REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
TALK VISUAL CORPORATION
(Exact name of Registrant as specified in its charter)
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NEVADA 4813 95-4561156
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(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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3550 Biscayne Boulevard
Suite 704
Miami, Florida 33137
(305) 572-0575
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
Eugene Rosov
President
Talk Visual Corporation
3550 Biscayne Boulevard
Suite 704
Miami, Florida 33137-3857
(305) 572-0575
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copy to:
Andrew J. Beck, Esq.
Torys
237 Park Avenue
New York, New York 10017
(212) 880-6000
Approximate date of commencement of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plan, please check the following
box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act , please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Proposed maximum Proposed maximum
Title of each class of Amount to be offering price aggregate offering Amount of
securities to be registered registered per share price registration fee
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Common Stock ($.001 par value)......... Up to 53,475,935(1) $ (2) $22,500,000 (3) $ 5940.00
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Common Stock ($.001 par value) 2,542,372 $ (4) $ 1,725,000 $ 455.40
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Total Up to 56,018,307 $24,225,000 $ 6395.40
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(1) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(o) of the Securities Act of 1933.
(2) The price per common share will vary based on the volume-weighted
average daily price of Talk Visual's common stock during the drawdown
periods provided for in the common stock purchase agreement described
in this registration statement. The purchase price will be equal to 85%
of the volume-weighted average daily price for each trading day within
such drawdown pricing periods when Talk Visual's average market
capitalization for the 10 trading days prior to the date the applicable
pricing period commences is less than or equal to $30 million. The
amount of the discount to the average daily price will be adjusted for
increases in Talk Visual's average market capitalization over $30
million as provided in the common stock purchase agreement. The
agreement allows for one draw during each drawdown period over a period
of 18 months for amounts up to $1,500,000 per draw.
(3) This represents the maximum purchase price that Evertrend Holdings
Limited is obligated to pay Talk Visual under the common stock purchase
agreement, including shares issued pursuant to a warrant certificate
permitting Evertrend to purchase up to a number of shares equal to 50%
of each drawdown amount. The maximum net proceeds Talk Visual can
receive is $22,500,000 less an 8% cash placement fee payable to its
placement agent, Ladenburg Thalmann & Co. Inc. and $1,500 in escrow
fees and expenses per drawdown.
(4) The remainder of the shares to be registered may be offered for sale
and sold from time to time during the period the registration statement
remains effective, by or for the account of Evertrend or Ladenburg
Thalmann. These shares consist of 1,271,186 shares issuable upon the
exercise of a warrant issued to Evertrend under the common stock
purchase agreement and 1,271,186 shares issuable upon the exercise of a
warrant issued to Ladenburg Thalmann as a placement fee. The exercise
price of these warrants is $0.6785 per share. These warrants may be
exercised until July 27, 2004. The proposed maximum offering price per
share has been estimated solely for the purpose of calculating the
registration fee pursuant to Rule 457(c) of the Securities Act of 1933.
The proposed maximum aggregate offering price for these shares is based
upon the average of the high and low reported prices of the
registrant's common stock on August 7, 2000.
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The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
The information in this Preliminary Prospectus is not complete and may be
changed. We may not sell these securities or accept any offer to buy these
securities until we deliver this Prospectus to you in final form. We are not
using this Prospectus to offer to sell these securities or to solicit offers to
buy these securities in any place where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED August __, 2000
PROSPECTUS
56,018,307 SHARES
TALK VISUAL CORPORATION
COMMON STOCK
The shares of common stock being offered in this prospectus may be
issued through a common stock purchase agreement with Evertrend Holdings
Limited, as further described in this prospectus, or upon the exercise of stock
purchase warrants held by Evertrend and Ladenburg Thalmann. The number of shares
of common stock which may be issued through the common stock purchase agreement
and upon exercise of the warrants would constitute 98.9% of our issued and
outstanding common stock as of August 7, 2000. We will not receive any proceeds
from the sale of the shares by Evertrend. However, we will receive the sale
price of any common stock that we sell through the common stock purchase
agreement and the proceeds upon the exercise for cash of the stock purchase
warrants, and Evertrend and Ladenburg Thalmann may resell those shares pursuant
to this prospectus.
The selling stockholders may offer shares of our common stock on the
OTC Bulletin Board, in negotiated transactions or otherwise, or by a combination
of these methods. The selling stockholders may sell the shares through
broker-dealers who may receive compensation from the selling stockholders in the
form of discounts or commissions. Evertrend is an "underwriter" within the
meaning of the Securities Act of 1933 in connection with its sales. We will pay
the costs of registering the shares under this prospectus, including legal fees.
Our common stock is listed on the OTC Bulletin Board under the symbol
"TVCP." On August 7, 2000, the closing sale price for our common stock as
reported on the OTC Bulletin Board was $0.495 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF FACTORS THAT
YOU SHOULD CONSIDER BEFORE YOU INVEST IN THE COMMON STOCK BEING SOLD UNDER THIS
PROSPECTUS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is August __, 2000.
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TABLE OF CONTENTS
Page
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Prospectus Summary..........................................................................................1
Risk Factors................................................................................................5
Cautionary Statements Concerning Forward-Looking Information...............................................11
Use of Proceeds............................................................................................12
Dividend Policy............................................................................................13
Price Range of Common Stock................................................................................13
Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................................14
Business...................................................................................................23
Management.................................................................................................32
Certain Transactions.......................................................................................44
Principal Stockholders.....................................................................................45
Description of Capital Stock...............................................................................46
Common Stock Purchase Agreement............................................................................49
Selling Stockholders.......................................................................................55
Plan of Distribution.......................................................................................56
Legal Matters..............................................................................................61
Experts....................................................................................................61
Available Information......................................................................................61
Index to Financial Statements..............................................................................63
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION THAT WE PRESENT FULLY IN THE REST OF
THIS PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE MAKING AN
INVESTMENT DECISION. THE TERMS "WE," "OUR," "US," THE "COMPANY" AND "TALK
VISUAL" MEAN TALK VISUAL CORPORATION AND ITS SUBSIDIARIES.
TALK VISUAL CORPORATION
Talk Visual Corporation is a leading provider of retail-based
videocalling services for business and the general public in North and South
America. Through our Retail Operations and Sales Division, we are rapidly
developing our videocalling services in Europe, Eastern Europe, the Caribbean
and North Africa. Taken together with our innovative videocalling equipment -
the TV225, produced under exclusive contract with Motion Media of Bristol, the
United Kingdom - our extensive suite of telecommunications products has
positioned us to become a major provider of videocalling services to businesses
and consumers worldwide, linking people in the developed countries to one
another and to businesses and families in less developed nations. Our retail
locations and our associated company branch locations in Canada, the United
Kingdom, Israel and the Philippines provide an audio-visual link for businesses
and families. The service enables unusually low-cost visual communications
especially designed for expatriates and the small home office marketplace,
allowing these groups to communicate with high-quality audio-visual images over
inter-continental distances, in real time.
We believe that there is a deep-seated relationship between certain key
telecommunications products/services and other tangential products/services we
carry in our retail operations. Conceptually, the products/services permit
businesses and consumers to communicate domestically and internationally. To
support the communication needs of key business and consumer populations, our
retail locations sell a wide range of telecom and telecom-related products and
services. The products sold include pagers, cellular telephones and videophones;
services include long-distance telephone calling in-store ("call-shop
services"), money transfer, and air travel ticket issuance. Recently, we have
begun the process of retail store build-out to create a network of retail
locations during the year 2000. These stores are in addition to the planned
deployment of over 1,000 videophone locations associated with Postal Business
Center partners in the United States. Generally, most company-owned and
partnership locations will sell the majority of our products and services.
The Videophone Sales Division markets a highly price-competitive
ISDN-based video-telephone, the TV225. The TV225 is a sophisticated interactive
video-appliance, with an enhanced features set designed to provide consumers and
businesses with the ability to download news, movies, information and other
real-time data from the desktop, without the need for a computer. The Videophone
Sales Division also arranges for us to provide TV225 purchasers with Local
Exchange Carrier hookup for a 128-Kilobit ISDN line. Long distance service, for
which the underlying provider is Sprint, is provided by us and billed to the
consumer on the local carrier monthly bill or separately, depending upon carrier
billing arrangements.
Our Carrier Sales Division works with the Videophone Sales Division to
resell ISDN service to support 128-Kilobit and greater ISDN videophone calls.
The Carrier Sales Division sells both international and domestic service for
ISDN ordinary analog telephone service. Both the Carrier Sales Division and the
Videophone Sales Division have been created recently (as of March 2000) for the
purposes of tying together all aspects of our product and service sales plan.
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We are also a reseller for Capsule Communications, Inc. (formerly US Wats, Inc.)
long distance service on a special website specially designed for verifiable
customer authorization for carrier designation. Capsule Communications provides
highly competitive domestic and international tariffs on a direct-to-consumer
basis, with reseller commissions forwarded automatically to us.
We believe that videocalling services will become one of the fastest
growing areas of the telecommunications industry. Despite its early promise,
videocalling has lagged major telecom products such as fax and cellular
telephone service, largely because of:
o the cost of equipment;
o the absence of a unified ISDN (or IP) setup mechanism; and
o the availability of adequate origination and termination
points.
We believe that we have remedied the first bullet point with the newly
available TV225 videophone; that in conjunction with the local exchange
carriers and outside ISDN service agencies the ordering and facilitation of
ISDN lines is now a routine and simple matter; and because of the low price of
the TV225 videophone, we will be able to offer businesses and consumers a broad
range of originating and terminating points for convenient videocalls.
According to the Gartner Group, a respected telecommunications research
company, the videoconferencing market is growing at 48 percent a year from a
base of 1.1 billion dollars in 1995. Another industry research company, Forward
Concepts, projects a 40% annualized growth rate from over $1 billion in 1996 to
over $5 billion by 2001. IDC sees the business market for videoconferencing
systems climbing to 600,000 systems in 2001. In contrast, they see the
heretofore non-existent consumer market also reaching a quarter-million units in
2001, but blossoming to 5.4 million systems in 2005. Finally, another research
firm, Frost and Sullivan, predicts staggering growth of videoconferencing sales
to $35 billion by 2002.
This prediction for 2002 is exactly equivalent to the industry
forecasts for wireless subscriber growth.
We believe that we have positioned ourselves to participate in this
projected growth by providing equipment, services and especially retail
locations for the processing of videocalls and other closely related
communications products and services.
We were organized as a Florida corporation in 1998 and merged with Talk
Visual Corporation (formerly Legacy Software, Inc.), a Delaware corporation,
pursuant to a merger agreement in 1999. As part of the merger, we became a
Nevada corporation. We introduced our videocalling services, cellular telephone
and pager sales products in early 1999 with the launch of our first corporate
retail locations. Our principal office is located at 3550 Biscayne Boulevard,
Suite 704, Miami, Florida 33137 and our telephone number is (305) 572-0575.
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THE OFFERING
This prospectus covers up to 56,018,307 shares of Talk Visual common
stock to be sold by the selling stockholders. The number of shares subject to
this prospectus represents 98.9% of our issued and outstanding common stock as
of August 7, 2000 and 49.7% after issuance of all currently unissued shares
included in this prospectus.
We signed a common stock purchase agreement with Evertrend, a British
Virgin Islands corporation, on July 27, 2000, for the future issuance and
purchase of shares of our common stock. The transaction closed on July 27, 2000.
The stock purchase agreement establishes what is sometimes termed an equity line
of credit or an equity drawdown facility.
In general, the drawdown facility operates like this: the investor,
Evertrend, has committed to provide up to $15 million as we request it over an
18 month period, in return for common stock we issue to Evertrend. Once every 22
trading days, we may request a draw of up to $1,500,000 of that money. The
maximum amount we actually can draw down upon each request will be determined by
the volume-weighted average daily price of our common stock for the 22 trading
days prior to our request and the average trading volume for the 45 trading days
prior to our request. Each draw down must be for at least $250,000. At the end
of a 22 trading day period following the drawdown request, the final drawdown
amount is determined based on the volume-weighted average stock price during
that 22 day period. We then use the formulas in the common stock purchase
agreement to determine the number of shares we will issue to Evertrend in return
for that money. Additionally, Evertrend will receive a warrant certificate to
purchase up to a number of shares of common stock equal to 50 % of the drawdown.
The formulas for determining the final drawdown amounts, the number of
shares we issue to Evertrend and the price per share paid by Evertrend are
described in detail beginning on page 50. The aggregate total of all draws
cannot exceed $15 million and no single draw can exceed $1,500,000. We are under
no obligation to request a draw for any period.
The market price for our common stock on August 7, 2000 was $0.495 and
the average daily trading volume for the 45 trading days ended August 7, 2000
was 943,596 shares. If our market price on August 7, 2000 and the 45-day average
trading volume preceding August 7, 2000 each remained constant over the 18 month
period of the common stock purchase agreement and we requested the maximum
amount available to us under the common stock purchase agreement, each draw
would be capped at $1,500,000 and we could make 10 draws for a total amount
drawn of $15,000,000.
The formula would dictate that, for this example, we would issue
Evertrend 35,650,623 shares at $0.42075 per share. The number of shares we would
issue and the proceeds we would receive could be limited by a provision of the
common stock purchase agreement that prevents us from issuing shares to
Evertrend to the extent Evertrend would beneficially own more than 9.9% of our
then outstanding common stock. Any resales of shares by Evertrend under this
prospectus would reduce the number of shares beneficially owned by Evertrend,
and would enable us to issue additional shares to Evertrend without violating
this condition.
The per share dollar amount Evertrend pays for our common stock for
each drawdown includes a discount to the average daily market price of our
common stock for the 22-day period
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after our drawdown request, weighted by trading volume. The discount is
determined by reference to our average market capitalization (calculated by
multiplying the number of shares of common stock issued and outstanding by the
closing bid price of the common stock for the 10 trading days prior to the date
the drawdown pricing period commences), and is applied as follows:
o 15% of the average daily market price when our average
market capitalization is less than or equal to $30 million;
o 13% of the average daily market price when our average
market capitalization is greater than $30 million and less
than or equal to $40 million;
o 11% of the average daily market price when our average
market capitalization is greater than $40 million and less
than or equal to $50 million; and
o 9% of the average daily market price when our average market
capitalization is greater than $50 million.
We will receive the amount of the drawdown less an escrow agent fee of $1,500
and an 8% placement fee payable to the placement agent, Ladenburg Thalmann & Co.
Inc., which introduced Evertrend to us. Ladenburg Thalmann is a registered
broker dealer. It is not obligated to purchase any of our shares, but as an
additional placement fee, we have issued to Ladenburg Thalmann warrants to
purchase 1,271,186 shares of our common stock at an exercise price of $0.6785
per share. The common stock issuable upon exercise of those warrants is included
in the registration statement of which this prospectus is a part.
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RISK FACTORS
YOU SHOULD BE AWARE OF VARIOUS RISKS BEFORE YOU INVEST IN OUR COMMON
STOCK, INCLUDING THOSE RISKS DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER
THESE RISK FACTORS TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS
PROSPECTUS BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR COMMON STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, RESULTS OF OPERATIONS AND
FINANCIAL CONDITION COULD BE MATERIALLY AFFECTED, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE, AND YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT
WE HAVE A LIMITED OPERATING HISTORY, WE HAVE EXPERIENCED LOSSES AND WE MAY NEVER
BECOME PROFITABLE.
Until August, 1999, we were a development stage company, with no
history of earnings. For the years ended December 31, 1998 and 1999, we incurred
net losses of $1,197,373 and $5,954,719, respectively. Primarily, these losses
were incurred in the establishment of the videocalling operations, investment in
the development of products, expansion of sales, marketing and administrative
systems and opening and start-up of the retail stores. There can be no assurance
that we will be profitable on either a quarterly or annual basis in the future.
OUR OPERATIONS HAVE EXPANDED RAPIDLY AND WE MAY HAVE DIFFICULTY IN MANAGING OUR
GROWTH.
We have expanded our operations rapidly, which has created significant
demands on our administrative, operational, developmental and financial
personnel. Additional expansion will place further demands on these resources.
There can be no assurance that our systems, procedures, controls and existing
space will be adequate to support expansion of our operations. Future operating
results will depend on the ability of our officers and key employees to manage
changing business conditions and to continue to improve our operational and
financial control and reporting systems. If management is unable to manage
growth effectively, our business, financial condition and results of operations
could be materially and adversely affected.
The success of our business depends in part upon our ability to
attract, train and retain a sufficient number of qualified personnel
commensurate with our expanding needs. An increase in the turnover rate among
our employees would increase recruiting and training costs, and if we were
unable to recruit and retain a sufficient number of employees, we could be
forced to limit our growth or possibly curtail our operations. There can be no
assurance that we will be successful in attracting, training and retaining the
required number of employees to support our business in the future.
WIDESPREAD OWNERSHIP OF VIDEOCALL TECHNOLOGY MAY SIGNIFICANTLY REDUCE DEMAND FOR
OUR SERVICES.
The communications industry is characterized by rapidly changing
technology, frequent new service and product introductions, significant and
rapid lowering of the price of technology, and more widespread personal
ownership of technology. New technology may make our technology obsolete.
Widespread personal ownership of videocall technology may significantly reduce
any demand for our services.
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CHANGES IN OUR INDUSTRY MAY RENDER OUR BUSINESS PLANS OBSOLETE.
The communications industry is fast paced and rapidly changing. There
is no guarantee that our plans as they exist today will be viable in the future.
Shifts in technology, business and consumer demands, acquisition of alternative
systems for teleconferencing and videocall technology by businesses and
consumers, and government regulations could hinder our strategy and growth
plans.
WE FACE SUBSTANTIAL COMPETITION FROM ESTABLISHED AND NEW COMPANIES IN OUR
INDUSTRY.
We are faced with competition from off-the-shelf and value-added
sellers of communications equipment and services and other retail communication
product resellers. There is no assurance that we will be able to compete
effectively in the future. Existing retailers and value-added communications
service providers could, if necessary, alter their business strategies and
compete more effectively than we do. Additionally, other start-up operations
could open in our targeted markets, thus hindering our growth plans.
Many of our current and potential competitors have significantly
greater financial, marketing, technical and other competitive resources, as well
as greater name recognition, than we have. As a result, our competitors may be
able to adapt more quickly to new or emerging technologies and changes in
customer requirements or may be able to devote greater resources to the
promotion and sale of their products and services. There can be no assurance
that we will be able to compete successfully with existing competitors or with
new competitors. In addition, competition could increase if new companies enter
the market or if existing competitors expand their service offerings. An
increase in competition could result in price reductions and loss of market
share and could have a material adverse effect on our business, financial
condition or results of operations.
To be competitive we will need to continue to invest in engineering,
research and development and sales and marketing. There can be no assurance that
we will have sufficient resources to make such investments or that we will be
able to make the technological advances necessary to remain competitive. In
addition, current and potential competitors have established or may in the
future establish collaborative relationships among themselves or with third
parties, including third parties with whom we have relationships, to increase
the visibility and utility of their products and services. Accordingly, it is
possible that new competitors or alliances may emerge and rapidly acquire
significant market share. If this were to occur, our business, financial
condition and results of operations would be materially adversely affected.
WE DO NOT PAY, AND DO NOT ANTICIPATE PAYING, DIVIDENDS ON OUR COMMON STOCK.
We intend to use all available funds for the operation and expansion of
our telecommunications activities. We have no plans to pay dividends on our
common stock for the foreseeable future, even if such funds were to become
available.
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WE MAY BE VULNERABLE TO TECHNICAL MALFUNCTIONS WHICH COULD ADVERSELY AFFECT OUR
OPERATIONS.
We are in the process of constructing our own network. This involves
the acquisition of switching and bridging equipment, along with high capacity
telecommunications lines. Our ability to provide services could be jeopardized
if our facilities or connections to transmission facilities were damaged by fire
or other natural disasters. To the extent that we are principally responsible
for providing our customers with telecommunications services, interruption or
failure to provide these services may subject us to claims from customers who
are damaged as a result of an interruption or failure. Interruptions or other
difficulties in operating our network could have a material adverse effect on
our financial condition and results of operations.
DIFFICULTIES WITH THIRD-PARTY CARRIERS COULD HAVE AN ADVERSE EFFECT ON OUR
OPERATIONS.
We obtain services from various long distance and local carriers of
telecommunications services for our services and our reselling operations. If
these carriers fail to provide service, our customers would still hold us
responsible. We may also not be able to obtain competitive or satisfactory rates
if carriers:
o choose not to enter into agreements with us;
o terminate existing contracts with us;
o reduce the level or type of telecommunications services they
offer; or
o refuse to negotiate cost reductions to meet competitive
prices.
Any such events could have a material adverse effect on our financial
condition and results of operations.
IF INTERNET TELEPHONY AND INTERNET INFRASTRUCTURE DO NOT CONTINUE TO DEVELOP AS
ANTICIPATED, OUR OPERATIONS WILL BE ADVERSELY AFFECTED.
For Internet telephony and Internet-based video conferencing services
to be commercially viable, the size of the network infrastructure, enabling
technologies, necessary performance improvements, and user security will need to
be upgraded and usage must increase substantially. If the Internet continues to
experience an increased number of users, increased frequency of use, or
increased bandwidth requirements, we can provide no assurance that the
performance or reliability of the Internet will not be adversely affected. There
is no assurance that the infrastructure or products or services necessary to
make the Internet a viable commercial marketplace for the long term will be
developed. The Internet has experienced a variety of outages and other delays as
a result of damage to portions of its infrastructure, and could face such
outages and delays in the future. These outages and delays could adversely
affect the level of Internet telephony usage, the level of traffic, and our
Internet-based video-teleconferencing services.
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DIFFICULTIES WITH A THIRD PARTY MANUFACTURER COULD HAVE AN ADVERSE EFFECT ON OUR
OPERATIONS.
We have signed an OEM agreement with Motion Media Technology Limited
for the purchase of video conferencing telephone units aggregating $9,994,000
over a three year period. We are entirely reliant on Motion Media to produce
these units for us, and in the event there were to be any disruption of
production or failure of Motion Media to supply the units for us to resell, it
would adversely affect our business, financial condition and results of
operation.
WE FACE NUMEROUS RISKS ASSOCIATED WITH POSSIBLE STRATEGIC RELATIONSHIPS, JOINT
VENTURES AND ACQUISITIONS.
We continually evaluate opportunities to acquire additional products,
technologies or businesses. Acquisitions may result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities, and amortization expense related to intangible assets acquired, any
of which could materially adversely affect our financial condition and results
of operations. In addition, acquired businesses may be experiencing operating
losses, which may adversely affect our earnings. Acquisitions involve a number
of risks, including difficulties in the assimilation of the acquired company's
operations and products, diversion of management resources, uncertainties
associated with operating in new markets and working with new customers, and the
potential loss of the acquired company's key employees.
As part of our growth plan, we seek to identify retail locations in
expatriate communities. We cannot give any assurances that we will be successful
in locating, developing and profitably operating such retail sites. Our business
operation may be influenced by general retail purchasing trends and local
community retail activity.
WE INCUR FINANCIAL RISKS IN OUR INTERNATIONAL OPERATIONS.
We incur financial risks associated with international operations and
related foreign currencies. We anticipate that international telecommunications
traffic will account for a significant portion of our consolidated revenue and
costs. In addition, the manufacturer of our video telephone model TV225 is based
in the United Kingdom and purchases of this equipment are subject to foreign
currency exchange risks. Our international video conferences that are initiated
outside the United States are denominated in local currency and are subject to
foreign currency exchange risks. The assets and liabilities in our international
operations and real estate, also are denominated in each country's local
currency and are subject to foreign currency exchange risks. Currently, we do
not employ currency hedging strategies to reduce this risk. In addition, our
international business may be subject to a variety of other risks not mentioned
above, including difficulties in collecting international accounts receivable or
obtaining U.S. export licenses, potentially longer payment cycles, increased
costs associated with maintaining international marketing efforts, the
introduction of non-tariff barriers and higher duty rates and difficulties in
enforcement of contractual obligations and intellectual property rights.
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WE MAY BE UNABLE TO EXPAND OUR INTERNATIONAL OPERATIONS AND BRING THEM TO
PROFITABILITY WITHIN A REASONABLE TIME.
We cannot assure you that all our international locations will become
and remain profitable. Our international locations are in Belgium, the
Philippines and Hong Kong. Through joint venture agreements, we have locations
in Canada, Britain, Israel, South America and Mexico. We intend to expand the
scope of our international operations, which may require us to open and staff
new locations in additional countries, invest in more bridging, switching and
video conferencing equipment, fund marketing expenses, and incur other start-up
costs. We incur these start-up expenses when we open a new international
location before we generate any revenue from that location. We intend to
continue opening new international locations and view these expansion expenses
as a necessary investment in future revenue growth, but we need each of these
locations to become profitable within a reasonable time if we are to continue
building our global platform.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADDITIONAL FINANCING MAY BE
UNAVAILABLE.
We may not be able to fully implement our domestic and international
expansion and acquisition plans with only the net proceeds from this offering.
We may need additional equity or debt financing, collaborative arrangements with
corporate partners, or funds from other sources for these purposes. Additional
equity financing may be dilutive to our stockholders and debt financing may
impose restrictive covenants on the way we operate our business. We may have
difficulty obtaining these funds on a timely basis and on acceptable terms, if
at all. If we cannot obtain adequate funds from operations or additional sources
of financing, we may experience operational difficulties and the loss of
customers. Our business, financial condition, and results of operations will be
materially and adversely affected by the unavailability of capital when we need
it.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
The trading in our common stock has been and may continue to be subject
to wide fluctuations of both price and volume, in response to various factors
such as:
o announcement of operating results that differ from
expectations;
o changes in the mix of products and sales channels;
o announcements of significant technological innovations,
contracts, acquisitions, strategic partnerships, joint
ventures or new products and services by us or our
competitors;
o announcements of agreements, letters of intent or equity
and/or other transactions;
o future sales of our common stock;
o macroeconomic conditions generally; and
o market conditions for stocks of telecommunications services
companies in general.
9
<PAGE>
In addition, in recent years the stock market in general, and the
shares of certain telecommunications-related companies in particular, have
experienced price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of our common stock.
THE EXERCISE OF OUTSTANDING WARRANTS, OPTIONS AND PREFERRED CONVERSION RIGHTS
MAY DEPRESS OUR STOCK PRICE.
The exercise of outstanding warrants and options along with the
conversion rights of the 1999 Series A convertible preferred stock and the
potential sale of the underlying shares could have a material adverse effect on
the public trading price of our stock, if the holders are willing to sell at a
price that is significantly less than the current market price or the number of
shares sold exceeds the number of shares the market can absorb at the current
market price. As of August 7, 2000, we had 56,597,858 shares of common stock
outstanding. As of August 7, 2000, various shareholders, former employees, and
directors held options and warrants to purchase a total of 18,993,043 shares of
common stock at a weighted average exercise price of $0.91 per share. Moreover,
Evertrend and Ladenburg Thalmann have been issued warrants allowing each to
purchase 1,271,186 shares of our common stock at an exercise price of $0.6785
per share and Evertrend will receive a warrant certificate to purchase up to a
number of shares equal to 50% of the drawdown amount. In addition, the 1999
Series A convertible preferred stock, as of August 7, 2000, is convertible into
4,196,805 shares of common stock.
WE MAY FAIL TO RETAIN KEY MANAGEMENT PERSONNEL, WHICH COULD HAVE AN ADVERSE
EFFECT ON OUR OPERATIONS.
The successful operation of our business depends on the services of key
members of management. If we lost the full-time services of these or other key
managers, it could have a material adverse effect on our business and results of
operations, and we cannot predict whether we would be able to find replacements
with the necessary skills or experience.
THE MINIMAL TRADING VOLUME OF OUR COMMON STOCK COULD LIMIT YOUR ABILITY TO
RESELL YOUR STOCK.
The trading volume for our common stock, as reported on the OTC
Bulletin Board, averaged 3,993,062 shares per week during the three month period
ended August 4, 2000, and purchasers of our common stock may be unable to sell
the common stock at the time or at the price desired. The trading volume of our
common stock is lower than many other similarly situated companies listed on the
OTC Bulletin Board.
STATE REGISTRATION REQUIRED FOR SALES OF SHARES MAY RESTRICT THE TRANSFERABILITY
OF THE SHARES COVERED IN THIS PROSPECTUS.
Under some state securities laws, shares of common stock may not be
sold unless they are qualified for sale or are exempt from the registration
requirements of the state in which the prospective purchaser lives. We will use
our best efforts to register and qualify our common stock under the state
securities laws in which we believe we need to do so. Failure to register
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<PAGE>
and qualify our common stock under applicable state securities laws may
indefinitely restrict the ability of a shareholder in a particular state to
transfer his or her shares.
THERE ARE SIGNIFICANT CONSEQUENCES ASSOCIATED WITH OUR STOCK TRADING ON THE NASD
OTC BULLETIN BOARD RATHER THAN A NATIONAL EXCHANGE.
We do not currently meet the requirements for trading in the Nasdaq
SmallCap Market or other national exchanges. We can give you no assurance that
we will achieve the quantitative criteria required by the Nasdaq SmallCap Market
or any other national exchange or that, even if we do, our listing application
would be approved by any such exchange. The effects of not being able to list
our securities on a national exchange include limited release of the market
prices of our securities, limited news coverage of our company, limited interest
by investors in our securities, increased difficulty in selling our securities
in certain states due to "blue sky" restrictions, and limited ability to issue
additional securities or to secure additional financing.
WE ARE SUBJECT TO THE APPLICATION OF THE PENNY STOCK RULES, WHICH COULD LIMIT
YOUR ABILITY TO RESELL YOUR STOCK.
Because our common stock is not trading in the Nasdaq SmallCap Market
or some other national exchange, and the trading price of the common stock is
less than $5 per share, we are subject to the Penny Stock Rules under the
Securities Enforcement and Penny Stock Reform Act of 1990. In addition to the
risk of volatility of stock prices, low price stocks are subject to the risks of
additional federal and state regulatory requirements and the potential loss of
effective trading markets. In particular, broker-dealers trading in our common
stock are subject to Rule 15g-9 under the Securities Exchange Act of 1934, as
amended. Rule 15g-9, among other things, requires that broker-dealers satisfy
special sales practice requirements, including making individualized written
suitability determinations and receiving any purchaser's written consent prior
to any transaction. Broker-dealers handling trades in our securities are
required to make additional disclosure in connection with those trades,
including the delivery of a disclosure schedule explaining the nature and risks
of the penny stock market. Such requirements could severely limit the liquidity
of our securities and your ability to sell your securities in the secondary
market, which could have an adverse impact on the price of our common stock.
CAUTIONARY STATEMENTS CONCERNING
FORWARD-LOOKING INFORMATION
Certain information both included and incorporated by reference in this
prospectus may contain forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act, and as such may
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of our company to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. Forward-looking statements, which are based
on certain assumptions and describe our future plans, strategies and
expectations are generally identifiable by use of the words "may," "will,"
"should," "expect," "anticipate," "estimate," "believe," "intend" or "project"
or the negative thereof or other variations thereon or comparable terminology.
Factors which could have a material adverse effect on the operations and future
prospects of our company are described under "Risk Factors." These risks and
11
<PAGE>
uncertainties should be considered in evaluating any forward-looking statements
contained or incorporated by reference herein. Our actual results may differ
significantly from the results discussed in the forward-looking statements.
DILUTION
The issuance of further shares and the eligibility of issued shares for
resale will dilute our common stock and may lower the price of our common stock.
If you invest in our common stock, your interest will be diluted to the extent
of the difference between the price per share you pay for the common stock and
the pro forma as adjusted net tangible book value per share of our common stock
at the time of sale. We calculate net tangible book value per share by
calculating the total assets less intangible assets and total liabilities, and
dividing it by the number of outstanding shares of common stock.
The net tangible book value of our common stock as of August 7, 2000
was $7,849,257, or approximately $0.14 per share. Assuming that:
o we issued on August 7, 2000 a total of 35,650,623 shares to
Evertrend under the common stock purchase agreement at $0.42075
per share, which is 85% of the closing price for our common stock
on August 7, 2000 and reflects Evertrend's 15% discount;
o on August 7, 2000, all vested options and warrants to purchase
common stock were exercised for cash at the exercise prices stated
in the options and warrants, and all conversion rights to common
stock were exercised by the holder of our Series A convertible
preferred stock; and
o on August 7, 2000 you purchased shares under this prospectus for
$0.495 per share, which is the closing price for our common stock
on August 7, 2000;
our pro forma net tangible book value as of August 7, 2000 would have been
$49,356,322, or $0.37 per share. This would represent an immediate increase in
the pro forma net tangible book value of $0.23 per share to existing
shareholders on August 7, 2000 and would represent dilution to you of
approximately $0.125 per share. The actual dilution to you may be greater or
less than in this example, depending on the actual price you pay for shares, the
actual prices at which we issue shares to Evertrend under the common stock
purchase agreement and how many of the vested options and warrants outstanding
have been exercised at the time of your investment.
Furthermore, stock options and warrants to acquire approximately 23.8
million shares of common stock will vest within the next five years, we may
issue additional shares, options and warrants and we may grant additional stock
options to our employees, officers, directors and consultants under our stock
option plan, all of which may further dilute our net tangible book value.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by
Evertrend Holdings Limited that it has obtained under the common stock purchase
agreement. However, we will
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<PAGE>
receive the sale price of any common stock we sell to Evertrend under the common
stock purchase agreement described in this prospectus and upon the cash exercise
of the stock purchase warrants held by Evertrend and Ladenburg Thalmann. We
expect to use the proceeds of any such sales for general working capital
purposes.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
Except with respect to the payment of dividends on our Series A convertible
preferred stock, as described below, we currently anticipate that we will retain
all future earnings, if any, for use in our business and do not anticipate
paying any cash dividends on our common stock in the foreseeable future. In
addition, the payment of cash dividends may be limited by financing agreements
entered into by us in the future.
In connection with the acquisition of real estate on February 24, 1999,
we issued 975,000 shares of Series A convertible preferred stock, $.001 par
value, paying a dividend of $0.095 per share per annum. We paid a total of
$69,469 in dividends on the Series A convertible preferred stock during 1999. No
further dividend payments are due on the Series A convertible preferred stock.
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
"TVCP". Our common stock was quoted on the Nasdaq SmallCap Market under the
symbol "LGCY" after we began public trading on May 14, 1996 through February 28,
1999, and under the symbol "TVCP" from March 1, 1999 through April 7, 1999. As
of July 29, 2000, we had 10,571 holders of record of our common stock and 22
listed market-makers.
The following table sets forth the high and low bid information for our
common stock for the periods indicated. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not necessarily
represent actual transactions. Market prices have been adjusted for the 1:3
reverse split of our common stock on September 6, 1998.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year Ending December 31, 2000
Quarter ended March 31, 2000 $3.875 $0.395
Quarter ended June 30, 2000 $1.750 $0.410
Quarter ended September 30, 2000 (through July 31, $0.840 $0.400
2000)
Fiscal Year Ended December 31, 1999
Quarter ended March 31, 1999 $4.125 $3.625
Quarter ended June 30, 1999 $3.500 $0.460
Quarter ended September 30, 1999 $0.570 $0.120
Quarter ended December 31, 1999 $0.910 $0.057
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<PAGE>
High Low
---- ---
Fiscal Year Ended December 31, 1998
Quarter ended March 31, 1998 $3.75 $1.125
Quarter ended June 30, 1998 $3.75 $0.3125
Quarter ended September 30, 1998 $1.78125 $0.9375
Quarter ended December 31, 1998 $4.00 $0.8125
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS DISCUSSION INCLUDES "FORWARD-LOOKING" STATEMENTS THAT REFLECT OUR
CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. WE USE
WORDS SUCH AS WE "EXPECT", "ANTICIPATE", "BELIEVE" AND "INTEND" AND SIMILAR
EXPRESSIONS TO IDENTIFY FORWARD-LOOKING STATEMENTS. INVESTORS SHOULD BE AWARE
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM OUR EXPRESSED EXPECTATIONS
BECAUSE OF RISKS AND UNCERTAINTIES INHERENT IN FUTURE EVENTS, PARTICULARLY THOSE
RISKS IDENTIFIED IN THE "RISK FACTORS" SECTION OF THIS PROSPECTUS, AND SHOULD
NOT UNDULY RELY ON THESE FORWARD LOOKING STATEMENTS. WE WILL NOT NECESSARILY
UPDATE THE INFORMATION IN THIS DISCUSSION IF ANY FORWARD-LOOKING STATEMENT LATER
TURNS OUT TO BE INACCURATE.
OVERVIEW
We were organized as Legacy Software, Inc. in California in 1989, as a
successor to a partnership formed in 1986, and were reincorporated in Delaware
in March, 1996, then reincorporated in Nevada in 1999. We completed an initial
public offering of 1,150,000 shares of our common stock, par value $.001 per
share, in May of 1996. In September of 1998, we effected a one for three reverse
split of our common stock. From inception until October, 1998, Legacy primarily
developed and sold educational entertainment software. On September 14, 1998, a
merger was announced between Videocall International Corporation and Legacy.
Videocall was a development stage company incorporated in Florida in February,
1998, headquartered in Cambridge, Massachusetts, to provide videocalling and
related telecommunications services to businesses and consumers. Following the
announcement of the proposed merger, the key officers of Videocall were elected
as officers of Legacy and open positions on the Board of Directors were filled
by Directors of Videocall, thus creating common control of the two companies. By
December 31, 1998, Legacy had ceased developing and marketing software products
and began focusing on the business activities of Videocall. On March 1, 1999,
our name was changed to Talk Visual Corporation. The stock-for-stock
transaction, in accordance with the terms of the merger, was approved by the
stockholders of both companies June 15, 1999, after which Videocall was merged
into Talk Visual, with Talk Visual being the survivor. In addition, the
stockholders approved increasing the authorized common shares to 100,000,000 and
the authorized preferred shares to 25,000,000.
The merger has been accounted for as a reverse acquisition. As a result
of the change in control and change in business activity in 1998, the merger is
considered to have occurred by December 31, 1998 and, accordingly, all
references are to the activities of Videocall.
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<PAGE>
In October of 1998, Videocall acquired the stock of Sacramento Results,
Inc., a California corporation. Sacramento Results' primary asset consists of a
119,100 square foot, two story, strip center retail and office complex located
in Sacramento, California. In February, 1999, we formed a Canadian subsidiary to
acquire a 22,662 square foot property in Toronto, Ontario, Canada, which
contains commercial retail rental tenants. Both properties currently represent
the primary source of our gross receipts.
On August 30, 1999, we moved our headquarters from Cambridge,
Massachusetts to Miami, Florida.
Prior to August 24, 1999, we were considered a development stage
company. On August 24, 1999, we launched our videocalling services through our
wholly owned retail stores in the United States and joint venture partners in
Europe, Israel, Canada, Asia and South America. On September 2, 1999, we
announced the successful transmission of full-motion, superior quality
videocalls over the Internet from our Sacramento, California location to our
Miami, Florida location.
In conjunction with Film World, Inc. and producers John Daly (PLATOON,
THE LAST EMPEROR, TERMINATOR) and Menahem Golan (COBRA, DELTA FORCE, RUNAWAY
TRAIN, MISSING IN ACTION), we initiated Global Visual Casting on November 2,
1999. This service permits aspiring actors and actresses around the globe to
conduct live videocall auditions with Film World's casting directors in
Hollywood.
In December, 1999, we announced a joint venture with Universal Express,
with access to over 7,000 potential sites for installation of videoconferencing
equipment. We designed and are currently offering an attractive, low-cost
turnkey package for those retail locations to join the videocalling network.
Also in December, we initiated our Internet sales operation, Beeperforabuck.com,
to commence selling pagers at a low cost over the World Wide Web.
On March 16, 2000, we signed an agreement to acquire a 25% interest in
Entertech Media Group, Inc. of Hollywood, California. Under the terms of the
agreement, we have formed a joint venture with Entertech and will exchange
3,000,000 common shares for 3,666,666 shares of Entertech Media common stock.
Entertech has been granted exclusive rights in North America to provide content
(such as movies, music, news programs, documentaries, etc.) to customers of Talk
Visual who have purchased our videotelephone model TV225. We have launched an
aggressive sales program to bring the benefits of the TV225 to the attention of
both business and consumers. We are obligated to pay a broker 75,000 shares of
our common stock on consummation of this transaction. The transaction is subject
to board approval.
Through a recently signed contract with an original equipment
manufacturer, Motion Media, Ltd., we now offer a desktop-based videoconferencing
telephone at a reasonable price. We view this unit as the next step in deploying
video telephony to the mass market.
On July 2, 2000, we signed a letter of intent to acquire 51% to 60% of
YAK Communications (USA) Inc., parent company to YAK Communications Canada, Inc.
YAK Canada is a leading Dial-Around service provider in Canada, with annual
revenues of $12 million (Cdn). YAK Communications (USA) Inc. is owned 32% by
parties related to Talk
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Visual. We have engaged an independent international consulting firm to render
an opinion of valuation for this acquisition. The consideration is $.50 and four
shares of Talk Visual common stock for each YAK share. YAK has 3,852,000 shares
outstanding. We also agreed to lend up to $5 million to YAK. This agreement is
subject to change based upon the valuation and board approval.
On June 22, 2000, we entered into an agreement to acquire the assets of
11 retail call centers in the New York and New Jersey area with Various Business
Management, Inc. ("VBM"). Terms of the agreement call for cash payments totaling
$350,000 and stock in the value of $550,000, for a total purchase price of
$900,000. The purchase price is subject to a downward adjustment, to be agreed
upon, in the event VBM is unable to obtain a lease assignment for any store
location which is for a period of less than three years.
We plan expansion through an aggressive program of acquisition, opening
new retail sites, forming joint ventures with other telecom providers and
expanding the telecom product offerings in all physical and Internet retail
sites.
We have embarked on an aggressive program to develop videocalling
retail locations, joint venture partners and sales of the desktop videophone
model TV225. To that end, we currently employ 31 full and part-time employees in
the telecommunications operations and nine full and part-time employees in the
real estate operations. With the completion of the acquisition of the New York
and New Jersey stores, we will add 35 employees to operate those activities.
Under the direction of our Chief Technical Manager and our Vice
President of Internetworking Systems, we are deploying wireless communication
systems for carrying voice, data and videocalls over our network. Additionally,
we have tested and began deploying the bridging of ISDN based videocalls over
the Internet and full motion, high quality videocalls entirely over the Internet
protocol. Our goal is to provide videocall technology over multiple platforms
and thus be able to deliver it to large segments of the population.
On February 1, 2000, we leased an additional 2,559 square feet of
office space at our Miami office headquarters. The lease increased rent
obligations by $52,000 per year and expires June 30, 2002. The additional space
has been added to house sales and marketing staff, telephonic equipment, the
data processing department and conference facilities.
We have commenced selling long distance services under an agreement
with Capsule Communications, Inc. (formerly US Wats, Inc.) over the Worldwide
Web. Employing relatively new technology allowing simple, cost efficient
web-based ordering and a unique electronic "Letter of Authorization,"
methodology along with very favorable telecom rates, this system is anticipated
to generate substantial activity. Our long distance services website is located
at www.talkvisual-ld.com. This new product offering is a continuing expansion of
our e-commerce development programs to enhance and expand revenue sources.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX
MONTHS ENDED JUNE 30, 1999
Prior to August 24, 1999, we were considered a development stage
company. On August 24, 1999, we became operational with the launch of our
videocalling services.
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<PAGE>
Additionally, during the fourth quarter of 1999, we commenced selling other
telecommunications services and equipment through our retail outlets and over
the Internet.
Telecommunication services, software and product sales increased
$94,779 for the six months ended June 30, 2000 compared to the six months ended
June 30, 1999. This increase resulted from sales of telephone products in the
stores and sales of the Company's TV225 videocalling equipment, which did not
exist in 1999.
Real estate revenue increased $96,045 for the comparative periods
ending June 30, 2000 and 1999, as a result of higher occupancy at the Sacramento
building and ownership for the full six months in 2000 of the Canadian property
compared to three months of ownership in 1999.
Cost of equipment sales, telecommunication and retail operation
expenses increased $473,481 to $476,685 for the six months ended June 30, 2000,
compared to $3,204 for the six months ended June 30, 1999. This increase
reflects the operation of our retail locations, cost of equipment sold and the
beeperforabuck web sales activities, which did not exist in 1999. The expense
amount of $3,204 for the six months ended June 30, 1999 is attributable to costs
of software sales.
The increase of $86,354 of depreciation expense for the six months
ended June 30, 2000 in comparison to the same period ended June 30, 1999,
represents capital assets acquired and put in service following the commencement
of operations after August, 1999, and improvements to the real estate in
Sacramento.
General and administrative expenses incurred in the six months ended
June 30, 1999 totaled $3,351,255 and for the six months ended June 30, 2000,
totaled $1,700,963, for a decrease of $1,650,292. Of this decrease, $1,535,613
was attributable to consulting services paid for in 1999 that were not incurred
in 2000. The majority of the 1999 consulting services were for assistance in
financing, investor relations and public relations services and were paid for
with common stock.
In connection with the acquisition of the Sacramento property, we
incurred a short term non-interest bearing obligation of $1,000,000. The short
term obligation to the seller of $1,000,000 was renegotiated and partially paid
down on February 19, 1999. Under the renegotiated note, we paid an advance
against leasehold improvements in the amount of $350,000 and a principal payment
of $107,000, leaving a balance due of $893,000 on the renegotiated note,
adjusted for certain offsets. On March 29, 2000, the holder of the note signed a
settlement agreement in which it accepted a cash payment of $450,000 and 100,000
shares of common stock in full payment of this obligation. The net result of
this transaction resulted in the recognition of a gain on debt forgiveness
totaling $122,347. This is reported as an extraordinary item in the Condensed
Consolidated Statements of Operations for the six months ended June 30, 2000.
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<PAGE>
RESULTS OF OPERATIONS FOR FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL
YEAR ENDED DECEMBER 31, 1998
Our predecessor, Videocall, was in development stage during all of 1998
and until August 24, 1999. Therefore, revenue from operations only commenced in
the fourth quarter of 1999.
Sales of $8,147 in services and $79,393 in equipment represent the
commencement of our core business activity - selling videocalling and telephony
service and equipment. The majority of the equipment sales were to joint venture
partners, some of which share common management with us and therefore are
considered related parties.
The initial investment in real estate property occurred in October,
1998. The increase in real estate revenues of $846,355 results from a full year
of ownership of the Sacramento property and the addition in February, 1999 of
the Toronto property. The Toronto property accounted for 20% and the Sacramento
property for 80% of rental receipts.
Software development costs incurred prior to the merger totaled
$1,487,018 and accumulated amortization prior to the current year aggregated
$1,105,325 for a net asset value of $381,693. Management reviewed the value of
the development costs and determined that it was necessary to reduce the value
by $206,694 to reflect the net realizable value of the asset. We currently have
a contract for sale of the software asset for the amount of the adjusted net
realizable value.
Telecommunications and retail operation expenses represented the costs
of initial store openings and operating expenses for the retail stores. The
major elements of the total expense of $442,710 are comprised of the following:
Advertising $64,956
Rents 22,704
Tech Support 104,539
Store Salaries 150,064
Telecom costs 46,933
Supplies, Utilities, Misc. 53,514
--------
Total $442,710
========
Research and development costs decreased $197,609, from $270,376 in
1998 to $72,767 in 1999. This decrease represented the reduction in expenditures
as a result of completion of the development of the Web based reservation system
for videocalling and the software for retail store operations.
Real estate operations expense for the year ended December 31, 1998,
included a one time charge to bad debt for $150,959. This amount was for funds
transferred by the seller of the Sacramento property to its related entities
that were never repaid. Actual general and administrative costs for the rental
operations totaled $50,774 for the short period of ownership in 1998 and
$292,610 for both properties for the year ended December 31, 1999.
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General, administrative and marketing expenses are comprised of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Salaries and benefits $719,943 $260,391
Travel 295,286 85,219
Office, computer and maintenance 372,927 90,140
Rents, licenses and other expenses 304,344 66,642
Consultants 1,652,453 48,827
Legal and other professional 1,178,418 205,260
Marketing and public relations 459,782 51,607
---------- --------
Total $4,983,153 $808,086
========== ========
</TABLE>
Of the total $4,983,153 expense in 1999, $2,441,568 was paid in common
stock; actual cash payments totaled $2,541,585. For the year ended December 31,
1998, of the total expense of $808,086, $223,000 was paid in common stock and
the balance of $585,086 was paid in cash. Consultants, legal and other
professional expenses totaling $2,830,871 for the year ended December 31, 1999,
included $2,296,629 paid in common stock, leaving actual cash payments to those
professionals in the amount of $534,242. Management anticipates that the
majority of these expenses are one time, as they result from identifying,
developing and cultivating business relations for deployment of the videocalling
network and with respect to the legal expense, resolution of issues arising from
the merger and deployment of videocalling services.
Interest expense of $663,964 for the year ended December 31, 1999
increased over the year ended December 31, 1998 in the amount of $557,196,
primarily from the full year ownership of the Sacramento and Toronto properties
in 1999.
Dividends paid on the preferred stock in 1999 result from the issuance
of the Series A convertible preferred stock for the acquisition of the Toronto
property. On December 1, 1999, the holder of the preferred stock notified us of
its intention to convert the preferred stock to common stock in accordance with
the Certificate of Designation of the Series A convertible preferred stock. No
further dividends will be due as a result of the election to convert.
As of December 31, 1999, we had federal and state net operating loss
carry-forwards of approximately $12,215,000 and $6,552,000, respectively,
available to offset taxable income through the year 2013. Our net deferred tax
assets consisted primarily of net operating losses. We have established a
valuation allowance equal to the net deferred tax asset for each period, as we
could not conclude, based upon prior recurring operating losses, that it was
more likely than not that we will generate sufficient taxable income before 2013
to utilize all of our deferred tax assets.
RESULTS OF OPERATIONS FOR FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL
YEAR ENDED DECEMBER 31, 1997
For the twelve months ended December 31, 1998, revenue decreased
$157,776 from the twelve months ended December 31, 1997. Royalty revenue
decreased $205,013, or 50%, from the twelve months ended December 31, 1997,
principally due to decreased sales of our ER Intern and DA Pursuit of Justice
titles. Software sales decreased $32,763, or 38%, due to decreasing
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<PAGE>
sales of The Best of ER and other offerings of our DOS products. Corporate
Services, a division formed in January 1998, recorded $80,000 in revenue for the
year ended December 31, 1998. The Corporate Services division was formed to
separate the development of new software titles with programming services
offered to commercial enterprises.
Cost of royalties decreased $201,750 for the twelve months ended
December 31, 1998 from the $211,308 recorded in the twelve months ended December
31, 1997. The decrease was caused primarily by the lower royalty sales in 1998
and a reclassification of a reduction in product development costs of $859,424
based on lower forecasted sales associated with the DA Pursuit of Justice title
from cost of royalties to product development expense. Cost of software sales
decreased from $98,881 in the twelve months ended December 31, 1997 to $33,254
for the twelve months ended December 31, 1998 due to a lower sales volume of all
software products.
Product development costs increased $389,124 for the twelve months
ended December 31, 1998, primarily due to the charge of $859,424 associated with
the DA Pursuit of Justice title in 1998, which was offset by a decrease in
production development expenses due to the cessation of development of new
titles by our company.
General and administrative costs decreased from $1,351,127 in the
twelve months ended December 31, 1997 to $941,667 for the twelve months ended
December 31, 1998, a decrease of 30%. This decrease is due to our implementation
in June, 1997 of cost reduction programs by ceasing all costs associated with
development of new titles, discontinuing our Internet gaming services, closing
one business office, significantly reducing marketing and public relations
efforts, reducing the total staff to two persons and implementing other
operating cost reductions.
Selling expenses decreased $190,067 to $77,309 for the twelve months
ended December 31, 1998 from $267,376 for the twelve months ended December 31,
1997. This decrease resulted from the elimination of all selling and public
relations efforts in 1998 with the 1998 expense primarily associated with
customer service and technical support of titles then in the market.
Interest expense in the twelve months ended December 31, 1998 was
$47,626, compared to $123,571 for the twelve months ended December 31, 1997 with
the reduction attributed to a decrease in the amount of outstanding debt during
1998. Other expenses of $32,862 in 1998 were due to the reduction of our fixed
assets to net realizable values and miscellaneous adjustments; other income of
$192,798 in 1998 primarily resulted from the sale of certain assets to, and the
assumption of certain liabilities by, a third party.
The extraordinary item of $300,000 in the twelve months ended December
31, 1998 is due to the cancellation of debt of $300,000. This resulted from our
signing a Payment Agreement with IBM relating to the licensing and distribution
agreements for the Emergency Room and DA Pursuit of Justice titles formerly
co-developed with IBM. In the event of a default in payment by us which is not
cured within a thirty day period, an amount of $400,000, less any payments
already made under the agreement, would be immediately due and payable to IBM,
with interest accruing at the rate of ten percent per annum.
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As of December 31, 1998, we had federal and state net operating loss
carryforwards of approximately $6,851,000 and $3,333,600, respectively,
available to offset taxable income through the year 2013. Our net deferred tax
assets of approximately $2,790,900 and $2,253,000 as of December 31, 1998 and
1997, respectively, consisted primarily of net operating losses. We established
a valuation allowance equal to the net deferred tax asset for each period, as we
could not conclude, based upon prior recurring operating losses, that it was
more likely than not that we will generate sufficient taxable income before 2013
to utilize all of our deferred tax assets.
YEAR 2000 COMPLIANCE
We did not encounter any disruptions in service as a result of Year
2000 computer programming. We did not separately identify costs incurred in
connection with our Year 2000 compliance activities as such costs were not
significant because they generally have been incurred in the normal course of
internally modifying and updating our software programs. Future expenditures are
not expected to be significant and will be funded out of operating cash flows.
LIQUIDITY AND CAPITAL RESOURCES
We had $2,044,855 in cash outflows from operating activities for the
six months ended June 30, 2000, compared to cash outflows of $704,924 for the
six months ended June 30, 1999. This increase in outflows of $1,339,931
primarily resulted from the payment of accounts payable and the increase in
inventory over the balances carried at the end of the same period in 1999.
Cash used in investing activities for the six months ended June 30,
2000, totaled $745,579, compared to $1,271,204, for the same period in 1999. We
purchased less property and equipment during the first six months of the current
year compared to the same six months in 1999, which accounted for the decrease
in cash expenditures for investing activities.
Net cash from financing activities increased in the six months ended
June 30, 2000, by $1,470,924, over the six months ended June 30, 1999. This
increase resulted from the receipt of option exercise proceeds, receipt of
$1,200,000 of private placement proceeds offset by an increase in payments on
long term debt over the amount paid in the same prior year period.
On February 24, 1999, we acquired an office facility in Ontario, Canada
with the issuance of 975,000 shares of Class A Preferred Stock, Series 1999-A,
$.001 par value. On December 1, 1999, the holder of the preferred shares issued
under this acquisition notified us of its election to convert the preferred
stock. The holders of the preferred shares have agreed on all conversions after
the first 3,348,500 shares of common stock to reinvest by purchasing shares of
common stock from Talk Visual at the then current market price, within the
thirty-six month period, $1.00 per share of common stock issued on conversion,
for a total investment in Talk Visual of $13,365,881. As of August 7, 2000, the
preferred shareholders had paid $2,495,000 toward this agreement, leaving an
outstanding commitment of $10,870,881.
We have submitted an application to refinance the Sacramento real
estate. The letter of interest obtained from a private investment company
outlines terms of a $6,600,000 loan at 2.5% over the 10 year U.S. Treasury Bill
rate of interest, with principal and interest amortized over 30 years, with a
ten year call. We anticipate net proceeds from the refinancing to be about
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$2,000,000. Additionally, we will benefit in reduced interest costs on the
existing mortgages under this refinancing proposal. This loan is subject to
completion of the lender's due diligence process.
The Chairman of Talk Visual has made a guarantee to fund or obtain
funding to meet our obligations and working capital needs. Based upon the
current cash utilization rate and management's plan for expansion and new
products/joint ventures/acquisitions, the Chairman's funding obligation, the
refinancing of the Sacramento property, the agreement of the preferred
shareholders and the proposed sale of common stock to Evertrend Holdings Limited
as described in this prospectus, management believes that there should be
sufficient capital to meet the needs of Talk Visual for both short term needs
and growth over at least the next 12 months.
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BUSINESS
OVERVIEW
Talk Visual Corporation is a leading provider of retail-based
videocalling services for business and the general public in North and South
America. Through our Retail Operations and Sales Division, we are rapidly
developing our videocalling services in Europe, Eastern Europe, the Caribbean
and North Africa. Taken together with our innovative videocalling equipment -
the TV225, produced under exclusive contract with Motion Media of Bristol, the
United Kingdom - our extensive suite of telecommunications products has
positioned us to become a major provider of videocalling services to businesses
and consumers worldwide, linking people in the developed countries to one
another and to businesses and families in less developed nations. Our retail
locations and our associated company branch locations in Canada, the United
Kingdom, Israel and the Philippines provide an audio-visual link for businesses
and families. The service enables unusually low-cost visual communications
especially designed for expatriates and the small home office marketplace,
allowing these groups to communicate with high-quality audio-visual images over
inter-continental distances, in real time.
We believe that there is a deep-seated relationship between certain key
telecommunications products/services and other tangential products/services we
carry in our retail operations. Conceptually, the products/services permit
businesses and consumers to communicate domestically and internationally. To
support the communication needs of key business and consumer populations, our
retail locations sell a wide range of telecom and telecom-related products and
services. The products sold include pagers, cellular telephones and videophones;
services include long-distance telephone calling in-store ("call-shop
services"), money transfer, and air travel ticket issuance. Recently, we have
begun the process of retail store build-out to create a network of retail
locations during the year 2000. These stores are in addition to the planned
deployment of over 1,000 videophone locations associated with Postal Business
Center partners in the United States. Generally, most company-owned and
partnership locations will sell the majority of our products and services.
The Videophone Sales Division markets a highly price-competitive
ISDN-based video-telephone, the TV225. The TV225 is a sophisticated interactive
video-appliance, with an enhanced features set designed to provide consumers and
businesses with the ability to download news, movies, information and other
real-time data from the desktop, without the need for a computer. The Videophone
Sales Division also arranges for us to provide TV225 purchasers with Local
Exchange Carrier hookup for a 128-Kilobit ISDN line. Long distance service, for
which the underlying provider is Sprint, is provided by us and billed to the
consumer on the local carrier monthly bill or separately, depending upon carrier
billing arrangements.
Our Carrier Sales Division works with the Videophone Sales Division to
resell ISDN service to support 128-Kilobit and greater ISDN videophone calls.
The Carrier Sales Division sells both international and domestic service for
ISDN ordinary analog telephone service. Both the Carrier Sales Division and the
Videophone Sales Division have been created recently (as of March 2000) for the
purposes of tying together all aspects of our product and service sales plan. We
are also a reseller for Capsule Communications, Inc. (formerly US Wats, Inc.)
long distance service on a special website specially designed for verifiable
customer authorization for carrier
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designation. Capsule Communications provides highly competitive domestic and
international tariffs on a direct-to-consumer basis, with reseller commissions
forwarded automatically to us.
We believe that videocalling services will become one of the fastest
growing areas of the telecommunications industry. Despite its early promise,
videocalling has lagged major telecom products such as fax and cellular
telephone service, largely because of:
o the cost of equipment;
o the absence of a unified ISDN (or IP) setup mechanism; and
o the availability of adequate origination and termination
points.
We believe that we have remedied the first bullet point with the newly available
TV225 videophone; that in conjunction with the local exchange carriers and
outside ISDN service agencies, the ordering and facilitation of ISDN lines is
now a routine and simple matter; and because of the low price of the TV225
videophone, we will be able to offer businesses and consumers a broad range of
originating and terminating points for convenient videocalls.
According to the Gartner Group, a respected telecommunications research
company, the videoconferencing market is growing at 48 percent a year from a
base of 1.1 billion dollars in 1995. Another industry research company, Forward
Concepts, projects a 40% annualized growth rate from over $1 billion in 1996 to
over $5 billion by 2001. IDC sees the business market for videoconferencing
systems climbing to 600,000 systems in 2001. In contrast, they see the
heretofore non-existent consumer market also reaching a quarter-million units in
2001, but blossoming to 5.4 million systems in 2005. Finally, another research
firm, Frost and Sullivan, predicts staggering growth of videoconferencing sales
to $35 billion by 2002.
This prediction for 2002 is exactly equivalent to the industry
forecasts for wireless subscriber growth.
We believe that we have positioned ourselves to participate in this
projected growth by providing equipment, services and especially retail
locations for the processing of videocalls and other closely related
communications products and services.
We were organized as a Florida corporation in 1998 and merged with Talk
Visual Corporation (formerly Legacy Software, Inc.), a Delaware corporation,
pursuant to a merger agreement in 1999. As part of the merger, we became a
Nevada corporation. We introduced our videocalling services, cellular telephone
and pager sales products in early 1999 with the launch of our first corporate
retail locations. Our principal office is located at 3550 Biscayne Boulevard,
Suite 704, Miami, Florida 33137 and our telephone number is (305) 572-0575.
RETAIL OPERATIONS AND SALES DIVISION
We introduced our first retail stores in early 1999, and were offering
connectivity in our 14 company-owned locations by July 1999. Through our current
partnerships with approximately 30 additional locations, and with 400
Sprint-enabled locations, we can offer
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service in most major cities on the planet. As we recently transitioned from a
development stage company, the revenue from retail sales of products and
services is negligible at this time.
We sell the following items out of our retail stores:
o Telephone calls ("call-shop services")
o Videocalls (domestic and international)
o Prepaid phone cards and prepaid residential services
o Cellular phones, pagers, and related accessories
o High-speed Internet services, including free email
o Sale and distribution of videotelephones and equipment
By the end of the year 2000, we plan to have presence in over 150 U.S.
Metropolitan Service Areas, which cover more than 70% of the U.S. population,
and all major markets in Canada. We anticipate being the leading videocalling
provider for small business and consumer videocalling services, and believe we
are currently the lowest-cost provider in the United States and abroad. We
purchase low-cost minutes from Sprint and other carriers and resell them to our
customers and partner retailers.
We have arranged with a variety of domestic and international carriers
to carry our voice traffic from key populous cities to South American,
Caribbean, Asian, African and European destinations. Calls are routed and rated
using outside-vendor software, deployed in each retail store location. A typical
average margin of 40% is retained by us for international calls.
We purchase our prepaid phone cards from a variety of vendors, and
offer our retail clients a range of pricing with "best per-minute values"
varying from week to week and month to month, depending upon vendor
arrangements. Prepaid phone cards produce a 30% average margin for us.
We have not launched our prepaid residential services, but have
acquired switching equipment to deliver this service in New York, Los Angeles
and Miami. The service is anticipated to be launched during the third quarter of
2000.
Cellular telephones and cellular services are provided to us by
Voicestream/Omnipoint, AT&T Wireless Services, and Sprint PCS. We make net
margins on service implementation of between $100 and $150 per instrument sold.
At this time, we do not enjoy any residual payments from these carriers.
Accessories for cellular telephones are a high-margin item (typically over
300%), and we promote our accessories sales whenever cellular phones are sold.
Pagers are provided to us by Nixxo, Motorola and Philips. Price points
enjoyed by Talk Visual allow retail margins of 10% to 50%, depending upon the
service plan and product. We believe that our pager sales programs will provide
a meaningful contribution to carrying
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expenses. Accessories are purchased from a range of vendors, largely based on
price, quality and the cellular telephones most popular within the retail area.
Integrated Digital Services Network, or "ISDN", is made up of two
channels of digital signals sent over standard copper telephone lines. Because
it is a digital signal, it can achieve information transfer rates of up to five
times faster than standard analog lines which carry regular telephone calls. Our
ISDN-based network permits a partner retailer to launch calls from the partner's
location to our switching platform, via the domestic Sprint network. Calls are
launched using either credit-card validation systems over the ISDN network, or
via the partnering retailer's locally-provided ISDN lines. All partner
retailers' ISDN local lines have long-distance service provided by us,
reselling/rebilling Sprint ISDN service. A subscribing partner retailer
establishes an account with us by assigning us a Letter of Authorization,
allowing us to order local and long distance ISDN service in the partner's name.
Fees are paid by the partner retailers to the local exchange carrier for
one-time installation and network connection fees, and for ongoing monthly
service rates. A wide range of national service plans, provided by the local
exchange carriers, offers monthly costs ranging from $30 to $90, with the more
costly plans including local exchange "free" minutes. We "PIC" (Preassigned
Interexchange Carrier assignment) the ISDN phone numbers to our own account, and
receive from Sprint a bill representing the monthly long-distance traffic by
individual account. Accounts are viewed on-line on a daily basis by our carrier
accounting department, and any calls made from the individual ISDN-based phones
are billed directly to the partner retailer. The billing method is simple and
effective; the retailer must have on-file with us a valid and current credit
card, which is charged for all calls on a daily basis. Charges are based on
pre-determined routings and ratings, which are made known to the retailer's
customers by literature at the ISDN videophone site. The retailer charges the
customer for all call minutes at the time of call termination, and collects
cash, credit card or other payment methodology; these methodologies are
transparent to us, and we bill the partner retailer's credit card for the
appropriate call charges less the retained retailer's portion. This retained
portion typically represents about 25% of the final videocall fee. Typical calls
are an average of 22 minutes long, and typical fees are $1.00 per minute for
domestic videocalls. The retailer, therefore, will normally keep $5.50 for each
call. While experience is limited, our current research indicates that five
calls per day are the likely complement, subject to local advertising,
demographics and location. This would represent approximately $650 per month in
revenue to the retailer, of which a median amount of $60 would be direct and
indirect costs. It is estimated that most retailers will retain a net income of
about $600 monthly.
The service is currently being rolled out in the United States. We will
provide a minimum of 1,000 retailers who are members of the Postal Business
Express Center association (USXP - Universal Express) with low-cost or zero-cost
videophones in order to create the network end-points for the origination and
termination of videocalls.
We are in the process of building retail locations of our own in key
major cities. Retail stores are being opened in several business locations and
expatriate communities in New York City (in the boroughs of Manhattan and
Queens), in towns on the New York/New Jersey border (greater New York area),
Miami, Chicago, Denver, Los Angeles and San Francisco. Correlated retail
locations are under investigation in the most populous cities of Colombia,
Guatemala, Honduras, the Dominican Republic, and Mexico. Some of these retail
locations will be partnership locations. In addition to these locations, we have
entered into an agreement with
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Skynet Corporation, an international package delivery service with over 300
locations in major cities worldwide, to set up 200 of its locations with
videophone services under a revenue sharing agreement.
VIDEOPHONE SALES DIVISION
We have begun providing videophone sales in response to the industry's
need for low-cost videophone instruments. Our videophone sales division has
committed to Motion Media, of Bristol, UK to sell a total of 10,000 of its TV225
videophone units, custom designed for Talk Visual. In order to implement sales
programs, we are hiring two teams of eight sales and sales support personnel to
implement the investigatory program focused on videophone sales in Miami,
Florida. Subscribers to the videophone program will:
o purchase a videophone for $1396, based on a downpayment of
$100 and 36 monthly payments of $36;
o purchase installation of facilities for and monthly ISDN
service from the local exchange carrier, arranged for by Talk
Visual; and
o purchase for $200 the required Network Interface device (NT-1)
to connect the videophone to the local network. Purchasers may
opt to purchase the videophone outright for $1599, with an
additional NT-1 purchase, if needed.
Videophone purchasers are connected to the local exchange carrier
through the efforts of the Carrier Sales Division. The Carrier Sales Division
receives orders from the Videophone Sales Division, implements the service, and
follows up with customers to offer them other long distance and local
telecommunications service products. We believe that the consumers and both
small and larger businesses will appreciate the convenient size and performance
of the TV225. In addition, local exchange subscribers are able to have any
"regular" telephone service line upgraded to ISDN service for a modest charge.
The new ISDN line allows both "regular" telephone services - phone calls, fax
calls - and permits as well high-speed Internet connection to the subscriber's
Internet Service Provider (ISP), along with providing for connectivity to
service videocalls. Long distance ISDN services will be provided by Sprint and
other carriers.
We believe that our sales efforts in Miami can be expanded city by city
into every major American business and population center. The combination of:
o a quality, low-cost videophone;
o "wrapped" service for the arranging of ISDN line installation;
o videophone availability in local retail partnership
operations;
o the existing "legacy" ISDN-based equipment in tens of
thousands of businesses; and
o the presence of videophones in high-visibility areas such as
airport lounges will create a vibrant market for videophone
carrier sales and videophone instrument sales.
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ENGINEERING, RESEARCH AND DEVELOPMENT
We believe that our future success will depend in large part on our
ability to enhance existing services and develop new services in response to
changing market, consumer or technological developments in the
video-telecommunications areas. An important factor in the future success of our
videophone sales and service offerings will be our ability to provide, at
competitive prices, more functionality and features than those which might
become typically available in other competitive offerings. While we do not know
of any other entities currently providing truly competitive services, we do
believe that such competition will arise in the future.
We are developing proprietary methodologies to route, rate and service
videocalls. Calls being launched from our partnership locations in, for example,
Trans World Airlines "Ambassadors Club" lounges, will go through the local
exchange carrier to a platform at our headquarters. Specialized ISDN-based T-1
circuits will route and rate the outbound call to other videocall equipment
anywhere in the world. The calling customer will pay for the call using a
standard credit card, the information for which is entered at the time of the
call.
We believe that providing a platform for centralization of videocalling
is a key element in our future growth. The platform allows callers to access a
vast menu of available sites to call - both private and business sites - in
addition to our locations. Callers may access a complete menu of choices in
order to make reservations with a live operator on-line, place a videocall, or
receive information from news or entertainment sources.
These technologies are currently under development at the research
level. We anticipate making them available to the general public by the middle
of year 2000.
We believe that two key wireless technologies will assist in our
effective delivery of services:
o the linking of physical locations, whether retail operations or
switching locations, by wireless services generally in the
unregulated 2.4 gigahertz range, to key points-of-presence for
carriers - specifically to avoid the costs associated with
"IP-T-1" facilities traditionally deployed by the local exchange
carriers, and the major long-distance carriers, for prices in
excess of $1,000 monthly carrying fees; and
o the development of "local area" wireless video-telephony to enable
a wireless mobile "cart" or "unit" to move around in hospital,
nursing home and hotel environments. We are developing both these
technologies, in both the ISDN and IP transmission realms, and
anticipate trial deployment before the end of year 2000.
SALES, MARKETING AND DISTRIBUTION
Our sales strategy is to establish and maintain long-term relationships
with our consumer and business customers, and to leverage relationships with
major corporations in order to rapidly expand our presence and reach. We utilize
a consultative sales process to understand and define customer needs, and
determine how those needs can be addressed by our services. We seek to build
upon our existing customer relationships by integrating and cross-selling our
different service offerings. Our sales cycle varies for different services and
products, and the development
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of key large corporate relationships can be up to 12 months for our Carrier and
Videophone Sales Divisions.
Our sales force consists of sales representatives who generally have
significant experience in either retail and/or telecommunications sales, either
as former employees of wireline or wireless carriers or in selling products and
services to businesses and/or within a quality retail environment. We typically
assign each business sales representative to a well-defined group of business
prospects in order to support the development and maintenance of long-term
strategic customer relationships. The sales representatives are supported by
product specific account and service managers within the sales teams and who
assist in the management of the accounts on a daily basis after the completion
of the initial sale. At this time, our sales representatives are located at our
headquarters in Miami, Florida; however, we intend to roll out our Miami-based
sales programs into strategic cities in major geographic regions.
Our direct sales strategy is complemented by a marketing program that
includes participation in industry shows, advertising and public relations.
Because our business and retail consumer groups are diverse, we seek to gain
wide exposure through selected promotions and advertising on a highly targeted
basis.
CUSTOMERS
We provide our services to small and large business users of
video-telephony through our Videophone Sales Division; to expatriate populations
seeking to contact their business associates, friends and family abroad through
the various Talk Visual and partnership retail outlets as mediated by the Retail
Operations and Sales Division; and to partners themselves through specialized
team members who are integrated into the other sales and support divisions. We
believe that a close integration and inter-penetration of sales, marketing and
support personnel helps to create the cross-communication necessary for a
vibrant, multi-purpose sales effort.
For the year ended December 31, 1999, our sales totaled $1,165,988,
which was composed of $1,075,482 from rental operations and $90,506 from
telecommunication products and services.
COMPETITION
The market for videocalling services is competitive on the equipment
side, and just beginning to develop on the carrier, support and product
development/features side. A number of companies currently offer one or more of
the services provided by us, but generally only in the area of hardware. In some
instances, such as, for example, in the case of Polycom and PictureTel, we act
as a reseller of equipment purchased through a major dealer such as Sprint. At
this time, we do not know of any other providers who bring together the various
disparate elements of the video-services sales process - from retail operations,
to hardware, to support of installation and long-distance services.
We believe that the principal competitive factors in the
video-telephony industry include the ability to identify and respond to customer
needs, quality and breadth of service offerings, price and technical expertise.
Our ability to compete also depends in part on a number of
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competitive factors out of our control, including the ability to hire and retain
employees, the development by others of products and services that are
competitive with our products and services, the price at which others offer
comparable products and services and the extent of our competitors'
responsiveness to customer needs. There can be no assurance that we will be able
to continue to compete successfully with our existing competitors or with new
competitors.
GOVERNMENT REGULATION
The Federal Communications Commission (FCC), under the terms of the
Communications Act of 1934, as amended, including the Telecommunications Act of
1996, regulates interstate communications and use of radio spectrum, including
entry, exit, rates and terms of operation. We presently neither operate any
facilities utilizing regulated frequencies nor have any facilities-based
services involving interstate communications. However, we have applied for and
have been granted a "Section 214" license from the FCC, which allows us to
resell international long-distance services. We will continue to maintain this
license, along with the reporting requirements pursuant thereto.
We recognize that the long-distance and local exchange carriers that
underlie our services are regulated at both the federal and state levels. Such
regulation may decrease the growth of the videocalling industry, affect the
development of key markets, and limit the number of potential customers for our
services or impede our ability to offer competitive services, or otherwise have
a material adverse effect on our business and results of operation.
REAL ESTATE OPERATIONS
As more fully described below under "Facilities," we own and operate
two real estate properties. One is located in Sacramento, California and the
other is in Toronto, Ontario, Canada. Both properties are leased to commercial
tenants and are held by our subsidiaries.
EMPLOYEES
As of August 7, 2000, we had a total of 82 full-time employees and 2
part-time employees. Our employees are not covered by a collective bargaining
agreement and we have experienced no work stoppages. We believe that our
relationships with our employees are good.
FACILITIES
We lease space at two retail locations, and at our principal
headquarters in Miami, Florida. The Miami location serves as the core sales,
support and marketing facility headquarters for our executive, engineering,
sales, human resources and finance personnel. The following is a listing of our
significant leased facilities:
<TABLE>
<CAPTION>
Location Square Footage Expiration Date
-------- -------------- ---------------
<S> <C> <C> <C>
Miami, Florida - Headquarters 5,702 June 30, 2002
Miami, Florida - Retail Store 1,890 December 31, 2001
Boston, Massachusetts - Store 1,030 December 31, 2001
</TABLE>
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Through our subsidiaries, we also own two commercial real estate
properties. We acquired a 119,100 square foot, two story, strip center retail
and office complex located in Sacramento, California with the acquisition of
Sacramento Results, Inc. A retail videocalling center has been opened in a 515
square foot space. On February 24, 1999, we acquired a 22,662 square foot
property in Toronto, Canada, which contains commercial rental tenants.
The Sacramento property has an occupancy rate of 82.2% and is composed
of 50.46% office rental and 49.54% retail stores. Two of the twenty six tenants
occupy more than ten percent of the rentable square footage; one is the U. S.
Post Office and the other operates a bingo hall. The average effective annual
rental per square foot for the entire property is $9.88. All existing leases,
excluding renewal provisions and the U. S. Post Office, will expire within the
next ten years. Management believes that the property is stable and the current
occupancy rate will be maintained or improved.
For federal tax purposes, the basis in the property is the acquisition
price paid by Sacramento Results, Inc., the subsidiary in which the property is
held. The property is being depreciated over 39 years under the straight line
method. Real estate taxes for 1999 totaled $55,696.
This property is encumbered by three loans as follows:
o Mortgage note, secured by a first lien on the land and building,
including a deed of trust on rents and fixtures, bearing interest
at 12%, payable monthly with the entire principal due January,
2004. The current balance on this mortgage is $3,840,000.
o 12.5% mortgage note, secured by a second lien on the land and
building, including a deed of trust on rents and a lien on
specified equipment; disbursed to a maximum funding of $500,000
based upon completion of certain leasehold improvements and
delivery of specified equipment; payable in monthly installments
of principal and interest for 60 months; undisbursed funds at
August 7, 2000 totaled $350,000. The balance on the mortgage is
$118,755 at June 30, 2000.
o A 9% mortgage note, secured by a lien on the land and building,
with a maximum funding of $1,000,000 due September 1, 2000.
Interest is payable monthly. The balance at June 30, 2000 is
$500,000.
The Toronto, Ontario, Canada property has an occupancy rate of 79.07%,
which represents three tenants out of the four units available. All tenants are
retail stores on street level. The average effective annual rental for 1999 was
$8.51 per square foot. All existing leases will expire within the next ten
years; however, management is confident that the property will maintain or
improve upon its current occupancy level.
The property is located in Canada and subject to Canadian tax law. Real
estate taxes for the year ended December 31, 1999 totaled $47,406.
This property is encumbered by a 7.05% mortgage note, secured by the
land and building and matures February 1, 2002. The mortgage is payable in
monthly installments of $8,000,
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including principal and interest. The mortgage is payable in Canadian dollars.
The balance on June 30, 2000 in US dollars was $923,652.
The property was pledged by the seller as collateral on an unrelated
bank debt of the seller in the amount of $621,000. The seller has provided a
personal guarantee and indemnity until the pledge is discharged. The seller is
in the process of having the pledge discharged.
Management believes it carries sufficient and adequate insurance on all
properties.
LEGAL PROCEEDINGS
We are not currently involved in any litigation that is expected to
have a material adverse effect on our business or financial position. There can
be no assurance, however, that third parties will not assert infringement or
other claims against us in the future which, regardless of the outcome, could
have an adverse impact on us as a result of defense costs, diversion of
management resources and other factors.
MANAGEMENT
DIRECTORS AND OFFICERS
The following sets forth certain information regarding our executive
officers and directors:
<TABLE>
<CAPTION>
Name Age Position(s) Held with Company
---- --- -----------------------------
<S> <C> <C>
Eugene A. Rosov 52 President, Chief Executive Officer and Director
Michael J. Zwebner 47 Chairman of the Board
Clinton H. Snyder 45 Chief Financial Officer, Secretary and Director
Michael Cuzner-Charles 46 Director
David B. Hurwitz 37 Director
Alexander H. Walker, Jr. 74 Director
</TABLE>
DAVID B. HURWITZ has been a director since November, 1998. Mr. Hurwitz
is the President and Chief Executive Officer of Capsule Communications, Inc.
Prior to joining Capsule Communications, Inc., Mr. Hurwitz was with Commonwealth
Long Distance/RCN as Vice President of Sales and Marketing. Mr. Hurwitz was
involved in several entrepreneurial start-up ventures funded by Petrocelli
Industries of NYC before joining Commonwealth Long
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<PAGE>
Distance/RCN. As Executive Vice President and Chief Operating Officer of
InterNet Communications Services, Inc., Mr. Hurwitz was responsible for the
development and operation of a prepaid "debit" long distance calling card
service and validation processing service bureau, and as General Manager of
FiberNet, Mr. Hurwitz was responsible for overseeing the sale and marketing of
services associated with FiberNet's Upstate and New York Metropolitan Area
Networks. Prior to developing the business plan and negotiating funding for
InterNet, Mr. Hurwitz participated in the due diligence and sale of FiberNet's
Upstate and Metropolitan New York Area markets to MFS. While affiliated with
Rochester Tel. Telecommunications Group, a division of Rochester Telephone (now
Frontier) from 1985 until February of 1992, Mr. Hurwitz held numerous positions
including Account Executive, Regional Sales Manager and Director of the
Mid-Atlantic and Central Regions. Mr. Hurwitz graduated with a B.A. in English
and History from Hobart College in 1985. He completed Master's level course work
in Telecommunications Management in 1988 and 1989 at the State University of New
York at Albany.
MICHAEL ZWEBNER is our founder and has served as Chairman of the Board
of Directors of Videocall International Corporation since February, 1998. Mr.
Zwebner has recently been appointed to the board of a Canadian public firm. From
1974 to 1986, Mr. Zwebner founded and ran a travel and tourism company and a
charter airline, specializing in the areas of air charter travel, wholesale
ticketing and general business and tourist travel. From 1986 to 1990, Mr.
Zwebner owned and operated several real estate companies as well as managed a
chain of five family restaurants and related catering services in England. From
1991 to 1997, Mr. Zwebner founded and served as Vice-President of Cardcall
International Holdings Inc. (USA) and Operating Manager of Cardcall (UK) Ltd.
for which he designed and developed telecommunications and marketing concepts
and organized the prepaid phone card operations. Mr. Zwebner also coordinated
corporate finance activities for Cardcall. In February of 1997, Mr. Zwebner
negotiated and secured the sale/merger of the Cardcall Group to DCI
Telecommunications Inc., a publicly-held entity based in Connecticut. In
addition, in February of 1988, Mr. Zwebner negotiated the creation of a
multi-million dollar joint venture between Cardcaller Canada Inc. with Datawave
Systems Inc. of Vancouver, Canada. Mr. Zwebner has served as Chairman of the
Board and a director of Talk Visual since September, 1998.
EUGENE ROSOV has served as director, President and Chief Executive
Officer of Videocall International Corporation since June, 1998. In 1967, Mr.
Rosov started a national music educational and touring company, and in 1978
started the international chamber music association, Chamber Music America. Mr.
Rosov served as acting Director of Marketing for the nation's largest public
radio station, WNYC, from 1979 to 1980. In 1980, he was founder, President and
Chief Executive Officer of Water Test Corporation, a national drinking water
testing laboratory acquired by Household International in 1987. From 1988 to
1995, he was founder, president, Chief Executive Officer and Chairman of
Innovative Telecom Corporation, the Nashua, New Hampshire telecommunications
systems integrator and provider to five (of six) Regional Bell operating
companies of prepaid telephone card technologies and customer service
operations. From 1995 to 1998, Mr. Rosov acted as a consultant to various
telecom companies. Mr. Rosov graduated from Harvard College in 1971 with a B.A.
in General Studies. Mr. Rosov has served as Chief Executive Officer since
November, 1998 and a director since September, 1998.
33
<PAGE>
MICHAEL CUZNER-CHARLES currently serves as Chief Executive Officer and
is a Director with the Internet-based firm Tango-Zebra. He formerly served as a
director of Regal Brook Ltd. in Berkshire (UK), since 1995. He was finance
director of Kingston Coatings, Courtaulds Plc from 1976 to 1979, and became a
director of the CJ Phoenix Group (Jewelers in Paris, London and Birmingham) in
1979 until 1982. For the international management consulting firm of Grant
Thornton, Mr. Cuzner-Charles was senior manager from 1982 to 1984, and became
senior manager of Corporate Finance for Touche Ross from 1984-1992. From
1992-1995, Mr. Cuzner-Charles served as a director of MBS Plc, a computer
distribution company, and was Chief Executive Officer of Trade Intermediary
Group Plc. He is a Fellow of the Institute of Chartered Accountants in England
and Wales. Mr. Cuzner-Charles has served as a Director of Talk Visual since
September, 1998.
ALEXANDER H. WALKER has served as a Director of Videocall International
Corporation since July, 1998. Since 1968, Mr. Walker has served as Chairman of
the Board of the Nevada Agency and Trust Company in Reno, Nevada, a licensed and
registered trust company and transfer agent in business since 1903. He received
his B.A. from Waynesburg College in 1950 and his J.D. from the University of
Pittsburgh School of Law in 1952. From 1956 to date, he has maintained a private
practice as an attorney in Utah. Mr. Walker has served as a Director of Talk
Visual since September, 1998.
CLINTON H. SNYDER, CPA has held the positions of Chief Financial
Officer since November, 1998, Secretary since March 1, 1999 and a Director since
June, 2000. From 1975 to 1982, he served as auditor and business consultant with
the public accounting firm of Stegman & Associates. From 1982 to 1985, he served
as Finance Officer for a multi-national construction products and real estate
development firm in Baltimore, Maryland. From 1985 to 1990, he served as
Executive Officer for Finance and Administration with North American Beauty
Services, Inc., a wholesale and retail distributor of beauty products. From 1990
to 1992, he served as Vice President of Finance for Innovative Telecom Company,
Inc., a telecommunications provider. From 1992 to 1998, he served as a business
consultant and financial and tax strategist for companies throughout the New
England area.
COMPENSATION OF DIRECTORS
We have no standard arrangements pursuant to which directors are
compensated for any services provided as a director except for the automatic
option grant program component of the 1995 Stock Option/Stock Issuance Plan.
Directors who are not current employees are eligible for the automatic option
grant program component of the stock option/stock issuance plan under which
option grants will automatically be made at periodic intervals to eligible
non-employee board members to purchase shares of our common stock at an exercise
price equal to 100% of their fair market value on the grant date.
Under the automatic option grant program, each individual who is first
elected or appointed as a non-employee board member will receive a 3,333 share
option grant on the date of such election or appointment, provided such
individual has not been in the prior employ of Talk Visual. In addition, at each
annual meeting, beginning with the 1997 annual meeting, each individual who is
to continue to serve as a non-employee board member after the meeting will
receive an additional option grant to purchase 833 shares of our common stock
whether or not such individual has been in the prior employ of Talk Visual.
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<PAGE>
Each automatic grant will have a term of ten years, subject to the
earlier termination following the optionee's cessation of board service. Each
automatic option will be immediately exercisable; however, any shares purchased
upon exercise of the option will be subject to repurchase should the optionee's
service as a non-employee board member cease prior to vesting in the shares. The
initial 3,333 share grant will vest in four equal and successive annual
installments over the optionee's period of board service. Each additional 833
share grant will vest upon the optionee's completion of one year of board
service measured from the grant date. However, each outstanding option will
immediately vest upon certain changes in the ownership or control of Talk Visual
or the death or disability of the optionee while serving as a board member.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain summary information concerning
compensation paid or accrued on behalf of the Chairman, the Chief Executive
Officer and the other most highly compensated executive officers whose total
annual salary and bonus for fiscal year 1999 exceeded $100,000 ("named executive
officers"), with respect to services rendered by such persons for each of the
fiscal years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
---------------------------- ---------------------
Fiscal Salary Other Annual Securities
Name and Principal Position Year ($) Compensation ($) Underlying Options
--------------------------- ----- ------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Michael J. Zwebner (1)......... 1999 -0- $120,000(2) -0-
Chairman of the Board of 1998 -0- $30,000(2) -0-
Directors 1997 -0- -0- -0-
Eugene A. Rosov (3)............ 1999 $148,961 $112,500(4) -0-
Chief Executive Officer, 1998 -0- -0- -0-
President 1997 -0- -0- -0-
Clinton H. Snyder, CPA (5)..... 1999 $120,000 -0- -0-
Chief Financial Officer and 1998 -0- -0- -0-
Secretary 1997 -0- -0- -0-
</TABLE>
----------
(1) Mr. Zwebner became Chairman on November 6, 1998.
(2) Mr. Zwebner's compensation is paid under a contract with Overseas
Communication, Ltd., a non U.S. company. This amount was paid by the
issuance of 1,698,014 shares at $.0766 per share on November 4, 1999.
(3) Mr. Rosov became Chief Executive Officer on November 6, 1998
(4) Paid by the issuance of 50,000 shares on June 8, 1999, at a value of
$2.25 per share.
(5) Mr. Snyder became Chief Financial Officer on October 6, 1998 and
Secretary on March 1, 1999.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has appointed an audit committee, compensation
committee and a stock option committee, but has not appointed a standing
nominating committee.
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<PAGE>
The members of the audit committee as appointed are Michael
Cuzner-Charles and Alexander H. Walker, Jr. During the fiscal year ended
December 31, 1999, the audit committee did not meet. The audit committee is
responsible for reviewing financial statements, consulting with the independent
auditors concerning our financial statements, accounting and financial policies
and internal controls and reviewing the scope of the independent auditors'
activities and fees.
The members of the compensation committee are Messrs. Hurwitz, Rosov
and Cuzner-Charles. During the fiscal year ended December 31, 1999, the
compensation committee met one time. The compensation committee reviews and
makes recommendations to the board of directors with respect to the compensation
of all officers and issuances of equity securities to directors, officers,
employees and consultants of Talk Visual.
The members of the stock option committee are Messrs. Hurwitz, Rosov
and Cuzner-Charles. During the fiscal year ended December 31, 1999, the stock
option committee did not meet. The stock option committee is responsible for
administering our stock option/stock issuance plan and granting options
thereunder.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors was formed in
January, 1996 to establish salary, bonus and other forms of compensation for
officers, provide recommendations for the salaries and incentive compensation of
the employees and consultants and make recommendations to the board of directors
regarding such matters.
The principal objectives of our executive compensation are to:
o support the achievement of the desired company performance;
o align the executive officer's interests with the success of
Talk Visual and with the interests of our stockholders; and
o provide compensation that will attract and retain qualified
management and reward performance.
These objectives are principally achieved through compensation in the
form of annual base salaries, discretionary bonuses and equity investment
opportunities, such as stock option grants. Prior to January, 1996, the board of
directors performed the functions of the compensation committee. We have not
historically linked executive compensation directly to corporate performance.
During the 1999 fiscal year, the compensation committee was composed of
Messrs. Hurwitz, Rosov and Cuzner-Charles. No interlocking relationship exists
between our board of directors or compensation committee and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
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<PAGE>
STOCK OPTION PLAN
On June 28, 2000, the board of directors of Talk Visual adopted, and on
July 27, 2000, the shareholders of Talk Visual approved, an amendment to the
1995 Stock Option/Stock Issuance Plan that increased the number of shares of
common stock reserved for future issuance under the plan by 3,500,000.
The amendment to increase the share reserve is designed to assure that
a sufficient reserve of common stock is available under the stock option/stock
issuance plan to attract and retain the services of key individuals essential to
our long-term growth and success, and to more closely align their interests with
those of the stockholders.
The stock option/stock issuance plan became effective on November 9,
1995, upon adoption by the board, and was subsequently approved by the
stockholders on November 9, 1995. On March 28, 1997, the board adopted
amendments to the stock option/stock issuance plan which were subsequently
approved by the stockholders on May 29, 1997. On August 20, 1998, the board
approved an amendment removing individual limits on amounts that may be granted
under the plan.
The following is a summary of the principal features of the stock
option/stock issuance plan.
EQUITY INCENTIVE PROGRAMS
The stock option/stock issuance plan contains three separate equity
incentive programs: (i) a discretionary option grant program, (ii) a stock
issuance program, and (iii) an automatic option grant program. The principal
features of each program are described below. The stock option/stock issuance
plan (other than the automatic option grant program) is administered by the
stock option committee. The stock option committee acting in such administrative
capacity as the plan administrator has complete discretion (subject to the
provisions of the stock option/stock issuance plan) to authorize option grants
and direct stock issuances under the stock option/stock issuance plan. All
grants under the automatic option grant program will be made in strict
compliance with the provisions of that program, and no administrative discretion
will be exercised by the plan administrator with respect to the grants made
under such program.
SHARE RESERVE
A total of 3,807,267 shares of common stock has been reserved for
issuance over the term of the stock option/stock issuance plan, after giving
effect to a 1 for 3 reverse split on September 8, 1998.
The shares issuable under the stock option/stock issuance plan may be
drawn from shares of our authorized but unissued common stock or from shares of
common stock reacquired by Talk Visual, including shares purchased on the open
market. Should an option expire or terminate for any reason prior to exercise in
full, or be cancelled in accordance with the cancellation-regrant provisions
under the plan, the shares subject to the portion of the option not so exercised
or cancelled will be available for subsequent issuance under the stock
option/stock issuance plan. Unvested shares issued under the stock option/stock
issuance plan and
37
<PAGE>
subsequently repurchased by Talk Visual at the original option exercise or share
issue price paid per share will be added back to the share reserve and will
accordingly be available for subsequent issuance under the stock option/stock
issuance plan.
In the event any change is made to the outstanding shares of common
stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change in corporate structure
effected without our receipt of consideration, appropriate adjustments shall be
made to
o the maximum number and/or class of securities issuable under the
stock option/stock issuance plan;
o the maximum number and/or class of securities for which any one
person may be granted options, separately exercisable stock
appreciation rights and direct stock issuances per calendar year;
o the number and/or class of securities for which option grants will
subsequently be made under the automatic option grant program to
each newly-elected or continuing non-employee board member; and
o the number and/or class of securities and the exercise price per
share in effect under each outstanding option.
ELIGIBILITY
Officers and other employees of Talk Visual and our parent or
subsidiary corporations, non-employee members of the board or the board of
directors of any parent or subsidiary corporation and consultants and other
advisors in the service of Talk Visual or our parent or subsidiary corporations
will be eligible to participate in the discretionary option grant and stock
issuance programs. Non-employee members of the board will also be eligible to
participate in the automatic option grant program.
VALUATION
The fair market value per share of common stock on any relevant date
under the stock option/stock issuance plan will be the closing selling price per
share on that date in the market in which the common stock is traded.
DISCRETIONARY OPTION GRANT PROGRAM
Options may be granted under the discretionary option grant program at
an exercise price per share not less than 85% of the fair market value per share
of common stock on the option grant date. No granted option will have a term in
excess of ten years. The options will generally become exercisable in a series
of installments over the optionee's period of service with Talk Visual.
Upon cessation of service, the optionee will have a limited period of
time in which to exercise his or her outstanding options for any shares in which
the optionee is vested at that time.
38
<PAGE>
The plan administrator will have complete discretion to extend the period
following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability or
vesting of such options in whole or in part. Such discretion may be exercised at
any time while the options remain outstanding, whether before or after the
optionee's actual cessation of service.
The plan administrator is authorized to issue two types of stock
appreciation rights in connection with option grants made under the
discretionary option grant program:
o Tandem stock appreciation rights provide the holders with the
right to surrender their options for an appreciation
distribution from Talk Visual equal in amount to the excess of
(a) the fair market value of the vested shares of common stock
subject to the surrendered option over (b) the aggregate
exercise price payable for such shares. Such appreciation
distribution may, at the discretion of the plan administrator,
be made in cash or in shares of common stock.
o Limited stock appreciation rights may be provided to one or
more officers or non-employee Board members of Talk Visual as
part of their option grants. Any option with such a limited
stock appreciation right may be surrendered to Talk Visual
upon the successful completion of a hostile tender offer for
more than 50% of our outstanding voting stock. In return for
the surrendered option, the officer will be entitled to a cash
distribution from Talk Visual in an amount per surrendered
option share equal to the excess of (a) the highest price paid
per share of common stock paid in connection with the tender
offer over (b) the exercise price payable for such share.
The shares of common stock acquired upon the exercise of one or more
options may be unvested and subject to repurchase by Talk Visual, at the
original exercise price paid per share, if the optionee ceases service with Talk
Visual prior to vesting in those shares. The plan administrator will have
complete discretion to establish the vesting schedule to be in effect for any
such unvested shares and may at any time cancel our outstanding repurchase
rights with respect to those shares and thereby accelerate the vesting of those
shares.
The plan administrator will also have the authority to effect the
cancellation of outstanding options under the discretionary option grant program
which have exercise prices in excess of the then current market price of the
common stock and to issue replacement options with an exercise price based on
the lower market price of common stock at the time of the new grant.
STOCK ISSUANCE PROGRAM
Shares may be sold under the stock issuance program at a price per
share not less than 85% of fair market value, payable in cash or check made
payable to Talk Visual. Shares may also be issued solely as a bonus for past
services.
The issued shares may either be immediately vested upon issuance or
subject to a vesting schedule tied to the performance of service or the
attainment of performance goals. The plan
39
<PAGE>
administrator will, however, have the discretionary authority at any time to
accelerate the vesting of any and all unvested shares outstanding under the
option plan.
AUTOMATIC OPTION GRANT PROGRAM
Under the automatic option grant program, each individual who first
becomes a non-employee board member, whether through election by the
stockholders or appointment by the board, will automatically be granted, at the
time of such initial election or appointment, a non-statutory option to purchase
3,333 shares of common stock, provided such individual has not previously been
in our employ. On the date of each annual stockholders meeting after an
individual's initial grant, each individual who continues to serve as a
non-employee board member will automatically be granted a non-statutory option
to purchase an additional 833 shares of common stock, provided such individual
has served as a non-employee board member for at least six months. There is no
limit on the number of such 833-share option grants any one eligible
non-employee board member may receive over his or her period of board service.
Each 3,333-share or 833-share option granted under the automatic option
grant program will have an exercise price per share equal to 100% of the fair
market value per share of common stock on the option grant date and a maximum
term of ten years measured from the grant date. The option will be immediately
exercisable for all the option shares, but any purchased shares will be subject
to repurchase by Talk Visual, at the exercise price paid per share, upon the
optionee's cessation of board service prior to vesting in those shares. Each
initial 3,333-share option will vest, and our repurchase right will lapse, in
four successive equal annual installments over the optionee's period of board
service, with the first such installment to vest upon completion of one year of
board service measured from the option grant date. Each annual 833-share grant
will vest, and our repurchase right will lapse, upon the optionee's completion
of one year of board service measured from the option grant date.
The shares subject to each outstanding automatic option grant will
immediately vest should the optionee die or become permanently disabled while a
board member or should any of the following events occur while the optionee
continues in board service: an acquisition of Talk Visual by merger or asset
sale, the successful completion of a tender offer for more than 50% of our
outstanding voting securities, or a change in the majority of the board effected
through one or more contested elections for board membership. In addition, upon
the successful completion of a hostile tender offer for more than 50% of our
outstanding voting stock, each automatic option grant may be surrendered to Talk
Visual for a cash distribution per surrendered option share in an amount equal
to the excess of (a) the highest price per share of common stock paid in
connection with such tender offer over (b) the exercise price payable for such
share.
GENERAL PROVISIONS
ACCELERATION
In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is not to
be assumed or replaced by the successor corporation will automatically
accelerate in full, and all unvested shares under the discretionary option grant
and stock issuance programs will immediately vest, except to the extent our
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<PAGE>
repurchase rights with respect to those shares are to be assigned to the
successor corporation. Any options assumed in connection with such acquisition
will accelerate in full, and any unvested shares which do not vest at the time
of such acquisition will vest in full, in the event the individual's service
with the successor entity is terminated within 12 months following the
acquisition. In connection with a change in control of Talk Visual (whether by
successful tender offer for more than 50% of the outstanding voting stock or by
contest for the election of board members), the plan administrator will have the
discretionary authority to provide for automatic acceleration of outstanding
options under the discretionary option grant program and the automatic vesting
of all unvested shares outstanding under the discretionary option grant and
stock issuance programs, with such acceleration or vesting to occur either at
the time of such change in control or upon the subsequent termination of the
individual's service.
The acceleration of vesting upon a change in the ownership or control
of Talk Visual may be seen as an anti-takeover provision and may have the effect
of discouraging a merger proposal, a takeover attempt or other efforts to gain
control of Talk Visual.
FINANCIAL ASSISTANCE
The plan administrator may institute a loan program to assist one or
more participants in financing the exercise of outstanding options or the
purchase of shares under the discretionary option grant and stock issuance
programs. The plan administrator will have complete discretion to determine the
terms of any such financial assistance. However, the maximum amount of financing
provided any individual may not exceed the cash consideration payable for the
issued shares plus all applicable taxes. Any such financing may be subject to
forgiveness in whole or in part, at the discretion of the plan administrator,
over the participant's period of service.
SPECIAL TAX ELECTION
The plan administrator may provide one or more holders of options or
unvested shares with the right to have Talk Visual withhold a portion of the
shares otherwise issuable to such individuals in satisfaction of the tax
liability incurred by such individuals in connection with the exercise of those
options or the vesting of those shares. Alternatively, the plan administrator
may allow such individuals to deliver previously acquired shares of common stock
in payment of such tax liability.
STOCK AWARDS AND NEW PLAN BENEFITS
During 1999, the stock option committee did not grant any stock
options. The stock option committee has not approved any grants that require
shareholder approval of the plan, as amended. On June 28, 2000, on
recommendation of the stock option committee, the Board of Director's approved
the following stock option grants together with its price (based on 100% of the
closing day's price):
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<PAGE>
<TABLE>
<CAPTION>
Options Granted Exercise
Name and Title (Number of Shares) Price Per Share
-------------- ------------------ ---------------
<S> <C> <C>
Eugene A. Rosov 2,350,000 $ 0.4375
CEO and President
Clinton H. Snyder, CPA 750,000 $ 0.4375
CFO, Secretary
Non-Employee Directors 300,000 $ 0.4375
</TABLE>
We cannot currently determine the number of stock options or the type
of stock options that may be granted to eligible participants under the plan, as
amended, in the future. Such determinations will be made from time to time by
the stock option committee.
[On June 30, 2000, the closing price per share of our common stock on
the OTC Bulletin Board was $0.4375.]
AMENDMENT AND TERMINATION
The board may amend or modify the option plan in any or all respects
whatsoever, subject to any stockholder approval required under applicable law or
regulation. The board may terminate the option plan at any time, and the option
plan will in all events terminate on October 31, 2005.
OPTION GRANTS
Options granted under the stock option/stock issuance plan may be
either incentive stock options which satisfy the requirements of Section 422 of
the Internal Revenue Code or non-statutory options which are not intended to
meet such requirements. The Federal income tax treatment for the two types of
options differs as follows:
INCENTIVE OPTIONS. No taxable income is recognized by the optionee at
the time of the option grant, and no taxable income is generally recognized at
the time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise made the
subject of a taxable disposition. For Federal tax purposes, dispositions are
divided into two categories: qualifying and disqualifying. A qualifying
disposition occurs if the sale or other disposition is made after the optionee
has held the shares for more than two years after the option grant date and more
than one year after the exercise date. If either of these two holding periods is
not satisfied, then a disqualifying disposition will result.
If the optionee makes a disqualifying disposition of the purchased
shares, then we will be entitled to an income tax deduction, for the taxable
year in which such disposition occurs, equal to the excess of (i) the fair
market value of such shares on the option exercise date over (ii) the exercise
price paid for the shares. In no other instance will we be allowed a deduction
with respect to the optionee's disposition of the purchased shares.
NON-STATUTORY OPTIONS. No taxable income is recognized by an optionee
upon the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares
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<PAGE>
on the exercise date over the exercise price paid for the shares, and the
optionee will be required to satisfy the tax withholding requirements applicable
to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by Talk Visual in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when our repurchase right lapses, an amount equal to
the excess of (i) the fair market value of the shares on the date the repurchase
right lapses over (ii) the exercise price paid for the shares. The optionee may,
however, elect under Section 83(b) of the Internal Revenue Code to include as
ordinary income in the year of exercise of the option an amount equal to the
excess of (i) the fair market value of the purchased shares on the exercise date
over (ii) the exercise price paid for such shares. If the Section 83(b) election
is made, the optionee will not recognize any additional income as and when the
repurchase right lapses.
We will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year of Talk Visual in which such ordinary income is recognized by the optionee.
STOCK APPRECIATION RIGHTS
An optionee who is granted a stock appreciation right will recognize
ordinary income in the year of exercise equal to the amount of the appreciation
distribution. We will be entitled to an income tax deduction equal to such
distribution for the taxable year in which the ordinary income is recognized by
the optionee.
DIRECT STOCK ISSUANCE
The tax principles applicable to direct stock issuances under the stock
option/stock issuance plan will be substantially the same as those summarized
above for the exercise of non-statutory option grants.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
We anticipate that any compensation deemed paid by us in connection
with disqualifying dispositions of incentive stock option shares or exercises of
non-statutory options granted with exercise prices equal to the fair market
value of the option shares on the grant date will qualify as performance-based
compensation for purposes of Internal Revenue Code Section 162(m) and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain
executive officers of Talk Visual. Accordingly, all compensation deemed paid
with respect to those options will remain deductible by Talk Visual without
limitation under Internal Revenue Code Section 162(m).
ACCOUNTING TREATMENT
Option grants or stock issuances with exercise or issue prices less
than the fair market value of the shares on the grant or issue date will result
in a compensation expense to our
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<PAGE>
earnings equal to the difference between the exercise or issue price and the
fair market value of the shares on the grant or issue date. Such expense will be
accruable by Talk Visual over the period that the option shares or issued shares
are to vest. Option grants or stock issuances with exercise or issue prices
equal to the fair market value of the shares at the time of issuance or grant
will not result in any charge to our earnings, but we must disclose, in the
notes to our financial statements, the pro-forma impact those option grants
would have upon our reported earnings were the value of those options treated as
compensation expense. Whether or not granted at a discount, the number of
outstanding options may be a factor in determining our earnings per share on a
fully-diluted basis.
Should one or more optionees be granted stock appreciation rights which
have no conditions upon exercisability other than a service or employment
requirement, then such rights will result in a compensation expense to our
earnings.
AGGREGATED OPTION EXERCISES IN FISCAL 1999 AND VALUE OF OPTIONS AT END OF
FISCAL 1999
The following table sets forth certain information with respect to our
named executive officers concerning unexercised stock options held as of
December 31, 1999. No stock options were exercised by such individuals during
fiscal year 1999. We did not grant any stock appreciation rights during fiscal
year 1999 and no such rights were outstanding as of the end of such fiscal year.
<TABLE>
<CAPTION>
Number of Unexercised Securities Value of Unexercised
Underlying In-the-Money
Options at Options at
Fiscal Year End Fiscal Year End($)
-------------------------------- -------------------------------
Name Exercisable/ Unexercisable Exercisable/ Unexercisable
---- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Michael J. Zwebner -0- -0- -0- -0-
Eugene A. Rosov -0- -0- -0- -0-
Clinton H. Snyder, CPA -0- -0- -0- -0-
</TABLE>
CERTAIN TRANSACTIONS
We engage the services of Michael Zwebner, the Chairman of the Board,
through Overseas Communications, Ltd. The annual payment is $120,000. Overseas
Communications, Ltd. is 33% owned by Mr. Zwebner.
On July 2, 2000, we signed a letter of intent to acquire 51% to 60% of
YAK Communications (USA) Inc. The consideration is $.50 and four shares of Talk
Visual common stock for each YAK share. YAK has 3,852,000 shares outstanding. We
also agreed to lend up to $5 million to YAK. YAK Communications (USA) Inc. is
owned 17% by Charles Zwebner, brother to the Chairman, 7% by Michael Zwebner,
Chairman and 8% by Anthony Heller, who is the beneficial owner of Helmsbridge
Holdings, Ltd., initial owner of our preferred shares.
On March 16, 2000, we signed an agreement to purchase a 25% interest in
Entertech Media Group, Inc. of Hollywood, California. Under the terms of the
agreement, we will exchange 3,000,000 common shares for 3,666,666 shares of
Entertech Media common stock. Entertech's Chairman is John Daly, who is a
principal shareholder of Whyteburg Ltd. At the
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<PAGE>
time of the Merger, Whyteburg Ltd. was a more than 5% holder of common stock. We
have agreed to pay a broker 75,000 shares of our common stock on consummation of
this transaction.
On May 25, 2000, Hard Disk Cafe, Inc. entered into a three year lease
agreement with Sacramento Results, Inc., a subsidiary of Talk Visual. Under the
terms of the lease, Hard Disk Cafe rents approximately 12,326 feet of commercial
space from Sacramento Results at a rent of $5200 per month for the first year
commencing January 1, 2000 and $12,326 per month for the second and third years.
Hard Disk Cafe may terminate the lease at the end of the twelfth month if it
does not have annualized sales of $600,000 based on the prior three months.
Michael Zwebner, our Chairman, is a director and principal shareholder of Hard
Disk Cafe.
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of June 30, 2000, the number and
percentage of shares of common stock beneficially owned (as defined in Rule
13d-3 adopted under the Exchange Act) by
o all persons known to us to own beneficially more than 5% of
any class of voting security of Talk Visual;
o each of our directors;
o our officers named in the summary compensation table set
forth herein; and
o all directors and executive officers of as a group.
<TABLE>
<CAPTION>
Common Stock
------------------------------------------------------
Number of Shares Percentage of Shares
Name and Addresses (1) Beneficially Owned (2)(3) Beneficially Owned (2)(3)
---------------------- ------------------------- -------------------------
<S> <C> <C>
Overseas Communications, Ltd. (4)
46/11 Diskin St
Jerusalem, Israel 4,835,670 8.55%
Helmsbridge Holdings Ltd. (5)
c/o Plazacorp Investments
3845 Bathurst St.
Toronto, Ontario, Canada 3,341,690 5.91%
Eurocap Holdings, Ltd.
5 Page Meadow
London, England 5,110,940 9.03%
European Central Ltd.
Twin Towers 2, Rm 201
35 Jabotinsky St.
Ramat Gan 52511 Israel 6,907,023 12.2%
Michael Cuzner-Charles 375,000 *
David B. Hurwitz 200,000 *
Eugene A. Rosov 3,500,000 6.18%
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<PAGE>
Common Stock
------------------------------------------------------
Number of Shares Percentage of Shares
Name and Addresses (1) Beneficially Owned (2)(3) Beneficially Owned (2)(3)
---------------------- ------------------------- -------------------------
<S> <C> <C>
Clinton H. Snyder 1,250,000 *
Alexander H. Walker, Jr. 200,000 *
Michael J. Zwebner (6) 5,071,890 8.96%
All directors and executive officers as a Group
(6 persons) (7) 10,596,890 18.7%
</TABLE>
--------------
* Amount represents less than 1% of the total number of shares of common
stock outstanding as of August 7, 2000.
(1) Unless otherwise indicated, the shareholder's address is Talk Visual's
principal executive offices.
(2) Percentage ownership is based on 56,597,858 shares of common stock
outstanding as of August 7, 2000, plus any shares issuable pursuant to
options or warrants held by the person or class in question which may
be exercised within 60 days of August 7, 2000. Only those shares
beneficially owned by the person holding such options are included in
the outstanding shares for purposes of computing the percentage
beneficially owned by that person; such shares are not deemed to be
outstanding for purposes of computing any other person's percentage.
(3) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in this
table has sole voting and investment power with respect to the shares
set forth opposite such stockholder's name.
(4) Michael J. Zwebner owns 33% of this entity, all other owners own less
than 10%. The shares listed include 2,000,000 issuable pursuant to
currently exercisable options at an exercise price of $1.00 per common
share.
(5) The beneficial owner of Helmbridge Holdings Ltd. is Anthony Heller. The
entire amount is composed of the common shares issuable upon conversion
of the preferred stock.
(6) Includes 1,611,890 beneficially owned.
(7) Includes options to purchase 5,588,667 shares of common stock.
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue up to 100,000,000 shares of common stock,
par value $.001 per share, and 25,000,000 shares of preferred stock, par value
$.001 per share. As of August 7, 2000, 56,597,858 shares of common stock were
issued and outstanding and 244,794 shares of preferred stock were issued and
outstanding.
COMMON STOCK
The holders of shares of common stock are entitled to one vote per
share in the election of our directors and on all other matters to be voted on
by shareholders. The holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of liquidation,
dissolution or winding up of Talk Visual Corporation, the holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities then outstanding. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable.
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<PAGE>
PREFERRED STOCK
The Board may without further action by our shareholders, from time to
time, direct the issuance of shares of preferred stock in series and may, at the
time of issuance, determine the rights, preferences and limitations of each
series. The rights of any such series may include voting and conversion rights
which would adversely affect the voting power of the holders of our common
stock. Satisfaction of any dividend preferences of outstanding preferred stock
would reduce the amount of funds available for payment of dividends on our
common stock. Also, the holders of preferred stock would normally be entitled to
receive a preference payment in the event of any liquidation, dissolution or
winding-up of Talk Visual before any payment is made to the holders of our
common stock.
We presently have 244,794 shares of one series of preferred stock, the
Class A Preferred Stock, Series 1999-A, outstanding. Each share of Series A
preferred stock is entitled to cumulative dividends, before any dividends are
paid on our common stock, at the annual rate of $0.095 per share, payable
monthly. The Series A preferred stock is redeemable by Talk Visual at any time,
in whole or in part, at the price of $1.15 per share, plus accrued and unpaid
cumulative dividends On December 1, 1999, the holder of the 975,000 shares of
our Series A preferred stock, originally issued in connection with the
acquisition of the Toronto property, notified us of its intention to convert the
preferred stock to common stock. Pursuant to the terms of conversion for the
preferred shares, the arithmetic average yields $0.0583 per share, for a total
issue obligation of 16,714,381 shares. At August 7, 2000, 12,517,576 shares had
been converted. We have been advised that the preferred shareholder will convert
the remaining shares over the next thirty-six months. The holders of the
preferred shares have agreed on all conversions after the first 3,348,500 shares
to re-invest by purchasing common stock from us at the three day average closing
price, less 25%, within the thirty-six month period, in the amount of $1.00 per
converted share, for a total investment in Talk Visual of $13,365,881. As of
August 7, 2000, the preferred shareholders had paid $2,495,000 toward this
agreement, leaving an outstanding commitment of $10,870,881.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE ARTICLES OF INCORPORATION, BYLAWS AND
NEVADA LAW
The following provisions of the Nevada General Corporation Law and our
articles of incorporation and bylaws could have the effect of preventing or
delaying a person from acquiring or seeking to acquire a substantial equity
interest in, or control of, our company.
PREFERRED STOCK. Our board of directors is authorized to issue
preferred stock in one or more series and to fix the voting rights, liquidation
preferences, dividend rights, conversion rights, redemption rights and terms,
including sinking fund provisions and certain other rights and preferences, of
the preferred stock. The board of directors can, without stockholder approval,
issue shares of such preferred stock with voting, conversion and liquidation
rights which could adversely affect the voting power and liquidation rights of
the holders of common stock and may have the effect of delaying, deferring or
preventing a change in control of Talk Visual.
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<PAGE>
STATUTORY PROVISIONS. The State of Nevada has enacted legislation that
may deter or frustrate takeovers of Nevada corporations. The Nevada General
Corporation Law generally prohibits a Nevada corporation with more than 200
record shareholders from engaging in certain significant business transactions
with an "interested shareholder," which is defined as a person or group of
persons that beneficially owns 10% or more of the outstanding voting stock of
the corporation, for a period of three years following the date that the
shareholder became an interested shareholder, unless the transaction or the
purchase of shares made by the interested shareholder is approved by the board
of directors of the corporation prior to the date of the acquisition of shares.
A corporation may not engage in such transactions with an interested shareholder
of the corporation after the expiration of three years after his date of
acquiring shares unless:
o the transaction or the purchase of shares made by the
interested shareholder is approved by the board of directors
of the corporation prior to the date the interested
shareholder acquired the shares;
o the transaction is approved by the holders of stock
representing a majority of the outstanding voting power not
beneficially owned by the interested shareholder proposing the
transaction, at a meeting called for that purpose at least
three years after the date of acquiring shares; or
o the total amount of cash and other consideration to be
received by all of the holders of outstanding common stock of
the corporation not beneficially owned by the interested
shareholder satisfies certain fair value requirements of the
statute.
Prohibited transactions include, among other things,
o a merger or consolidation with, disposition of assets to, or
issuance or transfer to, the interested stockholder; or
o allowing the interested shareholder to receive any
disproportionate benefit as a shareholder.
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the common stock is Nevada
Agency and Trust Company, Reno, Nevada.
STOCKHOLDER REPORTS
We furnish our stockholders with annual reports containing audited
financial statements and may furnish our stockholders quarterly or semi-annual
reports containing unaudited financial information.
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<PAGE>
COMMON STOCK PURCHASE AGREEMENT
OVERVIEW
We signed a common stock purchase agreement with Evertrend Holdings
Limited, a British Virgin Islands corporation, on July 27, 2000, for the future
issuance and purchase of shares of our common stock. The transaction closed on
July 27, 2000. The stock purchase agreement establishes what is sometimes termed
an equity line of credit or an equity drawdown facility.
In general, the drawdown facility operates like this: the investor,
Evertrend, has committed to provide us up to $15 million as we request it over
an 18 month period, in return for common stock we issue to Evertrend. Once every
22 trading days, we may request a draw of up to $1,500,000 of that money. The
maximum amount we actually can draw down upon each request will be determined by
the volume-weighted average daily price of our common stock for the 22 trading
days prior to our request and the average trading volume for the 45 trading days
prior to our request. Each draw down must be for at least $250,000.
At the end of a 22 trading day period following the drawdown request,
the actual drawdown amount is determined based on the volume-weighted average
stock price during that 22-day period. We then use the formulas in the common
stock purchase agreement to determine the number of shares we will issue to
Evertrend in return for that money. Additionally, Evertrend will receive a
warrant certificate to purchase up to a number of shares equal to 50% of each
drawdown amount. The formulas for determining the actual drawdown amounts, the
number of shares we issue to Evertrend and the price per share paid by Evertrend
are described in detail beginning on page 50. The aggregate total of all draws
cannot exceed $15 million and no single draw can exceed $1,500,000. We are under
no obligation to request a draw for any period.
The per share dollar amount Evertrend pays for our common stock for
each drawdown includes a discount to the average daily market price of our
common stock for the 22-day period after our drawdown request, weighted by
trading volume. The discount is determined by reference to our average market
capitalization (calculated by multiplying the number of shares of common stock
issued and outstanding by the closing bid price of the common stock for the 10
trading days prior to the date the drawdown pricing commences), and is applied
as follows:
o 15% of the average daily market price when our average market
capitalization is less than or equal to $30,000,000;
o 13% of the average daily market price when our average market
capitalization is greater than $30,000,000 and less than or
equal to $40,000,000;
o 11% of the average daily market price when our average market
capitalization is greater than $40,000,000 and less than or
equal to $50,000,000; and
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<PAGE>
o 9% of the average daily market price when our average market
capitalization is greater than $50,000,000.
We will receive the amount of the drawdown less an escrow agent fee of $1,500
and an 8% placement fee payable to the placement agent, Ladenburg Thalmann & Co.
Inc., which introduced Evertrend to us. Ladenburg Thalmann is not obligated to
purchase any of our shares, but as an additional placement fee, we have issued
to Ladenburg Thalmann warrants to purchase 1,271,186 shares of our common stock
at an exercise price of $0.6785 per share. The common stock issuable upon
exercise of those warrants is included in the registration statement of which
this prospectus is a part.
In lieu of providing Evertrend with a minimum aggregate drawdown
commitment, we have issued to Evertrend a stock purchase warrant to purchase
1,271,186 shares of our common stock with an exercise price of $0.6785 per
share, which was 115% of the closing bid price of ($.590) of the common stock on
July 26, 2000, the day prior to the closing date. The warrant expires July 27,
2004.
Based on a review of our trading volume and stock price history and the
number of drawdowns we estimate making, we are registering 35,650,623 shares of
common stock for possible issuance under the stock purchase agreement and
20,367,684 shares underlying the warrants for common shares delivered to
Evertrend and Ladenburg Thalmann & Co. Inc.
The common stock purchase agreement does not permit us to drawdown
funds if the issuance of shares of common stock to Evertrend pursuant to the
drawdown would result in Evertrend owning more than 9.9% of our outstanding
common stock on the drawdown exercise date.
THE DRAWDOWN PROCEDURE AND THE STOCK PURCHASES
We may request a drawdown by faxing a drawdown notice to Evertrend,
stating the amount of the drawdown we wish to exercise, the minimum threshold
price, if any, at which we are willing to sell the shares and the date on which
the pricing period will begin. A pricing committee consisting of two directors
sets the threshold price by determining the price below which we are unwilling
to sell shares of our common stock. The pricing committee has complete
discretion when determining the threshold price.
AMOUNT OF THE DRAW
No draw can exceed the lesser of $1,500,000 and the capped amount that
is derived from the following formula:
o Average daily trading volume for the 45 trading days immediately
prior to the date we give notice of the drawdown, multiplied by 22
multiplied by
o The average of the volume-weighted average daily prices for the 22
trading days immediately prior to the date we give notice of the
drawdown
50
<PAGE>
multiplied by
o 20%.
The lesser of our draw request and the capped amount is reduced by 1/22
for every day in the 22 trading days after our drawdown request that the
volume-weighted average daily price for a trading day is below the threshold
price set by us in the request. If the daily price for a day is below the
threshold price, we will not issue any shares and Evertrend will not purchase
any shares for that day. Thus, if our pricing committee sets a threshold price
too high and our stock price does not consistently meet that level during the 22
trading days after our drawdown request, the amount we can draw and the number
of shares we issue to Evertrend will be reduced. On the other hand, if our
pricing committee sets a threshold price too low and our stock price falls
significantly but stays above the threshold price, we will be able to draw the
lesser of our draw request and the capped amount, but we will have to issue a
greater number of shares to Evertrend at the reduced price. We cannot make
another drawdown request until expiration of the 22 trading days that follow a
drawdown request we have already made.
NUMBER OF SHARES
The 22 trading days immediately following the drawdown notice are also
used to determine the number of shares we will issue in return for the money
provided by Evertrend, and thus the price per share Evertrend will pay for our
shares.
To determine the number of shares of common stock we must issue in
connection with a drawdown, take 1/22 of the drawdown amount determined by the
formulas above, and for each of the 22 trading days immediately following the
date we give notice of the drawdown, divide it by 85% of the volume-weighted
average daily trading price of our common stock for that day. The 85% accounts
for Evertrend's 15% discount which is the applicable discount if our average
market capitalization is less than or equal to $30 million. The sum of these 22
daily calculations produces the number of common shares we will issue, unless
the volume-weighted average daily price for any given trading day is below the
threshold amount, in which case that day is ignored in the calculation. The
price per share Evertrend ultimately pays is determined by dividing the final
drawdown amount by the number of shares we issue Evertrend.
SAMPLE CALCULATION OF STOCK PURCHASES
The following is an example of the calculation of the drawdown amount
and the number of shares we would issue to Evertrend in connection with that
drawdown based on hypothetical assumptions.
SAMPLE DRAWDOWN AMOUNT CALCULATION.
We provide a drawdown notice to Evertrend that we wish to make a
drawdown. Suppose that our pricing committee of the board of directors has
specified in the notice a threshold price of $.50, below which we will not sell
any shares to Evertrend during this drawdown period.
Suppose the average daily trading volume for the 45 trading days prior
to our drawdown notice is 200,000 and that the average of the volume-weighted
average daily prices of our
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<PAGE>
common stock for the 22 trading days prior to the notice is $.625. You can apply
the formula to these hypothetical numbers as follows:
o the average trading volume for the 45 trading days prior to our
drawdown notice (200,000) multiplied by 22, equals 4,400,000
multiplied by
o the average of the volume-weighted average daily prices of our
common stock for the 22 trading days prior to the notice ($.625)
multiplied by
o 20%
The maximum amount we can draw down under the formula is therefore
capped at $550,000, subject to further adjustments if the volume-weighted
average daily price of our common stock for any of the 22 trading days following
the drawdown notice is below the threshold price we set of $.50. For example, if
the volume-weighted average daily price of our common stock is below $.50 on two
of those 22 days, the $550,000 would be reduced by 1/22 for each of those days
and our draw down amount would be 20/22 of $550,000, or $500,000.
SAMPLE CALCULATION OF NUMBER OF SHARES
Assume that we have made a drawdown request with a threshold price of
$.50. Assume the maximum amount we can draw down is capped at $550,000 based on
the formula above. Also, assume that the volume-weighted average daily price for
our common stock is as set forth in the table on the next page.
The number of shares to be issued based on any trading day during the
drawdown period is calculated from the formula:
o 1/22 of the drawdown amount of $550,000
divided by
o 85% of the volume weighted average daily price.
For example, for the first trading day in the example in the table
below, the calculation is as follows: 1/22 of $550,000 is $25,000. Divide
$25,000 by 85% of the volume-weighed average daily price for that day of $.625
per share, to get 47,059 shares. Perform this calculation for each of the 22
measuring days, excluding any days on which the volume-weighted average daily
price is below the $.50 threshold price, and add the results to determine the
number of shares to be issued. In the table below, there are two days which must
be excluded: days 16 and 17.
After excluding the days that are below the threshold price, the amount
of our drawdown in this example would be 550,000 and the total number of shares
we would issue to Evertrend for this drawdown request would be 963,240, so long
as those shares would not cause Evertrend to beneficially own more than 9.9% of
our then outstanding common stock. Evertrend would pay $.52 per share for these
shares.
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<PAGE>
<TABLE>
<CAPTION>
Number of Shares of Common
Volume-Weighted 1/22 of Requested Stock to be Issued for the
Trading Day Average Daily Stock Price* Draw Down Amount Trading Day
----------- -------------------------- ---------------- -----------
<S> <C> <C> <C>
1 $ .6250 $ 25,000 47,059
2 .6875 25,000 42,781
3 .6250 25,000 47,059
4 .5625 25,000 52,288
5 .5625 25,000 52,288
6 .5000 25,000 58,824
7 .5625 25,000 52,288
8 .6250 25,000 47,059
9 .6875 25,000 42,781
10 .7500 25,000 39,216
11 .8125 25,000 36,199
12 .7500 25,000 39,216
13 .6250 25,000 47,059
14 .5625 25,000 52,288
15 .5000 25,000 58,824
16** .4375 -- --
17** .4375 -- --
18 .5000 25,000 58,824
19 .5625 25,000 52,288
20 .6250 25,000 47,059
21 .6875 25,000 42,781
22 .6250 25,000 47,059
TOTAL $500,000 963,240
</TABLE>
------------
* The share prices are illustrative only and should not be interpreted as a
forecast of share prices or the expected or historical volatility of the
share prices of our common stock.
** Excluded because the volume-weighted average daily price is below the
threshold specified in our hypothetical draw down notice.
We would receive the amount of our drawdown ($500,000) less an 8% cash
fee paid to the placement agent of $40,000, less a $1,500 escrow fee, for net
proceeds to us of $458,500. The delivery of the requisite number of shares and
payment of the draw will take place through an escrow agent, Epstein, Becker &
Green, P.C. of New York. The escrow agent pays 92% of the draw to us -- after
subtracting its escrow fee -- and 8% to Ladenburg Thalmann & Co. Inc., our
placement agent, in satisfaction of placement agent fees.
NECESSARY CONDITIONS BEFORE EVERTREND IS OBLIGATED TO PURCHASE OUR SHARES
The following conditions must be satisfied before Evertrend is
obligated to purchase the common shares that we wish to sell from time to time:
o A registration statement for the shares must be declared effective
by the Securities and Exchange Commission and must remain
effective and available as of the draw down settlement date for
making resales of the common shares purchased by Evertrend;
o There can be no material adverse change in our business,
operations, properties, prospects or financial condition;
o We must not have merged or consolidated with or into another
company or transferred all or substantially all of our assets to
another company, unless the acquiring company has agreed to honor
the common stock purchase agreement;
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<PAGE>
o No statute, rule, regulation, executive order, decree, ruling or
injunction may be in effect which prohibits consummation of the
transactions contemplated by the stock purchase agreement;
o No litigation or proceeding nor any investigation by any
governmental authority can be pending or threatened against us or
Evertrend seeking to restrain, prevent or change the transactions
contemplated by the stock purchase agreement or seeking damages in
connection with such transactions; and
o Trading in our common shares must not have been suspended by the
Securities and Exchange Commission or the OTC Bulletin Board, or
any national market or exchange on which our stock is listed or
trades.
On each drawdown settlement date for the sale of common shares, we must
deliver an opinion from our counsel about a number of these matters.
RESTRICTIONS ON FUTURE FINANCINGS
The common stock purchase agreement limits our ability to raise money
by selling our securities for cash at a discount to the market price until the
earlier of 18 months from the effective date of the registration statement of
which this prospectus is a part or the date which is 60 days after Evertrend has
purchased the maximum of $15,000,000 worth of common stock from us under the
common stock purchase agreement.
There are exceptions to this limitation for securities sold in the
following situations:
o in a registered public offering which is underwritten by one or
more established investment banks;
o in one or more private placements where the purchasers do not
have registration rights;
o pursuant to any presently existing or future employee benefit
plan which plan has been or is approved by our stockholders;
o pursuant to any compensatory plan for a full-time employee or key
consultant;
o in connection with a strategic partnership or other business
transaction, the principal purpose of which is not simply to raise
money; and
o a transaction to which Evertrend gives its written approval.
COSTS OF CLOSING THE TRANSACTION
At the closing of the transaction on July 27, 2000, we delivered the
requisite opinion of counsel to Evertrend and paid the escrow agent, Epstein
Becker & Green P.C., $35,000 for Evertrend's legal, administrative and escrow
costs. We will pay Ladenburg Thalmann & Co. Inc. an additional $150,000 as a
non-accountable expense allowance for its expenses at the initial
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<PAGE>
drawdown. Ladenburg Thalmann also received warrants for a total of 1,271,186
shares of our common stock with an exercise price per share equal to 115% of the
closing bid price of our common stock as reported on the OTC Bulletin Board on
July 26, 2000 or $0.6785. Ladenburg Thalmann is not obligated to purchase any of
our shares pursuant to the warrant.
TERMINATION OF THE STOCK PURCHASE AGREEMENT
Evertrend may terminate the equity draw down facility under the stock
purchase agreement if the registration statement of which this prospectus forms
a part is not declared effective by September 30, 2000.
INDEMNIFICATION OF EVERTREND
Evertrend is entitled to customary indemnification from us for any
losses or liabilities suffered by it based upon material misstatements or
omissions from the registration statement and the prospectus, except as they
relate to information supplied by Evertrend to us for inclusion in the
registration statement and prospectus.
SELLING STOCKHOLDER
OVERVIEW
Common shares registered for resale under this prospectus constitute
98.9% of our issued and outstanding common shares as of August 7, 2000. The
number of shares we are registering is based in part on our good faith estimate
of the maximum number of shares we will issue to Evertrend under the common
stock purchase agreement. Accordingly, the number of shares we are registering
for issuance under the common stock purchase agreement may be higher than the
number we actually issue under the common stock purchase agreement.
EVERTREND HOLDINGS LIMITED
Evertrend Holdings Limited is engaged in the business of investing in
publicly traded equity securities for its own account. Evertrend's principal
offices are located at Aeulestrasse 74, FL-9490 Vaduz, Liechtenstein. Investment
decisions for Evertrend are made by its board of directors. Other than the
warrants we issued to Evertrend in connection with closing the common stock
purchase agreement, Evertrend does not currently own any of our securities as of
the date of this prospectus. Other than its obligation to purchase common shares
under the common stock purchase agreement, it has no other commitments or
arrangements to purchase or sell any of our securities. There are no business
relationships between Evertrend and us other than the common stock purchase
agreement.
LADENBURG THALMANN & CO. INC.
Ladenburg Thalmann & Co. Inc. has acted as placement agent in
connection with the common stock purchase agreement. Ladenburg Thalmann
introduced us to Evertrend and assisted us with structuring the equity line of
credit with Evertrend. Ladenburg Thalmann's duties as placement agent were
undertaken on a reasonable best efforts basis only. It made no
55
<PAGE>
commitment to purchase shares from us and did not ensure us of the successful
placement of any securities.
This prospectus covers 1,271,186 shares of common stock issuable upon
exercise of warrants we have issued to Ladenburg Thalmann as a placement fee for
introducing us to Evertrend. Those warrants are exercisable at $0.6785 per share
and expire July 27, 2004. The decision to exercise any warrants issued, and the
decision to sell the common stock issued pursuant to the warrants, will be made
by Ladenburg Thalmann's officers and board of directors. Other than the
warrants, Ladenburg Thalmann does not currently own any of our securities as of
the date of this prospectus. Our agreement with Ladenburg Thalmann provides
Ladenburg Thalmann with a right of first refusal for one year after completion
of the offering under the common stock purchase agreement, as underwriter or
placement agent for all of our financing arrangements on terms no less favorable
than we could obtain in the market.
PLAN OF DISTRIBUTION
GENERAL
Evertrend is offering the common shares for its account as statutory
underwriter, and not for our account. We will not receive any proceeds from the
sale of common shares by Evertrend. Evertrend may be offering for sale up to
53,475,935 common shares acquired by it pursuant to the terms of the stock
purchase agreement more fully described under the section above entitled "Common
Stock Purchase Agreement" and the warrants we issued to it in connection with
the transaction. Evertrend has agreed to be named as a statutory underwriter
within the meaning of the Securities Act of 1933 in connection with such sales
of common stock and will be acting as an underwriter in its resales of the
common stock under this prospectus. Evertrend has, prior to any sales, agreed
not to effect any offers or sales of the common stock in any manner other than
as specified in the prospectus and not to purchase or induce others to purchase
common stock in violation of any applicable state and federal securities laws,
rules and regulations and the rules and regulations of the OTC Bulletin Board.
If the maximum number of shares permitted to be issued pursuant to the common
stock purchase agreement and the warrants are in fact to be issued, we will seek
shareholder approval to increase the number of authorized shares.
On August 7, 2000, we had 56,597,858 shares of common stock
outstanding. The following table shows the number of shares we would issue to
Evertrend pursuant to the stock purchase agreement and the price it would pay
for those shares given the hypothetical variables shown in the table, if
o we requested drawdowns of the maximum amounts under the common
stock purchase agreement;
o we set a threshold price of $0.25;
o the volume-weighted average daily price in the table is the
volume-weighted average daily price of our common stock for the 22
trading days before each drawdown request under the common stock
purchase agreement and the 22 trading days after each drawdown
request;
56
<PAGE>
o the average trading volume in the table is the average trading
volume for the 45 trading days before each drawdown request; and
o we do not issue more shares to Evertrend under the common stock
purchase agreement than we are currently registering for resale of
the shares issued under the common stock purchase agreement.
<TABLE>
<CAPTION>
Number of Shares Issuable
to Evertrend under Common
Volume-Weighted Average Stock Purchase Price per Share
Daily Price Average Trading Volume Agreement(g) paid by Evertrend
----------- ---------------------- ------------ -----------------
<S> <C> <C> <C> <C>
$0.2791(a) 471,798(d) 35,620,623(h) $0.23724
$0.5582(b) 943,596(e) 35,620,623(h) $0.47447
$0.8373(c) 1,415,394(f) 35,620,623(h) $0.71171
</TABLE>
--------
(a) Represents 50% of the average closing price of our common stock for the 22
trading days before August 7, 2000.
(b) Represents the average closing price of our common stock for the 22 trading
days before August 7, 2000.
(c) Represents 150% of the average closing price of our common stock for the 22
trading days before August 7, 2000.
(d) Represents 50% of the average trading volume of our common stock for the 45
trading days preceding August 7, 2000.
(e) Represents the average trading volume of our common stock for the 45
trading days preceding August 7, 2000.
(f) Represents 150% of the average trading volume of our common stock for the
45 trading days preceding August 7, 2000.
(g) The number of shares we would issue could be limited by a provision of the
common stock purchase agreement that prevents us from issuing shares to
Evertrend to the extent Evertrend would beneficially own more than 9.9% of
our then outstanding common stock.
(h) Represents all 35,650,623 shares we are registering under the common stock
purchase agreement.
To permit Evertrend to resell the common shares issued to it under the
stock purchase agreement, we agreed to register those shares and to maintain
that registration. To that end, we have agreed with Evertrend that we will
prepare and file such amendments and supplements to the registration statement
and the prospectus as may be necessary in accordance with the Securities Act and
the rules and regulations promulgated thereunder, to keep it effective until the
earliest of any of the following dates:
o the date after which all of the common shares held by Evertrend or
its transferees that are covered by the registration statement of
which this prospectus is a part have been sold under the
provisions of Rule 144 under the Securities Act of 1933;
o the date after which all of the common shares held by Evertrend or
its transferees that are covered by the registration statement
have been transferred to persons who may trade such shares without
restriction under the Securities Act of 1933 and we have delivered
new certificates or other evidences of ownership of such common
shares without any restrictive legend;
o the date after which all of the common shares held by Evertrend or
its transferees that are covered by the registration statement
have been sold by Evertrend or its transferees pursuant to such
registration statement;
o the date after which all of the common shares held by Evertrend or
its transferees that are covered by the registration statement may
be sold, in the opinion of our counsel,
57
<PAGE>
under Rule 144 under the Securities Act of 1933 irrespective of
any applicable volume limitations;
o the date after which all of the common shares held by Evertrend or
its transferees that are covered by the registration statement may
be sold, in the opinion of our counsel, without any time, volume
or manner limitations under Rule 144(k) or similar provision then
in effect under the Securities Act of 1933; or
o the date after which none of the common shares held by Evertrend
that are covered by the registration statement are or may become
issued and outstanding.
Shares of common stock offered through this prospectus may be sold from
time to time by Evertrend and Ladenburg Thalmann. We will supplement this
prospectus to disclose the names of any pledgees, donees, transferees or other
successors in interest that intend to offer common stock through this
prospectus.
Sales may be made on the over-the-counter market or otherwise at prices
and at terms then prevailing or at prices related to the then current market
price, or in negotiated private transactions, or in a combination of these
methods. The selling stockholders will act independently of us in making
decisions with respect to the form, timing, manner and size of each sale. WE
HAVE BEEN INFORMED BY THE SELLING STOCKHOLDERS THAT THERE ARE NO EXISTING
ARRANGEMENTS BETWEEN ANY OF THE SELLING STOCKHOLDERS AND ANY OTHER STOCKHOLDER,
BROKER, DEALER, UNDERWRITER OR AGENT RELATING TO THE SALE OR DISTRIBUTION OF
SHARES OF COMMON STOCK WHICH MAY BE SOLD BY THE SELLING STOCKHOLDERS THROUGH
THIS PROSPECTUS. Evertrend is an underwriter and Ladenburg Thalmann may be
deemed an underwriter in connection with resales of their respective shares.
The common shares may be sold in one or more of the following manners:
o a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent, but may position and resell a
portion of the block as principal to facilitate the transaction;
o purchases by a broker or dealer for its account under this
prospectus; or
o ordinary brokerage transactions and transactions in which the
broker solicits purchases.
In effecting sales, brokers or dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Except as
disclosed in a supplement to this prospectus, no broker-dealer will be paid more
than a customary brokerage commission in connection with any sale of the common
shares by the selling stockholders. Brokers or dealers may receive commissions,
discounts or other concessions from the selling stockholders in amounts to be
negotiated immediately prior to the sale. The compensation to a particular
broker-dealer may be in excess of customary commissions. Profits on any resale
of the common shares as a principal by such broker-dealers and any commissions
received by such broker-dealers may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933. Any broker-dealer participating in
such transactions as agent may receive commissions from the selling
58
<PAGE>
stockholders (and, if they act as agent for the purchaser of such common shares,
from such purchaser).
Broker-dealers may agree with the selling stockholders to sell a
specified number of common shares at a stipulated price per share, and, to the
extent a broker dealer is unable to do so acting as agent for the selling
stockholders, to purchase as principal any unsold common shares at a price
required to fulfill the broker-dealer commitment to the selling stockholders.
Broker-dealers who acquire common shares as principal may thereafter resell such
common shares from time to time in transactions (which may involve crosses and
block transactions and which may involve sales to and through other
broker-dealers, including transactions of the nature described above) in the
over-the-counter market, in negotiated transactions or otherwise at market
prices prevailing at the time of sale or at negotiated prices, and in connection
with such resales may pay to or receive from the purchasers of such common
shares commissions computed as described above. Brokers or dealers who acquire
common shares as principal and any other participating brokers or dealers may be
deemed to be underwriters in connection with resales of the common shares.
In addition, any common shares covered by this prospectus which qualify
for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. We will not receive any of the proceeds from the sale of these
common shares, although we have paid the expenses of preparing this prospectus
and the related registration statement of which it is a part, and have
reimbursed Evertrend $35,000 for its legal, administrative and escrow costs.
Ladenburg Thalmann & Co. Inc. will receive, out of the initial drawdown,
$150,000 as a non-accountable expense allowance for its expenses.
Evertrend is subject to the applicable provisions of the Exchange Act,
including without limitation, Rule 10b-5 thereunder. Under applicable rules and
regulations under the Exchange Act, any person engaged in a distribution of the
common shares may not simultaneously engage in market making activities with
respect to such securities for a period beginning when such person becomes a
distribution participant and ending upon such person's completion of
participation in a distribution, including stabilization activities in the
common shares to effect covering transactions, to impose penalty bids or to
effect passive market making bids. In addition, in connection with the
transactions in the common shares, Evertrend and we will be subject to
applicable provisions of the Exchange Act and the rules and regulations under
that Act, including, without limitation, the rules set forth above. These
restrictions may affect the marketability of the common shares.
The selling stockholders will pay all commissions and its own expenses,
if any, associated with the sale of the common shares, other than the expenses
associated with preparing this prospectus and the registration statement of
which it is a part.
The price at which we will issue the common shares to Evertrend under
the stock purchase agreement will be 85% (assuming the average market
capitalization for the 10 trading days prior to the commencement of the
applicable drawdown pricing period is less than or equal to $30 million) of the
volume-weighted average daily trading price on the OTC Bulletin Board, for each
day in the pricing period with respect to each drawdown request. Assuming we use
the entire $15 million of financing available under the stock purchase
agreement, and assuming we
59
<PAGE>
issue all 35,620,623 shares registered for issuance under the common stock
purchase agreement, we will pay underwriting compensation to and expenses for
Evertrend, and other offering expenses, as follows:
<TABLE>
<CAPTION>
UNDERWRITING COMPENSATION AND EXPENSES
Per Share Total
--------- -----
<S> <C> <C>
Discount to Evertrend (15%)(a) $0.0641 $3,504,375.00
Expenses payable on behalf of Evertrend:
Escrow Fees $15,000.00
Legal Fees of Evertrend $35,000.00
Estimated offering expenses:
Placement agent fees (b) $.034 $1,869,000.00
SEC filing fee $6,395.40
Accountant's fees and expenses $10,000.00
Legal fees and expenses $50,000.00
Total $5,489,770.40
</TABLE>
----------------
(a) We also issued to Evertrend a warrant to purchase 1,271,186 shares of our
common stock at $0.6785 per share as consideration for providing the common
stock purchase agreement. Our common stock price on July 26, 2000 was
$0.59. The warrant expires July 27, 2004. Additionally, at each drawdown
settlement date, we will issue a warrant certificate to purchase up to a
number of shares equal to 50% of the draw down at the weighted average of
the purchase prices of the common stock. The drawdown warrants will expire
22 days after their issuance.
(b) We also issued to the placement agent a warrant to purchase 1,271,186
shares of our common stock at $0.6785 per share as consideration for
placement services. Our common stock price on July 26, 2000 was $0.59. The
warrant expires July 27, 2004.
LIMITED GRANT OF REGISTRATION RIGHTS
We granted registration rights to Evertrend to enable it to sell the
common stock it purchases under the common stock purchase agreement. In
connection with any such registration, we will have no obligation:
o to assist or cooperate with Evertrend in the offering or
disposition of such shares;
o to indemnify or hold harmless the holders of any such shares
(other than Evertrend) or any underwriter designated by such
holders;
o to obtain a commitment from an underwriter relative to the sale
of any such shares; or
o to include such shares within any underwritten offering we do.
We will assume no obligation or responsibility whatsoever to determine
a method of disposition for such shares or to otherwise include such shares
within the confines of any registered offering other than the registration
statement of which this prospectus is a part.
We will use our best efforts to file, during any period during which we
are required to do so under our registration rights agreement with Evertrend,
one or more post-effective amendments to the registration statement of which
this prospectus is a part to describe any material information with respect to
the plan of distribution not previously disclosed in this prospectus or any
material change to such information in this prospectus. This obligation may
60
<PAGE>
include, to the extent required under the Securities Act of 1933, that a
supplemental prospectus be filed, disclosing
o the name of any broker-dealers;
o the number of common shares involved;
o the price at which the common shares are to be sold;
o the commissions paid or discounts or concessions allowed to
broker-dealers, where applicable;
o that broker-dealers did not conduct any investigation to verify
the information set out or incorporated by reference in this
prospectus, as supplemented; and
o any other facts material to the transaction.
Our registration rights agreement with Evertrend permits us to restrict
the resale of the shares Evertrend has purchased from us under the common stock
purchase agreement for a period of time sufficient to permit us to amend or
supplement this prospectus to include material information. If we restrict
Evertrend for more than 20 days in any 12-month period and our stock price
declines during the restriction period, we are required to pay to Evertrend cash
to compensate Evertrend for its inability to sell shares during the restriction
period. The amount we would be required to pay would be the difference between
our stock price on the first day of the restriction period and the last day of
the restriction period, for each share held by Evertrend during the restriction
period that has been purchased under the common stock purchase agreement.
LEGAL MATTERS
The law firm of Torys, New York, New York will pass upon the validity
of the shares of common stock offered under this prospectus.
EXPERTS
Our financial statements as of December 31, 1998 and 1999, and for each
of the two years in the period ended December 31, 1999, have been included in
this prospectus and in the Registration Statement filed with the Securities and
Exchange Commission in reliance upon the report of Mayer, Ripsler & Company,
P.C., independent certified public accountants, upon its authority as experts in
accounting and auditing. Mayer, Ripsler & Company, P.C.'s report on the
financial statements can be found at the end of this prospectus and in the
Registration Statement.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission under the
Securities Act a registration statement on Form SB-2. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information set forth in the registration statement, certain
61
<PAGE>
items of which are contained in exhibits and schedules as permitted by the rules
and regulations of the Securities and Exchange Commission.
We are subject to the informational requirements of the Exchange Act
and, in accordance therewith, file certain periodic reports, proxy statements
and other information with the Securities and Exchange Commission. Reports and
other information filed by us may be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission at its
principal offices located at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following regional offices of the Securities
and Exchange Commission: Seven World Trade Center, 13th Floor, New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60601.
Copies of such material may be obtained by mail from the Public Reference
Section of the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Securities and
Exchange Commission maintains a Web site at http://www.sec.gov containing
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including Talk Visual
Corporation.
THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT WE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. YOU SHOULD RELY ONLY ON THE INFORMATION OR
REPRESENTATIONS PROVIDED IN THIS PROSPECTUS. WE HAVE AUTHORIZED NO ONE TO
PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE
SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME
THAT THE INFORMATION IN THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THE DOCUMENT.
62
<PAGE>
Item 22. Financial statements
---------------------
<TABLE>
<CAPTION>
Contents
<S> <C>
For the Years Ended December 31, 1999 and 1998
Report of Independent Auditors......................................... F-1
Consolidated Balance Sheets............................................ F-2 - F-3
Consolidated Statements of Operations.................................. F-4
Consolidated Statements of Shareholders' Equity........................ F-5 - F-6
Consolidated Statements of Cash Flows.................................. F-7 - F-8
Notes to Consolidated Financial Statements............................. F-9 - F-24
For the six months ended June 30, 2000 and June 30, 1999
Condensed Consolidated Balance Sheet...................................F-25 - F-26
Condensed Consolidated Statements of Operations........................ F-27
Condensed Consolidated Statements of Cash Flows........................F-28 - F-29
Notes to Condensed Consolidated Financial Statements...................F-30 - F-32
</TABLE>
63
<PAGE>
Report of Independent Auditors
To the Stockholders of
Talk Visual Corporation
Miami, Florida
We have audited the accompanying consolidated balance sheet of Talk Visual
Corporation as of December 31, 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Talk Visual
Corporation at December 31,1999, and the results of its operations and its cash
flows for each of the two years ended in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
As more fully described in Note 2 to the financial statements, there are certain
liquidity matters concerning the Company. Management's plans with regard to
these liquidity matters are discussed in Note 2.
Mayer Rispler & Company,P.C.
Brooklyn, New York
March 30, 2000
Page F-1
<PAGE>
TALK VISUAL CORPORATION
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 287,156
Accounts receivable, net of allowances
for doubtful accounts of $3,017 46,031
Inventory 25,853
Other receivables 530,319
Stock subscriptions receivable 1,908,790
Marketable securities 180,043
Other current assets 56,172
----------
Total current assets $ 3,034,364
PROPERTY AND EQUIPMENT, net 11,477,805
ADVANCES TO RELATED ENTITIES 675,102
OTHER ASSETS 451,118
----------
TOTAL $15,638,389
==========
See notes to consolidated financial statements.
Page F-2
<PAGE>
TALK VISUAL CORPORATION
CONSOLIDATED BALANCE SHEET
(continued)
DECEMBER 31, 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable and current portion
of long-term debt $ 1,571,634
Accounts payable 918,780
Accrued expenses 248,824
Other current liabilities 52,828
----------
Total current liabilities 2,792,066
LONG-TERM DEBT, net of current portion 5,372,001
---------
TOTAL LIABILITIES 8,164,067
---------
COMMITMENTS AND CONTINGENCIES -
STOCKHOLDERS' EQUITY
Series A Convertible redeemable preferred stock -
liquidation value $1 per share, par value $.001 per
share, 25,000,000 shares authorized;
975,000 issued and outstanding 975
Common Stock, par value $.001 per share,
100,000,000 shares authorized; 32,060,978 shares
issued and outstanding 32,061
Common stock subscribed 4,241
Additional paid in capital 16,409,119
Accumulated deficit (7,221,561)
Accumulated other comprehensive loss (688,537)
Stock subscriptions receivable (1,061,976)
----------
Total Stockholders' Equity 7,474,322
----------
TOTAL $15,638,389
==========
See notes to consolidated financial statements.
Page F-3
<PAGE>
TALK VISUAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
---- ----
REVENUE
Telecommunication Services and
Product sales $ 8,147 $ -
Equipment sales, related parties 79,393 -
Real Estate revenues 1,075,482 229,127
Other income 2,966 -
---------- ---------
Total revenue 1,165,988 229,127
---------- ---------
COSTS AND EXPENSES
Cost of equipment sales, telecommunication
and retail operation expenses 442,710 -
Depreciation and amortization 299,264 41,982
Research and development 72,767 270,376
Real estate operations 292,610 201,733
General, administrative and marketing 4,983,153 808,086
Write-down of software development
costs 206,694 -
---------- ---------
Total costs and expenses 6,297,198 1,322,177
---------- ---------
LOSS FROM OPERATIONS (5,131,210) (1,093,050)
---------- ---------
OTHER INCOME (EXPENSE)
Interest expense ( 663,964) (106,768)
Interest income 5,915 2,445
Foreign currency translation loss (962) -
Adjustment of non-marketable securities
to fair value ( 164,498) -
---------- ----------
( 823,509) ( 104,323)
---------- ----------
NET LOSS $(5,954,719) $(1,197,373)
DIVIDEND ON PREFERRED STOCK $ 69,469 $ -
---------- ----------
NET LOSS APPLICABLE TO COMMON SHARES $(6,024,188) $(1,197,373)
========== ==========
NET LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.23) $ (0.06)
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING THE PERIOD 26,674,262 21,234,818
========== ==========
See notes to consolidated financial statements
Page F-4
<PAGE>
Talk Visual Corporation
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
Preferred Shares Common Shares Stock Additional
Shares Amount Shares Amount Subscribed Paid In
Capital
------ ------ ------ ------ ---------- -------
<S> <C> <C> <C> <C> <C>
Balance January 1,1998 -- $ -- 885,000 $ 885 -- $ 7,062,557
Year Ended December 31, 1998:
Common shares issued in private-
placements -- -- 427,667 473 -- 308,777
Exercise of warrants -- -- 19,084 19 -- 74,981
Common shares subscribed -- -- -- 354 2,453,748
Common shares issued for services -- -- 16,667 -- 222,983
Common shares exchanged for debt -- -- -- 28 73,172
Net Loss -- -- -- -- -- --
Other comprehensive income -
Unrealized gain
(loss) on marketable securities -- -- -- -- -- --
Comprehensive loss
Issued pursuant to Videcall-
Talk Visual Merger -- -- 19,841,400 19,841 25,693 (481,599)
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1998 -- -- 21,234,818 21,235 26,075 9,714,619
Year Ended December 31,1999:
Effect Equity transfer of Talk -
Visual-Videocall Merger -- -- -- -- -- 678,592
Collections on subscriptions -- -- -- -- (25,693) --
Common shares issued for services -- -- 4,459,642 4,460 -- 2,437,108
Common shares issued in exchange
For debt -- -- 27,500 28 -- 106,535
Previously subscribed stock, issued -- -- 2,321,017 2,292 (354) (1,938)
Insurance of preferred shares 975,000 975 -- -- -- 94,024
Insurance of stock for prior agreement -- -- -- 28 (28) --
Common shares issued in private
placement -- -- 4,000,000 4,000 -- 996,000
Common shares subscribed -- -- -- -- 2,241 1,495,759
Issued to employees -- -- 18,000 18 -- 8,420
Net Loss -- -- -- -- -- --
Other comprehensive loss - unrealized
loss on marketable securities and
currency exchange -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
Dividends paid on preferred stock -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1999 $ 975,000 $ 975 $ 32,060,977 $ 32,061 $ 4,241 $ 16,409,119
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidate financial statements
F-5
<PAGE>
Talk Visual Corporation
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998 and 1999
(continued)
<TABLE>
<CAPTION>
Accumulated Accumulated Stocks Total Comprehensive
Deficit Other Subscription Stockholders' Loss
Comprehensive Receivable Equity
Loss
------- ----- ------------ ------------- ----
<S> <C> <C> <C> <C> <C>
Balance January 1,1998 $(6,511,054) $ -- $ -- $ 552,388 --
Year Ended December 31, 1998:
Common shares issued in private-
placements -- -- -- 309,250 --
Exercise of warrants -- -- -- 75,000 --
Common shares subscribed -- -- (157,000) 2,297,102 --
Common shares issued for services -- -- -- 223,000 --
Common shares exchanged for debt -- -- -- 73,200 --
Net Loss (1,318,706) -- -- (1,318,706) $(1,318,706)
Other comprehensive income -
Unrealized gain
(loss) on marketable securities -- 207,043 -- 207,043 207,043
-----------
Comprehensive loss -- -- -- -- $(1,111,663)
Issued pursuant to Videcall-Talk Visual
Merger 6,632,387 -- (1,589,666) 4,606,656
----------- ----------- ----------- -----------
Balance December 31, 1998 (1,197,373) 207,043 (1,746,666) 7,024,933
Year Ended December 31,1999:
Effect Equity transfer of Talk -
Visual-Videocall Merger -- -- -- 678,592 --
Collections on subscriptions -- -- 1,746,666 1,720,973 --
Common shares issued for services -- -- -- 2,441,568 --
Common shares issued in exchange
For debt -- -- -- 106,563 --
Previously subscribed stock, issued -- -- -- -- --
Insurance of preferred shares -- -- -- 974,999 --
Insurance of stock for prior agreement -- -- -- -- --
Common shares issued in
private placement -- -- -- 1,000,000 --
Common shares subscribed -- -- (1,061,796) 438,024 --
Issued to employees -- 18,000 -- 8,438 --
Net Loss (5,954,719) -- -- (5,954,719) (5,954,719)
Other comprehensive loss -
unrealized
Loss on marketable securities and
currency exchange -- (895,580) -- (895,580) (895,580)
-----------
Comprehensive loss -- -- -- -- $(6,850,299)
Dividends paid on preferred stock -- (69,469) -- (69,469)
----------- ----------- ----------- -----------
Balance December 31, 1999 $(7,221,561) $ (688,537) $(1,061,976) $ 7,474,322
=========== =========== =========== ===========
</TABLE>
See notes to consolidate financial statements
Page F-6
<PAGE>
TALK VISUAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
---- ----
Cash Flows From Operating Activities:
<S> <C> <C>
Net Loss $(5,954,719) $(1,197,374)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 272,491 41,979
Amortization of product development costs 206,605 -
Write down of other investments 145,563 -
Write off of intangibles 27,645 -
Issuance of common stock in exchange for services 2,441,567 223,000
Increase (decrease) in cash from changes in:
Accounts receivable, net 27,785 28,326
Inventory (17,603) -
Other receivables (134,320) (98,674)
Other current assets 81,740 (94,160)
Accounts payable 514,893 184,838
Accrued expenses 73,232 43,024
Other current liabilities 28 29,530
--------- ----------
Net Cash from Operating Activities (2,315,093) ( 839,511)
--------- ----------
Cash Flows From Investing Activities:
Purchase of property and equipment (1,275,724) (125,138)
Advances - related parties (589,366) -
Purchase of subsidiary - (468,950)
Assets acquired in merger 2,157,842 153,608
Acquisition or disposition of other assets 2,237 (85,606)
--------- ----------
Net Cash from Investing Activities 294,989 ( 526,086)
--------- ----------
Cash Flows from Financing Activities:
Borrowings on debt 1,054,568 608,493
Payments on Notes Payable and Long Term Debt (727,883) (1,812)
Proceeds from Private Placements of Common Stock 1,000,000 1,172,709
Collections on stock subscriptions receivable 688,931 -
Cash dividend payments (69,469) -
Other (17,545) (36,349)
--------- ----------
Net Cash from Financing Activities 1,928,602 1,743,041
--------- ----------
Increase (decrease) in cash and cash equivalents (91,502) 377,444
Cash and cash equivalents at beginning of period 378,658 1,214
--------- ----------
Cash and cash equivalents at end of period $ 287,156 $ 378,658
========= ==========
</TABLE>
See notes to consolidated financial statements
Page F-7
<PAGE>
TALK VISUAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(continued)
YEAR ENDED DECEMBER 31,
-----------------------
Supplemental disclosure of cash flow information: 1999 1998
---- ----
a. Cash paid during the period for:
interest $ 641,888 $ 5,540
--------- ----------
income taxes $ 800 $ -0-
--------- ----------
b. Noncash investing and financing transactions:
For the year ended December 31, 1999:
Purchase of Canadian real estate in exchange for 975,000 shares of
convertible preferred stock and assumption of a mortgage in the amount of
$987,755.
Issuance of 200,000 shares of common stock in satisfaction of accounts
payable in the amount of $81,240.
Issuance of 55,650 shares of common stock in satisfaction of notes payable
in the amount of $129,009.
Videocall International
-----------------------
For the year ended December 31, 1998:
Issuance of 611,909 shares of common stock for $75,000 in equipment and
$66,000 in third party notes receivable.
Issuance of 2,974,250 shares of common stock for marketable securities with
a value of $882,100.
Issuance of 3,000,000 common shares and a note payable for $1,000,000 for
the acquisition of the subsidiary which holds the California real estate.
Issuance of 212,500 shares of common stock for 212,500 options to purchase
marketable securities, valued at $341,998 net of the option exercise price.
Talk Visual Corp. (formerly Legacy Software, Inc.)
--------------------------------------------------
For the year ended December 31, 1998:
On December 18, 1998, the Company agreed to issue 52,051 shares of
common stock in exchange for the contribution of a short term investment with a
market value of $104,102.
In December, 1998, the Company agreed to issue 28,150 shares of common
stock for the cancellation of a note payable including accrued interest in the
amount of $73,200.
Sale of assets and assumption of debt by a third party $147,935. Reduction
of debt by a former co-development partner $300,000.
See notes to consolidated financial statements
Page F-8
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Merger
Talk Visual Corporation, formerly Legacy Software, Inc. ("Legacy") was
incorporated in Delaware in 1996 and primarily developed and sold educational
entertainment software. Videocall International Corporation ("Videocall") was a
development stage company incorporated in Florida in February, 1998, to provide
videocalling services to businesses and consumers. Pursuant to an Agreement and
Plan of Merger ("Merger"), dated September 14, 1998, a merger was announced
between Videocall and Legacy. Subsequently, the key officers of Videocall were
elected as directors and officers of Legacy, thus creating common control of the
two companies. At December 31, 1998, Legacy had ceased developing and marketing
software products and began focusing on the business activities of Videocall. In
February, 1999, Legacy's name was changed to Talk Visual Corporation ("Talk
Visual"). The stock-for-stock transaction was approved by the stockholders of
both companies June 15, 1999, after which Videocall was merged with Talk Visual,
with Talk Visual (the "Company") being the survivor.
The Merger has been accounted for as a reverse acquisition. Shareholders of the
Company also approved the re-incorporation of the Company in Nevada. Each share
of Videocall's common stock was converted into either 3 shares, 1 share and/or
options exercisable at $1.00 per share, depending on the shareholder's purchase
price of the holdings. In effecting the Merger, the Company was obligated to
issue 19,841,400 shares of common stock to the Videocall shareholders, and has
granted 15,608,475 three year options for one share of stock each, at an
exercise price of $1.00 per share. As a result of the common control and change
of business activities, these financial statements reflect the combined
operations of both companies for the full 1999 fiscal year, as if the merger had
occurred at December 31, 1998.
Business
Prior to August 24, 1999, the Company was considered a development stage
company. On August 24, 1999, the Company became operational with the launch of
its videocalling services through its wholly owned retail stores in the United
States and joint venture partners in Europe, Israel, Canada, Asia and South
America. Additionally, during 1999, the Company commenced selling other
telecommunications services and equipment through its retail outlets and over
the internet. The Company also owns and operates, through its wholly owned
subsidiary, Sacramento Results, Inc., a commercial property located in
Sacramento, California and through its wholly owned subsidiary, The Ontario
International Property Corporation, a commercial property in Toronto, Ontario,
Canada.
On August 30, 1999, the Company moved its headquarters from Cambridge,
Massachusetts to Miami, Florida.
On February 8, 1999, the Company purchased a commercial property through its
wholly owned subsidiary, The Ontario International Property Corporation, a
Canadian corporation, as follows:
Page F-9
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Business(continued)
Assumption of mortgage $ 987,755
Issuance of 975,000 shares of Class A
Convertible preferred stock valued at
$1.00 per share, paying dividends
of $.095 per share 975,000
Cash 45,383
---------
$2,008,138
=========
The property was purchased subject to a lien of $621,000. The prior owners have
committed to have the lien released on the property and have provided a personal
guarantee and indemnity to that effect from the prior owner's principal.
Principles of Consolidation
The consolidated financial statements include the accounts of Talk Visual
Corporation and its wholly owned subsidiaries, Sacramento Results, Inc. and The
Ontario International Property Corporation. All intercompany balances and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an initial maturity of three months or
less to be cash equivalents.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and temporary cash investments. At
times, cash balances held at financial institutions were in excess of federally
insured limits. The Company places its temporary cash investments with
high-credit, quality financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution. The Company believes no
significant concentration of credit risk exists with respect to these cash
investments.
Page F-10
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventory
Inventory, which consists of finished goods, is valued at the lower of cost or
market. Cost is determined by the first-in, first-out (FIFO) method.
Stock Subscriptions Receivable
On December 14, 1999 a private placement of $1,500,000 for 4,241,322 shares of
Common Stock was subscribed to by third party investors to provide additional
capital to the Company. Of the $2,970,766 still due under the subscriptions at
December 31, 1999, through March 27, 1999, $1,908,790 has been received in cash
and have been presented as a component of current assets in the accompanying
financial statements; the balance of $1,061,976 remains to be collected, and has
been presented as a reduction of stockholders' equity in the accompanying
financial statements.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation.
Depreciation on property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years for furniture, fixtures and equipment and fifteen to forty years for
real estate.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes." Under the
asset and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Under SFAS 109, deferred tax assets may be recognized for temporary differences
that will result in deductible amounts in future periods. A valuation allowance
is recognized, if on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized.
Revenue Recognition
Revenue is recognized upon completion of the service or delivery of equipment.
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires
presentation of basic and diluted earnings per share. Basic earnings per share
is computed by dividing income available to common stockholders by the weighted
average
Page F-11
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Share (continued)
number of common shares outstanding for the reporting period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts, such as stock options, to issue common stock were exercised or
converted into common stock. All amounts have been adjusted for the September 8,
1998 one for three reverse split. For the years ended December 31, 1999 and
1998, diluted earnings per share have not been included as it would be
antidilutive.
Foreign Currency Conversion
The financial statements of the Company's foreign subsidiary have been
translated into United States dollars at the average exchange rate during the
year for the statement of operations and year-end rate for the balance sheet.
Stock Based Compensation
The Company accounts for its stock option awards under the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. The Company makes pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
had been applied as required by SFAS No. 123, "Accounting for Stock-Based
Compensation".
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") issued by the FASB is
effective for financial statements with fiscal years beginning after June 15,
2000. This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Company does not expect
the adoption of SFAS 133 to have an impact on its financial position or results
of operations.
NOTE 2 - LIQUIDITY
As reflected in the accompanying financial statements, the Company incurred
significant net losses for the years 1999 and 1998, and expects to continue to
incur losses in 2000. The Company is dependent on revenues from the real estate
operations, investor stock subscriptions, short term and long term borrowings
and retail videocalling and telecommunication product sales for working capital
Page F-12
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2 - LIQUIDITY (continued)
needs, until the operating activities generate sufficient cash flow to fund the
Company.
During the first quarter of 2000 the Company collected $1,908,790 of its
subscriptions receivable. It is anticipated that the remaining $1,061,976 will
be collected during the second quarter of 2000. Additionally, the Company
collected $1,053,500 in option exercise payments and $446,900 due from the
Chairman, during the first quarter of 2000. The Chairman of the Company has made
a guarantee to fund or obtain funding to meet the obligations and working
capital needs of the Company. Based upon the current cash utilization rate and
Management's plan for expansion and new products/joint ventures/acquisitions,
and the Chairman's funding obligation, Management believes that there should be
sufficient capital to meet the needs of the Company for the next twelve months.
In addition to the funding noted above, the Company has entered into a placement
agreement with an investment banking firm for a proposed offering of equity
securities to provide capital to the Company in an amount of up to $75,000,000.
NOTE 3 - MARKETABLE SECURITIES
Marketable securities consist of common stock currently trading on a national
exchange. Marketable securities are stated at market value as determined by the
most recently traded price of each security at the balance sheet date. At
December 31, 1999, marketable securities were considered as available-for-sale
as defined by Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. The cost of
investments sold is determined on the specific identification or the first-in,
first-out method. At December 31, 1999, available-for-sale equity securities and
their market value was as follows:
Equity Securities, at cost $ 882,100
Unrealized Loss (702,057)
-------
Market Value at December 31, 1999 $ 180,043
=======
These equity securities are held in a Canadian brokerage account under the name
of the Company's chairman. The Company has received executed stock assignment
certificates.
Page F-13
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4 - OTHER RECEIVABLES
Included in other receivables at December 31, 1999, is a receivable in the
amount of $446,901 due from the Chairman of the Company. This receivable was
repaid, in full, during the first quarter of 2000.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
Other operations:
Equipment, Machinery and Automobiles $ 406,106
Furniture and Fixtures 42,255
Leasehold Improvements 348,568
Real estate operations:
Equipment, Machinery and Automobiles 137,476
Furniture and Fixtures 13,833
Leasehold Improvements 92,268
Buildings 6,167,094
Land 4,590,296
---------
11,797,896
Less accumulated depreciation ( 320,091)
----------
Net assets $11,477,805
==========
Depreciation and amortization expense on property and equipment was $223,733 for
the year ended December 31, 1999 and $29,793 for the year ended December 31,
1998.
NOTE 6 - PRODUCT DEVELOPMENT COSTS
As noted earlier, the Company has ceased developing and marketing software
products and is focusing on videoconferencing and telecommunications. With
respect to the year ended December 31, 1999, the Company reduced the capitalized
software development costs by $206,694 to reflect management's determination of
the current estimated net realizable value.
NOTE 7 - DEBT
The Company's debt is as follows:
In connection with the acquisition of the Sacramento property, the Company
incurred a short term non-interest bearing obligation of $1,000,000. The short
term obligation to the
Page F-14
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 - DEBT (continued)
seller of $1,000,000 was renegotiated and partially paid down on February 19,
1999. Under the renegotiated note, the Company paid an advance against leasehold
improvements in the amount of $350,000 and a principal payment of $107,000,
leaving a balance due of $893,000 on the renegotiated note. The renegotiated
note is secured by a third position on the real estate and collateralized by
200,000 shares of Talk Visual common stock. Subsequent to the balance sheet
date, the holder of the note signed a settlement agreement in which it has
accepted a cash payment of $450,000 and 100,000 shares of common stock in full
payment of this obligation. The adjustment will be reflected in subsequent
financial statements.
<TABLE>
<S> <C>
Balance due as of December 31, 1999 $ 893,000
Unsecured note payable to IBM (past due, currently in
negotiation) 150,000
Due to prior officer (in arbitration) 72,066
Convertible discounted loan note ("CDLN"), secured by an unrecorded lien on the
Sacramento land and building, with imputed interest at the rate of 9.4%,
interest payable monthly, principal balance due November 2001, net of
unamortized discount of $108,900 (see discussion below) 386,100
Mortgage note, secured by a first lien on the Sacramento land and building,
including a deed of trust on rents and fixtures; bearing interest at 10% for the
initial 12 months and 12% thereafter; payable monthly, interest only for
seventy-two months, with the entire principal due January, 2004 3,840,000
12.5% Mortgage note, secured by a second lien on the Sacramento land and
building, including a deed of trust on rents and a lien on specified equipment;
disbursed to a maximum funding of $500,000 based upon completion of certain
leasehold improvements and delivery of specified equipment; payable in monthly
installments of principal and interest for 60
months; undisbursed funds at December 31, 1999 totaled $350,000 124,912
9% Mortgage note, secured by a lien on the Sacramento land and
building, maximum funding of $1,000,000 due September 1, 2000.
Interest payable monthly 500,000
</TABLE>
Page F-15
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 - DEBT (continued)
7.05% Mortgage note, secured by the land and building in Toronto Ontario, and
matures February 1, 2002. The mortgage is payable in monthly installments of
$8,000, including principal and interest The mortgage is payable in Canadian
dollars 964,089
10.27% Unsecured installment obligation payable monthly,
principal and interest, in the amount of $1,561.21 for 9 months 13,468
----------
Total Debt $6,943,635
Less current maturity 1,571,634
----------
Long term obligations $5,372,001
==========
The aggregate maturities of long-term debt maturing in succeeding years are as
follows:
Amount
---------
2001 $ 499,423
2002 62,058
2003 934,924
2004 3,875,596
Concurrent with the placement of the Convertible Discounted Loan Note ("CDLN"),
the lenders have subscribed to 990,000 shares of common stock at a price of
$990,000, paying $108,900 toward the total subscription. The CDLN is convertible
with an additional payment of $108,900, at the option of the holder, into
495,000 shares of the Company's common stock, during the term of the note or at
maturity. If at maturity, the holder declines the conversion feature, the
Company is obligated to pay the principal on the note, rescind the subscription
for the 990,000 shares of common stock and refund the deposit paid toward that
subscription. At the time of the placement of the CDLN, there was no beneficial
conversion feature as the conversion price and market price of the underlying
common stock were both at $1.00 per share.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain equipment and real estate under various operating
leases which expire at various dates through June 30, 2002. Future minimum
rental payments required under operating leases that have initial or remaining
terms in excess of one year at December 31, 1999 are as follows:
Page F-16
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 - COMMITMENTS AND CONTINGENCIES (continued)
Operating
December 31, Leases
------------ ------
2000 $114,358
2001 92,586
2002 23,573
-------
Total future minimum rentals $230,517
=======
Rent expense for the years ended December 31, 1999 and 1998 was $144,432 and
$42,601, respectively.
Legal Proceedings
There are no material legal proceedings, other than routine litigation
incidental to the business, to which the Company or any of its subsidiaries is a
party to or which any of their property is subject.
NOTE 9 - STOCKHOLDERS' EQUITY
The Company's authorized capital stock consists of 100,000,000 shares of common
stock, par value of $0.001 and 25,000,000 shares of non-voting preferred stock,
par value $0.001. At December 31, 1999, the Company has 32,060,978 issued and
outstanding Common shares and 975,000 issued and outstanding Series 1999-A
Preferred shares. The preferred issue has a stated liquidation preference value
of $975,000 or $1.00 per share, with no voting rights and pays a cumulative
dividend of $0.095 per share. Holders of the Series 1999-A preferred have the
right to convert the stated value of their shares, in whole or in part, into
common stock at a conversion price of $1.00 per share. The Company has the right
to redeem, in whole or in part, the Series 1999-A Preferred issue for $1.15 per
share at any time.
In May 1996, the Company consummated an initial public offering of 383,333
shares of its common stock, adjusted for the 1:3 reverse split in September
1998. On June 18, 1999, the Company completed the merger with Videocall
International Corporation. This transaction was recorded as a reverse merger
effective December 31, 1998.
Options and Warrants Outstanding
As a result of the Merger, on June 18, 1999, the Company issued options to
purchase 15,608,475 shares of common stock at $1.00 per share with a three year
expiration period to the Videocall shareholders and 1,800,000 warrants at $0.25
per share with a three year expiration period as a commission fee to brokers
involved in the introduction of the merged companies. No value has been recorded
for these options since they have not been registered and are not tradeable.
Page F-17
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
On May 30, 1999, the Company issued 45,000 options at $2.97 per share with a two
year expiration period to a former employee. The stock price on the date of
issue was $2.875. Accordingly, no compensation expense was recorded.
In connection with the Company's initial public offering of common stock, the
Company issued warrants to a trust company to purchase 66,667 shares of common
stock at $3.93 per share, expiring five years from the date of issue. The
warrants were exercisable immediately. Through December 31, 1999, the trust
company has exercised 60,432 of the warrants.
As of December 31, 1999, warrants and options to purchase 17,593,043 shares of
common stock were outstanding.
Capital Stock Transactions
During 1999 the Company issued an aggregate 1,132,128 shares of common stock,
for various services and obligations. At issuance, the stock ranged in price
from $0.0625 per share to $4.00 per share. These issuances were recorded at a
total expense of $2,056,773, which includes a non-marketability discount.
Included in this amount is 50,000 shares of common stock to the President as a
bonus and 18,000 shares of common stock to employees and associates as
additional compensation.
On January 25, 1999, the Company issued 600,000 shares of common stock pursuant
to the agreement with the parties responsible for the introduction of Videocall
to the Company. This transaction was priced at $3.75 per share for a total cost
of $2,250,000, which was charged to equity. The Company is also obligated under
the agreement, to issue options, exercisable at $0.25 per share, to the same
parties. See the discussion under the June 18, 1999 equity transaction noted
below.
On February 24, 1999, the Company acquired a 22,622 square foot office facility
in Ontario, Canada with the issuance of 975,000 shares of Class A Preferred
Stock, Series 1999-A, $.001 par value, and the assumption of a first mortgage in
the amount of $935,450 along with various minor obligations totaling $31,293.
The total acquisition price of the property was $2,008,138. On December 1, 1999,
the holder of the Preferred shares issued under this acquisition, notified the
Company of its election to exercise the convertibility feature of the
certificate provisions. Under the formula outlined in the certificate of
designation of the preferred stock and based upon the price of the Company's
common stock for the time period on which the conversion is based, each share of
preferred stock will be converted to 17.14 shares of common stock. The
conversion of the preferred stock will result in the issuance of 16,714,381
shares of common stock. The Company has been advised that the Preferred
shareholder will convert the shares over the next thirty six months. The holder
of the Preferred shares has agreed on all conversions after the first 3,348,500
shares to reinvest, within the thirty-six month period, $1.00 per converted
share, for a total investment to the Company of $13,365,000.
On March 5, 1999, the Company issued 27,500 shares of common stock in exchange
for $105,000 of notes payable and accrued interest at $3.875 per share. The
market value
Page F-18
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 9 - STOCKHOLDERS' EQUITY (continued)
of the shares issued on the date of exchange exceeded the obligations recorded
on the books of the Company by $1,562.
On June 18, 1999, as a result of the Videocall Merger, each share of Videocall
common was converted into the right to receive either one share, three shares,
and/or options of Talk Visual Common Stock or, 19,841,400 shares and 15,608,477
options in the aggregate. The options are exercisable at $1.00 per share and
expire three years from their issue date. In connection with the Merger, the
Company also issued 1,800,000 options, in addition to the options to the
shareholders previously noted, at an exercise price of $0.25 per share for a
three year period, to third parties who were responsible for the introduction of
the Company and Videocall.
On July 16, 1999, the Company issued 4,000,000 shares of common stock under a
private placement subscription dated July 7, 1999. The shares were issued at a
subscribed price of $0.25 per share, based on the trading price for the day at a
twenty percent discount.
On November 4, 1999, the Company satisfied its obligation to Overseas
Communications, Ltd., a foreign corporation in which the Chairman of the Company
is a 33% shareholder, for open invoices in the amount of $130,000, representing
consulting and management services provided by the Chairman, with the issuance
of 1,698,014 shares of common stock. The value on the date of issue was $.0766
per share.
Pursuant to an S-8 filing December 17, 1999, the Company issued 980,000 shares
of common stock to various individuals as compensation for services rendered.
Issue prices ranged from $0.10 per share to $0.4688 per share, for a total value
of $347,750.
NOTE 10 - STOCK OPTION AND PURCHASE PLAN
Talk Visual Corporation, formerly Legacy Software, Inc., predecessor to the
merged entities, had a tax qualified stock option plan for employees and certain
non-employees, that provided for the granting of stock options and authorized
the issuance of common stock. On June 19, 1997, in connection with the
termination of certain employment agreements, all stock options were fully
vested for terminating employees. At December 31, 1999, all outstanding stock
options were fully vested.
Under the former option plan, options granted fell into two catagories: (i) the
Incentive Stock Option Plan under which qualified employees could, at the
discretion of the Plan administrator, be granted options to purchase shares of
Common Stock at an exercise price of not less than 85% of their fair market
value on the grant date or at the Plan Administrator's discretion, be issued
shares of Common Stock
Page F-19
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 10 - STOCK OPTION AND PURCHASE PLAN (continued)
directly, through the purchase of shares at a price not less than 85% of their
fair market value at the time of issuance or as a bonus tied to the performance
of services; and (ii) the Automatic Option Grant Program under which option
grants will automatically be made at periodic intervals to eligible non-employee
Board members to purchase shares of Common Stock at an exercise price equal to
100% of the fair market value on the grant date.
Videocall International Corporation granted a stock option with respect to Talk
Visual common stock, to a former employee. Dated May 30, 1999, the employee was
granted the right to purchase up to 45,000 shares at a price of $2.97 per share
expiring February 28, 2002.
Option activity within each plan was as follows:
Weighted
Incentive Directors Average
Stock Option Stock Option Price
Plan Plan Per Share
------------ ------------ ---------
Balance outstanding, December 31, 1997 119,000 8,333 $9.60
Options granted range from
$2.07 to $12.00 per share 140,000 1,667 $3.20
Options cancelled range from
$3.00 to $12.00 per share (6,667) (10,000) $9.60
------- --------
Balance outstanding, December 31, 1998 252,333 -0- $5.74
========
Options expired range from
$8.25 to $9.75 per share (119,000) $9.00
-------
Balance outstanding, December 31, 1999 133,333 $2.85
=======
Talk Visual stock option granted by Videocall International Corporation: 45,000
shares at a weighted average price per share of $2.97
The total balance outstanding at December 31, 1999 is 178,333, with a weighted
average exercise price of $2.88 per share.
Information relating to stock options outstanding and exercisable at December
31, 1999, summarized by exercise price are as follows:
Page F-20
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 10 - STOCK OPTION AND PURCHASE PLAN (continued)
Life Exercise
Shares (months) Price
-------- ------ --------
Incentive Stock Option Plan
8,333 9.0 $4.14
25,000 14.0 $4.14
8,333 9.0 $3.11
25,000 14.0 $3.11
16,667 9.0 $2.07
50,000 14.0 $2.07
Granted May 30, 1999
45,000 26.0 $2.97
-------
Total 178,333 $2.88
=======
All stock options issued to employees have an exercise price of not less than
85% of the fair market value of the Company's common stock on the date of the
grant, and in accordance with accounting for such options utilizing the
intrinsic value method there is a related compensation expense recorded in the
Company's financial statements representing 15% of the fair market value. Had
the compensation cost for stock-based compensation been determined based on the
fair value of the grant dates consistent with the method of SFAS 123, the
Company's net loss and loss per share for the years ended December 31, 1999 and
1998 would have been increased to the pro forma amounts presented below as
follows:
1999 1998
--------- ---------
Net loss as reported $(6,024,188) $(1,197,373)
Net loss pro forma $(6,092,320) $(1,244,787)
Basic and diluted net loss per
common share as reported $(0.23) $(0.06)
Basic and diluted net loss per
common share pro forma $(0.23) $(0.06)
The fair value of option grants is estimated on the date of grant utilizing the
Black-Sholes option-pricing model with the following weighted average
assumptions for grants in 1999 and 1998: expected life of option of 2.5 years
and 10 years, respectively, expected volatility of 80.0% and 26.2%,
respectively, risk-free interest rate of 6.0% and a 0% dividend yield for both
years. The weighted average fair value at date of grants for options granted
during 1999 and 1998 was $1.51 and $0.34 per option, respectively.
Page F-21
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 11 - GENERAL, ADMINISTRATIVE AND MARKETING EXPENSE
General, administrative and marketing expense is comprised of the following
items:
1999 1998
------ ------
Salaries and benefits $ 719,943 $260,391
Consultants 1,652,453 48,827
Legal and other professional 1,178,418 205,260
Marketing and public relations 459,782 51,607
Other general and administrative 972,557 242,001
--------- -------
Total $4,983,153 $808,086
========= =======
Of the total $4,983,153 expense in 1999, $2,441,567 was paid in common stock;
actual cash payments totaled $2,541,585. For the year ended December 31, 1998,
of the total expense of $808,086, $223,000 was paid in common stock and the
balance of $585,086 was paid in cash.
NOTE 12 - INCOME TAXES
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $12,215,000 and $6,552,000, available to offset
taxable income expiring at various times through the year 2019. The Tax Reform
Act of 1986 contains provisions which limit the federal net operating loss
carryforwards available that can be used in any given year in the event of
certain occurrences, which include significant ownership changes.
At December 31, 1999 and 1998, the Company's net deferred tax asset consisted
primarily of net operating losses. The Company established a 100% valuation
allowance equal to the net deferred tax asset, as the Company could not conclude
that it was more likely than not that the deferred tax asset would be realized.
NOTE 13 - RELATED PARTY TRANSACTIONS
The Company provided certain administrative, technical and operational support,
loan advances, loan of equipment and sales of equipment along with facilities
utilization to the foreign entities TV Telecommunications, Ltd, Videocall of
Canada, Inc., Videocall Israel, Ltd. and the Belgium operations. These entities
are owned and/or managed by individuals are stockholders of in the Company. At
December 31, 1999, balances due from these entities totaled $675,102.
During 1999, the Company incurred and paid $35,788 of interest and recorded
$6,413 of prepaid interest to a foreign entity managed by a Director of the
Company. The same Director was issued 175,000 shares of common stock at a price
of $2.719 for a
Page F-22
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 13 - RELATED PARTY TRANSACTIONS(continued)
total charge to expense of $475,781, for services rendered in securing financing
for the Company.
The Company accrued $150,000 to Overseas Communications Ltd., a foreign
corporation owned 33% by the Chairman of the Company, for consulting services
provided by the Chairman. The Company issued common stock in payment of $130,000
of this obligation.
NOTE 14 - EARNINGS PER SHARE
The following is a reconciliation of the weighted average number of shares used
to compute basic and diluted earnings per share:
1999 1998
---- ----
Basic weighted average shares outstanding 26,674,262 20,895,575
Dilutive effect of options -- --
---------- ----------
Diluted weighted average shares outstanding 26,674,262 20,895,575
========== ==========
Options and warrants to purchase 17,593,043 and 252,333 shares were outstanding
during the years ended December 31, 1999 and 1998, respectively, and Class A
Preferred Stock, Series 1999-A convertible into 16,715,241 shares was also
outstanding, but these amounts were not included in the computation of diluted
loss per common share because the effect would be antidilutive.
NOTE 15 - SUBSEQUENT EVENTS
Business Acquisitions
On January 30, 2000, the Company signed a letter of intent to acquire 100% of
First Debit Corporation for $2,750,000, payable by $225,000 in cash and the
balance in common shares. First Debit Corporation specializes in the production,
distribution and sales of prepaid telephone cards in Toronto and Montreal.
On March 6, 2000, the Company signed a letter of intent to acquire 70% of YAK
Communications (USA) Inc., a company of which 17% is owned by Charles Zwebner,
brother to the Chairman of the Company, 7% by the Chairman and 8% by the
principal holder of the convertible preferred stock. The consideration is
8,400,000 preferred shares with a face value of $8,400,000 convertible into
common shares at the lower of $3.875 per share or the average of the lowest
closing bid price in the five days prior to conversion. The Company also agreed
to invest an additional $6,000,000 consisting of $500,000 in cash and $5,500,000
of convertible preferred shares under the same terms. The Company has engaged an
independent outside valuation firm for this acquisition.
Page F-23
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 15 - SUBSEQUENT EVENTS (continued)
Business Acquisitions (continued)
On March 16, 2000, the Company signed an agreement to purchase a 25% interest in
Entertech Media Group, Inc. of Hollywood, CA. Under the terms of the agreement,
the Company will exchange 3,000,000 common shares for 3,666,666 shares of
Entertech Media common stock. Entertech has agreed to provide content (such as
movies, music, news programs, documentaries, etc.) to customers of the Company
who have purchased the Company's videotelephone model TV225. The Company has
agreed to pay a broker 75,000 shares of its common stock on consummation of this
transaction. The transaction is subject to Board approval.
On March 24, 2000, the Company signed a letter of intent to acquire QuickPage of
NJ, Inc., a retail chain of fourteen stores in the New York/New Jersey area. The
consideration is $5,500,000, payable in stock and cash. At closing, the Company
will make a cash payment of $250,000, pay cash for the inventory, not to exceed
$250,000, and will commence payments of $100,000 per month for the ten months
following closing. The balance, due in common stock, will be priced at the
average trading price for the five trading days prior to closing.
Manufacturing Agreement
On February 11, 2000, the Company signed an OEM agreement with Motion Media
Technology Limited for the purchase of video conferencing telephone units
aggregating $9,994,000 over a three year period.
Financing Agreement
On March 30, 2000, the Company entered into a one year placement agreement with
an investment banking firm for a proposed underwriting of common stock in an
amount of up to $75,000,000. Under the terms of the agreement, the Company is
required to file a registration statement with the Securities and Exchange
Commission covering the common stock to be issued. The issue price of the stock
will be based upon an average price for a period of 22 consecutive trading days
preceding the date of funding. If the underwriter is unable to locate a
qualified institutional investor willing to invest in the offering within sixty
days of the contract signing, the Company has the right to terminate the
agreement.
Facilities
The Company leased an additional 2,559 square feet at its corporate headquarters
effective February 1, 2000. The lease term is twenty nine months and calls for a
monthly payment of $4,265 the first year, increasing $170 in year two and $179
in the final year, for a total obligation of $127,480.
Page F-24
<PAGE>
TALK VISUAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 16 - SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," ("SFAS 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. SFAS 131 requires that public companies report certain information
about operating segments, products, services and geographical areas in which
they operate and their major customers.
The Company's reportable operating segments consist of real estate and
telecommunication services. The summary of the operating segment information is
as follows at December 31,:
Rental Telecom Total
---------- ---------- ----------
1999
Net revenue $1,075,482 $ 90,506 $1,165,988
Depreciation/Amortization 213,323 85,940 299,263
Operating Income (loss) (414,784) (5,539,935) (5,954,719)
Assets, net 11,068,078 4,570,311 15,638,389
Capital expenditures 2,637,963 619,016 3,256,979
1998
Net revenue 229,127 - 229,127
Depreciation/Amortization 36,701 5,280 41,982
Operating Income (loss) (190,549) (1,006,824) (1,197,373)
Assets, net 8,564,161 889,113 9,453,274
Capital expenditures 8,363,003 177,913 8,540,916
F-24
<PAGE>
TALK VISUAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, DECEMBER 31,
2000 1999
----------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 609,699 $ 287,156
Accounts receivable, net of allowances 64,989 46,031
Inventory 138,028 25,853
Other receivables 91,584 530,319
Stock subscriptions receivable --
1,908,790
Marketable securities 102,238 180,043
Other current assets 161,294 56,172
----------- -----------
Total current assets 1,167,832 3,034,364
PROPERTY AND EQUIPMENT, net 11,808,613 11,477,805
ADVANCES TO RELATED ENTITIES 730,797 675,102
OTHER ASSETS 644,033 451,118
----------- -----------
TOTAL $14,351,275 $15,638,389
=========== ===========
See notes to condensed consolidated financial statements.
F-25
<PAGE>
TALK VISUAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(continued)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Notes payable and current portion
of long-term debt $ 259,329 $ 1,571,634
Accounts payable 514,032 918,780
Accrued expenses 252,758 248,824
Other current liabilities 92,779 52,828
------------ ------------
Total current liabilities 1,118,898 2,792,066
LONG-TERM DEBT, net of current portion 5,376,252 5,372,001
------------ ------------
TOTAL LIABILITIES 6,495,150 8,164,067
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Series A convertible redeemable
preferred stock - liquidation value
$1 per share, par value $.001 per
share, 25,000,000 shares authorized; 469,289
and 975,000 shares issued and outstanding 469 975
Common Stock, par value $.001 per share,
100,000,000 shares authorized; 50,638,244
and 32,060,977 shares issued and outstanding 50,638 32,061
Common stock subscribed -- 4,241
Additional paid in capital 18,025,939 16,409,119
Accumulated deficit (9,298,447) (7,221,561)
Accumulated other comprehensive loss (766,342) (688,537)
Stock subscriptions receivable (156,132) (1,061,976)
------------ ------------
Total Stockholders' Equity 7,856,125 7,474,322
------------ ------------
TOTAL $ 14,351,275 $ 15,638,389
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
F-26
<PAGE>
TALK VISUAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Telecommunication services, Software
and product sales $ 87,623 $ 13,232 $ 110,039 $ 15,260
Real estate revenue 310,858 304,201 626,414 530,369
Other income -- -- 3,435 --
------------ ------------ ------------ ------------
Total revenue 398,481 317,433 739,888 545,629
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Cost of equipment sales, telecommunication
and retail operation expenses 295,201 -- 476,685 3,204
Depreciation and amortization 99,688 52,678 185,012 98,658
Research & product development -- 79,389 10,000 118,324
Real estate operations 138,454 170,870 243,175 290,958
General & administrative 1,018,317 1,230,247 1,700,963 3,351,255
------------ ------------ ------------ ------------
Total costs and expenses 1,551,660 1,533,183 2,615,835 3,862,398
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (1,153,179) (1,215,750) (1,875,947) (3,316,769)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
INTEREST EXPENSE (143,582) (192,883) (323,886) (323,696)
INTEREST INCOME 289 2,169 599 6,206
------------ ------------ ------------ ------------
(143,293) (190,714) (323,287) (317,490)
LOSS BEFORE EXTRAORDINARY ITEM (1,296,472) (1,406,464) (2,199,234) (3,634,259)
EXTRAORDINARY ITEM - DEBT RESTRUCTURING -- -- 122,347 --
------------ ------------ ------------ ------------
NET LOSS (1,296,472) (1,406,464) (2,076,887) (3,634,259)
DIVIDENDS ON PREFERRED STOCK -- 23,156 -- 30,875
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON SHARES (1,296,472) $ (1,429,620) (2,076,887) $ (3,665,134)
============ ============ ============ ============
NET LOSS PER COMMON SHARE BASIC (1)
BEFORE EXTRAORDINARY ITEM $ ( 0.02) $ ( 0.06) $ (0.05) $ (0.15)
EXTRAORDINARY ITEM -- -- $ 0.00 --
$ ( 0.02) $ ( 0.06) $ (0.05) (0.15)
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING DURING THE PERIOD 43,791,469 24,678,614 40,884,211 24,046,944
</TABLE>
(1) The effect of common stock options and warrants is excluded from diluted
earnings per share as its inclusion would be anti-dilutive for the three month
and six months periods ended June 30, 2000 and 1999.
See notes to condensed consolidated financial statements.
F-27
<PAGE>
TALK VISUAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Loss $(2,076,887) $(3,634,259)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 185,012 98,658
Amortization of product development costs 12,000 --
(Gain) loss on stock exchanged for debt (122,347) 1,563
Issuance of common stock in exchange for services 149,900 2,251,387
Increase (decrease) in cash from changes in:
Accounts receivable, net (18,958) 55,124
Inventory (112,175) 221
Other receivables 438,735 (23,018)
Other current assets (105,122) 2,732
Accounts payable (438,898) 520,634
Accrued expenses 3,934 (4,435)
Other current liabilities 39,951 26,469
----------- -----------
Net Cash from Operating Activities (2,044,855) (704,924)
----------- -----------
Cash Flows From Investing Activities:
Purchase of property and equipment (491,441) (1,001,300)
Disposal of marketable securities -- 89,210
Advances - related parties (55,695) (358,246)
Deposit on asset acquisition (158,285) --
Other (40,158) (868)
----------- -----------
Net Cash from Investing Activities (745,579) (1,271,204)
----------- -----------
Cash Flows from Financing Activities:
Borrowings on debt 54,567 --
Payments on notes payable and long term debt (544,522) (247,451)
Proceeds from exercise of options on common stock 591,000 --
Collections on stock subscriptions receivable 1,929,293 1,900,000
Proceeds from private placements of common stock 1,200,000 --
Cash dividend payments -- (23,156)
Other (117,361) 12,660
----------- -----------
Net Cash from Financing Activities 3,112,977 1,642,053
----------- -----------
Increase (decrease) in cash and cash equivalents 322,543 (334,075)
Cash and cash equivalents at beginning of period 287,156 378,658
----------- -----------
Cash and cash equivalents at end of period $ 609,699 $ 44,583
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-28
<PAGE>
TALK VISUAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
SIX MONTHS ENDED JUNE 30,
-------------------------
Supplemental disclosure of cash flow information: 2000 1999
---- ----
a. Cash paid during the period for:
interest $ 321,489 $ 320,321
--------- ----------
income taxes $ 800 $ 800
---------- ----------
b. Noncash investing and financing transactions:
For the period ended June 30, 1999:
Purchase of Canadian real estate in exchange for 975,000 shares of
convertible preferred stock and assumption of a mortgage in the amount of
$987,755.
Issuance of 55,650 shares of common stock in satisfaction of notes payable
in the amount of $129,009.
Issuance of 600,000 shares of common stock as a commission with respect to
the acquisition of Videocall International Corp, total value of $2,250,000.
Cancellation of an advance payable in the amount of $30,000 in exchange for
7,500 shares of common stock.
Issuance of 19,841,400 shares of common stock pursuant to the merger of
Videocall International Corp. with Talk Visual Corporation.
For the period ended June 30, 2000:
Conversion of the Convertible Discounted Loan Notes into 495,000 shares of
common stock, previously issued, for the outstanding balance of the note in the
amount of $386,100.
Cashless exercise of an Option to purchase 900,000 shares of common stock
at $0.25 per share, at a market price of $3.875 for a total issue of 841,935
shares.
F-29
<PAGE>
TALK VISUAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) General and Summary of Business and Significant Accounting Policies
Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation of the Company's financial position
at June 30, 2000, the results of operations for the six months ended June 30,
2000 and June 30, 1999, and the cash flows for the six months ended June 30,
2000 and June 30, 1999 are included. Operating results for the six month period
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
The information contained in this Form 10-QSB should be read in conjunction with
the audited financial statements as of December 31, 1999, filed as part of the
Company's Annual Report on Form 10-KSB.
Prior Period Restatement
The Company, prior to February, 1999, was known as Legacy Software, Inc., a
developer of educational entertainment software. In September of 1998, an
agreement and plan of merger between Legacy Software, Inc. ("Legacy")and
Videocall International Corp ("Videocall") was announced, but didn't take effect
until June of 1999. Videocall was a development stage company in the
telecommunications industry. During the fourth quarter of 1998, key officers of
Videocall were elected as directors and officers of Legacy, and effective at the
end of December, the business activity of Legacy was changed to focus on the
business activity of Videocall. Even though the stock-for-stock transaction
merger was approved by the stockholders of both companies in June of 1999, as a
result of the common control and change of business activities, these financial
statements, as reflected in the December 31, 1999 form 10-KSB, report the
combined operations of both companies as if the merger had occurred at December
31, 1998.
A summary of the adjusted amounts for the six months ended June 30, 1999, in
comparison to amounts reported on the June 30, 1999 10-QSB is as follows:
Reported on
6/30/99 10-QSB Restated
-------------- --------------
Total Revenue $ 131,508 $ 545,629
Total Expenses 2,602,853 3,862,398
Loss From Operations (2,471,345) (3,316,769)
Net Loss Applicable to
Common Shares (2,511,244) (3,665,134)
Net Loss per Common Share
Basic and Diluted ($0.37) ($0.15)
F-30
<PAGE>
(2) Financial Condition and Liquidity
Since inception, the Company has incurred significant net losses and expects to
continue to incur losses through year end. The Company is dependent on revenues
from the real estate operations, investor stock subscriptions, short term and
long term borrowings to supplement retail videocalling and telecommunication
product sales for working capital needs, until the operating activities generate
sufficient cash flow to fund the Company.
The Company collected $1,929,293 of its subscriptions receivable, $591,000 in
option exercise payments, $1,200,000 in private placement funds and $446,900 due
from the Chairman, during the six months ended June 30, 2000. The Company is
pursuing refinancing of the Sacramento property and has received a term sheet
proposing $6,600,000 of first mortgage financing. This refinancing would make
$2,100,000 available to the Company, after satisfying existing debt on the
property. Additionally, the Chairman of the Company has made a guarantee to fund
or obtain funding to meet the obligations and working capital needs of the
Company. Finally, the Company has entered into a placement agreement with an
investment banking firm for a proposed offering of equity securities to provide
capital to the Company in an amount of up to $75,000,000. In connection with the
proposed offering, the Company signed a Common Stock Purchase Agreement with a
private investor for an amount of up to $15 Million, on July 28, 2000. See the
discussion below for more information. Based upon the current cash utilization
rate and Management's plan for expansion and new products/joint
ventures/acquisitions, the Chairman's funding obligation, the recently signed
Common Stock Purchase Agreement and the proposed equity offering, Management
believes that there should be sufficient capital to meet the needs of the
Company for the next thirteen months.
(3) Recent Sale of Equity Securities
The Company has issued and sold unregistered securities that have not been
previously reported as set forth below. An underwriter was not utilized in any
of these transactions. The recipients of securities in each transaction
represented their intention to acquire the securities without a view to the
distribution thereof. All the issued securities were restricted securities,
under Rule 144, or Reg S regulations, and appropriate restrictive legends were
affixed to the securities in each transaction.
On June 29, 2000, the Company issued 841,935 shares of common stock from the
cashless exercise of 900,000 warrants, at $0.25 per share.
On June 29, 2000, the Company issued 155,000 shares of common stock to two
vendors for services rendered, at a price of $0.4375 per common share for a
total value of $67,813.
On June 29, 2000, the Company issued 2,250 shares of common stock to an employee
pursuant to an employment letter of agreement, at a price of $0.4375 per common
share for a total value of $914.
On June 29, 2000, the Company issued 3,412,968 shares of common stock under a
private placement subscription pursuant to the agreement of the preferred
shareholders to contribute $1.00 per converted common share received after the
first 3,348,500 common shares. The shares were issued at a price of $0.3516 per
share, based on the average closing price for the day of funding and two days
prior to the funding, at a twenty five percent discount. Included in the total
subscription, was 1,137,656 shares to Overseas Communications Ltd., a foreign
corporation which is 33% owned by the Chairman of the Company.
F-31
<PAGE>
(4) Segment Information
The Company's reportable operating segments consist of real estate and
telecommunication services. The summary of the operating segment information is
as follows:
Rental Telecom Total
---------- ---------- ----------
June 30, 2000
Net revenue $ 626,414 $ 113,474 $ 739,888
Depreciation/amortization 117,474 67,538 185,012
Income (loss)before
extraordinary item (90,193) (1,986,694) (2,076,887)
Assets, net 10,914,469 3,436,806 14,351,275
June 30, 1999
Net revenue 527,189 18,440 545,629
Depreciation/amortization 74,766 23,892 98,658
Loss (344,966) (3,289,293) (3,634,259)
Assets, net 10,770,953 3,140,135 13,911,088
(5) Contingencies
The Company is involved in certain claims arising in the normal course of
business. An estimate of the possible loss resulting from these matters cannot
be made; however, the Company believes that the ultimate resolution of these
matters will not have a material adverse effect on its financial position or
results of operations.
(6) Subsequent Events
On July 3, 2000, the Company hired Pedro D. Sanchez as Chief Technical Officer.
Mr. Sanchez has an extensive background in computer telephony and telco system
design, testing, deployment and management.
For the period July 17, 2000, through August 3, the Company received $1,295,000
in private placement funds as part of the commitment made by the preferred
shareholders to contribute funds on the conversion of the preferred shares into
common shares. A total of 3,169,120 shares were issued at prices ranging from
$0.3125 to $0.5517.
On July 28, 2000, the Company signed a Common Stock Purchase Agreement with a
private equity investor pursuant to an equity line agreement. The private
investor has committed to purchase up to $15 million of the Company's common
stock, subject to the effectiveness of a Registration Statement to be filed with
the Securities Exchange Commission. The issuance of the common stock to be sold
to the private investor under the Common Stock Purchase Agreement will not be
registered under the Securities Act of 1933. However, the Company plans to file
a Registration Statement on Form SB-2 covering the resale of the shares by the
investor. The Company's ability to draw down on the $15 million that the
investor is committing for the purchase of the common stock is conditioned on
the SB-2 being declared effective by the SEC. Draws under the Common Stock
Purchase Agreement may be in increments of up to $1.5 million.
It was announced on August 10, 2000, that the Company's Chairman of the Board,
Mr. Michael Zwebner, had been elected to the Board of Sector Communications,
Inc. Sector Communications, Inc. is listed on the Over the Counter Bulletin
Board under the symbol SECT.
F-32
<PAGE>
================================================================================
56,018,307 SHARES
COMMON STOCK
TALK VISUAL CORPORATION
---------------------------------------------
PRELIMINARY PROSPECTUS
---------------------------------------------
August __, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be incurred and borne by
Talk Visual in connection with the sale of the shares offered hereby. All
amounts shown are estimates, except for the Securities and Exchange Commission
filing fee.
<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission filing fee................................. $ 6,395.40
Legal fees and expenses....................................................... $ 50,000
Accounting fees and expenses.................................................. $ 10,000
Blue Sky fees and expenses.................................................... $
-------------
Miscellaneous................................................................. $
-------------
Total fees and expenses.................................................. $
-------------
</TABLE>
ITEM 25. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the provisions of Article Twelve of the Articles of Incorporation
of the Company, a director or officer of the Company shall not have personal
liability to the Company or to its stockholders for monetary damages for a
breach of his fiduciary duty as a director or officer, except in the case where
the director or officer engaged in intentional misconduct or fraud, knowingly
violated a law, or authorized the payment of dividends in violation of Nevada
corporate law.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued and sold unregistered securities that have not
been previously reported as set forth below. An underwriter was not utilized in
any of these transactions. The recipients of securities in each transaction
represented their intention to acquire the securities without a view to
distribution. All the issued securities were restricted securities under Rule
144, or Reg S regulations, and appropriate restrictive legends were affixed to
the securities in each transaction. Unless otherwise indicated, the securities
were issued in transactions that were exempt from registration under the
Securities Act of 1933 in reliance on Sections 4(2) and 4(6) of the Securities
Act of 1933.
On August 15, 1997 a trust company exchanged 41,348 warrants on the
Company's common stock for $162,500.
On June 23, 1998 a trust company exchanged 19,084 warrants on the
Company's common stock for $75,000.
On June 30, 1998 the Company issued 72,667 shares of common stock in a
private placement of $109,250.
II-1
<PAGE>
On September 14, 1998 the Company issued 400,000 shares of common stock
in a private placement for $200,000.
On September 22, 1998 the Company received stock subscriptions for
2,040,818 shares of common stock in a private placement of $2,000,000. At that
date $100,000 was paid on the subscriptions. Of the remaining $1,900,000 due
under the subscriptions, $1,743,000 was subsequently received in cash funds,
and, the balance of $157,000 was received in other assets.
On October 1, 1998 the Company issued 16,667 shares of common stock for
services.
On December 18, 1998, the Company exchanged 52,051 shares for
marketable securities with a market value of $104,102.
On December 31, 1998, the Company had received $300,000 in cash and an
advance receivable in the amount of $50,000 for 200,000 shares to be issued.
On December 31, 1998, a shareholder and former member of the Board,
agreed to cancel the Company's debt obligation to him of $73,200 in exchange for
28,150 shares of stock to be issued. The debt was cancelled effective December
31, 1998.
On January 19, 1999, the Company issued 175,000 shares of common stock
to an entity for services related to obtaining financing sources. This
transaction was priced at $3.625 per share for a total expense of $634,375.
On January 25, 1999, the Company issued 600,000 shares of common stock
pursuant to the agreement with the parties responsible for the introduction of
Videocall to the Company. This transaction was priced at $3.75 per share for a
total cost of $2,250,000. The Company was also obligated under the agreement to
issue options, exercisable at $0.25 per share, to the same parties.
On January 25, 1999, the Company issued 190,000 shares of common stock
for consulting services at $3.75 per share for a total expense of $712,500.
On February 1, 1999, the Company issued 5,000 shares of common stock
for legal services at $3.25 per share for a total expense of $16,250.
On February 2, 1999, the Company issued 40,000 shares of common stock
for consulting services at $3.25 per share for a total expense of $130,000.
On February 24, 1999, the Company acquired a 22,622 square foot office
facility in Ontario, Canada with the issuance of 975,000 shares of Class A
Preferred Stock, Series 1999-A, $.001 par value, and the assumption of a first
mortgage in the amount of $935,450 along with various minor obligations totaling
$31,293. The preferred shares had a stated value of $975,000 ($1.00 per share),
were non-voting, and paid a cumulative dividend of $0.095 per share.
On March 5, 1999, the Company issued 27,500 shares of common stock in
exchange for $105,000 of notes payable and accrued interest at $3.875 per share.
II-2
<PAGE>
On March 16, 1999, the Company issued 1,128 shares of common stock for
services rendered at $4.00 per share for a total expense of $4,512.
On April 9, 1999, the Company issued 30,000 shares of common stock for
legal services at $3.375 per share for a total expense of $101,250. On that same
date, the Company set aside 200,000 shares in escrow for the former owners of
Sacramento Results, Inc., the subsidiary of Videocall which holds the Town and
Country Plaza real estate. This stock was set aside as collateral for the note
payable from Videocall to the former owners of Sacramento Results, Inc. as part
of the original purchase agreement.
On June 8, 1999, the Company issued 50,000 shares of common stock to
the President of the Company as a bonus. The Company also issued 220,000 shares
in payment for legal services and set aside 20,000 for a consultant, to be
released at a later date. The shares were issued at a price of $2.25, for a
total expense of $652,500.
On June 18, 1999, as a result of the Videocall merger, each share of
Videocall common stock was converted into the right to receive either one share,
three shares, and/or options of Talk Visual common stock or, 19,841,400 shares
and 15,608,477 options in the aggregate. The options are exercisable at $1.00
per share and expire three years from their issue date. The transaction was
valued at $0.275 per share for a total purchase price of $5,462,458. In
connection with the merger, the Company also issued 1,800,000 options, in
addition to the options to the shareholders previously noted, at an exercise
price of $0.25 per share for a three year period, to third parties who were
responsible for the introduction of the Company and Videocall.
On July 16, 1999, the Company issued 4,000,000 shares of common stock
under a private placement subscription dated July 7, 1999. The shares were
issued at a subscribed price of $0.25 per share.
On October 26, 1999, the Company issued 200,000 shares of common stock
to a consultant for services in representing the Company to the investing
community. The shares were issued at a value of $0.0625 for a total value of
$12,500.
On November 4, 1999, the Company satisfied its obligation to a
foreign-based corporation in which the Chairman of the Company is a 33%
shareholder for open invoices in the amount of $130,000, representing consulting
and management services provided by the Chairman, with the issuance of 1,698,014
shares. The value on the date of issue was $.0766 per share.
On November 17, 1999, the Company issued 100,000 shares of common stock
to a consultant for services in representing the Company to the investing public
via the Internet. The shares were issued at $0.7031 for a total value of
$70,310.
On December 23, 1999, the Company issued 18,000 shares to employees and
associates as additional compensation. These shares were valued at $0.4688 per
share, for a total expense of $8,438.
II-3
<PAGE>
On December 30, 1999, the Company issued 150,500 shares in satisfaction
of consulting contract obligations to three consultants for marketing, business
acquisition and computer programming services. Issue prices ranged from $0.4062
to $0.4688 per share for a total expense of $70,523.
During the three months ended March 31, 2000, the Company issued
1,100,000 shares of common stock from the exercise of options and warrants, at
prices ranging from $0.25 to $2.07 per share.
On January 14, 2000, the Company issued 10,000 shares of common stock
to a former employee pursuant to an employment agreement, at a price of $0.4375
per share for a total value of $4,365.
On March 23, 2000, the Company issued 100,000 shares of common stock
along with a payment of $450,000 in exchange for a note payable with an adjusted
book value of $840,997. The price of the common stock on the date of issue was
$2.6865 per share, for a total value of $268,650. The difference of $122,347 is
reflected as extraordinary income.
On March 27, 2000, the Company issued 45,000 shares of common stock for
legal services in the amount of $50,000. At issuance, the stock was priced at
$1.87 per share, which includes a non-marketability discount, for a total
expense of $84,150.
On June 29, 2000, the Company issued 2,250 shares of common stock to an
employee and 155,000 shares to two consultants. The price of the common stock on
the date of issue was $0.4062 per share, for a total expense of $63,875.
On June 29, 2000, the Company exchanged 900,000 stock purchase warrants
in a cashless exchange for 841,935 shares of common stock.
On June 29, 2000, the Company issued 3,412,968 shares of common stock
under a private placement subscription pursuant to the agreement of subscription
on the Series A 1999-A Preferred Share exchange. The shares were issued at a
subscribed price of $0.3516 per share, for a total contribution of $1,200,000.
On July 17, 2000, the Company issued 1,707,433 shares of common stock
under a private placement subscription pursuant to the agreement of subscription
on the Series A 1999-A Preferred Share exchange. The shares were issued at
prices ranging from $0.3125 to $0.5517 per share, for a total contribution of
$650,000.
The Company has received $645,000 on a subscription pursuant to the
agreement of subscription on the Series A 1999-A Preferred Share exchange, for
1,461,687 shares of common stock at prices ranging from $0.3828 to $0.4570 per
share, but has not issued the shares under the subscription as of August 7,
2000.
II-4
<PAGE>
ITEM 27. EXHIBITS.
The following is a list of exhibits filed as a part of this
registration statement:
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
1.1 Common Stock Purchase Agreement dated July
27, 2000 between Registrant and Evertrend
Holdings Limited
1.2 Amendment, dated July 28, 2000, to the
Common Stock Purchase Agreement dated July
27, 2000 between Registrant and Evertrend
Holdings Limited.
3.1 Articles of Incorporation (Incorporated by
reference to Exhibit 3(i) to the
Registrant's Annual Report on Form 10-KSB)
3.2 By-Laws (Incorporated by reference to
Exhibit 3(ii) to Registrant's Annual
Report on Form 10-KSB)
4.1 1995 Stock Option/Stock Issuance Plan
4.2 Stock Purchase Warrant dated July 27,
2000, issued to Evertrend Holdings Limited
4.3 Stock Purchase Warrant dated __________
issued to Evertrend Holdings Limited.
4.4 Stock Purchase Warrant dated July 27,
2000, issued to Ladenburg Thalmann & Co.
Inc.
4.5 $3,840,000 Note dated September 24, 1998
issued by Sacramento Results, Inc. to Bar
K, Inc.
5.1 Opinion of Torys (regarding the validity
of the shares of Common Stock)
10.1 Registration Rights Agreement dated July
27, 2000 between Registrant and Evertrend
Holdings Limited
10.2 Escrow Agreement dated July 27, 2000 among
Registrant, Evertrend Holdings Limited,
and Epstein, Becker & Green, P.C.
10.3 OEM Agreement dated as of February 11,
2000 between the Registrant and Motion
Media Technology Limited
10.4 Joint Venture Agreement dated February
___, 2000 between the Registrant and
EnterTech Media Group
10.5 Lease Agreement dated July 30, 1999
between Lucky Capital, Inc. and Talk
Visual Corporation.
10.6 Lease Agreement dated February 1, 2000
between Lucky Capital, Inc. and Talk
Visual Corporation.
10.7 Agreement dated as of June __, 2000 by and
between Talk Visual Retail Acquisitions,
Inc. and Various Business Management.
10.8 Agreement and Plan of Merger dated as of
September 14, 1998 among the Registrant,
Legacy Software Acquisition, Inc., and
Videocall International Corporation
(incorporated herein by reference to Annex
A to the Proxy
Statement/Prospectus/Notification of
Merger, included in the Registration
Statement on Form S-4 of the Registrant
(File No. 333-79597) declared effective by
the Commission on June 1, 1999)
10.9 Amendment No. 1 to Agreement and Plan of
Merger dated as of December 1, 1998 among
the Registrant, Legacy Software
Acquisition, Inc., and Videocall
International Corporation (incorporated
herein by reference to Annex A to the
Proxy Statement/Prospectus/Notification of
Merger, included in the Registration
Statement on Form S-4 of the Registrant
(File No. 333-79597) declared effective by
the Commission on June 1, 1999)
21.1 Subsidiaries of Talk Visual Corporation
23.1 Consent of Mayer, Ripsler & Company, P.C.,
Independent Auditors
23.2 Consent of Torys (included in Exhibit 5.1)
II-5
<PAGE>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
24.1 Power of Attorney (included on page II-7)
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the
II-6
<PAGE>
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act, Talk Visual
Corporation certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Miami, State of Florida, on August 14, 2000.
TALK VISUAL CORPORATION
By: /s/ Eugene Rosov
-----------------------------------------
Eugene Rosov
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Eugene Rosov, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution in the premises for him and in his name, place
and stead, and in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or any
other Registration Statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite or necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Date Signature/Title
---- ---------------
<S> <C>
Dated: August 14, 2000 /s/ Eugene Rosov
----------------------------------------
Eugene Rosov
President and Chief Executive
Officer (Principal Executive
Officer) and Director
Dated: August 14, 2000 /s/ C. Harold Snyder
----------------------------------------
C. Harold Snyder
II-7
<PAGE>
Principal Financial Officer
and Principal Accounting Officer and
Director
Dated: August 14, 2000 /s/ Michael Zwebner
----------------------------------------
Michael Zwebner
Chairman of the Board and Director
Dated: August 14, 2000 /s/ David B. Hurwitz
----------------------------------------
David B. Hurwitz
Director
Dated: August 14, 2000 /s/ Alexander Walker, Jr.
----------------------------------------
Alexander Walker, Jr.
Director
Dated: August 14, 2000 /s/ Michael Cuzner-Charles
----------------------------------------
Michael Cuzner-Charles
Director
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
-------------- -----------------------
1.1 Common Stock Purchase Agreement dated July
27, 2000 between Registrant and Evertrend
Holdings Limited
1.2 Amendment, dated July 28, 2000, to the
Common Stock Purchase Agreement dated July
27, 2000 between Registrant and Evertrend
Holdings Limited.
3.1 Articles of Incorporation (Incorporated by
reference to Exhibit 3(i) to the
Registrant's Annual Report on Form 10-KSB)
3.2 By-Laws (Incorporated by reference to
Exhibit 3(ii) to Registrant's Annual
Report on Form 10-KSB)
4.1 1995 Stock Option/Stock Issuance Plan
4.2 Stock Purchase Warrant dated July 27,
2000, issued to Evertrend Holdings Limited
4.3 Stock Purchase Warrant dated __________
issued to Evertrend Holdings Limited.
4.4 Stock Purchase Warrant dated July 27,
2000, issued to Ladenburg Thalmann & Co.
Inc.
4.5 $3,840,000 Note dated September 24, 1998
issued by Sacramento Results, Inc. to Bar
K, Inc.
5.1 Opinion of Torys (regarding the validity
of the shares of Common Stock)
10.1 Registration Rights Agreement dated July
27, 2000 between Registrant and Evertrend
Holdings Limited
10.2 Escrow Agreement dated July 27, 2000 among
Registrant, Evertrend Holdings Limited,
and Epstein, Becker & Green, P.C.
10.3 OEM Agreement dated as of February 11,
2000 between the Registrant and Motion
Media Technology Limited
10.4 Joint Venture Agreement dated February
___, 2000 between the Registrant and
EnterTech Media Group
10.5 Lease Agreement dated July 30, 1999
between Lucky Capital, Inc. and Talk
Visual Corporation.
10.6 Lease Agreement dated February 1, 2000
between Lucky Capital, Inc. and Talk
Visual Corporation.
10.7 Agreement dated as of June __, 2000 by and
between Talk Visual Retail Acquisitions,
Inc. and Various Business Management.
10.8 Agreement and Plan of Merger dated as of
September 14, 1998 among the Registrant,
Legacy Software Acquisition, Inc., and
Videocall International Corporation
(incorporated herein by reference to Annex
A to the Proxy
Statement/Prospectus/Notification of
Merger, included in the Registration
Statement on Form S-4 of the Registrant
(File No. 333-79597) declared effective by
the Commission on June 1, 1999)
10.9 Amendment No. 1 to Agreement and Plan of
Merger dated as of December 1, 1998 among
the Registrant, Legacy Software
Acquisition, Inc., and Videocall
International Corporation (incorporated
herein by reference to Annex A to the
Proxy Statement/Prospectus/Notification of
Merger, included in the Registration
Statement on Form S-4 of the Registrant
(File No. 333-79597) declared effective by
the Commission on June 1, 1999)
21.1 Subsidiaries of Talk Visual Corporation
23.1 Consent of Mayer, Ripsler & Company, P.C.,
Independent Auditors
23.2 Consent of Torys (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-7)
