of securities
specified above (the "Permitted Volume"), the following
provisions apply:
* Where both convertible securities and securities of the
class into which they are convertible are sold, the amount
of convertible securities sold is deemed to be the amount of
securities of the class into which they are convertible for
the purpose of determining the aggregate amount of
securities of both classes sold;
Page 31
<PAGE>
* The amount of securities sold for the account of a
pledgee thereof, or for the account of a purchaser of the
pledged securities, during any period of three months within
one year after a default in the obligation secured by the
pledge, and the amount of securities sold during the same
three- month period for the account of the pledgor may not
exceed, in the aggregate, the Permitted Volume.
* The amount of securities sold for the account of a
donee thereof during any period of three months within one
year after the donation, and the amount of securities sold
during the same three-month period for the account of the
donor, shall not exceed, in the aggregate, the Permitted
Volume.
* Where securities were acquired by a trust from the
settlor of the trust, the amount of such securities sold for
the account of the trust during any period of three months
within one year after the acquisition of the securities by
the trust, and the amount of securities sold during the same
three-month period for the account of the settlor, shall not
exceed, in the aggregate, the Permitted Volume.
* The amount of securities sold for the account of the
estate of a deceased person, or for the account of a
beneficiary of such estate, during any period of three
months and the amount of securities sold during the same
period for the account of the deceased person prior to his
death shall not exceed, in the aggregate, the Permitted
Volume; provided, that no limitation on amount shall apply
if the estate or beneficiary thereof is not an affiliate of
the Registrant;
* When two or more affiliates or other persons agree to
act in concert for the purpose of selling securities of a
Registrant, all securities of the same class sold for the
account of all such persons during any period of three
months shall be aggregated for the purpose of determining
the limitation on the amount of securities sold;
Securities The following sales of securities need not be included
excluded: in determining the amount of securities sold in reliance
upon this section:
* Securities sold pursuant to an effective registration
statement under the Securities Act;
* Securities sold pursuant to an exemption provided by
Regulation A under the Securities Act; and
* Securities sold in a transaction exempt pursuant to
Section 4 of the Securities Act and not involving any public
offering.
Because a major theoretical component of securities pricing involves supply
and demand, sales in reliance on Rule 144 will increase the supply and, unless
there is a corresponding increase in demand, can be expected to result in lower
prices.
Page 32
<PAGE>
Amount of Common Equity That the Registrant Has Agreed to Register under the
Securities Act for Sale by Security Holders
The Registrant has not agreed to register any of its common stock, except
in conjunctions to include securities in registration statements that it may
otherwise file (commonly referred to as "piggyback" rights).
Amounts of Common Equity That the Registrant Is Considering Publicly Offering or
Privately Placing Other than Shares to Be Issued (Pursuant to an Employee
Benefit Plan or Dividend Reinvestment Plan), the Offering of Which Could Have a
Material Effect on the Market Price of the Registrant's Common Equity.
During the Year Following the Reporting Period
Information concerning the Registrant's actual issued during the year ended
September 30, 1999, is contained below at "Recent Sales of Unregistered
Securities - Material Subsequent Events."
Material Subsequent Events
As of June 30, 2000, the Registrant had no definitive plans to offer
securities other than as disclosed above in conjunction with shares currently
reserved. However, after the Registrant has become current with its reporting
obligations to the Commission and resolved currently asserted or anticipated
claims by third parties, it will require operating and expansion capital which
it intends to obtain, first through private placements of its securities and
thereafter, through one or more secondary offerings of its securities. Such
securities may involve the Registrant's common equity. No current estimates of
the amounts involved can be determined. The offering price will be tied to the
market price at the time of offering except for small discounts if a rights
offering to existing stockholders is involved and somewhat larger discounts for
shares privately placed. However, the Registrant cannot currently provide any
realistic estimates as to what such prices will be since they will depend on
market conditions, the Registrant's success in either renewing its telephone
resale business under the BellSouth agreement or effecting profitable
acquisitions that appeal to the investing public and other factors beyond the
Registrant's control.
Recent Sales of Unregistered Securities
During The Three Year Period Preceding Reporting Date
During the three year period ended September 30, 1998, the Registrant sold
the securities listed in the tables below without registration under the
Securities Act in reliance on the exemption from registration requirements
cited.
Footnotes for all tables follow the last table after "Material Subsequent
Events."
Page 33
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock:
Amount of Total Registration
Securities Offering Total Exemption
Date Sold Subscriber Consideration Discounts Relied on
---- ----- ---------- ------------- --------- ---------
1995:
November 28 25,000 Tony Alford (3) (3) (1)
November 28 30,000 Mickey Lee Britt (3) (3) (1)
November 28 25,000 Richard Dolan (3) (3) (1)
November 28 65,000 Frank Gambosh (3) (3) (1)
November 28 25,000 John J. Hanky (3) (3) (1)
November 28 10,000 Charles E. Henderson (3) (3) (1)
November 28 25,000 David & Janice Lester (3) (3) (1)
November 28 4,452,000 Norman O. Milligan, Sr. (3) (3) (1)
November 28 25,000 Warren S. Rutledge (3) (3) (1)
November 28 100,000 Ronald K. Stack (3) (3) (1)
November 28 12,500 William H. Stephens (3) (3) (1)
1996:
May 30 50,000 Robert J. Skandalaris (3) (3) (1)
December 26 10,000 Lorine S. Caveness (4) None (1)
December 26 10,000 Joe H. Gieck (4) None (1)
December 26 25,000 John M. Grubb Jr. (4) None (1)
December 26 75,000 John Moates (4) None (1)
December 26 2,000 Bruce N. Shaw (4) None (1)
December 26 5,000 Thomas R. Squires, Jr. (4) None (1)
1997:
none
1998
January 7 46,500 Marshal Family LTD (4) None (1)
January 12 100,000 Richard Cherskov (4) None (1)
January 12 18,750 Peter Accorti (6) None (1)
January 12 50,000 Borden Barrows (4) None (1)
January 12 25,000 Ronald Denne (6) None (1)
January 12 50,000 David DeBenedetto (4) None (1)
January 12 50,000 Leonard J. Feilez, Jr. (4) None (1)
January 12 50,000 Robert S. Gigliotti (5) None (1)
January 12 175,000 Marty Gillespie (6) None (1)
January 12 30,000 Patrick Graham (6) None (1)
January 12 937,500 Lakewood Manufacturing (6) None (1)
January 12 11,250 Jeffery Outcalt (6) None (1)
January 12 400,000 Beth M. Peplin (6) None (1)
January 12 2,500,000 Richard C. Peplin, Jr. (6) None (1)
January 12 7,500 Richard C. Peplin, Jr (6) None (1)
c/f Richard C. Peplin, III
January 12 7,500 Richard C. Peplin, Jr (6) None (1)
c/f Alexandria M. Peplin
January 12 7,500 Richard C. Peplin, Jr (6) None (1)
c/f Dustin A. Peplin
January 12 100,000 Arlene Powers (4) None (1)
January 12 15,000 Mark Schmeidle (6) None (1)
January 12 175,000 Anna Villanueva (6) None (1)
January 12 200,000 Marshall Family LTD (4) None (1)
January 13 10 Ralph Gesauldo (3) None (1)
March 10 200,000 Players, Inc. (4) None (1)
June 11 100,000 Troy D. Wiseman (7) None (1)
August 19 300,000 Arnold A. Semler, Inc. (8) None (1)
September 19 100,000 Ila Sethi (9) None (1)
</TABLE>
Page 34
<PAGE>
Convertible Securities:
On March 16, 1998, a total of 2,900,000 shares of common stock were
registered under the Securities Act of 1933, as amended, pursuant to a
Registration Statement on Form S-8. The aggregate 2,900,000 shares comprises a
total of 600,000 shares for stock options authorized under the 1998 Stock Option
Plan, 1,500,000 shares for stock options issued to a consultant as of February
25, 1998, and 800,000 shares as agreed per various consulting agreements as of
November 10, 1997.
Material Subsequent Events
Since the end of the three year period ended September 30, 1998, the
Registrant sold the securities listed in the tables below without registration
under the Securities Act in reliance on the exemption from registration
requirements cited.
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Stock:
Amount of Total Registration
Securities Offering Total Exemption
Date Sold Subscriber Consideration Discounts Relied on
---- ----- ---------- ------------- --------- ---------
1999:
February 22 2,000,000 The Yankee Companies, Inc. (10) (11) (2)
April 14 2,000,000 The Yankee Companies, Inc. (10) (11) (2)
October 6 2,000,000 The Yankee Companies, Inc. (10) (11) (2)
2000:
March 17 34,000 Jack Levine (12) None (1)
March 17 677,087 Oppenheimer Wolff & Donnelly (12) None (1)
May 11 136,147 Larry Van Etten (12) None (1)
May 4 200,000 Anthony Q. Joffe (13) None (2)
May 31 533,333 Troy D. Wiseman (12) None (1)
August 7 250,000 Madhu & Ila Sethi (12) None (1)
Convertible
Securities:
Amount of Total Terms of Registration
Securities Offering Conversion Exemption
Date Sold Subscriber Consideration or Exercise Relied on
---- ----- ---------- ------------- ----------- ---------
1999:
January 15 570,000 Stock Purchase Warrant $18,500 $0.05(14) (2)
October 15 200,000 Consulting Agreement (15) (15) (1)
2000:
January 3 1,000,000 Stock Option Plan (16) (16) (1)
January 3 200,000 Anthony Q. Joffe (17) (17) (2)
2000 2,000,000 (18) (18) (18) (1)
--------------
</TABLE>
Page 35
<PAGE>
(1) Section 4(2) of the Securities Act. In each case, the subscriber was
required to represent that the shares were purchased for investment
purposes, the certificates were legended to prevent transfer except in
compliance with applicable laws and the transfer agent was instructed not
to permit transfers unless directed to do so by the Registrant, after
approval by its legal counsel. In addition, each subscriber was directed to
review the Registrant's filings with the Commission under the Exchange Act
and was provided with access to the Registrant's officers, directors, books
and records, in order to obtain required information.
(2) Section 4(6) of the Securities Act. In each case, the subscriber was
required to represent that the shares were purchased for investment
purposes, the certificates were legended to prevent transfer except in
compliance with applicable laws and the transfer agent was instructed not
to permit transfers unless directed to do so by the Registrant, after
approval by its legal counsel. Each subscriber was directed to review the
Registrant's filings with the Commission under the Exchange Act and was
provided with access to the Registrant's officers, directors, books and
records, in order to obtain required information; and, a Form D reporting
the transaction was filed with the Commission.
(3) Current management has no knowledge of these transactions.
(4) Compensation for unspecified services rendered for the benefit of the
Registrant, with neither the offering price or consideration clearly set
forth.
(5) For services as a director.
(6) Shares of Tio stock were converted into the Registrant's common stock.
(7) Compensation for consulting services for the benefit of the Registrant,
with neither the offering price or consideration clearly set forth. A copy
of the agreement is filed as an exhibit to this report, see "Part III, Item
13(a), Exhibits Required by Item 601 of Regulation SB."
(8) Asset Purchase Agreement dated May 19, 1998, entered into by and between
the Registrant and Arnold A. Semler, Inc. doing business under the
fictitious name "Associated Industries."
(9) Consideration for the purchase of Business Technology Systems, Inc. by the
Registrant.
(10) Option to purchase 75% of the Registrant's outstanding and reserved common
stock measured immediately following exercise of the option, in
consideration for an aggregate of $80,000, such option being the portion of
consideration granted to Yankees under its consulting agreement with the
Registrant in exchange for Yankees agreement to forego hourly and document
licensing fees for a period of approximately two years, see "Part III: Item
11, Security Ownership of Certain Beneficial Owners and Management;" and,
"Part III, Item 12, Certain Relationships and Related Transactions."
(11) No commissions or discounts were paid to anyone in conjunction with the
sale of the foregoing securities.
(12) Term of settlement for various services provided to the Registrant.
(13) Compensation to Anthony Q. Joffe for his services as president from May 4,
1999 to May 3, 2000.
(14) Represents the shares issuable to members of the Registrant's board of
directors, as disclosed in "Part III, Item 10, Executive Compensation."
(15) Represents the shares issuable pursuant to the Supplemental Services
Agreement between Yankees and the Registrant, a copy of which is filed as
an exhibit to this report, see "Part III, Item 13(a), Exhibits Required by
Item 601 of Regulation SB."
(16) Represents the shares issuable pursuant to the Registrant's 1998 and 2000
stock option plans, as disclosed at "Part III, Item 10, Executive
Compensation" and the "Notes to Financials."
(17) Represents the shares issuable to Mr. Joffe for his services as the
Registrant's president, as disclosed in "Part III, Item 10, Executive
Compensation."
(18) Represents shares reserved for issuance in the event offers of settlement
by the Registrant are accepted by certain current creditors, as disclosed
at "Part I, Item 1, Description of Business - New Strategic Plans & Change
in Control."
Page 36
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
The following discussion should be read in conjunction with the
Registrant's audited financial statements and the more detailed information
contained in Part I, Item 1 of this report. During November of 1997, the
Registrant became engaged in the business of marketing and distributing
long-distance telephone service calling cards and in the manufacture and
distribution of premium hand-rolled cigars, in each case, through wholly owned
subsidiaries. During March of 1999, the Registrant's board of directors
concluded negotiations to divest the Registrant of its wholly owned subsidiaries
positioning itself to undertake new business endeavors or to become a more
attractive acquisition candidate.
Plan of Operations
During January of 1999, the Registrant's board of directors signed a
consulting agreement with Yankees, calling for Yankees to provide the Registrant
with working capital and assistance in development and implementation of new
strategic plans. Yankees suggested that the Registrant first concentrate on
completing the audit of its financial statements for the fiscal year ended
September 30, 1998. Concurrently with activities pertaining to the 1998 Audit,
Yankees assisted the Registrant to identify persons with claims and potential
claims against the Registrant and to negotiate with them to amicably resolve
such claims (See further discussion in "Part I, Item 1, Description of Business
- New Strategic Plans & Change of Control").
The Registrant has completed the audit of its financial statements for the
fiscal year ended September 30, 1998 and is completing the quarterly unaudited
financial statements required in order to complete and file its delinquent
reports on Commission Form 10-QSB for the calendar quarters ended December 31,
1998 and 1999, March 31, 1999 and 2000 and June 30, 1999 and 2000, and the audit
for its fiscal year ended September 30, 1999. The Registrant expects to have all
such financial statements and reports filed with the commission prior to
December 31, 2000.
Almost all claims and potential claims against the Registrant identified by
Yankees have been amicably resolved through the issuance of approximately
1,730,567 shares of common stock, with the notable exception of the arbitral
award in Deutsche Financial Services Corporation vs. Business Technology
Systems, Inc., Ila Sethi, Madhu Sethi, Richard C. Peplin, Jr., and Colmena
Corporation, which the Registrant will contest (see "Part I, Item 3, Legal
Proceedings"). Yankees, on behalf of the Registrant is currently conducting
negotiations with certain remaining claimants and has made offers of settlement
for claims of approximately $165,956 While management feels that there is a
reasonable likelihood that such offers will be accepted, no assurances to that
effect can be provided.
The Registrant currently has no businesses operations other than those
pertaining to correcting deficiencies in filing obligations under the Exchange
Act, maintenance of its corporate existence and potential operations under a
negotiated resale agreement involving the purchase of telecommunication services
for the resale to end users from BellSouth Telecommunications, Inc. The
agreement pertains to Sections 251 and 252 of the Telecommunications Act of
1996, and allows the Registrant to operate as an alternative local exchange
telecommunications company in the States of Alabama, Florida, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina and Tennessee. The
agreement permits the Registrant to provide competing telephone exchange
services to residential and business subscribers in territories where BellSouth
operates. The Registrant currently has no customers and is not conducting any
business under its agreement with BellSouth. As soon as the Registrant has
become current in its filing obligations under the Exchange Act, it plans to
either obtain capital required to resume business operations pursuant to the
Page 37
<PAGE>
BellSouth agreement, or to acquire complimentary businesses in exchange for
shares of the Registrant's common stock and a commitment by the Registrant to
provide required expansion capital. However, no assurances can be provided that
such business plan can be attained.
The foregoing plan of operation contains forward-looking statements that
are subject to risks and uncertainties which could cause actual results to
differ materially from those discussed in the forward-looking statements and
from historical results of operations. Among the risks and uncertainties which
could cause such a difference are those relating to the Registrant's dependence
upon certain key personnel, its ability to manage its growth, the Registrant's
success in implementing its business strategy, the Registrant's success in
arranging financing where required, and the risk of economic and market factors
affecting the Registrant or its customers. Many of such risk factors are beyond
the control of the Registrant and its management.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Year ended September 30, 1998 compared to year ended September 30, 1997.
Prior to the discontinuation of past operations, substantially all
financial activity during 1998 and 1997 was a result of business conducted in
the marketing and distributing of long-distance telephone service calling cards.
The Registrant reported losses for the fiscal year ended September 30, 1998 of
($16,824,000) and net income for the fiscal period from inception (June 1, 1997)
to September 30, 1997 of $211,000. This translates to a per share (loss) of
$(2.64) for fiscal year 1998 and per share income of $.05 for fiscal year 1997.
The net income (loss) figures were based on corresponding revenues of
$10,344,480 and $1,266,414 for the years ended September 30, 1998 and 1997,
respectively. The increase in net revenue and corresponding increase in cost of
revenue in 1998 as compared to 1997 was attributable to the marketing and
distributing of long-distance telephone service calling cards. Operating
expenses rose to $20,682,276 in 1998 as compared to $39,516 in 1997. The
substantial increase was due to issuance of common stock and options to
consultants amounting to $12,611,200 in consulting expense, and $5,453,907
related to the write off of accounts receivable.
On a cash basis, 1998 operations were slightly more than breakeven. Cash
used in investing activities were $1,558,736 and related substantially to the
purchase of a customer base. The Registrant received net proceeds from financing
activities of $1,472,295. These funds were primarily from the issuance of common
stock. These items resulted in a positive total cash flow position for the year,
which was similar to the prior year.
No additional meaningful comparisons can be made for the year ended
September 30, 1998 as compared to the year ended September 30, 1997 in that
during the year ended September 30, 1997, the activities of the Registrant's
predecessor were unrelated.
Interim Periods
Management has taken steps to redirect the Registrant's business focus to
more profitable activities (See Item 1 and previous discussion in Item 6
regarding new strategic plans). At this time it is not possible to predict
whether or not the Registrant will succeed in obtaining capital required to
resume business operations pursuant to the BellSouth agreement or to invest in
expansion of complimentary, acquired businesses, or, what, if any, financial
benefits it might derive were such financing to be obtained.
Page 38
<PAGE>
The effect of the board of directors' decision to discontinue past
operations has had the effect of allowing the Registrant to be classified as a
development stage company prepared to conduct profitable business activities.
Current revenues have been reduced to zero in contemplation of new business
opportunities being sought by the Registrant.
Year 2000 Compliance
As of the date this report was to have been filed with the Commission,
there were serious concerns about the effects the transition from the 1900s to
the 2000s would have on computer programs designed to ignore the first two
digits of each year in determining operating periods. As a result, the
Commission required Registrant's to report on their states of readiness to face
potential year 2000 problems. The following disclosure would have been accurate
prior to January 1, 2000:
The inability of business processes to continue to function correctly after
the beginning of the Year 2000 could have serious adverse effects on
companies and entities throughout the world. The Registrant does not
currently own any computer equipment and thus would not be subject directly
to any problems associated with such Year 2000 problems. It currently uses
computer equipment provided by its management and consultants, none of
which would be materially affected by Year 2000 software and hardware
problems. However, in the event it makes a material acquisition, such
problems could affect the acquired entity's operations and, to the extent
that the problem affects national communications, financial or utility
businesses in general, the Registrant, like other businesses could be
adversely affected. In the event that the Registrant experiences Year 2000
related problems, it would be forced to expend such amounts of its working
capital as might be necessary to correct the affected software and hardware
systems and implement contingency plans.
As a material subsequent event, no material year 2000 problems occurred as
a result of the transition from the 1900s to the 2000s on computer programs
designed to ignore the first two digits of each year in determining operating
periods.
Liquidity and Capital Resources
At September 30, 1998, the Registrant had a stockholders' deficiency of
approximately $1,921,000. The Registrant's future operations and growth is
dependent on its ability, with the assistance of Yankees, to raise capital for
expansion and to implement its strategic plan. If the Registrant is not
successful in raising capital and in resolving the remaining claims of certain
claimants, or if the arbitral award in Deutsche Financial Services Corporation
vs. Business Technology Systems, Inc., Ila Sethi, Madhu Sethi, Richard C.
Peplin, Jr., and Colmena Corporation, were successfully reduced to a judgment,
the Registrant may file for reorganization pursuant to Chapter 11 of the United
States Bankruptcy Code. The Registrant has no other material commitments for
capital expenditures.
Page 39
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
Index to Financial Statements and Financial Statement Schedules.
The auditor's report and audited balance sheet of the Registrant for its
years ended September 30, 1998 and December 31, 1997 and related statements of
operations, stockholder's equity, cash flows and notes to financial statements
for such years, including indexes therefor, follow in sequentially numbered
pages numbered 40 through 67.
COLMENA CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND
COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1997
Colmena Corp. and Subsidiaries
Contents
Page 41 Independent Auditors' Report
Page 42 Consolidated Balance Sheet as of September 30, 1998
Page 43 Statements of Operations for the Years Ended September 30,
1998 (Consolidated) and 1997 (Combined)
Page 44 Statements of Changes in Stockholders' Equity (Deficiency) for
the Years Ended September 30, 1998 (Consolidated) and 1997
(Combined)
Pages 45 - 46 Statements of Cash Flows for the Years Ended September 30,
1998 (Consolidated) and 1997 (Combined)
Pages 47 - 67 Notes to Financial Statements as of September 30, 1998 and 1997
Page 40
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Colmena Corp.
We have audited the accompanying consolidated balance sheet of Colmena
Corp. and subsidiaries as of September 30, 1998 and the related consolidated
statements of operations, changes in stockholders' equity (deficiency) and cash
flows for the year then ended. These 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. The combined
financial statements of Colmena Corp. and affiliated companies as of September
30, 1997, were audited by other auditors whose report dated January 23, 1998,
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. These 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 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 1998 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Colmena Corp. and subsidiaries as of September 30, 1998 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying 1998 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
18 to the financial statements, the Company has suffered recurring losses from
operations and has a stockholders' and working capital deficiency that raise
substantial doubt about its ability to continue as a going concern. In addition,
through the discontinuance of operations and the sale of subsidiaries, the
Company has ceased all operations. (See Notes 12, 18 and 19) Management's plans
in regard to these matters are also described in Note 18. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/WEINBERG & COMPANY, P.A.
Boca Raton, Florida July 31, 1999
except for Notes 17 and 19 as to which the
date is March 17, 2000
Page 41
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
FOR THE YEAR ENDED SEPTEMBER 30, 1998
ASSETS
CURRENT ASSETS
Cash $ 6,287
Accounts receivable-net 9,664
Investment in stock 3,400
Other current assets 4,377
-------------
Total Current Assets 23,728
------------
PROPERTY AND EQUIPMENT
Furniture and equipment 25,589
Less: Accumulated depreciation (2,729)
------------
Total Property and Equipment 22,860
------------
OTHER ASSETS
Equipment to be repossessed under security
agreement, net of impairment 275,000
------------
TOTAL ASSETS $ 321,588
------------ ============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Cash overdraft $ 84,386
Accounts payable and accrued expenses 403,697
Notes payable - non-related parties 443,423
Notes payable - related parties 281,288
Net liabilities of discontinued operations 1,007,834
-----------
Total Current Liabilities $ 2,220,628
-----------
LONG-TERM LIABILITIES
Notes payable - non-related parties 16,419
Notes payable - related parties 5,843
------------
Total Long-term Liabilities $ 22,262
-----------
TOTAL LIABILITIES $ 2,242,890
-----------
STOCKHOLDERS' DEFICIENCY
Common stock, $0.01 par value; 20,000,000 shares authorized;
7,741,697 shares issued and outstanding $ 77,417
Additional Paid-In Capital 14,614,351
Accumulated deficit (16,613,070)
-----------
Total Stockholders' Deficiency $ (1,921,302)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 321,588
=============
See accompanying notes to financial statements.
Page 42
<PAGE>
<TABLE>
<S> <C> <C>
COLMENA CORP. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(Consolidated) (Combined)
1998 1997
---- ----
NET REVENUE $ 10,344,480 $ 1,266,414
COST OF REVENUE 3,164,474 896,220
------------- -----------
GROSS PROFIT 7,180,006 370,194
------------- -----------
OPERATING EXPENSES
Compensation expense 674,582 -
Amortization and depreciation 283,070 -
Consulting 12,481,200 -
Professional and legal fees 946,947 -
Provision for doubtful accounts and receivable 5,453,907 -
Selling, general and administrative 842,570 39,516
------------ -----------
Total Operating Expenses 20,682,276 39,516
------------ -----------
INCOME (LOSS) FROM OPERATIONS (13,502,270) 330,678
------------ ------------
OTHER EXPENSES
Interest expense-net (120,414) -
Loss on impairment of assets (1,717,491) -
------------- -----------
Total Other Expenses (1,837,905) -
----------- ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (15,340,175) 330,678
------------ -------------
LOSS FROM DISCONTINUED OPERATIONS
Loss from Operations (1,379,547) (119,522)
Loss on Disposal (104,504) -
-------------- -------------
Total Loss From Discontinued Operations (1,484,051) (119,522)
------------- -------------
NET INCOME (LOSS) $(16,824,226) 211,156
------------- -------------
NET INCOME (LOSS) PER COMMON SHARE - BASIC AND DILUTED $ (2.64) 0.05
============== =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 6,366,877 4,310,000
============== =============
</TABLE>
See accompanying notes to financial statements.
Page 43
<PAGE>
<TABLE>
COLMENA CORP. AND SUBSIDIARIES
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997, RESPECTIVELY
<S> <C> <C> <C> <C> <C>
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit) Total
Balance, June 1, 1997
(Date of Inception) 4,310,000 $43,100 $ (43,100) $ - $ -
Contributions - - 2,000 - 2,000
Net income, June 1, 1997
to September 30, 1997 - - - 211,156 211,156
---------- ---------- ------------ ----------- ------------
Balance,
September 30, 1997 4,310,000 43,100 (41,100) 211,156 213,156
Recapitalization:
Balance, Pre-merger
Sports Guard, Inc. 645,192 6,452 595,709 (721,041) (118,880)
Reclassification of
Sports Guard, Inc.'s
Retained Earnings - - (721,041) 721,041 -
---------- --------- ----------- ----------- ------------
4,955,192 49,552 (166,432) 211,156 94,276
Common stock issued to
Consultants: 1,646,500 16,465 7,694,735 - 7,711,200
Exercise of options 640,000 6,400 1,273,600 - 1,280,000
Common stock issued in
exchange for equipment 300,000 3,000 307,935 - 310,935
Common stock issued in
exchange for BTS Assets 100,000 1,000 (51,000) - (50,000)
Common stock issued for
cash 100,000 1,000 299,263 - 300,263
Goodwill resulting from
BTS purchase - - 356,250 - 356,250
Stock options issued to:
consultants - - 4,770,000 - 4,770,000
employees - - 130,000 - 130,000
Net loss 1998 - - - (16,824,226) (16,824,226)
------------- ---------- ------------- ------------ --------------
Balance,
September 30, 1998 7,741,692 $ 77,417 $14,614,351 $(16,613,070) $ (1,921,302)
============ ========== ============= ============= ==============
</TABLE>
See accompanying notes to financial statements.
Page 44
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<S> <C> <C>
(Consolidated) (Combined)
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) (16,824,226) $ 211,156
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Depreciation 21,045 -
Amortization 330,051 82,538
Provision for doubtful Accounts 5,453,907 -
Write-off of due from stockholder 115,483 -
Loss on impairment of customer base 1,232,946 -
Write-down of inventory to net realizable value 110,196 -
Write-down of goodwill 365,401 -
Impairment loss on marketable Securities 73,610 -
Loss on disposal of PP&E 104,700 -
Loss on impairment of equipment to be repossessed 410,935 -
Stock and options issued to consultants 12,611,200 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (4,728,091) (459,709)
Third party settlement receivable 51,829 (51,829)
Inventories - (131,945)
Deposits 9,624 (9,624)
Prepaid customer base - (283,525)
Other current assets 178,121 -
Net assets of discontinued operations 105,035 -
Cash overdraft 84,386 -
Accounts payable and accrued expenses (544,977) 212,006
Deferred revenue (22,993) 22,993
Net liabilities of discontinued operations 949,524 -
------------- ------------
TOTAL ADJUSTMENTS 16,911,932 (619,095)
------------- ------------
Net cash provided by (used in) operating activities 87,706 (407,939)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Business Technology Systems, Inc.,
Net of cash acquired (29,727) -
Purchase of property and equipment (38,322) (50,100)
Purchase of equipment to be repossessed (100,000) -
Loan to stockholder (115,483) -
Purchase of customer base (1,275,204) -
------------- -------------
Net cash used in investing activities (1,558,736) (50,100)
See accompanying notes to financial statements.
</TABLE> Page 45
<PAGE>
<TABLE>
COLMENA CORP. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
<S> <C> <C>
(Consolidated) (Combined)
1998 1997
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (Repayment) on notes to related parties $(173,930) 461,061
Proceeds from borrowings - non-related parties 65,962 -
Proceeds from issuance of common stock 1,580,263 2,000
------------ ------------
Net cash provided by(used in) financing activities 1,472,295 463,061
------------ ------------
NET INCREASE IN CASH 1,265 5,022
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,022 -
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,287 $ 5,022
============ =============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 1998, the Registrant purchased telecommunications equipment for
$685,935 which included non-cash consideration of a $275,000 note payable and
300,000 shares of common stock valued at $310,935.
Pursuant to the recapitalization (See Note 1(A)), the Registrant assumed
$118,880 of liabilities.
In February 1998, the Registrant issued 100,000 shares of common stock as
part of the total consideration to acquire the net assets of Business Technology
Systems, Inc. (See Note 9)
See accompanying notes to financial statements.
Page 46
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
Note 1 Summary of Significant Accounting Policies and Organization
(A) Description of Business
Colmena Corp. (the "Registrant"), formerly known as Sports-Guard, Inc., is
a Delaware corporation that through its subsidiaries was engaged in various
industries. Through its subsidiary T2U Co. (formerly known as RCP Enterprises
Group, Inc.), which was doing business as RCP Communications Group, Inc. ("RCP")
and through its subsidiary, TechTel Communications, Inc. ("TechTel"), the
Registrant was engaged in the business of marketing and distributing
telecommunications services. Through its subsidiary, Business Technology
Systems, Inc., ("BTSF") whose operations were discontinued in 1998 (See Note
12), the Registrant was in the business of selling computer equipment. In
addition, the Registrant was in the business of manufacturing and distributing
premium hand-rolled cigars through its subsidiary, Tio Mariano Cigar Corp.
("Tio"), whose operations were discontinued in 1998 (See Note 12). In March
1999, the Registrant transferred one hundred percent of its subsidiaries, RCP
and BTSF to its president and principal stockholder in a transaction accounted
for as a sale. In November 1999, the Registrant sold its subsidiary, TechTel
[See Note 19(B)].
On November 10, 1997, RCP was acquired by Sports-Guard, Inc., a public
traded company, which had no operations as of the merger date. Sports-Guard,
Inc. issued 3,000,000 shares of common stock to complete the acquisition. Also,
on November 10, 1997, Tio was acquired by Sports-Guard, Inc. for the issuance of
1,310,000 shares of stock. The transactions are treated for accounting purposes
as a recapitalization of the Registrant at historical cost.
All share quantities and per share data in the accompanying financial
statements have been retroactively restated for the recapitalization.
During 1998 the Registrant's operations were significantly impacted from
the bankruptcy of its sole service bureau. (See Note 2)
(B) Principles of Consolidation and Combination
The 1998 consolidated financial statements include the accounts of The
Registrant. and its subsidiaries RCP, BTSF, Tio and TechTel. All significant
intercompany balances and transactions have been eliminated in consolidation.
The 1997 financial statements have been presented on a combined basis,
which represents as the Registrant, the Registrant's owned affiliates RCP and
Tio. Significant intercompany balances and transactions have been eliminated in
combination.
Page 47
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
(C) Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reported period. Actual results could differ
from those estimates.
(D) Cash and Cash Equivalents
For purpose of the cash flow statements, the Registrant considers all
highly liquid investments with original maturities of three months or less at
time of purchase to be cash equivalents.
(E) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Expenditures from maintenance and repairs are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful life of the assets of five to seven years.
(F) Investments
The Registrant accounts for investments in marketable equity securities in
accordance with Statement of Financial Accounting Standards Number 115
"Accounting for Certain Investments in Debt and Equity Securities." Management
determines the appropriate classification of its investments at the time of
acquisition and reevaluates such determination at each balance sheet date.
Trading securities are characterized by the Registrant's intent to sell them in
the near term, while available-for-sale securities are those securities that do
not qualify as trading securities. Trading securities are carried at fair value,
with unrealized trading gains and losses included in earnings. Available-
for-sale securities are carried at fair value, with unrealized gains and losses,
net of tax, reported as a separate component of stockholders' equity. In
determining realized gains and losses, the cost of the securities sold is based
on the specific identification method.
Page 48
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
(G) Long Term Investments
The Registrant accounts for investments in non-marketable equity securities
in accordance with Accounting Principles Board Opinion Number 18 ("Accounting
Principles Board Opinion 18") and related interpretations. Under Accounting
Principles Board Opinion 18, investments in corporate joint ventures and other
common stock of less than 20% are generally accounted for using the cost method
while investments between 20% and 50% are generally accounted for using the
equity method.
Under the cost method, investments are recorded and reported at original
cost until they are partially or entirely disposed of or the original cost value
has been impaired. Under the equity method, the investment is recorded at
original cost and periodically increased (decreased) by the investor's
proportionate share of earnings (losses) of the entity invested in and decreased
by all dividends received by the investor from the entity invested in.
During November 1998, the Registrant received a dividend in the form of
common stock of another corporation on the investments in the 10,000 shares
acquired in the sale of Tio (See Notes 1(F), 5 and 12). The stock dividend was
in effect a spin-off of a subsidiary of the publicly held company. The stock
dividend received was recorded at its original cost of zero.
(H) Revenue Recognition and Cost of Revenue
The Registrant recognizes revenue, less an amount for uncollectible
accounts, based upon their experience and others in the long distance service
calling cards industry, and related costs from the selling of their long
distance telephone service calling cards at the expiration of its use, generally
thirty days or end of month. Until the thirty-day period has passed, the
Registrant defers all revenues and costs.
(I) Third Party Receivable
The Registrant's service bureau, responsible for the billing and
collections of the net receivables from the local exchange carriers operates
under a retrospective payment system. The Registrant records a third party
settlement receivable for its estimates of amounts to be received from the
service bureau as it settles with the local exchange carriers in future months.
Final settlements are usually made six to eight months subsequent to original
billing and are subject to reasonable estimates by management and are reported
in the financial statements in the period in which the phone services are
rendered. Differences between the estimates originally reported in the financial
statements and final settlements are included in the statement of income in the
period the settlements are made. (See Note 2)
(J) Income Taxes
The Registrant accounts for income taxes under the Financial Accounting
Standards Board Statement of Financial Accounting Standards Number 109.
"Accounting for Income Taxes" ("Statement No.109"). Under Statement Number 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those assets or
liabilities are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(K) Per Share Data
Net income (loss) per common share for the years ended September 30, 1998
and 1997 is based upon the weighted average common shares and dilutive common
stock equivalents outstanding during the year as defined by Statement of
Financial Accounting Standards, Number 128, "Earnings Per Share". There were no
common stock equivalents at September 30, 1997. The assumed exercise of common
stock equivalents was not utilized in 1998 since the effect was anti-dilutive.
At September 30, 1998, there were 1,860,000 options outstanding, which could
potentially dilute future earnings per share.
Page 49
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
(L) Stock Options
In accordance with Statement of Financial Accounting Standards Number 123,
the Registrant has elected to account for Stock Options issued to employees
under Accounting Principles Board Opinion Number 25 and related interpretations.
The Registrant accounts for stock options issued to consultants and other
non-employees under the fair value method of Statement of Financial Accounting
Standards 123.
Note 2 Accounts Receivable
Accounts receivable were as follows at September 30, 1998:
Accounts receivable $ 5,919,366
Allowance for doubtful accounts (5,909,702)
-----------
$ 9,664
===========
At September 30, 1998, approximately 95% of accounts receivable was due
from one customer, International Telemedia Associates, Inc. ("ITA"). Of that
amount, $1,298,933 was a hold back receivable to cover charge backs. In
September 1998, ITA was placed into involuntary bankruptcy pursuant to Chapter 7
of the United States Bankruptcy Code [See Note 17(B)]. As it is unlikely that
these accounts receivable will be collectible, the allowance for doubtful
accounts includes a 100% allowance of $5,600,710 for this receivable. [See Note
1(I)]
Note 3 Property and Equipment and Other Assets
Property and equipment at September 30, 1998 consisted of the following:
Office furniture $ 2,784
Computer and office equipment 12,828
Computer software 9,977
Less accumulated depreciation (2,729)
-------
$ 22,860
=======
Depreciation expense for the year ended September 30, 1998 was $21,045, of
which $19,765 is part of discontinued operations, and $1,280 is included in
continuing operations. Certain telecommunications equipment totaling $275,000 at
September 30, 1998 was not in use and was recorded as equipment to be
repossessed under security agreement, net of impairments.
The Registrant applies Statement of Financial Accounting Standards Number
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". In evaluating the potential impairment of Property &
Equipment as of September 30, 1998, the Registrant determined that a portion of
the carrying amount of the telecommunications equipment, originally recorded at
a cost of $685,935, was not recoverable. The equipment was therefore written
down to its net realizable value of $275,000. Accordingly, an impairment loss of
$410,935 has been recorded which is included in other expenses on the statement
of operations. (See Note 10) On October 1, 1999 the Registrant received a Notice
of Proposal to Retain Collateral pursuant to the Security Agreement of August
14, 1998 in full satisfaction of the obligation secured by the Security
Agreement totaling $275,000 at September 30, 1998 [See Note 6 and 19(H)].
Page 50
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
Note 4 Amortizable Customer Base
The Registrant purchases customer databases from third parties. These
databases are used to market the Registrant's service plans. These databases,
which are not re-saleable are amortized over a 12 month period. During 1998, a
subsidiary of the Registrant acquired a customer database for $1,476,191 which
was amortized through September 30, 1998. Since the subsidiary ceased operations
and there was no use in its business plan for the customer base, nor was it
saleable, the Registrant has written off the remaining $1,232,946 net carrying
value of this asset, which has been included as an impairment loss in other
expenses. Amortization for the period prior to write-off was $243,245.
Note 5 Investment in Stock
The Registrant's investment in stock represents 10,000 shares of common
stock of a publicly held company received in exchange for the sale of Tio's
assets (See Note 12). These equity securities have been classified as available-
for-sale securities and accordingly, are carried at their fair value based upon
the quoted market prices as of September 30, 1998. The investment had suffered
considerable losses from the date of acquisition to the balance sheet date. As
the quoted stock price showed a further decline in the market value subsequent
to the balance sheet date, and no indication for recovery, the decline through
September 30, 1998 was considered an other-than-temporary impairment in
accordance with Statement of Financial Accounting Standards 115. Accordingly, a
loss on impairment of stock aggregating $73,610 has been included in other
expenses as part of the loss on impairment of assets.
The composition of investments at September 30, 1998 is as follows:
Fair
Cost Value
Common stock $77,010 $ 3,400
-------- --------
Total investments $77,010 $ 3,400
======== ========
Loss on Impairment of stock for the year ended September 30, 1998 was
as follows:
Loss on Impairment of stock $73,610
=======
Note 6 Notes Payable - Non-related Parties
The following schedule reflects loans payable to non-related parties at
September 30, 1998:
Note payable to non-related party, original principal $290,000,
interest at 30% per annum, due on October 17, 1999, payable
in monthly principal and interest installments of $16,829,
secured by all of RCP present and future accounts receivable
and related rights, guaranteed by Richard C. Peplin, Jr.
("Mr. Peplin")and David DiBenedetto $184,842
Note payable to related party, interest at 9% per annum,
maturing August 14, 1999, payable in monthly principal
and interest installments secured by telecommunications
equipment. In default and due immediately. On October 1,
1999 the Registrant received Notice of Proposal to
retain collateral in full satisfaction of this note.
(See Notes 3, 10 and 19[H]); $275,000
---------
459,842
Less current maturities 443,423
--------
Notes Payable- Nonrelated Parties- Long Term $ 16,419
========
Page 51
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
Note 7 Notes Payable - Related Parties
The following schedule reflects loans payable to related parties at
September 30, 1998:
Note payable to related party, interest at 10% per annum,
due and payable on July 30, 1999. Holder may convert any
portion of the principal balance into shares of the
Registrant's common stock at a conversion price of $0.40
per share. In default as of August 1, 1999;
$82,500
Note payable to related party, original principal $50,000,
interest at 30% per annum, maturing October 17, 1999,
payable in monthly principal and interest installments
of $2,805, secured by all RCP present and future accounts
receivable and related rights, guaranteed by Mr. Peplin.
In default and due immediately; $34,177
Note payable to related party, original principal $40,000,
interest at 30% per annum, maturing October 17, 1997,
payable in monthly principal and interest installments
of $2,237 secured by all RCP present and future accounts
receivable and related rights, guaranteed by Mr. Peplin.
In default and due immediately; $26,147
Note payable to related party, original principal $80,000,
interest at 30% per annum, maturing October 17, 1999,
payable in monthly principal and interest installments
of $4,883, secured by all RCP present and future accounts
receivable and related rights, guaranteed by Mr. Peplin; $53,628
Note payable to related party, original principal $100,000,
interest at 30% per annum, maturing October 17, 1999,
payable in monthly principal and interest installments
of $5,945, secured by all RCP present and future accounts
receivable, guaranteed by Mr. Peplin. In default and due
immediately; $78,517
Note payable to related party, original principal $20,000,
interest at 30% per annum, maturing October 19, 1999,
payable in monthly principal and interest installments
of $1,107, secured by all RCP present and future accounts
receivable and related rights, guaranteed by Mr. Peplin; $12,162
287,131
Less current maturities 281,288
----------
Notes Payable - Related Parties - Long-Term $ 5,843
==========
Page 52
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
Note 8 Loan Agreement and Extension Agreement with Deutsche Financial Services
Corporation
On or about February 26, 1997 (the "Effective Date"), an agreement, as
amended, for wholesale financing (the "Loan Agreement") was entered into
between Deutsche Financial Services Corporation and Business Technology
Systems, Inc. (the "Borrower"), Madhu Sethi, Ila Sethi, Mr. Peplin, and the
Registrant (the "Guarantors"). The Loan Agreement provided for inventory
financing for the Borrower. The loans made under the Loan Agreement have
been secured by a first priority perfected lien and security interest in
all of Borrower's assets, rights, and proceeds thereof, owned at the
Effective Date or thereafter acquired by the Borrower. The loan was also
guaranteed by the parent, The Registrant. As of August 19, 1998, the
Borrower was in default of payments. As of August 19, 1998, the amount of
past due obligations totaled approximately $112,000, and the total
indebtedness including accrued interest was approximately $350,000 (See
Note 9).
On August 19, 1998, an extension agreement (the "Extension Agreement") was
entered into between Deutsche Financial Services Corporation and Business
Technology Systems, Inc. (the "Borrower"), Madhu Sethi, Ila Sethi, Mr.
Peplin and the Registrant (the "Guarantors"). (See further discussion
regarding the repudiation of this extension agreement in succeeding
paragraph.) The Extension Agreement extended the terms of the Agreement
(see above) entered into on February, 26 1997, as amended, and extended the
payment of the debt, including past due obligations. Under the terms of the
Extension Agreement, the Borrower acknowledged an indebtedness due to
Deutsche Financial Services Corporation of $348,858 representing principal
as of August 14, 1998 of $345,474, interest charges of $3,384 through July
31, 1998, additional interest charges from August 1, 1998 at the per annum
rate of Prime plus 6.5%, and fees and expenses incurred by Deutsche
Financial Services Corporation (the "Debt"). In addition, the Borrower
agreed to surrender its inventory to Deutsche Financial Services
Corporation for the purpose of its liquidation and application to the Debt
as of the date of the Extension Agreement. Under the repayment terms, the
Debt was to be paid on or before September 15, 1998 by the Borrower or the
Guarantors. Furthermore, the Borrower and the Guarantors agreed to the
entry of a consent arbitration award for the total Debt as described above.
As of September 30, 1998, the remaining debt totaled approximately $331,000
and is included in the balance sheet in net liabilities of discontinued
operations [See Note 12(B)]. At that date, the Borrower was in default of
the payment of the Debt pursuant to the Extension Agreement. Subsequent to
the balance sheet date, Deutsche Financial Services Corporation filed a
Consent Arbitration Award based upon alleged breach of the Extension
Agreement. Due to matters relating to the execution of the Consent
Arbitration Award, the Registrant repudiated its signing of the extension
agreements and has taken the position that the Consent Arbitration Award
entered pursuant to the extension agreement is not legally binding [See
Notes 17(D) and 19(D)].
Note 9 Purchase of Assets and Liabilities of Business Technology Systems, Inc.
Effective February 19, 1998, the Registrant and its wholly-owned
subsidiary, RCP, (the "Buyer") entered into an agreement with Business
Technology Systems, Inc., to acquire the assets and assume the liabilities of
Business Technology Systems, Inc.. As consideration for the purchase, the Buyer
agreed to pay $100,000 in cash and to issue 100,000 restricted shares of the
Registrant's common stock. The agreement was later amended to lower the cash
portion of the purchase price to $50,000 from $100,000. For financial reporting
purposes, the Registrant's common stock issued pursuant to the acquisition was
valued at $306,250. From February 19, 1998, Business Technology Systems, Inc.
operated as a defacto corporation until the articles of incorporation were filed
in the State of Florida on May 15, 1998. All assets and liabilities were pushed
down to the subsidiary using push-down accounting.
Page 53
<PAGE>
The purchase was recorded under the purchase method of accounting.
Accordingly, the purchase price was allocated to assets acquired and liabilities
assumed based on the estimated fair market values at the date of acquisition.
The fair market value of the net assets acquired was a net liability of $57,412
resulting in the recording of goodwill totaling $413,662.
As of September 30, 1998, the Registrant discontinued operations of BTSF
and wrote down any unamortized goodwill to its net realizable value of zero [See
Notes 8 and 12 (B)].
Note 10 Purchase of Telecommunications Equipment
Effective May 19, 1998, the Registrant entered into an agreement with an
individual doing business as Associated Industries (the "Seller"), a California
Corporation, to purchase telecommunications equipment. As consideration for the
equipment, the agreement stipulated a total payment of $375,000 and the issuance
of 300,000 shares of the Registrant's common stock. Of the total of $375,000,
the Registrant agreed to pay $100,000 in cash and issue a 24 month secured
promissory note for $250,000, at an annual interest rate of 9%, payable and due
on August 14, 1999. The remaining $25,000 was agreed to be covered by a credit
issued by an affiliate of the Seller. As the latter never occurred the
Registrant still owes the seller an additional $25,000 which has been added to
the total outstanding promissory note balance of $250,000 (See Note 7).
The equipment was recorded under the purchase method of accounting for an
aggregate $685,935 consisting of the common stock issued with a value of
$310,935 based upon the discounted trading price of the Registrant's common
stock on the transaction date, a note payable of $275,000 and a cash payment of
$100,000.
The equipment was written down to its net realizable value of $275,000 at
September 30, 1998 (See Note 3). On October 1, 1999 the Registrant received
Notice to Retain Collateral regarding this equipment in full satisfaction of the
$275,000 of related debt [See Note 3, 7 and 19(H)].
Page 54
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
Note 11 Advances Pursuant to Stock Purchase Agreement
Pursuant to a stock purchase agreement (the "Agreement") dated May 8, 1998,
whereby the Registrant was to acquire 100% of the issued and outstanding common
stock of World Long Distance, Inc., Telenet International, Inc. and Telecuba,
Inc. (the "Sellers"), the Registrant advanced the Seller $304,000. The Agreement
was never consummated and the Registrant has been unable to collect the
$304,000. Accordingly, an allowance for non-collect ability has been established
for $304,000 at September 30, 1998, resulting in a provision for bad debts in
1998 for the same amount.
Note 12 Discontinued Operations
During 1998 the Registrant discontinued operations of two of its
subsidiaries; Tio [See Note 12 (A) below] and BTSF [See Note 12 (B) below]. The
net liabilities of discontinued operations which are shown as a separate line
item in the Balance Sheet as of September 30, 1998 comprise the following:
Net liabilities of discontinued operations:
Tio $ 288,783
BTSF 719,051
---------
Total $ 1,007,834
---------
The loss from discontinued operations reported separately in the Statement
of Operations for the years ended September 30, 1998 and 1997 is comprised of
the following amounts:
Loss from discontinued operations: 1998 1997
Loss from Operations
Tio $ (172,599) $ (119,522)
BTSF (1,206,948) -
------------- ----------------
Total Loss from Operations (1,379,547) (119,522)
------------- ----------------
Loss on Disposal
Tio $ (104,504) $ -
------------- ----------------
Total Loss on Disposal $ (104,504) $ -
------------- ----------------
Total Loss from Discontinued Operations $ (1,484,051) $ (119,522)
------------- ----------------
(A) Discontinued Operations - Tio
On February 8, 1998 (the "Measurement Date") management decided to
discontinue operations of the Registrant's subsidiary, Tio, which was in the
business of manufacturing and distributing premium hand-rolled cigars. Effective
March 1, 1998 (the "Disposal Date"), the Registrant sold the inventory and fixed
assets of Tio to Dominican Cigar Corporation, ("Dominican") a publicly held
corporation, in exchange for 10,000 restricted shares (300,000 restricted
pre-split shares) of Dominican. At the time of the exchange the Dominican shares
had a market value of $77,010. (See Note 5). The book value of the assets
exchanged exceeded the value of the stock. Accordingly, a loss on disposal under
discontinued operations of $85,176 was recorded. In addition, the loss on
operations incurred from the Measurement Date to the Disposal Date totaling
$19,328 has been included in the loss on disposal under discontinued operations.
The loss from operations of $172,599 for the period up to the Measurement Date
is shown as loss from operations under discontinued operations.
Page 55
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
Net assets and liabilities of Tio's discontinued operations have been
classified as current. A summary of the net liabilities of Tio's discontinued
operations is as follows:
Cash $ 1,376
Notes payable - related parties (168,333)
Due to related party (30,000)
Due to Shareholder (91,826)
-------------
Net liabilities of discontinued operations $ (288,783)
=============
(i) Notes Payable
The following schedule reflects notes payable at September 30, 1998
related to the discontinued segment Tio:
Note payable to related party interest at 10% per annum,
due on demand, unsecured; $10,000.
Note payable to related party interest at 10% per annum,
due on demand, unsecured; $10,000.
Note payable to related party interest at 10% per annum,
due on demand, unsecured; $10,000
Note payable to related party interest at 10% per annum,
due on demand, unsecured; $15,000.
Note payable to related party interest at 10% per annum,
due on demand, unsecured; $40,000.
Note payable to related party interest at 10% per annum,
due on demand, unsecured; $50,000.
Note payable to related party interest at 10% per annum,
due on demand, unsecured, $33,333.
--------
Notes Payable - Related Parties - Current $168,333
========
(B) Discontinued Operations - Business Technolgy Systems, Inc.
On September 30, 1998 the Registrant's management decided to discontinue
operations of its subsidiary, BTSF. The loss from operations of $1,206,948 for
1998 is shown as loss from operations under discontinued operations (See Note
9).
Net assets and liabilities of BTSF's discontinued operations have been
classified as current. A summary of the net liabilities of BTSF's discontinued
operations is as follows:
Cash $ 1,666
Accounts receivable - net 12,805
Inventory -
Property and Equipment -
Cash overdraft (1,148)
Loan payable (See Note 8) (331,000)
Accounts payable (401,374)
----------
Net liabilities of discontinued operations $ (719,051)
==========
Page 56
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
(i) Accounts receivable
Accounts receivable were as follows at September 30, 1998:
Accounts receivable $ 127,823
Allowance for doubtful accounts (115,018)
---------
$ 12,805
========
(ii) Inventory
Inventory was as follows at September 30, 1998:
Inventory $ 34,094
Allowance to reduce inventory to market (34,094)
-------------
$ -
=============
Because of the discontinuance of BTSF operations, its inventory as of
September 30, 1998 totaling $34,094 had no current use in its business plan. The
Registrant determined that the inventory could not be sold and therefore had no
market value. Accordingly, the Registrant has written down the inventory to its
net realizable value of zero and included the loss in the loss from operations
under discontinued operations.
(iii) Property and Equipment
The Registrant applies Statement of Financial Accounting Standards Number
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". In evaluating the potential impairment of Property &
Equipment as of September 30, 1998, the Registrant determined that office
equipment and furniture totaling $71,235 had no current use in the business plan
of BTSF because of the discontinuance of its operations, and was not saleable.
Accordingly, the Registrant has written down the remaining net carrying value by
recording an impairment loss of $71,235 which has been included in the loss from
discontinued operations.
Note 13 Income Taxes
RCP was formed as a limited liability company with total capital of $1,000.
Tio was incorporated as a C Corporation, with 850 shares of common stock
and contributed capital of $1,000.
Tio incurred a loss for the period of July 1, 1997 to September 30, 1997
and has a net operating loss of approximately $119,500, which can be carried
forward, subject to certain limitations for 15 years. At September 30, 1997, a
deferred tax asset of approximately $36,000 was recorded. Because of the
uncertainty surrounding this asset, a valuation allowance for $36,000 was also
recorded at September 30, 1997. RCP is a limited liability company and was taxed
as a partnership until November 10, 1997, the date of the merger. There was no
current income tax provision for the year ended September 30, 1998 due to the
Registrant's net loss.
The Registrant's tax expense differs from the "expected" tax expense for
the year ended September 30, 1998 (computed by applying the Federal Corporate
tax rate of 34 percent to income (loss) before taxes), as follows:
Computed "expected" tax expense (benefit) $ 5,720,237
Non-deductible stock based compensation (4,243,608)
Effect of net operating loss carry forwards (1,476,629)
-----------------
$ -
=================
Page 57
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities at September 31, 1998 are as
follows:
Deferred tax assets:
Net operating loss carryforward $ 1,476,629
Stock based compensation 4,243,608
-----------------
Total gross deferred tax assets 5,720,237
Less valuation allowance (5,720,237)
----------------
Net deferred tax assets $ -
================
At September 30, 1998 the Registrant had net operating loss carry forwards
of approximately $4,343,000 for income tax purposes, available to offset future
taxable income expiring on various dates through 2019.
In assessing the realizability of the deferred tax assets management
considers whether it is more likely than not that some portions or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income or changes
in ownership or business during the periods in which the temporary differences
become deductible. Due to the Registrant's reorganization [See Note 19(B)] and
the ceasing of all operations it is more likely than not that the deferred tax
assets will not be realized.
The valuation allowance at September 30, 1997 was $36,000. The net change
in the valuation allowance was an increase of $5,684,237.
Note 14 Stock Options
(A) Stock Option Plan
On February 27, 1998 the Board of Directors of the Registrant adopted
the 1998 Stock Option Plan (the "Plan") to provide added incentive for high
levels of performance to officers, directors, employees, consultants, and
independent contractors of the Registrant. Options granted under the plan are
designed either as incentive stock options or as non-qualified stock options.
The plan will terminate on February 27, 2008, unless previously terminated.
The Stock Option Plan authorizes options up to an aggregate of 600,000
shares of the Registrant's common stock. The Registrant grants non-qualified and
incentive stock options. Non-qualified options may be granted to officers,
employees, directors, consultants, independent contractors or other service
providers of the Registrant at an exercise price determined by the Registrant's
Board of Directors (the "Committee") which shall be at least equal to 85% of the
fair market value of the common stock at the date of the grant. Incentive stock
options may only be granted to officers, employees, and directors, who are also
employees of the Registrant at an exercise price determined by the Committee
which shall not be less than 100% of the fair market value of the common stock
at the date of grant and may not be less than 110% of the fair market value of
the common stock at the date of grant if granted to an individual owning more
than ten percent of the total combined voting power.
Options are exercisable at dates and conditions determined by the Committee
at the time of grant. However, an option shall not be exercisable after the
expiration of 10 years from the date it is granted. In the case of incentive
stock options the term may not exceed five years if granted to an option holder
owning more than ten percent of the total combined voting power. Through the
date of this report no stock options have been granted.
(B) Stock Options Granted to Consultant
On February 25, 1998, the Registrant issued 1,500,000 common stock options
at an exercise price of $2.00 per share to a consultant as consideration for
services. The options vested and became exercisable over a period of 10 months.
The option period will terminate on the second anniversary from the effective
date of the agreement. As of September 30, 1998, the consultant had exercised
640,000 options [See Note 16 B(i)].
Page 58
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
The Registrant applies the fair market value method of Statement of
Financial Accounting Standards 123 in accounting for stock options issued to
consultants. Accordingly, consulting expense of $4,770,000 was recognized during
1998 for the 1,500,000 options issued.
(C) Stock Options Granted to the Registrant's President
On June 1, 1998, the Registrant issued 1,000,000 common stock options to
the President and Chief Executive Officer of the Registrant under an employment
agreement effective as of the same date. The options vest at a rate of 200,000
shares per year on each anniversary date of the employment agreement, and are
exercisable at $6.00 per share for six years following the grant of such
options. As of September 30, 1998, none of these stock options have been
exercised [See Note 16(C)].
In accordance with Statement of Financial Accounting Standards 123, for
options issued to employees, the Registrant applies the intrinsic value method
of Accounting Principles Board Opinion Number 25 and related interpretations in
accounting for options issued. Accordingly, $130,000 was charged to compensation
during 1998, since the fair market value of the common stock based upon the
trading price at the grant date exceeded the exercise price by $0.13 per share.
Had compensation cost been recognized based on the fair market value of the
options on the grant date consistent with Statement of Financial Accounting
Standards 123, the Registrant's net loss for the year ended September 30, 1998
would have been increased to the pro forma amounts as follows:
Net loss:
As reported (16,824,226)
Pro Forma (18,894,226)
Net loss per share:
As reported $ (2.64)
Pro Forma $ (2.97)
The effect of applying Statement of Financial Accounting Standards 123 is
not likely to be representative of the effects on reported net income for future
years due to, among other things, the effects of vesting.
Note 15 Common Stock Registration Pursuant to Registration Statement on Form S-8
On March 16, 1998, a total of 2,900,000 shares of common stock were
registered under the Securities Act of 1933, as amended, pursuant to a
Registration Statement on Form S-8. The aggregate 2,900,000 shares comprises a
total of 600,000 shares for stock options authorized under the 1998 Stock Option
Plan [see Note 14 (A)], 1,500,000 shares for stock options issued to a
consultant as of February 25, 1998 [see Notes 14(B) and 16 (B)(i)], and 800,000
shares as agreed per various consulting agreements as of November 10, 1997 [See
Note 16 B(ii)].
Note 16 Commitments and Contingencies
(A) Year 2000 Issues
The Registrant is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two-digit year to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
As of the date of this report, the Registrant has either discontinued or
divested of most of its operations and therefore has not addressed any Year 2000
issues.
Page 59
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
(B) Consulting Agreements
(i) Consulting Agreement with SBV Corporation
On February 25, 1998 (the "Effective Date"), the Registrant entered into a
consulting agreement with SBV Corporation (the "Consultant"). The agreement was
established for a term of twelve months from the Effective Date. The services
provided by the Consultant primarily comprised the review of business operations
of potential transaction candidates, initiation and negotiation on behalf of the
Registrant to explore potential transactions, analysis and evaluation of the
projected financial performance of the Registrant and the assistance in the
negotiation of definitive purchase or financing agreements with any interest
parties. As consideration for the services provided, the Registrant issued to
the Consultant 1,500,000 options to purchase shares of the Registrant's common
stock at an exercise price of $2.00 per share (See Note 14). As of March 16,
1998, these options and the underlying shares have been registered under the
Securities Act of 1933, as amended, pursuant to a Registration Statement on Form
S-8 (See Note 15). The options vested and became exercisable over a period of
approximately 10 months with 250,000 of the options vesting after the September
30, 1998 balance sheet date on December 1, 1998. The option period will
terminate on the second anniversary from the Effective Date of the agreement. As
of September 30, 1998, the Consultant had exercised 640,000 options [See Note
14(B)].
(ii) Consulting Agreements with Various Consultants
On November 10, 1997 (the "Effective Date"), the Registrant entered into
five consulting agreements with various consultants. The agreements were
established for terms ranging from twelve to thirty-six months from the
Effective Date. One of these agreements was terminated as of April 28, 1998. One
of the remaining consultants was engaged to perform marketing consulting
services. The services provided by the other consultants mainly comprised the
review of business operations of potential transaction candidates, initiation
and negotiation on behalf of the Registrant to explore potential transactions,
analysis and evaluation of the projected financial performance of the Registrant
and the assistance in the negotiation of definitive purchase or financing
agreements with any interest parties. As consideration for the services
provided, the Registrant agreed to issue to the consultants an aggregate of
800,000 shares of the Registrant's common stock. As of March 16, 1998, these
shares have been registered under the Securities Act of 1933, as amended,
pursuant to a Registration Statement on Form S-8. As of September 30, 1998, the
Registrant had issued a total of 700,000 shares (See Note 14 and Note 15).
(iii) Investment Banking and Advisory Services Agreement
On May 7, 1998 (the "Effective Date"), the Registrant entered into an
Investment Banking and Advisory Services Agreement with Strategica Services
Corporation ("Services Corp.") and Strategica Financial Corporation ("Financial
Corp."). The agreement was established for a term lasting from the effective
date of the agreement through April 30, 2003 (the "Expiration Date"). The
services provided by Services Corp., or at it's option, by Financial Corp.,
primarily consists of (i) providing advice to the Registrant and assisting the
Registrant with contract negotiations, business strategies, and, if applicable,
required regulatory filings, (ii) providing the Registrant with advice relating
to financing options, (iii) advising the Registrant with respect to potential
public offerings and private placements of equity or debt securities, (iv)
assisting the Registrant in preparing the required offering documents, (v)
assisting the Registrant in identifying potential equity and/or debt investors,
(vi) providing advice to the Registrant with respect to potential marketing
strategies, mergers, other acquisitions, reorganizations, recapitalizations or
sales of assets, and (vii) providing advice in the structure of all business
strategies and agreements. As consideration for the services provided, the
Registrant agreed to pay a non-refundable due diligence review fee of $100,000
and a monthly fee to Services Corp. of $5,000 for the month of May 1998, $10,000
from June 1998 to May 1999, and $5,000 thereafter until the Expiration Date. In
addition, the Registrant agreed to pay to Financial Corp. 5% and 3%,
respectively, of the gross proceeds committed to the Registrant for equity sold
and debt issued, respectively, and to Services Corp. 5% of the gross purchase
price received in a sale of the Registrant or one of its subsidiaries, or
affiliates and a debt restructuring fee of 10% of all debt restructured,
converted to equity, or extended. Furthermore, the Registrant agreed to
reimburse Services corp. and Financial Corp. for reasonable expenses paid. In
addition, the Registrant agreed to provide Services Corp. and Financial Corp.
with warrants for 25% of the common stock of the Registrant with full
anti-dilution and registration rights.
Page 60
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
(iv) Billing and Collection Contract
On June 20, 1997 the Registrant entered into a 12 month Customer Billing
and Collection Contract (the "Contract") with ITA whereby ITA was to provide
processing billing and collection services relating to the Registrant's long
distance telephone services. As stipulated in the contract, ITA had the right to
reject, adjust or reserve for any submitted billings. ITA charges the Registrant
fees based upon a per transaction schedule as stipulated in the Contract. In
September 1998 ITA defaulted in its payments to the Registrant and subsequently
entered into Chapter 7 bankruptcy [See Note 17(B)].
(C) Employment Agreements
On June 1, 1998 (the "Effective Date"), the Registrant entered into an
employment agreement (the "Agreement") with Mr. Peplin(the "Employee"), a
principal shareholder, director and executive employee of the Registrant. The
Employee was engaged as the President and Chief Executive Officer of the
Registrant. The Agreement was established for a term of 5 years from the
Effective Date. The Agreement contains a confidentiality clause and a
non-competition clause. As consideration for the Employee's performance, the
Registrant agreed to pay a base salary of $300,000 per year. In addition, the
Registrant agreed to grant 1,000,000 options to purchase shares of the
Registrant's common stock, vesting at a rate of 200,000 shares per year on each
anniversary date of the agreement, at an exercise price of $6.00 per share and
exercisable for 6 years following the grant of such options. As of September 30,
1998, no stock options have been exercised (See Note 14). On May 4, 1999 the
employment contract was terminated [See Note 19(B)].
(D) Wholesale Independent Contractor Agreement
On August 8, 1997, RCP Enterprises Group, LLC entered into a wholesale
independent contract agreement (the "Agreement") with Coronado Telecom. The
Agreement was established on a month to month basis until terminated by either
party upon at least thirty days prior written notice.
Note 17 Litigation
(A) People of the State of Illinois versus RCP
On March 19, 1998, the State of Illinois filed a complaint for injunctive
relief and civil money penalties against RCP doing business as RCP. The
complaint alleges that RCP and its co-defendant, ITA, a Georgia corporation
violated the Illinois Consumer Fraud and Deceptive Business Practices Act in
connection with the sale of prepaid calling cards to Illinois consumers by
committing unfair or deceptive acts or practices. RCP was accused of having
"purportedly advertised, solicited, offered for sale, sold, and distributed
enhanced services to, among others, residents of Sangamon County, Illinois, and
billed or caused Illinois consumers to be billed for such services." A final
Judgment and Consent Decree has been executed by RCP. and has been submitted to
the Attorney General's Office for signature. The Registrant's council
anticipates that the Attorney General's Office will present the Decree to the
Court in the near future for entry. The Consent decree essentially requires RCP.
to follow proper State rules and regulations regarding business practices for
telephone service providers and does not impose any monetary penalties or
restitution by RCP based on RCP's statements that it is financially insolvent.
Page 61
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
(B) The Registrant. versus ITA
In September 1998, ITA, defaulted in its payments to T2U Co., doing
business as RCP, for services rendered to third parties, payment of which was
collected by ITA. Thereafter, RCP and two other corporations, Psychic Discovery
Network, Inc.,("PDN") a Delaware corporation affiliated to the Registrant
through common ownership by the principal shareholder of PDN's parent, Viatech
communications Group, Inc. and BLJ Communications, Inc., a Florida corporation,
all creditors of ITA, filed a petition seeking ITA'S involuntary bankruptcy
pursuant to Chapter 7 of the United States Bankruptcy Code. It is management's
assertion that a favorable outcome for the Registrant is not likely.
Accordingly, a 100% allowance of the accounts receivable due from ITA has been
recorded (See Note 2).
(C) Investigation of T2U Co. by Federal Trade Commission
On December 9 and 10, 1998, the president and regulatory affairs manager,
respectively, of T2U Co. were asked to testify in a confidential, non-public
hearing before staff of the Federal Trade Commission ("FTC") "to determine
whether various entities may be engaging or have engaged in unfair or deceptive
action, acts or practices in or affecting commerce in violation of Section 5 of
the Federal Trade Commission Act, 15 U.S.C. Section 45, or the Commission's
[FTC] Trade Regulation Rule pursuant to the Telephone Disclosure and Dispute
Resolution Act of 1992, 16 CFR part 308" [See Note 18(E)]. As monetary relief
for any such violations the Federal Trade Commission is seeking consumer redress
and disgorgement from the United States Treasury of up to the full amount of
income generated by RCP. A proposed Stipu1ated Final Judgement and Order for
Permanent Injunction and Consumer Redress ("Consent Decree") was signed by T2U
and Mr. Peplin on November 23, 1999 and sent to the Division of Marketing
Practices, Federal Trade Commission. The Consent Decree, if signed by the FTC
will result in certain injunctions and a judgement against T2U and Mr. Peplin in
an amount of $3,200,000. Based upon representations made by the Registrant to
the FTC regarding the Registrant's financial insolvency, in lieu of payment of
the foregoing amount, T2U and Mr. Peplin are to assign to the FTC all rights,
title and interest they may have in their proceedings in bankruptcy against ITA.
Management and its council believes that since T2U is no longer a subsidiary of
the Registrant, that absent the ability to "pierce the corporate veil", no
liabilities attributable to T2U should effect the Registrant. However, this
matter is likely to have a material adverse impact on T2U and its former
president.
(D) Deutsche Financial Services Corporation
Subsequent to September 30, 1998, Deutsche Financial Services Corporation,
a creditor of BTSF filed a consent arbitration award based upon alleged breach
of a loan extension agreement [See Note 8 and 19(D)].
(E) Various Creditor Claims
The Registrant has been negotiating with several creditors who have made
claims against the Registrant aggregating approximately $66,000. Management and
its counsel have not been able to assess the probable outcome of such claims.
All known amounts have been accrued by the Registrant at September 30, 1998.
(F) Subsequent Litigation
As discussed in Note 19, Subsequent Events, various lawsuits,
investigations, claims, resolutions or settlements occurred subsequent to
September 30, 1998.
Note 18 Going Concern
The accompanying financial statements have been prepared assuming that the
Registrant will continue as a going concern. The Registrant incurred a net loss
of $16,824,226 during 1998 and had a working capital deficiency of $2,196,900
and an accumulated deficit of $16,613,070 at September 30, 1998. In addition,
through current and subsequent discontinuance of operations and the sale and the
divestiture of its subsidiaries, the Registrant has ceased all operations. These
conditions raise substantial doubt about the Registrant's ability to continue as
a going concern.
Page 62
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
The Registrant continues to maintain its licenses as telephone service
resellers with the Federal Communications Commission and Management looks to
expand on such operations. Management is also considering seeking protection
under Chapter 11 of the Bankruptcy Code as a means of making continuation of
operations possible.
Note 19 Subsequent Events
(A) Consulting Agreement between The Registrant. and the Yankee Companies, Inc.
On January 5, 1999 (the "Effective Date"), a consulting agreement (the
"Agreement") was entered into by and between the Registrant and The Yankee
Companies, Inc. (the "Consultant"), a Florida corporation. The Agreement was
established for a term of 730 days from the Effective Date and will be renewed
automatically, on a continuing annual basis, unless terminated by one of the
parties 30 days prior to the termination of the then current term. The services
provided by the consultant were agreed to be the services, on a reasonable, as
required, basis, consistent with the consultant's other business activities. The
consultant's areas of expertise mainly comprise corporate structure,
organization and reorganization, mergers, acquisitions and divestitures,
strategic corporate development, corporate financial and equity analysis, and
other corporate matters. Furthermore, the consultant agreed to be responsible
for administering the expenditure of the proceeds derived by the Registrant from
the exercise of options that were given to the consultant as part of its
compensation for the services rendered (see below) in order to implement the
strategic plans developed by the consultant and to settle and discharge the
corporate obligations of the Registrant. In this role, the consultant agreed to
establish and operate bank accounts for the Registrant, using such signatories
as the consultant deems appropriate.
As consideration for the first 200 hours of services provided (in lieu of
document license fees and required cash payments valued at $20,000), the
Registrant agreed to issue within the first 365 days of the agreement, (the
"Initial Term") to the consultant 8,066,326 Class A options to purchase
8,066,326 shares of the Registrant's common stock at an exercise price of $0.005
per share, under the assumption that 7,750,000 common shares were outstanding or
reserved for future issuance, and therefore resulting in the consultant owning
51% of the Registrant's common stock. Any increase or decrease in the
outstanding or reserved shares would result in a corresponding adjustment of the
options' quantity and prices. The options may be executed from the 10th day
until the 365th day following the effective date. As of the date of this report,
the consultant had exercised 5,000,000 options.
For additional services provided, during the initial term, the Registrant
agreed to pay the following consideration: (a) If the consultant arranges or
provides funding for the Registrant on more beneficial terms than those
currently reflected in the Registrant's current principal financing agreements,
the consultant shall be entitled, at its election, to either (i) a fee of 25% of
the savings achieved, or (ii) if equity funding is provided through consultants
or its affiliates, a discount of 10% from the bid price for the subject equity
securities, if issuable as free trading securities, or a discount of 50%, if
issuable as restricted securities, or (iii) an introduction fee of 5% of the
aggregate proceeds obtained if funding is provided by any persons introduced to
the Registrant by the consultant; (b) If the consultant generates business for
the Registrant, the consultant shall be entitled to a commission of 10% of the
gross income derived by the Registrant therefrom on a continuing basis; (c) If
the consultant arranges for an acquisition by the Registrant, the consultant
shall be entitled to 10% of the compensation paid for such acquisition. In
addition, the Registrant will be responsible for the payment of all costs and
disbursements associated with the consultant's services subject to certain
limitations and/or approvals, as stipulated in the Agreement.
Page 63
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
(B) Reorganization Agreement between the Registrant and Mr. Peplin, and
Resignation of Mr. Peplin.
On March 25, 1999, a Reorganization Agreement (the "Agreement") was entered
into and consummated by and among the Registrant and Mr. Peplin the principal
stockholder and former president of the Registrant. Under the terms of the
Agreement, the Registrant conveyed to the order of Mr. Peplin, and Mr. Peplin
accepted, all of the Registrant's right, title and interest in and to all of the
capital stock of T2U Co. and BTSF (the "Subsidiaries"), expecting that Mr.
Peplin will designate a newly organized corporation to assume ownership of the
Subsidiaries. The transaction was accounted for as a sale, at fair market value,
the consideration being an assumption of net liabilities by Mr. Peplin. The
Registrant agreed to pay all reasonable costs required to effect a liquidation
of the Subsidiaries by Mr. Peplin's designee pursuant to Chapter 7 of the United
States Bankruptcy Code and to defend any resulting litigation or regulatory
actions. Furthermore, the Registrant agreed to spin out 20% of the capital stock
of TechTel to the Registrant's stockholders under the parameters established by
Securities Exchange Commission Division of Corporate Finance Staff Legal
Bulletin Number 5, and to use the remaining 80% of the capital stock of TechTel
to settle outstanding liabilities of TechTel to Mr. Peplin, to a principal of
Yankees [see Note 19 (A)] and to other persons, based on negotiations to be
conducted by Yankees. Mr. Peplin irrevocably agreed that any net assets
remaining after liquidation of the Subsidiaries will be used to pay taxes and
liabilities of TechTel guaranteed by Mr. Peplin or the Registrant, with the net
balance returned to the Registrant, such net balance interest to be represented
by a security interest memorialized in one or more Forms UCC-1 to be filed in
each state in which the Subsidiaries have any assets. The 80% of TechTel common
stock was transferred to Mr. Peplin and others in a transaction accounted for as
a sale, the consideration being the assumption by the transferors of liabilities
of TechTel. Before the transfer of the 20% TechTel common stock as discussed
above, in November 1999 the interest of all stockholders in TechTel, including
the Registrant, was acquired by FON Digital Network, Inc. ("FON"), an OTC
Bulletin Board company. FON issued 50,000 shares to various parties including
5,000 to the Registrant in exchange for TechTel shares.
As of September 30, 1998, the assets and liabilities representing RCP, BTSF
and TechTel were $41,597 and $1,570,944 respectively, Amounts totaling
approximately $310,000 due to Deutsche Financial Services Corporation were
guaranteed by the Registrant, (See Notes 8, 17(D), and 19(D) for repudiation of
this agreement) the parent company at that time. During 1999, pursuant to the
sale of the subsidiaries the Registrant recognized a gain on sale.
The reorganizations discussed above do not qualify as tax-free
reorganizations. However, no taxes will be payable, as the income generated by
the Registrant as a result of its reorganizations is from the relief of
liabilities which is fully excludable under the insolvency/bankruptcy exception.
Under such exception, the net operating loss and other tax attributes are
reduced in lieu of reporting income.
On May 4, 1999, Mr. Peplin resigned from all offices and directorships held
in the Registrant and its remaining subsidiary.
(C) Filing and Settlement of Litigation: Madhu Sethi versus the Registrant,
TechTel and RCP.
On January 7, 1999, Madhu Sethi (Mr. Sethi") filed a complaint seeking the
recovery of $24,069 for expenses and interest and future wages for alleged
breach of an agreement entered into with The Registrant. The complaint was based
on an employment agreement, executed on February 18, 1998, established for a
term of 5 years and agreed compensation of $100,000 per year exclusive of fringe
benefits and payable in weekly installments. In addition, Mr. Sethi was to
receive an annual bonus based upon profits of the Registrant.
Page 64
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
On June 3, 1999, a settlement agreement (the "Agreement") was made and
entered into by and among the Registrant, Mr. Sethi, and Ila Sethi, Mr. Sethi's
spouse (the "Parties"). The Parties agreed to an accord and satisfaction of all
of their rights, obligations and liabilities. Mr. and Mrs. Sethi agreed to
relinquish all rights, whether accrued or inchoate, under any agreements between
them or their affiliates and the Registrant and its affiliates, other than those
agreed upon in the Agreement. The Registrant agreed to use its best efforts to
include Mr. and Mrs. Sethi in any settlements of the current dispute with
Deutsche Financial Services Corporation [See Notes 8 and 17 (D)] and issue to
Mr. and Mrs. Sethi, 250,000 shares of the Registrant's common stock, in reliance
on the exemption from registration requirements under the Securities Act of
1933, as amended. Mr. and Mrs. Sethi represented, warranted, and covenanted that
all of the common stock will bear legends restricting its transfer, sale,
conveyance, or hypothecation unless such common stock is either registered under
provisions of Section 5 of the Securities Act and the Florida Blue Sky Act, or
an opinion of legal counsel is provided that such registration is not required
as a result of applicable exemptions therefrom. In addition, the Registrant's
transfer agent shall be instructed not to transfer any of the stock unless the
Registrant advises it that such transfer is in compliance with all applicable
laws. Furthermore, Mr. and Mrs. Sethi represented that they are each acquiring
the stock for their own account, for investment purposes only and that Mr. and
Mrs. Sethi or their advisors have examined the Registrant's Exchange Act filings
and are fully familiar with the Registrant and its operations.
(D) Filing of Litigation: Deutsche Financial Services Corporation versus
BTSF, Mr. Peplin and the Registrant.
Subsequent to the balance sheet date, on October 8, 1999, Deutsche
Financial Services Corporation caused a Consent Arbitration Award in the amount
if $348,858 plus interest at the per annum rate of prime plus 6.5% from August
1, 1998 less any sums received pursuant to the Extension Agreement referred to
below, to be entered against the Registrant and others based on the Registrant
purportedly having consented to such award. The Registrant signed the Consent
Award after having signed a loan extension agreement (the "Extension Agreement")
in August of 1998, along with Mr. Peplin. Because the Registrant has agreed to
the terms of the Extension Agreement, and the accompanying Consent Arbitration
Award, on the condition that two additional parties, Mr. and Mrs. Sethi, would
sign them both and by similarly bound by them, and because these additional
parties have not signed the Extension Agreement by September 15, 1998, the time
payment of $348,858 was due under the Extension Agreement, the Registrant,
through its counsel, repudiated its signing of both the Extension Agreement and
the Consent Arbitration Award. Accordingly, the Registrant takes the position
that the Consent Arbitrator Award is not binding and enforceable.
(E) Investigation by the Federal Trade Commission ("FTC") of T2U Co.
On December 9 and 10, 1998, the president and regulatory affairs manager of
T2U Co. were asked to testify in a confidential, non-public hearing before staff
of the FTC "to determine whether various entities may be engaging or have
engaged in unfair or deceptive action, acts or practices in or affecting
commerce in violation of Section 5 of the Federal Trade Commission Act, 15
U.S.C. Section 45, or the Commission's [FTC] Trade Regulation Rule pursuant to
the Telephone Disclosure and Dispute Resolution Act of 1992, 16 CFR part 308."
(See Note 17 C). As of the date of this report, no further information is
available.
(F) Ziff Davis, Inc. vs. BTSF
On February 12, 1999 Ziff-Davis filed an action for damages against BTSF. A
material judgement was entered against BTSF on July 26, 1999. At the time of the
judgement, BTSF was no longer a subsidiary of the Registrant. Management of the
Registrant and its counsel believe that absent the ability to "pierce the
corporate veil" no liabilities attributable to BTSF should affect the
Registrant.
Page 65
<PAGE>
COLMENA CORP. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED SEPTEMBER 30, 1998 AND 1997
(continued)
(G) Patrick Graham vs. Five Star Cigar, Inc, Tio Marino Cigar Corporation,
the Registrant, and Mr. Peplin
On July 9, 1999, the plaintiff filed an action for compensatory damages and
money lent claiming that on March 16, 1997, Five Star Cigar, Inc. ("Five Star")
executed a promissory note to Patrick V. Graham ("Mr. Graham")and that Five Star
failed to pay the note in the amount of $40,000 and is in default and that on
March 31, 1997, Tio executed a promissory note to Mr. Graham in the amount of
$40,000 and is now in default. Mr. Graham has taken the position that The
Registrant. is the successor by merger of Tio and Five Star and as its successor
is liable for the indebtedness of Five Star for the amount of $40,000 plus
interest, costs and attorney fees. The Registrant's position is that Tio and
Five Star were never merged into the Registrant and thus the Registrant is not a
proper party to the action. The accompanying consolidated financial statements
include the note payable liability of $40,000 and related accrued interest of
$6,000 at September 30, 1998. The Registrant and its counsel believe the debt
will likely be settled in exchange for 100,000 restricted shares of the
Registrant's common stock.
(H) Louisiana Public Service Commission vs. RCP Enterprises Group, Inc. ,
T2U Communications
Although no formal complaint has been filed, the parties have been
requested to appear, at an unspecified date, before the Louisiana Public Service
Commission by notice dated January 7, 1999. Management of the Registrant and its
counsel believe that absent the ability to "pierce the corporate veil" no
liabilities attributable to this matter should effect the Registrant.
(I) Note Payable - Related Party
As of October 1, 1998, the principal of the note payable issued to a
related party for $82,500 as of September 30, 1998, was increased to $100,000.
This note is due and payable on July 30, 1999, with interest at 10% per annum.
The holder may convert any portion of the principal balance into shares of the
Registrant's common stock at a conversion price of $0.40 per share. As of the
date of this report, the Registrant has defaulted on this note and the holder
has not sought to exercise their conversion rights (See Note 7).
(J) Note Payable - Related Party
As of December 2, 1998, a note payable was issued to a related party for
$6,799, by TechTel, one of the Registrant's subsidiaries. Principal and interest
of 10% per annum were due in 90 days from the date of issuance. The holder of
the note had the option to convert principal and interest to the Registrant
common stock at $0.5 per share with demand registration rights or to 10% of
TechTel on a fully diluted basis or to the Prostar 16x16 telephone system for
which the money was originally lent. Any payments not made within five days of
the due date were agreed to be subject to a late charge of 18% of the amount
due.
(K) Conversions of Debt to Equity
On January 3, 2000, a vendor who provided legal services to the Registrant
converted total amounts due aggregating $50,782 at September 30, 1998 to 677,087
restricted shares of common stock of the Registrant.
On January 3, 2000, a vendor converted total amounts due of $2,550 at
September 30, 1998 to 34,000 shares of common stock of the Registrant.
In January 2000, a vendor who provided legal services to the Registrant
converted total amounts due of $31,214 at October 11, 1999 to 416,185 shares of
common stock of the Registrant. The $31,214 includes amounts due and accrued at
September 30, 1998 of $15,917.
On January 29, 1999, a vendor of the Registrant was issued for legal
services, 70,000 common stock options at an exercise price of $0.05 per share on
or before January 15, 2000, which has been extended to January 14, 2001.
Page 66
<PAGE>
For all conversions of debt with unrelated parties, the Registrant will
record a gain or loss on the extinguishment of debt based upon the quoted market
price of the stock on the conversion dates.
(L) Potential Reorganization Under Bankruptcy Code
In light of the volume of litigation, potential litigation and regulatory
action, the Registrant and its Board of Directors have discussed the possibility
of reorganization under Chapter 11 of the United States Bankruptcy Code. As of
the date of this report no such reorganization has been consummated.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
On January 21, 1999, Ernst & Young LLP resigned as independent auditors for
the Registrant. The report of Ernst & Young LLP on the Registrant's financial
statements as of September 30, 1997 and for period from June 1, 1997 (date of
inception) to September 30, 1997 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles.
In connection with the audit of the Registrant's financial statements as of
September 30, 1997 and for the period from June 1, 1997 (date of inception) to
September 30, 1997, and in the subsequent period, there were no disagreements
with Ernst & Young LLP in any matters of accounting principles or practices,
financial statement disclosure , or auditing scope or procedures which, if not
resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst &
Young LLP to make reference to the matter in their report. Ernst & Young LLP
furnished a letter addressed to the Commission stating that it agreed with the
foregoing statements which the Registrant filed by amendment on February 12,
1999 as an exhibit to the current report on Form 8-K which it had filed with the
Commission on January 29, 1999 to disclose such resignation.
The Registrant selected the firm of Weinberg & Company, P.A., Certified
Public Accountants, of Boca Raton, Florida to replace Ernst & Young LLP and such
firm has audited the Registrant's financial statements for the fiscal year ended
September 30, 1998, included in this report.
Page 67
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Directors and Executive Officers
Directors and Executive Officers as of September 30, 1998
As of September 30, 1998, the following persons served as the Registrant's
directors and executive officers:
Name Age Term Positions
Richard C. Peplin, Jr. 41 * Chairman of the Board of Directors,
Director, Chief Executive Officer;
Treasurer
Robert S. Gigliotti 51 ** Director; Secretary
---------
* Elected on November 10, 1997, by the Board of Directors to serve until the
next annual meeting of the Registrant's stockholders, and until his
successors were elected, and assumed their office except that service as an
officer was at the pleasure of the Board of Directors. Mr. Peplin resigned
from all roles with the Registrant on May 4,1999.
** Elected on December 11, 1997, by the Board of Directors to serve until the
next annual meeting of the Registrant's stockholders, and until his
successors were elected, and assumed their office except that service as an
officer was at the pleasure of the Board of Directors.
Material Subsequent Events
On or about September 15, 1998, ITA defaulted in its obligation to pay RCP
$5,600,710 for services rendered to third parties, payment for which was
collected by ITA. As a result of such default, all of the Registrant's
operations were materially affected in a very negative fashion and all of the
Registrant's business operations were subsequently divested or terminated.
Realizing that the Registrant would have to drastically revise its operations,
the Registrant began negotiations with Yankees for assistance in developing and
implementing new strategic plans. Negotiations with Yankees culminated in the
Yankees Consulting Agreement. The Yankees Consulting Agreement originally
permitted Yankees to acquire 51% of the Registrant's common stock at a cost of
$40,000, and required Yankees to recruit additional directors and to assist the
Registrant to develop and implement a new strategic plan, assist the Registrant
to negotiate with its creditors and assist the Registrant to prepare and file
required reports with the Securities and Exchange Commission (the Registrant's
independent ability to do so having been affected by its current lack of
required funds). The option was modified during January of 2000 as an inducement
to Yankees' extension of the consulting agreement by increasing the percentage
of shares of the Registrant's securities which Yankees had a right to purchase
up to 75% and increasing the exercise price to $80,000 (the "Yankee Options").
As of June 30, 2000, Yankees had paid $30,000 of such exercise price. Most of
the proceeds from exercise of the Yankee Options has been paid by the Registrant
to its auditors in conjunction with the audit of the Registrant's financial
statements for the period ended September 30, 1998, to a consultant who worked
to gather information required by the Registrant's auditors, and to settle
outstanding liabilities of the Registrant.
Page 68
<PAGE>
In conjunction with its obligations to the Registrant under the Yankees
Consulting Agreement, Yankees recommended that three new directors be elected
(see biographies below) and recruited a new general counsel and secretary, all
of which were elected by the Registrant's existing directors to the positions
described below. Thereafter, Mr. Peplin resigned from all positions with the
Registrant on May 4, 1999 and Yankees recommended and the Registrant's board of
directors elected, the following people (in addition to Mr. Gigliotti who
continues to serve as a member of the Registrant's board of directors) as
officers and directors of the Registrant.
Name Age (1) Term (2) Positions
---- ------- -------- ---------
Anthony Q. Joffe 57 (3)(4) President,director, chairman
of the board of directors.
Penny Adams Field 44 (3)(5) Director, chairperson of the
audit committee
Charles J. Champion, Jr. 33 (3)(6) Director and member of the
audit committee.
Vanessa H. Lindsey 29 (3)(7) Secretary and director.
Lawrence R. Van Etten 63 (8) Director.
G. Richard Chamberlin, Esquire 53 (3)(9) General counsel.
--------
(1) As of July 31, 2000.
(2) All directors were elected for a term ending at such time as his
successor is elected at the next annual meeting of the Registrant's
stockholders and is qualified in office and all officers serve at the
pleasure of the board of directors, subject to any contractual rights
to compensation that may survive their termination.
(3) Term started on January 12, 1999.
(4) Mr. Joffe was elected as a member of the Registrant's board of
directors on January 12, 1999, as the chairman of the Registrant's
board of directors during March of 1999 and as the Registrant's
president on May 4, 1999.
(5) Ms. Field resigned as chair of the audit committee on November 4, 1999
and as a member of the Registrant's board of directors on March 1,
2000, in each case due to other business commitments.
(6) Mr. Champion became the chairperson of the audit committee upon the
resignation of Penny Fields. (7) Ms. Lindsey was elected as the
Registrant's secretary on January 12, 1999, and as a member of the
Registrant's board of directors effective February 1, 2000. (8) Mr.
Van Etten was elected as a member of the Registrant's board of
directors on May 31, 2000. (9) Mr. Chamberlin resigned as general
counsel in order to pursue other business interest as of March 31,
2000.
Page 69
<PAGE>
Biographies of Directors and Executive Officers
Richard C. Peplin, Jr., President, chief executive officer and director until
May 4, 1999.
Mr. Peplin's biography is incorporated by reference from the Registrant's
report on Form 10-KSB for the fiscal year ended September 30, 1997, as permitted
by Commission Rule 12b-23.
Anthony Q. Joffe, Director, President.
Anthony Q. Joffe, age 57, has served as a member of the Registrant's board
of directors since January 12, 1999, in March of 1999, Mr. Joffe was elected as
its chairman of the board of directors and in May of 1999, he was elected as its
president. Mr. Joffe holds a degree in Aeronautical Engineering Management from
Boston University, Boston, Massachusetts. Subsequent to his graduation, Mr.
Joffe was employed as the Quality Control Manager for Cognitronics Corporation,
a computer manufacturer, where he was responsible for overseeing the United
States Air Force compliance testing program as well as normal day-to-day
management. In 1967, Mr. Joffe was employed by General Electric as a production
engineer in the insulating materials field. In 1970, Mr. Joffe was employed by
King's Electronics, a RF coaxial connector manufacturer, where he was
responsible for major accounts and guided the field sales force. In 1973, Mr.
Joffe was one of the founders and vice-president of J.S. Love Associates, Inc.,
a commodity brokerage house no longer in operation (then headquartered in New
York City). In 1976, Mr. Joffe formed and served as President and Chief
Operating Officer of London Futures, Ltd., a commodity broker with 275 employees
in nine offices. London Futures, Ltd. was closed in 1979 and Mr. Joffe moved to
Florida. From 1979 until 1986, Mr. Joffe was vice president of Gramco Holdings,
Inc. (and its predecessor companies), a firm which owned and operated a variety
of companies. These companies included five cemeteries and funeral homes in
Broward County, Florida, a 33 acre marina, a general contracting company, a boat
title insurance underwriting firm, three restaurants, a real estate brokerage
company, a mortgage brokerage company and a leasing company. His
responsibilities involved supervision of the day-to-day operations and new
business development. From 1986 to 1991, Mr. Joffe served as consultant and/or
principal to a variety of small businesses in the South Florida area. In 1989
Mr. Joffe became President of Windy City Capital Corp., a small publicly traded,
reported company that was originally formed as a "blind pool" for the express
purpose of finding an acquisition candidate. Eventually, a reverse merger was
consummated with a computer software company from Pennsylvania. Mr. Joffe then
took the position of President of Rare Earth Metals, Inc. (and its predecessor
companies), a small publicly traded company which has purchased Spinecare, Inc.,
a medical clinic in New York. Spinecare changed its name to Americare Health
Group and relocated its state domicile to Delaware. Since March of 1993, Mr.
Joffe has performed consulting services for First Commodities, Inc., an Atlanta
based commodities firm, and has been involved in fund raising for the Multiple
Sclerosis Foundation. He also assisted Digital Interactive Associates and IVDS
Partnership with financial affairs in conjunction with their successful bid to
the Federal Communications Commission for licenses in the cities of Atlanta,
Georgia, Minneapolis/St. Paul, Minnesota, and Kansas City, Missouri. Mr. Joffe
served as the interim president of Madison Sports & Entertainment Group, Inc., a
publicly held Utah corporation then headquartered in Fort Lauderdale, Florida,
from September 1, 1994, until February 16, 1996, at which time he became its
vice president and vice chairman, chief operating officer, treasurer and chief
financial officer until he resigned in 1996. Since 1996, he has founded a boat
financing company and joined NorthStar Capital ("NorthStar") as Managing
Director. NorthStar is an investment banking firm with offices in Stamford,
Connecticut and Boca Raton, Florida which specializes in assisting small to mid
size private and publicly traded companies with business and financial planning;
acquisition and divestiture: financial public relations and market position
advice: and, treasury services. Mr. Joffe has, since November of 1998, served as
a member of the Board of Directors of AmeriNet Group.com, Inc., (formerly Equity
Growth Systems, inc.), a publicly held Delaware corporation.
Page 70
<PAGE>
Penny Adams Field, Former director, audit committee chair.
Penny Adams Field, age 44, was elected as a member of the Registrant's
board of directors and as the chair of the audit committee of the board of
directors on January 12, 1999. She was replaced as chair of the audit committee
on November 4, 1999 and resigned as a director on March 1, 2000, in each case
due to her inability to dedicate the time required to such roles due to other
business commitments. Mrs. Field is a principal and co-founder of Executive
Concepts, a management consulting and investment banking advisory firm. Ms.
Field has technical expertise in designing and implementing financial management
systems, acquisition and divestiture models, cash flow management, information
systems assessment and implementations, and operational and cost system audits.
Her background in strategic planning, performance measurement, comprehensive
business planning, and cost structure analysis add to the breadth and depth of
the Executive Concepts team skills. Ms. Field is an experienced and accredited
business valuation specialist and is a member of the Institute of Business
Appraisers. She serves on numerous not-for- profit and corporate boards. As a
management consultant, Ms. Field has consulted with firms such as Monsanto,
Mallinckrodt, McDonnell-Douglas, MEMC Electronic Materials Company, Maytag, Mark
Andy, CyberTel, and numerous other small firms in the healthcare, manufacturing,
construction, and service industries. Prior to founding Executive Concepts, Ms.
Field was an administrator for the John M. Olin School of Business at Washington
University in St. Louis, where she helped to establish the Executive Programs
division. Her responsibilities included program development in the Far East.
Prior to her administrative role she served as a full-time member of the
accounting faculty instructing in financial accounting and cost management for
undergraduate and graduate programs at the Olin School. Prior to graduate study
at Washington University, Ms. Field worked in healthcare administration and
banking, including positions at Children's Hospital National Medical Center in
Washington, D.C. and Harris Bank in Chicago. After earning a B.B.A. in
Accounting and Finance, Ms. Field earned her M.B.A. from the Olin School of
Business at Washington University in St. Louis. Ms. Field also posted several
hours of Ph.D. level course work in accounting and finance prior to making a
full-time commitment to consulting. From November of 1998 until March 1, 2000,
Mrs. Field served as a member of the Board of Directors of AmeriNet Group.com,
Inc. (formerly Equity Growth Systems, inc.], a publicly held Delaware
corporation.
Charles J. Champion, Jr., Director, current audit committee chair.
Charles J. Champion, Jr., age 33, graduated from Florida State University
in 1988 with a bachelor's degree in political science. Following graduation, he
joined the Champion Group of Companies, a family owned enterprise involved in
the insurance and financial industries. In 1991, while continuing his
association with the Champion Group of Companies, he became a vice president
with Sunshine Securities Corporation, a licensed broker dealer in securities and
member of the National Association of Securities Dealers, Inc., which he
purchased in 1996, at which time it became one of the Champion Group of
Companies. He then became Sunshine Securities Corporation's president and its
business capabilities were expanded to include practice as a registered
investment advisor. Sunshine Securities Corporation's name was changed to
Champion Capital Corporation on or about February 5, 2000. Mr. Champion holds a
number of insurance and securities licenses, including series 7 and series 24
securities licenses.
Vanessa H. Lindsey, Secretary and director.
Vanessa H. Lindsey, age 29, was elected as the Registrant's secretary on
January 12, 1999 and was elected as a member of its board of directors effective
February 1, 2000. From 1993 to 1995 she was employed by Accell Plumbing Systems,
Inc., an Ohio corporation, as that company's office manager and bookkeeper.
Since 1995 she has been employed by Diversified Corporate Consulting Group,
L.L.C., a Delaware limited liability company engaged in providing diversified
consulting services and in filing EDGARized documents for clients with the
Commission, as that company's chief administrative officer. Since 1996 she has
been employed by the Southeast Companies, Inc., a Florida corporation, involved
in the entertainment industry, in business and political consulting and as a
finance company, as its chief administrative officer and currently serves as its
vice president and secretary. She is also the secretary and chief administrative
officer for the Yankee Companies, Inc., which serves as the Registrant's
strategic consultant and for Southern Capital Group, Inc, a Florida retail
finance corporation and licensed mortgage brokerage business. She currently
holds the position of secretary of The Marion County Libertarian Party and was
the Campaign Treasurer for the Cyndi Calvo for State Senate, District 8
Campaign. Since November of 1999, she has served as the secretary and as a
member of the board of directors of AmeriNet Group.com, Inc., a publicly held
Delaware corporation.
Page 71
<PAGE>
Lawrence R. Van Etten, Director.
Mr. Van Etten, age 63,was elected as a member of the Registrant's board of
directors on May 31, 2000. Mr. Van Etten [add educational background, including
full name and location of school, degrees obtained, including dates). He was
employed by IBM from 1956, until 1987, where he held several senior management
positions including Corporate Control Operations Manager, Corporate Scheduling
Manager and Director of Logistics Special Processes. Since leaving IBM, Mr. Van
Etten has served as vice president with several companies in the United States
and Canada [need names, dates, locations and description of business] and owned
and managed his own consulting company [need name, dates, location and
description of business]. Much of his recent work experience has dealt with
business management systems, personal computer application software and the
Internet. Since May 22, 2000, Mr. Van Etten has served as a member of the board
of directors and as acting president and chief operating officer of AmeriNet
Group.com, Inc., a publicly held Delaware corporation.
G. Richard Chamberlin, Esquire, Former general counsel.
G. Richard Chamberlin age 53, served as the Registrant's general counsel
from January 12, 1999 until March 31, 2000. He is a graduate of Eastern Military
Academy, Huntington, New York (College Prep Diploma, 1964): The Citadel, The
Military College of South Carolina, (B.A., political science, 1968): and the
University of Georgia School of Law, (J.D., 1971). From 1973 to 1974 he served
as Trust Officer with Central Bank & Trust Company, Jonesboro, Georgia. Mr.
Chamberlin is a practicing attorney and is a member of the Georgia Bar, (since
1974), and the Florida Bar, (since 1990). He is also a member of the Bars for
the Federal District Court for the Northern District of Georgia, (since 1974)
and the Federal District Court for the Northern District of Florida (since
1995), the Court of Appeals for the State of Georgia, (since 1974) and the
Supreme Court for the State of Georgia (since 1974). Mr. Chamberlin is also a
member of the Bar for the Eleventh District Court of Appeals, (since 1982). Mr.
Chamberlin earned a Certificate from the American Bankers Association, National
Trust School, (1974). Mr. Chamberlin is a two term former member of the Georgia
House of Representatives, (1979-1983). In the State House, Mr. Chamberlin served
on the Following committees: House Journal Committee, Natural Resources
Committee, Special Judiciary Committee and Labor Committee. He is a former
member of the Counsel for National Policy. He is the founder of the Georgia
Roundtable, Inc., and served as President from 1981 to 1986.: He is the founder
of the Georgia Heritage Foundation, and served as President from 1982 to 1986.
He is the former Principal of Soul's Harbor Christian Academy, Belleview,
Florida, (1990-1992). Mr. Chamberlin served as national music chairman for the
Religious Roundtable, Inc., at the premier event known as the 1992 National
Affairs Briefing in Dallas, Texas wherein President George Bush was the keynote
speaker. Mr. Chamberlin has received Resolutions of Commendation from the House
of Representatives for the Commonwealth of Kentucky, (1985) and from the House
of representatives for the State of Georgia, (1982). Mr. Chamberlin is former
president and director for Atrieties Development Company, Inc., a publicly held
corporation involved in the real estate industry, (1986 through 1987), and has
held licenses as a real estate agent, (Georgia and Florida). He presently serves
as president of Southern Capital Group, Inc., a Florida corporation, ("SCG")
with offices in Belleview and Ocala, Florida. SCG was founded in 1999 to
consolidate pre existing business lines in the automotive and mortgage business.
Mr. Chamberlin is also president and sole director of and majority stockholder
in Sports Collectible Exchange, Inc., a Florida corporation, ("SCE"). SCE was
founded in 1999 specializing in the sale and distribution of minor league
baseball collectibles. Mr. Chamberlin served as general counsel to Yankees from
its inception until March 31, 2000. Since November of 1998, Mr. Chamberlin has
served as a member of the board of directors of AmeriNet Group.com, Inc.
(formerly Equity Growth Systems, inc.], a publicly held Delaware corporation,
and until November 11, 1999, also served as its secretary and general counsel
until March 31, 2000.
Page 72
<PAGE>
Robert S. Gigliotti, Director, audit committee member.
Robert S. Gigliotti, age 51, served as the Registrant's secretary from
November 10, 1997 until January 12, 1999 and has served as a member of its board
of directors since December 11, 1997. In 1970, Mr. Gigliotti received a
bachelor's degree in business from Alma College, located in Alma, Michigan. For
longer than the past five years, Mr. Gigliotti has been a practicing certified
public accountant and serves as the managing tax partner of Perrin, Fordree &
Company, P.C. in Troy, Michigan. Mr. Gigliotti received his certified public
accountancy license in 1972 and joined the firm of Perrin, Fordree & Company,
P.C. in 1976 after six years in the tax department of the Detroit office of
Arthur Andersen & Company. Mr. Gigliotti's specialties include estate and
financial planning, franchising and corporate taxation.
Other Material Personnel
In addition to the Registrant's directors and executive officers, since
January of 1999, William A. Calvo, III and Leonard Miles Tucker have also
provided material services to the Registrant through Yankees, in which they
serve as directors and executive officers and which they and their families own.
Because Yankees has the right to acquire up to 75% of the Registrant's
securities, it should also be deemed a control person of the Registrant.
Family Relationships.
There are no family relationships among the current officers and directors
of the Registrant.
Involvement in Certain Legal Proceedings.
Based on information provided in response to the Registrant's legal
counsel, except as otherwise disclosed in this report, during the five year
periods ending on September 30, 1998 and 2000, no current director, person
nominated to become a director or executive officer, and no promoter or control
person of the Registrant has been a party to or the subject of:
(1) Any bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time;
(2) Any conviction in a criminal proceeding or has been subject to a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
(3) Any order, judgment, or decree, not subsequently reversed, suspended or
vacated, of any court of competent jurisdiction, permanently or temporarily
enjoining, barring, suspending or otherwise limiting his involvement in any
type of business, securities or banking activities; and
(4) Been found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the judgment has not
been reversed, suspended, or vacated.
Compliance with Section 16(a) of the Exchange Act
To the best of the Registrant's knowledge, no one subject to Section 16(a)
of the Exchange Act engaged in any transactions in the Registrant's securities
during 1998, except with reference to receipt of securities from the Registrant,
as described in this report.
ITEM 10. EXECUTIVE COMPENSATION.
During the 57 month period commencing on October 1, 1995 and ending on June
30, 2000, Mr. Milligan, served as the Registrant's president and chief executive
officer until October 31, 1997, when Mr. Wiseman, was elected as the
Registrant's president, secretary, treasurer and chief financial officer until
November 10, 1997, when Mr. Peplin, was elected as the Registrant's president
and chief executive officer. Mr. Peplin was replaced as President and Chief
Executive Officer by Mr. Joffe on May 4, 1999.
Page 73
<PAGE>
During the 12 month period ended September 30, 1996, Mr. Milligan received
$72,000 as compensation for services to the Registrant. During the 12 month
period ended September 30, 1997, Mr. Milligan received $96,000 as compensation
for services to the Registrant. During the 12 month period ended September 30,
1998, Mr. Peplin received $153,000as compensation for services to the
Registrant. As of the date of this report Mr. Joffe is to receive 200,000 shares
as compensation for his services to the Registrant.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Summary Compensation Table
Annual Compensation Awards Payouts
Securities
Other Underlying Long All
Name and Annual Restricted Options & Term Other
Principal Compen- Stock Stock Apprecia- Incentive Compen-
Position Year Salary Bonus sation Awards tion Rights Payouts sation
-------- ---- ------ ----- ------ ------ ----------- ------- ------
Mr. Milligan (1) 1996 $72,000 * * * * * *
Mr. Milligan (1) 1997 $96,000 * * * * * *
Mr. Peplin (2) 1998 $153,000 * * * * * *
Mr. Joffe (3) 1999 * * * 200,000 * * *
</TABLE>
(1) Mr. Milligan served as the Registrant's president and chief executive
officer during the period beginning on October 1, 1996 and ending on
November 10, 1997. See the disclosure concerning Mr. Milligan's
compensation at "Executive Compensation" above.
(2) Mr. Peplin served as the Registrant's president and chief executive officer
during the period beginning on November 10, 1997 and ending on May 4, 1999.
See the disclosure concerning Mr. Peplin's compensation at "Executive
Compensation" above.
(3) Mr. Joffe has served as the Registrant's president and chief executive
officer since May 4, 1999. See disclosure concerning Mr. Joffe's
compensation at "Executive Compensation" above.
* Not Applicable
Options and Stock Appreciation Rights Grants Table
For Fiscal Year Ended September 30, 1998:
Quantity of Percentage of Total
Securities Options or Stock
Underlying Appreciation Exercise
Options & Stock Rights Granted or Base
Appreciation to Employees Price Per Expiration
Name Rights Granted In Fiscal Year Share Date
---- -------------- -------------- ----- ----
Mr. Peplin 1,000,000 100% $6.00 June 30, 2000*
-------
* Mr. Peplin resigned as an officer and director on May 4, 2000
Page 74
<PAGE>
For Fiscal Year Ended September 30, 1999:
Quality of Percentage of Total
Securities Options or Stock
Underlying Appreciation Exercise
Options & Stock Rights Granted or Base
Appreciation to Employees Price Per Expiration
Name Rights Granted In Fiscal Year Share Date
---- -------------- -------------- ----- ----
Mrs. Lindsey 20,000 25% $0.05 January 12, 2001
Mr. Chamberlin 70,000 75% $0.05 January 12, 2001
For Quarter Ended June 30, 2000:
Quantity of Percentage of Total
Securities Options or Stock
Underlying Appreciation Exercise
Options & Stock Rights Granted or Base
Appreciation to Employees Price Per Expiration
Name Rights Granted In Fiscal Year Share Date
---- -------------- -------------- ----- ----
Mrs. Lindsey 24,000 100% $0.02 December 31, 2002
Aggregated Option & Stock Appreciation Right Exercises and Fiscal Year-End
Options & Stock Appreciation Rights Value Table
Number of
Securities
Underlying
Options & Value of
Stock Unexercised
Appreciation In-the-Money
Shares Rights at Options & Stock
Acquired Value Fiscal Appreciation Rights
Name On Exercise Realized Year End at Fiscal Year End
---- ----------- -------- -------- ------------------
None
Long Term Incentive Plan Awards Table
Long Term Incentive Plans - Awards in Last Fiscal Year
Performance
Number or Other
Name of Units Period Until
of or Other Maturation
Executive Officer Rights or Payout Threshold Target Maximum
----------------- ----- ------------ --------- ------ -------
Not Applicable
Compensation of Directors
Standard Arrangements
During the reporting period, members of the Registrant's board of
directors, except for Mr. Gigliotti as disclosed below, did not receive any
compensation for such role; however, they may have received compensation in
conjunction with their roles as employees or officers of the Registrant, or as
consultants thereto, all of which is either disclosed as part of this Item, or
is disclosed in Part III, Item 12, Certain Relationships and Related
Transactions.
Page 75
<PAGE>
Mr. Gigliotti received an option to purchase 50,000 for $0.01 per share,
which he exercised on January 12, 1998.
Other Arrangements
During the reporting period, members of the Registrant's board of directors
did not receive any compensation for such role; however, they may have received
compensation in conjunction with their roles as employees or officers of the
Registrant, or as consultants thereto, all of which is either disclosed as part
of this Item, or is disclosed in Part III, Item 12, Certain Relationships and
Related Transactions.
Material Subsequent Events
In January of 1999, the members of the Registrant's board of directors and
officers were compensated through the grant of warrants to purchase shares of
the Registrant's common stock, as disclosed in the following table:
Date of Expiration Exercise Underlying
Name Option Date Price Shares
---- ------ ------ ----- ------
Anthony Q. Joffe (1) 1-29-99 1-15-00 $0.05 70,000
Penny Adams Field (1) 1-29-99 1-15-00 $0.05 70,000
Charles J. Champion, Jr.(1) 1-29-99 1-15-00 $0.05 70,000
Vanessa H. Lindsey (2) 1-29-99 1-15-00 $0.05 20,000
G. Richard Chamberlain (2) 1-29-99 1-15-00 $0.05 70,000
------
(1) Directors
(2) Officers
In January of 2000, the members of the Registrant's board of directors and
officers were compensated through the grant of warrants to purchase shares of
the Registrant's common stock, as disclosed in the following table:
Date of Expiration Exercise Underlying
Name & Category Option Date Price Shares
--------------- ------ -------- ----- ------
Anthony Q. Joffe (1)(2) 1-3-00 12-31-02 $0.02 48,000
Charles J. Champion, Jr.(1) 1-3-00 12-31-02 $0.02 48,000
Robert S. Gigliotti (1) 1-3-00 12-31-02 $0.02 48,000
Robert S. Gigliotti (1) 3-14-00 1-12-01 $0.05 70,000
Vanessa H. Lindsey (1)(2) 1-3-00 12-31-02 $0.02 48,000
Vanessa H. Lindsey (1)(2) 1-3-00 12-31-02 $0.02 24,000
Lawrence R. Van Etten (1) 1-3-00 12-31-02 $0.02 48,000
------
(1) Director
(2) Executive Officer
A sample copy of the warrant agreements listed above is filed as an exhibit
to this report, see "Part III, Item 13(a), Exhibits Required by Item 601 of
Regulation SB."
At Yankees recommendation, on January 3, 2000, the Registrant adopted a
plan to compensate its directors based on set quantities of options for service
on the board of directors and for services on committees of the board of
directors, for services chairing the board of directors and its committees; with
forfeiture provisions in the event of non- participation. As currently
contemplated, the plan would provide that members of the Registrant's board of
directors who are not provided other compensation by the Registrant's
subsidiaries (if any are subsequently acquired), be compensated for their
services during the period ending on December 31, 2001, as follows:
Page 76
<PAGE>
* For basic service as a member of the Registrant's board of directors, an
option to purchase 48,000 shares of the Registrant's common stock during
the twelve month period commencing on January 1, 2001 and ending on
December 31, 2002, at an exercise price based on the last reported
transaction price for the Registrant's common stock reported on the OTC
Bulletin Board on an appropriate measuring date, possibly the first
business day following the next annual meeting of the Registrant's
stockholders. The options would vest as to 4,000 shares of the underlying
common stock per month, provided that the subject director attended all
meetings of the board of directors held during such month and any options
that did not vest would expire.
* For service on the audit or executive committee, the option would be
increased by an additional 12,000 shares which would vest at the rate of
1,000 shares per month, provided that the subject director attended all
meetings of the subject committee held during such month and any options
that did not vest would expire; and
* For service as the chair of the audit or executive committee, the option
would be increased by an additional 24,000 shares which would vest at the
rate of 2,000 shares per month, provided that the subject director attended
all meetings of the subject committee held during such month and any
options that did not vest would expire.
All of the foregoing options would require that the recipient comply on a
timely basis with all personal reporting obligations to the Commission
pertaining to his or her role with the Registrant and that the recipient serve
in the designated position providing all of the services required thereby
prudently and in good faith until September 30, 2001 (unless such person was not
elected to such position by the Registrant's stockholders despite a willingness
and ability to serve). In addition to the compensation described above, the
Registrant's directors elected at the Annual Meeting of Stockholders would be
entitled to the following contingent compensation and right to indemnification:
(1) In the event that a member of the Registrant's board of directors arranged
or provided funding for the Registrant on terms more beneficial than those
reflected in the Registrant's current principal financing agreements,
copies of which are included among the Registrant's records available
through the SEC's EDGAR web site, the director would be entitled, at his or
her election, to either:
(A) A fee equal to 5% of such savings, on a continuing basis; or
(B) If equity funding is provided through the director or any affiliates
thereof, a discount of 5% from the bid price for the subject equity
securities, if they are issuable as free trading securities, or, a
discount of 25% from the bid price for the subject equity securities,
if they are issuable as restricted securities (as the term restricted
is used for purposes of SEC Rule 144); and
(C) If equity funding is arranged for the Registrant by the director and
the Registrant is not obligated to pay any other source compensation
in conjunction therewith, other than the normal commissions charged by
broker dealers in securities in compliance with the compensation
guidelines of the NASD, the director would be entitled to a bonus in a
sum equal to 5% of the net proceeds of such funding.
(2) In the event that the director generated business for the Registrant, then,
on any sales resulting therefrom, the director would be entitled to a
commission equal to 5% of the net income derived by the Registrant
therefrom, on a continuing basis.
Page 77
<PAGE>
The Registrant would defend, indemnify and hold the members of its board of
directors harmless from all liabilities, suits, judgments, fines, penalties or
disabilities, including expenses associated directly, therewith (e.g. legal
fees, court costs, investigative costs, witness fees, etc.) resulting from any
reasonable actions taken by them, in good faith on behalf of the Registrant, its
affiliates or for other persons or entities at the request of the Registrant's
board of directors, to the fullest extent legally permitted, and in conjunction
therewith, would assure that all required expenditures were made in a manner
making it unnecessary for indemnified directors to incur any out of pocket
expenses; provided, however, that such director permitted the Registrant to
select and supervise all personnel involved in such defense and that the
director waived any conflicts of interest that such personnel may have as a
result of also representing the Registrant, its stockholders or other personnel
and agreed to hold them harmless from any matters involving such representation,
except such as involved fraud or bad faith. A copy of the 2000 plan is filed as
an exhibit to this report, see "Part III, Item 13(a), Exhibits Required by Item
601 of Regulation SB."
Yankees' has also recommended that the Registrant's board of directors
resolve that, at such time as the Registrant has, on a consolidated basis,
earned a net, after tax profit of at least $100,000 per quarter for four
calendar quarters, the Registrant would:
* Obtain insurance to cover the Registrant's indemnification obligations, if
available on terms deemed economically reasonable under the circumstances,
which would not materially, detrimentally affect the Registrant's liquidity
at the time;
* Provide members of its board of directors who would not have overlapping
coverage with health and life insurance coverage, if available on terms
deemed economically reasonable under the circumstances, which would not
materially, detrimentally affect the Registrant's liquidity at the time;
and
* Pay $500 per diem cash allowance for all meetings or functions attended in
person rather than by telephone or similar means at the request of the
Registrant, to all members of the board of directors who are not also
officers or employees of the Registrant or its subsidiaries.
All of the foregoing would be reflected in a form of "agreement to serve as
a corporate director" that each director nominee would have signed prior to the
Annual Meeting of Stockholders, except that the stock bonus provisions would not
apply to directors who served as designees of subsidiaries or businesses that
the Registrant acquired pursuant to contractual commitments obligating the
Registrant to nominate them for membership on the Registrant's board of
directors. Copies of the executed agreements would be filed as exhibits to the
Registrant's quarterly report on Form 10-QSB or current report on Form 8-K first
filed with the Commission following the Annual Meeting of Stockholders at which
such plan was adopted.
Employment Contracts and Termination of Employment and Change in Control
Arrangements.
During the fiscal year that started on October 1, 1997 and ended on
September 30, 1998, the Registrant had no employment contracts, termination of
employment or change in control arrangements with any of its executive officers,
except as set forth below. However, see Part I, Item 3, Legal proceedings,
concerning employment agreements with presidents of the Registrant's
subsidiaries and settlement agreements associated therewith.
Page 78
<PAGE>
Employment Agreements
On June 1, 1998, the Registrant entered into an employment agreement with
Mr. Peplin pursuant to which he was engaged as the Registrant's president and
chief executive officer. The agreement was established for a term of 5 years and
contained confidentiality and non-competition clauses. As consideration for Mr.
Peplin's services, the Registrant agreed to pay a base salary of $300,000 per
year. In addition, the Registrant agreed to grant him an option to purchase
1,000,000 shares of the Registrant's common stock at an exercise price of $6.00
per share and exercisable for 6 years following the grant of such options,
vesting at a rate of 200,000 shares per year on each anniversary date of the
agreement. No stock options were exercised and on March 25, 1999, the employment
contract was terminated. A copy of the Peplin employment agreement is filed as
an exhibit to this report, see "Part III, Item 13(a), Exhibits Required by Item
601 of Regulation SB."
As a material subsequent event, in conjunction with the resignation of Mr.
Peplin as the Registrant's president and a member of the Registrant's board of
directors, on May 4, 1999, the Registrant's board of directors elected Anthony
Q. Joffe as its president. Mr. Joffe's term as an officer is at the pleasure of
the Registrant's board of directors, subject to his contractual rights under an
employment agreement. The terms of Mr. Joffe's compensation for services to the
Registrant are set forth in his employment agreement with the Registrant,
summarized below. A copy of the Joffe employment agreement is filed as an
exhibit to this report., see "Part III, Item 13 (a), Exhibit Required by Item
601 of Regulation SB."
TERMS OF EMPLOYMENT
The following summary information extracted from the Joffe Agreement is
qualified in its entirety by reference to the Joffe Agreement.
Duties: Mr. Joffe will:
Serve as the principal point of contact between the Registrant and the
media (print, electronic, voice and picture), the investment community and the
Registrant's security holders;
Be responsible for supervision of all of the Registrant's other officers;
Be responsible for the Registrant's compliance with all applicable laws,
including federal, state and local securities laws and tax laws;
Be responsible for supervision of the Registrant's subsidiaries; and,
Perform such other duties as are assigned to him by the Registrant's board
of directors, subject to compliance with all applicable laws and fiduciary
obligations.
Other Activities
Mr. Joffe shall, unless specifically otherwise authorized by Colmena's
board of directors, on a case by case basis, devote his business time in a way
that the affairs of Colmena are satisfied; provided, however, that Colmena
hereby recognizes that Mr. Joffe is a full time employee of Harbour Acceptance
Corp. and hereby consents to his continuation in such roles, provided that his
role as Colmena's president shall take priority in allocation of time and
resources to any activities pertaining to such roles, and that he will resolve
any actual conflicts of interest resulting from such roles in favor of Colmena
whenever possible and practical.
Status:
Mr. Joffe will serve as an employee of the Registrant but shall have no
authority to act as an agent thereof or to bind the Registrant or its
subsidiaries as a principal or agent thereof without the specific consent of the
Registrant's board of directors, all such functions being reserved to the board
of directors in compliance with the requirements of its constituent documents.
Page 79
<PAGE>
Limitations:
Mr. Joffe has agreed that he will not:
Release any financial or other material information or data about the
Registrant without the prior written consent and approval of the Registrant's
General Counsel; or, conduct any meetings with financial analysts without
informing the Registrant's General Counsel and board of directors in advance of
the proposed meeting and the format or agenda of such meeting.
Disclose to any third party any confidential non-public information
furnished by the Registrant except on a need to know basis, and in such case,
subject to appropriate assurances that such information shall not be used,
directly or indirectly, in any manner that would violate state or federal
prohibitions on insider trading of the Registrant's securities.
Take any action which would in any way adversely affect the reputation,
standing or prospects of the Registrant or which would cause the Registrant to
be in violation of applicable laws. In any circumstances where Mr. Joffe is
describing the securities of the Registrant to a third party, Mr. Joffe has
agreed to disclose to such person any compensation received from the Registrant
to the extent required under any applicable laws, including, without limitation,
Section 17(b) of the Securities Act of 1933, as amended.
Term:
The Joffe Agreement is for a term of one year, subject to automatic annual
renewal thereafter unless the Party deciding not to renew provides the other
with written notice of intention not to renew prior to the 60th day before
termination of the then effective term or renewal thereof.
Compensation:
A. 200,000 shares of the Registrant's common stock, provided that:
(1) He remains in the employ of the Registrant for a period of not
less than 365 consecutive days;
(2) He has not been discharged by the Registrant for cause;
(3) He fully complies with the provisions of the Joffe Agreement,
including, without limitation, the confidentiality and
non-competition sections hereof;
B. In the event that Mr. Joffe arranges or provides funding for the
Registrant on terms more beneficial than those reflected in the
Registrant's current principal financing agreements, copies of which
are included among the Registrant's records available through the
SEC's EDGAR web site, Mr. Joffe shall be entitled, at its election, to
either:
(1) A fee equal to 5% of such savings, on a continuing basis; or
(2) If equity funding is provided through Mr. Joffe or any affiliates
thereof, a discount of 5% from the bid price for the subject
equity securities if they are issuable as free trading
securities, or, a discount of 25% from the bid price for the
subject equity securities, if they are issuable as restricted
securities (as the term restricted is used for purposes of SEC
Rule 144); and
(3) If equity funding is arranged for the Registrant by Mr. Joffe and
the Registrant is not obligated to pay any other source
compensation in conjunction therewith, other then the normal
commissions charged by broker dealers in securities in compliance
with the compensation guidelines of the NASD, the Mr. Joffe shall
be entitled to a bonus in a sum equal to 5% of the net proceeds
of such funding.
Page 80
<PAGE>
C In the event that Mr.Joffe generates business for the Registrant,
then, on any sales resulting therefrom, Mr. Joffe shall be entitled to
a commission equal to 5% of the net income derived by the Registrant
therefrom, on a continuing basis.
Benefits:
Mr. Joffe is entitled to any benefits generally made available to all other
employees (rather than to a specified employee or group of employees) of the
Registrant or its subsidiaries.
Indemnification:
The Registrant will defend, indemnify and hold Mr. Joffe harmless from all
liabilities, suits, judgments, fines, penalties or disabilities, including
expenses associated directly, therewith (e.g. legal fees, court costs,
investigative costs, witness fees, etc.) resulting from any reasonable actions
taken by him in good faith on behalf of the Registrant, its affiliates or for
other persons or entities at the request of the board of directors of the
Registrant, to the fullest extent legally permitted, and in conjunction
therewith, shall assure that all required expenditures are made in a manner
making it unnecessary for Mr. Joffe to incur any out of pocket expenses;
provided, however, that Mr. Joffe permits the Registrant to select and supervise
all personnel involved in such defense and that Mr. Joffe waives any conflicts
of interest that such personnel may have as a result of also representing the
Registrant, their stockholders or other personnel and agrees to hold them
harmless from any matters involving such representation, except such as involve
fraud or bad faith.
Early Termination:
The Registrant can terminate the employment agreements severally, as to the
terminating entity only, for cause (e.g., the inability through sickness or
other incapacity to discharge duties for 21 or more consecutive days or for a
total of 45 or more days in a period of twelve consecutive months; refusal to
follow directions of the board of directors; dishonesty; theft; or conviction of
a crime involving moral turpitude; material default in the performance of
obligations, services or duties required under the employment agreement (other
than for illness or incapacity) or materially breach of any provision of the
employment agreement, which continues for 5 days after written notice if it
resulted in material damage); discontinuance of business; and death. In the
event of a dispute concerning termination due to breach or default, compensation
will be continued until resolution of such dispute by a tribunal of competent
jurisdiction, subject to repayment upon final determination that such
compensation was not called for The Joffe Agreement contains broad
non-disparagement, confidentiality and non-competition covenants subject to
judicial restructuring if found to be legally unenforceable which provide for
both injunctive relief and liquidated damages.
COMPENSATION OF CORPORATE SECRETARY
The Registrant has agreed to compensate Mrs. Lindsey for her services as
secretary until December 31, 2000, by granting her a non-qualified stock option
pursuant to the Registrant's Stock Option Plan (described in this report) to
purchase 24,000 shares of the Registrant's common stock at a price of $0.02 per
share, exercisable during the period starting on January 1, 2001 and ending on
December 31, 2002. A copy of the agreement to serve as corporate secretary is
filed as an exhibit to this report., see "Part III, Item 13 (a), Exhibit
Required by Item 601 of Regulation SB."
Page 81
<PAGE>
Report of Re-Pricing of Options or Stock Appreciation Rights
During the report period (October 1, 1997 until September 30, 1998), to the
best knowledge of the Registrant, the former management did not re-price any
options or stock appreciation rights previously granted to any of the
Registrant's executive officers, whether by amendment, cancellation or
replacement grants, or any other means.
As a material subsequent event, during the period commencing on January 12,
1999 and ending on the date of this report, except as disclosed below, the
Registrant has not adjusted or amended the exercise price of stock options or
stock appreciation rights previously awarded to any of the named directors or
executive officers, whether through amendment, cancellation or replacement
grants, or any other means, nor are any such adjustments or amendments currently
contemplated:
1. The consulting agreement with Yankees calls for services which in certain
cases approach duties normally undertaken by a corporation's board of
directors (e.g., recommendations concerning divestitures, acquisitions,
compensation for officers and directors, and nominations for officers and
directors). While in each case, the ultimate decision is made by the
Registrant's board of directors, because Yankees is the Registrant's
largest stockholder, currently provides almost all of the Registrant's
capital and operating facilities and has nominated all of the members of
the Registrant's board of directors (other than Mr. Gigliotti), the
Registrant has elected to respond to this Item as if Yankees was a director
or executive officer.
The consulting agreement with Yankees was renegotiated during January of
2000 at the Registrant's request, due to its inability to start making the
cash payments called for by the original agreement. As a result of the
amendment, Yankees option was increased from the right to purchase 51% of
the Registrant's common stock for $40,000 to the right to purchase 75% of
the Registrant's common stock for $80,000, in consideration for Yankees'
agreement to waive its hourly and licensing fees for services to the
Registrant until December 31, 2000. A copy of the amended consulting
agreement is filed as an exhibit to this report, see "Part III, Item 13(a),
Exhibits Required by Item 601 of Regulation SB."
2. On or about January 3, 2000, the expiration date of the options granted to
the members of the Registrant's board of directors and its executive
officers who assumed office on and after January 12, 1999, was extended
until January 12, 2001.
Page 82
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of the end of the Report Period
As of September 30, 1998, the Registrant's only currently outstanding
voting securities were 7,741,697 shares of common stock, $0.01 par value. The
following tables disclose information concerning ownership of the Registrant's
common stock by officers, directors and principal stockholders (holders of 5% or
more of the Registrant's common stock) as of such date. The Registrant's
outstanding shares of common stock for purposes of these calculations, include
both outstanding securities as of the report date and securities which a named
person had a right to acquire within 60 days following the report date
(September 30, 1998). Consequently, the number of shares deemed outstanding for
purposes of the first table (principal stockholders) will vary materially from
those deemed outstanding for purposes of the second table (executive officers
and directors).
Footnotes to all tables follow the second table after "Material Subsequent
Events."
Security Ownership of Certain Beneficial Owners
As of September 30, 1998, the following persons (including any "group")
were, based on information available to the Registrant, beneficial owners of
more than five percent of the Registrant's common stock (its only class of
voting securities). Of the number of shares shown in column 2, the associated
footnotes indicate the amount of shares with respect to which such persons had
the right to acquire beneficial ownership as specified in Commission Rule
13(d)(1), within 60 days following the report date. For purposes of Table A,
7,741,697 shares of the Registrant's common stock are assumed to be outstanding.
Amount
and Nature Percent
Of Beneficial of
Name and Address of Beneficial Owner (1) Ownership (2) Class
---------------------------------------- ------------- -----
Richard C. Peplin, Jr. 1,626,041 (3) 21%
25100 Detroit Road; Westlake, Ohio 44145
Lakewood Manufacturing Co. 793,944(3) 10%
25100 Detroit Road; Westlake, Ohio 44145
Security Ownership of Management
As of September 30, 1998, the following table discloses the Registrant's
common stock (the only outstanding class of equity securities for the
Registrant, its parents or subsidiaries held by persons other than the
Registrant) other than directors' qualifying shares, beneficially owned by all
directors and nominees, naming them each; each of the named executive officers
as defined in Item 402(a) of Commission Regulation S-B; and, all directors and
executive officers of the Registrant as a group, without naming them. The table
shows in column 3 the total number of shares beneficially owned and in column 4
the percent owned. Of the number of shares shown in column 2, the associated
footnotes indicate the amount of shares, if any, with respect to which such
persons had the right to acquire beneficial ownership as specified in Commission
Rule 13(d)(1), within 60 days following the report dated. For purposes of this
table, 7,741,697 shares of the Registrant's common stock are assumed to have
been outstanding based on the options to acquire shares of the Registrant's
common stock exercisable within the next 60 days held by the persons listed.
Page 83
<PAGE>
Name and Address of Amount Nature of Percent
Beneficial Of Equity Beneficial of
Owner (1) Owned Ownership Class
----- --- ----- --------- -----
Richard C. Peplin, Jr. 2,419,985 (3) 31%
25100 Detroit Road; Westlake, Ohio 44145
Robert S. Gigliotti 100,000 (6) 1%
901 Wilshire Drive, Suite 400;
Troy, Michigan 48084
All officers and directors as a group 2,519,985 (2) 32%
Material Subsequent Events
The Registrant has issued a material quantity of its common stock (its only
class of outstanding securities, since the report date (September 30, 1998). As
of June 30, 2000, the Registrant's only currently outstanding voting securities
are 15,572,265 shares of common stock, $0.01 par value, held by approximately
497 registered holders of record and approximately 325 additional holders whose
securities are registered in "street name" (e.g., held in the names of brokers
or dealers in securities or their designees, the Depository Trust Company,
etc.). The following tables disclose information concerning ownership of the
Registrant's common stock by officers, directors and principal stockholders
(holders of 5% or more of the Registrant's common stock). The Registrant's
currently outstanding shares of common stock, for purposes of these
calculations, are calculated based on information available as of June 30, 2000,
and include both currently outstanding securities and securities which a named
person has a right to acquire within 60 days following the date of this report.
Consequently, the number of shares deemed outstanding for purposes of the first
table (principal stockholders) will vary materially from those deemed
outstanding for purposes of the second table (executive officers and directors).
All footnotes follow the second table.
Security Ownership of Certain Beneficial Owners
As of June 30, 2000, the following persons (including any "group") are,
based on information available to the Registrant, beneficial owners of more than
five percent of the Registrant's common stock (its only class of voting
securities). Of the number of shares shown in column 2, the associated footnotes
indicate the amount of shares with respect to which such persons have the right
to acquire beneficial ownership as specified in Commission Rule 13(d)(1), within
60 days following the date of this report. For purposes of Table A, 51,399,060
shares of the Registrant's common stock are assumed to be outstanding.
Amount
and Nature Percent
Of Beneficial of
Name and Address of Beneficial Owner (1) Ownership (2) Class
---------------------------------------- ------------- -----
The Yankee Companies, Inc.
(and its affiliates)(4) 42,616,795 (5) 83%
2500 North Military Trail, Suite 225;
Boca Raton, Florida 33431
Security Ownership of Management
As of June 30, 2000, the following Table discloses the Registrant's common
stock (the only outstanding class of equity securities for the Registrant, its
parents or subsidiaries held by persons other than the Registrant) other than
directors' qualifying shares, beneficially owned by all directors and nominees,
naming them each; each of the named executive officers as defined in Item 402(a)
of Commission Regulation S-B; and, all directors and executive officers of the
Registrant as a group, without naming them. The table shows in column 3 the
total number of shares beneficially owned and in column 4 the percent owned. Of
the number of shares shown in column 2, the associated footnotes indicate the
amount of shares, if any, with respect to which such persons have the right to
acquire beneficial ownership as specified in Commission Rule 13(d)(1), within 60
days following the date of this report. For purposes of this Table, 15,942,265
shares of the Registrant's common stock are assumed to be outstanding based on
the options to acquire shares of the Registrant's common stock exercisable
within the next 60 days held by the persons listed. Footnotes follow this table.
Page 84
<PAGE>
Name and Address of Amount Nature of Percent
Beneficial Of Equity Beneficial of
Owner (1) Owned Ownership Class
--------- ----- --------- -----
Robert S. Gigliotti 160,000 (6) 0.01%
901 Wilshire Drive, Suite 400;
Troy, Michigan 48084
Anthony Q. Joffe 70,000 (7) 0.004%
101 Southwest 11th Avenue;
Boca Raton, Florida 33486
Penny Adams Field 70,000 (8) 0.004%
2424 Longboat Drive;
Naples, Florida 34104
G. Richard Chamberlin, Esquire 70,000 (9) 0.004%
4518 Southwest 44th Lane,
Ocala, Florida 34474
Vanessa H. Lindsey 20,000 (10) 0.001%
340 Southeast 55th Avenue;
Ocala, Florida 34471
Charles J. Champion 70,000 (11) 0.004%
Post Office Box 952259;
Lake Mary, Florida 32795
Lawrence R. Van Etten 0 (12) 0%
1601 North 15th Terrace;
Hollywood, Florida 33020
All officers and directors
as a group 460,000 (2) 0.028%
Footnotes to Tables of Principal Stockholders and Tables of Executive Officers
and Directors
The following footnotes apply to the preceding four tables:
(1) This table pertains to common stock, the Registrant's only outstanding
equity securities.
(2) Beneficial and record.
(3) Mr. Peplin served as the Registrant's president, chief executive officer,
as a member of the Registrant's board of directors and as its chair from
November 10, 1997 until May 4, 1999 (except that he resigned as chairman on
March 3, 1999). Lakewood Mfg. Co. is an entity control by Mr. Peplin.
(4) The Tucker family is comprised of Michelle Tucker, Leonard Miles Tucker,
her husband, Shayna and Montana, their minor daughters and Jerrold Tucker,
her father-in-law. Mr. Jerrold Tucker holds 250,000 shares and 440,000
shares in trust for his minor granddaughters and, in addition, 100,000
shares are held by Blue Lake Capital Corp., a Florida corporation owned by
Mrs. Tucker.
(5) The Yankee Companies, Inc., is a Florida corporation, 50% of which is owned
by members of the Tucker family. Consequently, half of its securities could
be attributed beneficially to the Tucker Family (see note 2).
(6) Mr.Gigliotti has served as a member of the Registrant's board of directors
since December 11, 1997, and as its secretary until January 12, 1999.
Page 85
<PAGE>
(7) Mr. Joffe has served as a member of the Registrant's board of directors
since January 12, 1999, as its president and chief executive officer since
May 4, 1999.
(8) Ms. Field served as a member of the Registrant's board of directors from
January 12, 1999 until March 1, 2000, as a member of the board of
directors' audit committee from January 12, 1999 until March 1, 2000 and as
chair of the audit committee from January 12, 1999 until March 1, 2000.
(9) Mr. Chamberlin served as the Registrant's general counsel from January 12,
1999 until March 31, 2000.
(10) Ms. Lindsey was elected as the Registrant's secretary on January 12, 1999
and as a member of the Registrant's board of directors effective February
1, 2000.
(11) Mr. Champion has served as a member of the Registrant's board of directors
since January 12, 1999.
(12) Mr. Van Etten, was elected as a member of the Registrant's board of
directors on May 31, 2000.
Changes in Control
As of the end of the report period (September 30, 1998), there were no
change of control arrangements in effect. Since the end of the report period,
material changes in control have taken place (see "Part III, Item 9, Directors,
Executive Officers, Promoters and Control Persons ...." for a discussion of how
current management assumed control of the Registrant starting in January of
1999). As a result of the investments by Yankees and equity compensation to
which Yankees is entitled under its consulting agreement with the Registrant,
the Registrant's former principal stockholder (Mr. Peplin) can no longer control
decisions by the Registrant's stockholders, although he has fully supported the
Registrant's current management. Based on its current stock ownership and its
option to acquire up to 75% of the Registrants common stock, Yankees and its
stockholders should be deemed to currently control the Registrant and to have
the capacity to pass matters to be acted on at stockholders meetings. Except for
the foregoing, to the best knowledge and belief of the Registrant, there are no
arrangements, understandings, or agreements relative to the disposition of the
Registrant's securities, the operation of which would at a subsequent date
result in a change in control of the Registrant.
Parents of the Registrant
As defined in Rule 405 of Commission Regulation C, a "parent" of a
specified person is an affiliate controlling such person directly or indirectly
through one or more intermediaries. The same rule defines an affiliate as a
person that directly or indirectly through one or more intermediaries, controls
or is controlled by, or is under common control with, the person specified.
The following table discloses all persons who were parents of the
Registrant (as such term is defined in Securities and Exchange Commission
Regulation C) as of September 30, 1998, showing the basis of control and as to
each parent, the percentage of voting securities owned or other basis of control
by its immediate parent if any.
Basis for Percentage of Voting
Name Control Securities Owned
---- ------- ----------------
Richard C. Peplin, Jr. * 31%
---------
* Stock ownership & options, employment agreement. The discussion of Mr.
Peplin is dealt with in detail in Part I, Item 1, Description of Business."
Page 86
<PAGE>
As a material subsequent event, since the report date, Yankees has
supplanted Mr. Peplin as the Registrant's parent (as such term is defined in
Securities and Exchange Commission Regulation C) and the following table, as of
June 30, 2000, discloses the basis of Yankees' control.
Basis for Percentage of Voting
Name Control Securities Owned
---- ------- ----------------
Yankees * 83%
---------
* Stock ownership & options, consulting agreement. The discussion of Yankees,
association with the Registrant is, as permitted by Commission Rule 12b-23,
incorporated by reference to the discussion thereof in Part II of the
Registrant's report on Form 8-K filed with the Commission on January 12,
1999. Leonard Miles Tucker, a resident of Boca Raton Florida, serves as
Yankees' president and as a member of its board of directors; William A.
Calvo, III, serves as Yankees' vice president, treasurer and as a member of
its board of directors; Vanessa H. Lindsey (also an officer and director of
the Registrant) serves as Yankees secretary and chief administrative
officer. Yankees is owned in equal shares by members of Mr. Tucker's family
and Mr. Calvo's family.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this Item set forth below is supplemented by information
contained in the Registrant's reports: on Form 10-KSB for the year ended
September 30, 1997; on Form 10-QSB for the quarters ended December 31, 1997,
March 31, 1998 and June 30, 1998; and, the current reports on Form 8-K filed
with the Commission on January 29, 1999, February 12, 1999, March 22, 1999 and
May 18, 1999, all hereby incorporated by reference, as permitted by Commission
Rule 12b-23, and for matters discussed in this report in response to Items 1, 2,
3, 9, 10 and 11 above.
Materially Adverse Proceedings
The Registrant is not aware of any proceedings involving its executive
officers or directors adverse to the Registrant's interests.
Certain Business Relationships
As of the Report Date
Except as specifically set forth below, none of the Registrant's directors
or nominees for director:
(1) Was during the fiscal year ended September 30, 1998 (the 1998 fiscal
year"), an executive officer of, or owned of record or beneficially in
excess of ten percent equity interest in, any business or professional
entity that made or proposed to make during the 1999 fiscal year, payments
to the Registrant or its subsidiaries for property or services in excess of
five percent of (i) the Registrant's consolidated gross revenues for the
1998 fiscal year, or (ii) the other entity's consolidated gross revenues
for its 1998 fiscal year;
(2) Was during the 1998 fiscal year an executive officer of, or owned, or
during the 1998 fiscal year owned, of record or beneficially in excess of
ten percent equity interest in, any business or professional entity to
which the Registrant or its subsidiaries made during the 1998 fiscal year,
or proposed to make during the 1999 fiscal year, payments for property or
services in excess of five percent of (i) the Registrant's consolidated
gross revenues for its 1998 fiscal year, or (ii) the other entity's
consolidated gross revenues for its 1998 fiscal year;
Page 87
<PAGE>
(3) Was during the 1998 fiscal year an executive officer of, or owned, or
during 1998 fiscal year had owned, of record or beneficially in excess of
ten percent equity interest in, any business or professional entity to
which the Registrant or its subsidiaries was indebted at the end of the
Registrant's 1998 fiscal year in an aggregate amount in excess of five
percent of the Registrant's total consolidated assets at the end of such
fiscal year;
(4) Was during the 1998 fiscal year a member of, or of counsel to, a law firm
that the Registrant retained during the 1998 fiscal year or proposed to
retain during the 1999 fiscal year, which had or was expected to result in
payment of fees exceeding five percent of the law firm's gross revenues for
that firm's last 1998 fiscal year;
(5) Was during the 1998 fiscal year a partner or executive officer of any
investment banking firm that performed services for the Registrant, other
than as a participating underwriter in a syndicate, during the 1998 fiscal
year or that the Registrant proposed to have perform services during the
1999 fiscal year and the dollar amount of compensation received by an
investment banking firm exceeded or was expected to exceed five percent of
the investment banking firm's consolidated gross revenues for that firm's
1998 fiscal year; or
(6) Was during the 1998 year involved in any other relationships that the
Registrant is aware of between the nominee or director and the Registrant
that is or was substantially similar in nature and scope to those
relationships listed in paragraphs (1) through (5).
Nature of Amount
Relationship to Interest in the of Such
Name The Registrant Transaction Interest
---- -------------- ----------- --------
Richard C. Peplin, Jr. (1) (2) (3) (2) (3)
-------
(1) Mr. Peplin served as a member of the Registrant's board of directors, as
its chairman and as the Registrant's president and chief executive officer
from November 10, 1997 until May 4, 1999 (except as chairman, where he
resigned on March 3, 1999). He was also the Registrant's principal
stockholder until Yankees attained that status.
(2) On November 10, 1997, the Registrant acquired RCP Enterprises Group, LLC,
an Ohio limited liability company and Tio Cigars, Inc., both of which were
principally owned by Mr. Peplin, in exchange for an aggregate of 4,310,000
shares of the Registrant's common stock (see details at "Part I, Item 1,
Description of Business - Peplin Related Operations").
(3) As a material subsequent event, on or about March 16, 1999, the Registrant
conveyed all of the capital stock of its subsidiaries to Mr. Peplin (see
details at "Part I, Item 1, Description of Business - Material Subsequent
Event - 1999 Divestitures").
Material Subsequent Events
Except as specifically set forth below, during the period starting on
October 1, 1998 and ending on June 30, 2000, none of the Registrant's directors
or nominees for director:
(1) Is, or during the last fiscal year has been, an executive officer of, or
owns, or during the last fiscal year has owned, of record or beneficially
in excess of ten percent equity interest in, any business or professional
entity that has made during the Registrant's last full fiscal year, or
proposes to make during the Registrant's current fiscal year, payments to
the Registrant or its subsidiaries for property or services in excess of
five percent of (i) the Registrant's consolidated gross revenues for its
last full fiscal year, or (ii) the other entity's consolidated gross
revenues for its last full fiscal year;
(2) Is, or during the last fiscal year has been, an executive officer of, or
owns, or during the last fiscal year has owned, of record or beneficially
in excess of ten percent equity interest in, any business or professional
entity to which the Registrant or its subsidiaries has made during the
Registrant's last full fiscal year, or proposes to make during the
Registrant's current fiscal year, payments for property or services in
excess of five percent of (i) the Registrant's consolidated gross revenues
for its last full fiscal year, or (ii) the other entity's consolidated
gross revenues for its last full fiscal year;
Page 88
<PAGE>
(3) Is, or during the last fiscal year has been, an executive officer of, or
owns, or during the last fiscal year has owned, of record or beneficially
in excess of ten percent equity interest in, any business or professional
entity to which the Registrant or its subsidiaries was indebted at the end
of the Registrant's last full fiscal year in an aggregate amount in excess
of five percent of the Registrant's total consolidated assets at the end of
such fiscal year;
(4) Is, or during the last fiscal year has been, a member of, or of counsel to,
a law firm that the issuer has retained during the last fiscal year or
proposes to retain during the current fiscal year, which has or is expected
to result in payment of fees exceeding five percent of the law firm's gross
revenues for that firm's last full fiscal year;
(5) Is, or during the last fiscal year has been, a partner or executive officer
of any investment banking firm that has performed services for the
Registrant, other than as a participating underwriter in a syndicate,
during the last fiscal year or that the Registrant proposes to have perform
services during the current year and the dollar amount of compensation
received by an investment banking firm exceeded or is expected to exceed
five percent of the investment banking firm's consolidated gross revenues
for that firm's last full fiscal year; or
(6) Is, or during the last fiscal year has been involved in any other
relationships that the Registrant is aware of between the nominee or
director and the Registrant that is or was substantially similar in nature
and scope to those relationships listed in paragraphs (1) through (5).
Nature of Amount
Relationship to Interest in the of Such
Name The Registrant Transaction Interest
---- -------------- ----------- --------
Bell Entertainment (1) (1) 200,000 shares
-------
(1) Represents the shares issued pursuant to the Supplemental Services
Agreement between Yankees and the Registrant, a copy of which is filed
as an exhibit to this report, see "Part III, Item 13(a), Exhibits
Required by Item 601 of Regulation SB."
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
Exhibits Required by Item 601of Regulation S-B
The response to this Item as contained in the Registrant's report on Form
10-KSB for the year ended September 30, 1997, is hereby incorporated by
reference, as permitted by Commission Rule 12b-23, except as modified by the
disclosure contained in the Registrant's: reports on Form 10-QSB for the
quarters ended December 31, 1997, March 31, 1998 and June 30, 1998; and, the
current reports on Form 8-K filed with the Commission on January 29, 1999,
February 12, 1999, March 22, 1999 and May 18, 1999 and for the following
additional exhibits filed herewith. The exhibits listed below and designated as
filed herewith (rather than incorporated by reference) follow the signature page
in sequential order.
Page 89
<PAGE>
Designation Page
of Exhibit Number
as Set Forth or Source of
in Item 601 of Incorporation
Regulation S-B By Reference Description
(1) * Underwriting Agreement
(2) Plan of acquisition, reorganization,arrangement,
liquidation or succession:
2.1 (1) Merger Agreement among Sports-Guard, Inc.,
RCP Enterprise, Inc. and RCP Enterprises Group,
LLC, dated October 31, 1997
2.2 (1) Merger Agreement among Sports-Guard, Inc.,
Tio Mariano Cigar Corp. and Tio Cigars, Inc.,
dated October 31, 1997
2.3 96 Agreement for Purchase and Sale of Assets By and
among RCP Communications Group, Inc., Colmena
Corp. and Business Technology Systems, Inc.,
dated February 19, 1998.
(3) (i) Articles of incorporation:
3.1 (2) Certificate of Incorporation of the company,
dated July 17, 1995.
3.2 (1) Certificate of Amendment of Certificate of
Incorporation of the Company, dated November 10,
1997
(ii) Bylaws:
3.3 (2) Bylaws of the company.
3.4 (1) Amended and Restated Bylaws of the Registrant.
3.5 115 Amended and Restated Bylaws of the Registrant.
(4) Instruments defining the rights of holders,
including indentures:
4.1 (2) Specimen Common Stock Certificate
4.2 (2) (Form of) Stock Purchase Warrant
4.3 (3) (Form of) 10% Convertible Notes
4.4 (4) Registrant's 1998 Stock Option Plan and Forms
of Incentive Stock Option Agreement and Non-
Qualified Stock Option Agreement.
4.5 142 Yankees Warrant Agreement, effective January 5,
1999.
4.6 157 Common Stock Purchase Warrants between the
directors and officers of the Registrant, dated
January 29, 1999.
4.7 163 Yankees Amended Warrant Agreement, dated
December 30, 1999
4.8 179 Amended Common Stock Purchase Warrants between
the directors and officers of the Registrant,
dated January 3, 2000.
4.9 185 Registrant's 2000 Non-qualified Stock Option &
Stock Incentive Plan, dated January 3, 2000.
Page 90
<PAGE>
(5) * Opinion re: legality
(6) *
(8) * Opinion re: tax matters
(9) Voting trust agreements
(10) Material Contracts:
10.1 (5) Yankee Consulting Agreement, dated January 5,
1999
10.b-3 (6) Reorganization Agreement with Richard C.Peplin,
Jr., dated March 25, 1999
10.4 203 Financing Agreement,Amended Financing Agreement
Extension Agreement with Dueutsche and BTS,
dated February 26, 1997 and August 19, 1998
10.5 234 Customer Billing & Collection Contract with
International Telemedia Associates, dated June
20, 1997.
10.6 251 Loan Agreement between Wiseman Family, Peplin
and RCP, dated October 13, 1997.
10.7 266 Consulting Agreement between The Kaplan Group
and the Registrant, dated November 10, 1997.
10.8 269 Consulting Agreement between Robert S.Gigliotti
and the Registrant, dated November 10, 1997.
10.9 273 Consulting Agreement between Troy Wiseman and
the Registrant, dated November 10, 1997.
10.10 276 Consulting Agreement and Termination Agreement
between Jeff Outcalt and the Registrant, dated
November 10, 1997 and May 1, 1998.
10.11 283 Consulting Agreement between Michael J. Feldman
and the Registrant, dated November 10, 1997.
10.12 286 Consulting Agreement between Sohail Quraushi
and the Registrant, dated November 10, 1997.
10.13 289 Purchase Agreement between Arnold Semler, Inc.
and the Registrant, dated November 10, 1997
10.14 296 Employment Agreement between Madhu Sethi and
the Registrant, dated February 18, 1998.
10.15 300 Consulting Agreement between SBV Holdings, Inc
and the Registrant, dated February 25, 1998.
10.16 303 Investment Banking and Advisory Services
Agreement with Strategica and the Registrant
dated May 7, 1998.
10.17 311 Employment Agreement between Richard C.Peplin,
Jr. and the Registrant, dated June 1, 1998.
10.18 319 SBV Promissory Note, dated October 1, 1998.
10.19 320 Settlement Agreement between Madhu Sethi and
the Registrant, dated June 3, 1999.
10.20 325 Supplemental Services Agreement between
Yankees and the Registrant, dated October 15,
1999
10.21 338 Memorandum of Acquisition between Fon Digital
Network, Inc. and TechTel Communications,Inc.,
dated November 1999.
10.22 339 Agreement between Registrant and BellSouth
Telecommunications, dated November 22, 1999.
10.23 397 Yankees Second Amendment to Consulting
Agreement, dated January 2, 2000
10.24 403 Agreement to Serve as Corporate Secretary
between Vanessa Lindsey and the Registrant,
dated January 3, 2000.
10.25 418 Employment agreement between Anthony Q. Joffe
and the Registrant, dated January 3, 2000.
10.26 430 Settlement Agreement between Jack Levine and
the Registrant, dated January 17, 2000.
10.27 42 Settlement Agreement between Lawrence VanEtten
and the Registrant, dated May 11, 2000.
10.28 438 Settlement Agreement between Troy D. Wiseman,
Richard C. Peplin, Jr. and the Registrant,
dated May 31, 2000.
Page 91
<PAGE>
Designation Page
of Exhibit Number
as Set Forth or Source of
in Item 601 of Incorporation
Regulation S-B By Reference Description
(11) 43 Statement re computation of per share earnings
(13) * Annual or quarterly reports, Form 10-QSB
(15) * Letter on unaudited interim financial
information
(16) Letter on change in certifying accountant
16.1 (7) Letter re Change in Certifying Accountant
Ernst & Young LLP
(17) ** Letter on director resignation
(18) ** Letter re change in accounting principals
(19) * Reports furnished to security holders
(20) ** Other documents or statements to security
holders or any document incorporated by
reference
(21) 95 Subsidiaries of the Registrant
(22) ** Published report regarding matters submitted
to vote
(23) Consent of experts and counsel
23.4 (8) Consent of Weinberg & Co.
(24) ** Power of attorney
(25) * Statement re eligibility of trustee
(26) * Invitation for competitive bids
(27) 441 Financial data schedule
(99) Additional Exhibits:
-------
* Not applicable
** None
(1) Filed as an exhibit to the Registrant's Report on Form 10-KSB for the
fiscal year ended September 31, 1997, bearing the exhibit designation
number shown above; incorporated by reference herein as permitted by
Commission Rule 12b-23.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form
10-SB filed February 23, 1996, bearing the exhibit designation number
shown above; incorporated by reference herein as permitted by
Commission Rule 12b-23.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form
10-SB/A filed June 3, 1996, bearing the exhibit designation number
shown above; incorporated by reference herein as permitted by
Commission Rule 12b-23.
Page 92
<PAGE>
(4) Filed as an exhibit to the Registrant's Report on Form 8-K dated
January 29, 1999, bearing the exhibit designation number shown above;
incorporated by reference herein as permitted by Commission Rule
12b-23.
(5) Filed as an exhibit to the Registrant's registration statement on Form
S-8, registration number 333-47999, declared effective by the
Securities and Exchange Commission on March 16, 1998, as exhibit 99.1;
and, incorporated by reference herein as permitted by Commission Rule
12b-23.
(6) Filed as an exhibit to the Registrant's Report on Form 8-K dated March
22, 1999, bearing the exhibit designation number shown above;
incorporated by reference herein as permitted by Commission Rule
12b-23.
(7) Filed as an exhibit to the Registrant's Report on Form 8-K/A dated
February 12, 1999, bearing the exhibit designation number shown above;
incorporated by reference herein as permitted by Commission Rule
12b-23.
(8) On August 31, 2000, the Registrant received a letter from Derek M.
Webb, CPA from the firm of Weinberg & Company, P.A. which stated "A
consent letter is not needed for this filing, but we have proof read
the finacnial staements conatined in the 10-K filing and have found no
inconsistencies.
Reports on Form 8-K Filed During Quarter Ended September 30, 1998
During the calendar quarter ended September 30, 1998, the Registrant
filed the following reports on Form 8-K with the Commission:
Financial
Items Reported Statements Included Date Filed
-------------- ------------------- ----------
1,2 and 7 No December 1,1997
4 and 7 For the Period of June 1, 1997 (Date of
Inception) to September 30, 1997,
Combined Balance Sheet, Combined
Statement of Income, Combined Statement
of Changes in Shareholders' Interest,
Combined Statement of Cash Flows,
Notes to Combined Financial Statements,
Unaudited Pro Forma Combined Balance,
Unaudited ProForma Combined Statement,
Notes to Unaudited Pro Forma Financial
Statements. February 26, 1998
As material subsequent events, the Registrant filed the following
reports on Form 8-K with the Commission after September 30, 1998:
Financial
Items Reported Statements Included Date Filed
-------------- ---------------- ----------
1,2,4,5 and 7 No January 29, 1999
4 and 7 No February 12, 1999
2 and 5 No March 22, 1999
1 No May 18, 1999
Page 93
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Exchange Act, as amended, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: September 7, 2000
Colmena Corp.
By: /s/Anthony Q. Joffe/s/
President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Date Title
/s/Anthony Q. Joffe/s/ September 7, 2000 President,
Chief Executive Officer,
Director
/s/Vanessa H. Lindsey/s/ September 7, 2000 Secretary & Director
/s/Charles J. Champion, Jr. /s/ September 7, 2000 Director & Audit
Committee Member
/s/Robert S. Gigliotti/s/ September 7, 2000 Director & Audit
Committee Member
/s/Lawrence R. Van Etten/s/ September 7, 2000 Director
Page 94
<PAGE>
Additional Information
Colmena Corp.
Registrant
Crystal Corporate Center; 2500 North Military Trail, Suite 225-D;
Boca Raton, Florida 33431
Telephone Number: (561) 998-3435; Facsimile Transmission (561) 998-3425;
E-mail [email protected]
-------------------
Corporate Headquarters
Anthony Q. Joffe, President;
Vanessa H. Lindsey, Secretary & Chief Administrative Officer
------
Officers
Anthony Q. Joffe; Robert S. Gigliotti; Charles J. Champion, Jr.
; Vanessa H. Lindsey; Lawrence R. Van Etten
------
Board of Directors
Weinberg & Co. Certified Public Accountants
6100 Glades Road, Suite 314; Boca Raton, Florida 33434
Telephone (561) 487-5765: Facsimile Transmission (561) 487-5766;
E-mail [email protected]
-----------------
Independent Public Accountants
American Stock Transfer & Trust Company
40 Wall Street; New York, New York 10005
Telephone (212) 936-5100: Facsimile Transmission (718) 921-8326;
E-mail [email protected]
----------------
Transfer Agent
Exhibits to this Form 10-KSB are available on the Securities and Exchange
Commission's web site located at www.sec.gov in the EDGAR archives, on the
Registrant's website located at www.colmenacorp.com and will be provided without
charge to stockholders of the Registrant upon written request addressed to
Vanessa H. Lindsey, Secretary; Colmena Corp.; 1941 Southeast 51st Terrace;
Ocala, Florida 34471.
The Securities and Exchange Commission has not approved or disapproved of
this Form 10-KSB and Annual Report to Stockholders nor has it passed upon its
accuracy or adequacy.
Page 95
