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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB-A3
Third Amended Registration Statement on Form 10-SB-A3
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS
CYBERTEL, COMMUNICATIONS CORP.
------------------------------
(Name of Small Business Issuer as specified in its charter)
NEVADA 86-0862532
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(State or other jurisdiction of (I.R.S. incorporation or
organization) Employer I.D. No.)
4275 Executive Square, Suite 510
La Jolla, California 92037
--------------------------
(Address of Principal Executive Office)
Issuer's Telephone Number, including Area Code: (858) 646-7410
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
$0.001 Par Value Common Voting Stock
------------------------------------
Title of Class
DOCUMENTS INCORPORATED BY REFERENCE: None.
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Item 1. Description of Business.
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Business Development.
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Organization, Charter Amendments and General History
----------------------------------------------------
Organization
------------
Cybertel, Communications Corp., a Nevada corporation (the
"Company"), was organized on June 13, 1996, for the purpose of engaging in any
lawful activity.
At inception, the Company was authorized to issue 20,000,000 shares
of non-assessable common voting stock, par value one mill ($0.001) per share.
In addition, the Company is authorized to issue 5,000,000 shares of preferred
stock having a par value of one mill ($0.001) per share, with such rights and
preferences as the Board of Directors shall determine. As of the date of this
Registration Statement, the Board of Directors has not designated the rights
and preferences of the preferred stock and no shares of preferred stock have
been issued. Copies of the Company's Articles of Incorporation and Bylaws are
attached hereto and incorporated herein by this reference. See Item 15.
Charter Amendments
------------------
The Company has never amended its Articles of Incorporation.
General History
---------------
Until approximately May, 1999, the Company was a development stage
company. Its business plan is to provide long distance voice and data
telecommunications services using the networks and network switching
facilities of Tier I long distance carriers (i.e., providers of communications
transmission services by fiber or wire, with at least $100 million of volume
per year) such as MCI/Worldcomm and Level 3 Communications, as well as its own
IP switching facilities, to provide a broad array of integrated long distance
telecommunications services. The Company plans to use Internet Protocol
("IP") Telephony technology to offer a range of services including basic "1
plus" (i.e., dial "1" then the area code and telephone number of the person
being called) and "800" long distance, frame relay data transmission and
wireless communications services as well as enhanced telecommunications
services such as international callback, prepaid calling cards and Internet
access. Frame relay data transmission refers to the digitization of
information as electronic packets. Wireless communications services include,
for example, satellite and cellular communications.
The Company is a facilities-based provider (i.e., a provider that
owns or leases the property and equipment necessary to provide its services)
of a broad range of integrated communications services. It is building a
regional IP network in the western United States that will interconnect with a
national network, allowing the Company to transport telecommunications
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nationally. Using IP technology, the Company's goal is to enable its customers
to place long distance calls over the Internet through their existing
telephone equipment.
This Registration Statement is being filed on a voluntary basis to
maintain the Company's quotations on the OTC Bulletin Board of the National
Association of Securities Dealers, Inc. (the "NASD"). See the heading
"Effects of Existing or Probable Governmental Regulations," Item I.
NASD OTC Bulletin Board Quotations
----------------------------------
The Company's common stock is quoted on the OTC Bulletin Board of
the National Association of Securities Dealers, Inc. (the "NASD") under the
symbol "CYTP." For information concerning these stock quotations during the
past two years, see the caption "Market Price of and Dividends on the
Company's Common Equity and Other Stockholder Matters," Item 9. The quotations
presented do not represent actual transactions or broker/dealer markups,
markdowns or commissions.
Effective January 4, 1999, the NASD adopted rules and
regulations requiring that prior to any issuer having its securities quoted on
the OTC Bulletin Board of the NASD that such issuer must be a "reporting
issuer" which is required to file reports under Section 13 or 15(d) of the
Securities and Exchange Act of the 1934, as amended (the "1934 Act"). The
Company is not currently a "reporting issuer," and this Registration Statement
will bring the Company into compliance with these listing provision of the OTC
Bulletin Board and should prevent the NASD from "delisting" quotations of the
Company's common stock. Under the "phase-in" schedule of the NASD, the
Company has until November, 1999, within which to become a "reporting issuer"
and to satisfy all comments of the Securities and Exchange Commission with
respect to this Registration Statement.
Changes of Control During the Past Three Years
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There have been no changes in control of the Company since its
inception in June, 1996.
Sales of "Unregistered" and "Restricted" Securities Over the Past Three
Years
-----
For information concerning sales of "unregistered" and "restricted"
securities during the past three years, see the caption " Recent Sales of
Unregistered Securities," Item 10.
Business.
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The Company provides long distance voice and data telecommunications
services. It utilizes the network switching and transport facilities of Tier I
long distance carriers, such as TeleHub Network Services Corporation; Level 3
Communications; and Bell Atlantic Network Services, Inc., to provide a broad
array of integrated long distance telecommunications services such as long
distance, calling cards, paging and wireless communications on a seamless and
highly reliable basis. A non-facilities based carrier provides long distance
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services without the use of its own preferred interexchange carrier code
(i.e., a code that allows a customer to dial "1" to access its Primary
Interexchange Carrier, or "PIC"). A "reseller" places its customers' calls
through a facilities based carrier and that carrier bills and collects from
the end-user customers. Facilities-based carriers have the advantage of lower
long-term costs because they do not lease their networks from another carrier
and are not subject to pricing policies of other carriers; the disadvantage is
that initial capital investments are higher.
The Company's service offerings include basic "1 plus" and "800"
long distance, frame relay data transmission, Internet telephony and wireless
communications services, as well as enhanced telecommunications services such
as prepaid calling cards and Internet access.
In addition, the Company is developing a regional internet protocol
network in the western United States that will connect with a national
network, allowing the Company to transport telecommunications nationally. To
reach this goal, management plans to purchase equipment and lease facilities
and other assets. The Company is arranging financing for this purpose. See
the caption "Management's Discussion and Analysis or Plan of Operation" of
this Registration Statement.
Risk Factors
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Limited Operating History.
--------------------------
The Company was incorporated in June, 1996 for the purpose of
engaging in any lawful activity. The Company's plan of operations calls for
it to create an international, facilities-based communications network.
However, the Company is still in a formative stage. Potential investors
should be aware of the difficulties normally encountered by a new enterprise
in a highly competitive industry. There is limited evidence at this time upon
which to base an assumption that the Company's business plans will prove
successful or that its products and services will be successfully marketed.
As a consequence, there is no assurance that the Company will be able to
operate profitably in the future.
Operating Results of the Company.
---------------------------------
The Company is still a development stage company and has not yet
earned an annual profit. The gross revenues and net losses of the Company for
the three calendar years ended December 31, 1998, are shown below:
Year ended Gross Net
December 31, Revenues Loss
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1996 -0- $ 33,300
1997 $25,962 $ 72,405
1998 $16,004 $730,241
The Company's accumulated deficit as of June 30, 1999, was
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($1,952,611). No assurance can be given that the Company will not continue to
report losses on an annual basis or that the Company's business operations
will ultimately prove to be profitable.
Any substantial downturn in economic conditions or any significant
price decreases related to the telecommunications industry could have a
material adverse effect on the Company's business. Economic conditions such
as inflation may also affect the future availability of attractive financing
rates for the Company or its customers and may materially adversely affect the
Company's business. Deflation may also affect the Company's income derived
from telecommunications to the extent that the Company's costs of providing
services increase from the time that the services are sold until the time that
they provided and the Company must adjust its rates.
Dependence Upon Additional Financing.
-------------------------------------
The Company's proposed business operations will depend upon its ability to
raise substantial additional financing. It has negotiated equity lines of
credit totaling $30 million with three entities (Swartz Private Equity, LLC;
Oxford International; and Capital Growth Planning), and loans with Braveheart,
Inc. and Capital Growth Planning, but has not finalized any of these lines of
credit. Failure to achieve sufficient financing will significantly delay or
destroy the Company's ability to build its IP network and commence direct
marketing operations. The lines of credit provide for the Company to issue
shares of "unregistered" and "restricted" stock at 91% of the market price for
such stock. The issuance of such shares may have a dilutive effect on the
holdings of existing stockholders.
Highly Competitive Industry.
----------------------------
The Company will be operating in a highly competitive industry; most
of its competitors have significantly greater experience in the industry and
substantially more assets and customers than the Company. There can be no
assurance that the Company will be able to compete successfully in the
telecommunications industry. See the caption "Competitive Business
Conditions" of this Registration Statement.
Reliance on Existing Management.
--------------------------------
The Company's operations are primarily dependent upon the experience
and expertise of Richard Mangiarelli (Chief Executive Officer, President and
director) and Paul Mills (Chairman of the Board and Secretary). The loss of
either Mr. Mangiarelli or Mr. Mills may have a material adverse effect on the
Company's business. As of the date of this Registration Statement, neither
Mr. Mangiarelli nor Mr. Mills has entered into any covenant not to compete
with the Company.
The Company's success is also dependent on its ability to attract
and retain qualified management, administrative and sales personnel to support
its anticipated future growth, of which there can be no assurance. The
Company does not carry key man insurance upon the lives of any of its
officers. It has entered into employment contracts with Mr. Mangiarelli and
with James D. Boring, its Senior Vice President of Operations.
As disclosed under the caption "Changes in Control" of this
Registration Statement, Mr. Mangiarelli's shares of the Company's common stock
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are subject to an Order requiring their delivery to the Marshal of the County
of San Diego for potential satisfaction of a judgment in favor of a creditor.
Mr. Mangiarelli intends to vigorously contest this matter. However, the
transfer of title to the shares of Company stock beneficially owned by Mr.
Mangiarelli could effect a change in control of the Company. If such were the
case, Mr. Mangiarelli would continue in his current capacities as a director
and executive officer of the Company. See the caption "Changes in Control" of
this Registration Statement.
Rapid Technological Change.
---------------------------
The telecommunications industry is characterized by rapidly evolving
technology. The Company believes that its success will increasingly depend on
its ability to offer, on a timely basis, new services based on evolving
technologies and industry standards. The Company intends to develop new
services; however, there can be no assurance that the Company will have the
ability or resources to develop such new services, that new technologies
required for such services will be available to the Company on favorable terms
or that such services and technologies will enjoy market acceptance. Further,
there can be no assurance that the Company's competitors will not develop
products or services that are technologically superior to those expected to be
used by the Company or that achieve greater market acceptance. The development
of any such superior technology by the Company's competitors or the inability
of the Company to successfully respond to such a development, could render the
Company's existing products or services obsolete and could have a material
adverse effect on the Company's business, financial condition and results of
operations. The lack of capital resources could materially affect the
Company's ability to respond to technological changes.
Lack of Dividends.
------------------
The Company has never paid, and does not plan to pay in the
foreseeable future, any cash dividends with respect to its common stock.
Shares Eligible for Future Sales.
---------------------------------
Of the 3,408,909 currently issued and outstanding shares of the
Company's common stock, 1,131,209 are freely tradeable, and 2,277,700 are
unregistered securities and therefore restricted from resale other than by way
of a transaction complying with the provisions of Rule 144, adopted under the
Securities Act of 1933, as amended, or some other exemption from registration.
Of the 2,277,700 "unregistered" and "restricted" securities, 1,889,200 have
been held for over one year and are eligible for resale upon compliance with
the provisions of Rule 144.
Rule 144 provides, among other things, that if certain information
concerning the operating and financial affairs of the Company is publicly
available, persons who have held restricted securities for a period of one
year thereafter may sell in each subsequent three month period up to that
number of such shares equal to the greater of 1% of the Company's outstanding
common stock or the average weekly reported volume of common stock trading
during the four calendar weeks preceding the filing of a notice of proposed
sale. Pursuant to Rule 144(k), unlimited sales of such restricted stock by
non-affiliates may be effected following a two year holding period, without
regard to the other Rule 144 requirements. Approximately 83% of the Company's
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"restricted" shares are currently eligible for resale upon compliance with the
requirements of Rule 144. Future sales of this large number of shares under
Rule 144 could depress the current market price of the common stock and any
market which may develop in the near future. For a discussion of the
Company's securities that have been issued without registration, see the
caption "Recent Sales of Unregistered Securities" of this Registration
Statement.
Conflicts of Interest.
----------------------
Although they have no present plans to do so, the Company's
directors and officers may become officer, directors, controlling shareholders
and/or partners of other entities engaged in a variety of businesses. Thus,
there exist potential conflicts of interest including, among other things,
time, effort and corporate opportunity, involved in participation with such
other business entities.
No Assurance of Continued Public Market for the Company's
Securities.
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There is currently a public market for the Company's common
stock; however, there can be no assurance such a market will continue. This is
because in January, 1999, the NASD promulgated a requirement that all issuers
whose securities are quoted on the OTC Bulletin Board must have such
securities registered under Section 12 of the 1934 Act and that the
registration statement providing such registration must not be subject to
Securities and Exchange Commission comment by a "phase-in" date based on the
issuer's trading symbol on the OTC Bulletin Board. Under this provision, this
Registration Statement must have reached the "no comment" stage of Securities
and Exchange Commission review before November 3, 1999. The Company can make
no assurance that it will be able to meet this deadline. Purchasers of the
Company's securities may, therefore, have difficulty in selling such
securities should they desire to do so.
Market Value of Common Stock.
-----------------------------
There is no correlation between the market price of the Company's
common stock and its book value. As of December 31, 1998, the net book value
of a share of the Company's common stock was $0.03, whereas the average
closing bid price of a share of common stock during the quarterly period ended
on such date was $1.50 per share, and does not necessarily bear any
relationship to the Company's asset value, net worth or other established
criteria of value and should not be considered indicative of the actual value
of the Company or the market price of the common stock.
Based on this "book value" determination of the value of the Company's common
stock, it is highly overvalued and there can be no assurance that present or
future stockholders will be able to resell their shares at a profit.
Risks of "Penny Stock."
-----------------------
The Company's common stock may be deemed to be "penny stock" as
that term is defined in Reg. Section 240.3a51-1 of the Securities and Exchange
Commission. Penny stocks are stocks (i) with a price of less than five
dollars per share; (ii) that are not traded on a "recognized" national
exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation
system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv)
in issuers with net tangible assets less than $2,000,000 (if the issuer has
been in continuous operation for at least three years) or $5,000,000 (if in
continuous operation for less than three years), or with average revenues of
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less than $6,000,000 for the last three years.
Subject to compliance with applicable listing standards, the Company
plans to attempt to qualify for listing on NASDAQ. However, its common stock
is currently traded on the OTC Bulletin Board of the NASD.
Section 15(g) of the 1934 Act, as amended, and Reg. Section
240.15g-2 of the Securities and Exchange Commission require broker-dealers
dealing in penny stocks to provide potential investors with a document
disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction in
a penny stock for the investor's account. Potential investors in the
Company's common stock are urged to obtain and read such disclosure carefully
before purchasing any shares that are deemed to be "penny stock."
Moreover, Reg. Section 240.15g-9 of the Securities and Exchange
Commission requires broker-dealers in penny stocks to approve the account of
any investor for transactions in such stocks before selling any penny stock to
that investor. This procedure requires the broker-dealer to (i) obtain from
the investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor
and that the investor has sufficient knowledge and experience as to be
reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it
more difficult for investors in the Company's common stock to resell their
shares to third parties or to otherwise dispose of them.
Risks Associated with Execution of Growth Strategy.
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A principal component of the Company's growth strategy is to build a
regional telecommunications network in the western United States. The
Company's ability to execute its growth strategy depends on a number of
factors including (i) the availability of attractive opportunities; (ii) the
Company's ability to acquire service relating to such opportunities on
economically feasible terms; (iii) the Company's ability to obtain the capital
necessary to finance the acquisition of facilities, as well as to cover any
necessary sales, marketing and operation expenditures; (iv) the Company's
ability to market and sell services; and (v) the Company's ability to manage
rapidly growing operations effectively and in a manner which results in
significant customer satisfaction. There can be no assurance that the Company
will be successful with respect to any or all of these factors.
Principal Products and Services
--------------------------------
Long Distance Service
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The Company intends to offer basic "1 plus" and "800" long distance
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services. Management believes it will be successful as a provider of these
basic services because of the volume discounts it has been able to negotiate
with underlying carriers and its ability to direct customer call traffic over
the transmission networks of more than one carrier. The Company has negotiated
pricing ranging from $0.049 to $0.056 per minute for switchless services, and
ranging from $0.041 to $0.044 with guarantees to the carriers of certain
minimum monthly volume. If these minimum volumes are not met, the Company
will still be responsible for paying for them. As the Company expands its
network of switching facilities, it will increasingly have the ability to
choose among the transmission networks of different carriers to take advantage
of the most favorable rates to different destinations at different times of
the day.
The per minute cost to the Company from underlying carriers is a
function of negotiating the best rates with the carriers. Volume and "ramp up"
periods affect cost. If the Company is able to project substantial volumes at
some point in the mid-term future, underlying carriers are willing to
negotiate a better rate. The Company has no way to gauge what underlying
carriers charge to others, as that is not public information. However
management knows that the Company's charges to its customers are very
competitive in comparison to other carriers. As an example, a customer using
200 minutes per month and subscribing to AT&T's 7 cent per minute anytime plan
would pay $19.95 when AT&T's $5.95 monthly recurring charge is added. A
Company customer using the same 200 minutes would pay $19.80 at the Company's
9.9 cent per minute rate.
Initially, the Company will charge its customers on the basis of
minutes or partial minutes of usage at rates which may vary with the distance,
duration, time of day of the call and the type of call. Rates charged for a
call are not affected by the particular transmission facilities selected for
call transmission but are affected by the type of call a user may select.
The Company has contracted with Tritel Communications, LLC, of Irving, Texas,
for the performance of billing services. The agreement is for a term of three
years and provides for Tritel to process the Company's calling records on a
weekly basis. The agreement also provides for a one-time setup cost of
$3,000, with a monthly processing charge of $675 plus $0.005 per calling
record processed and payment of a monthly telecommunications excise tax of
$825. Tritel will also print and mail invoices for the Company at a rate of
$1.00 per invoice per month. The minimum monthly payment for Tritel's
services will be $1,500. Any custom programming that the Company requires
will be billed at $100 per hour.
On August 4, 1999, the Company entered into a letter of intent with
Telenomics, Inc., a California corporation, and the holders of all of
Telenomics' outstanding common stock, by which the Company agreed to acquire
all of such shares in exchange for a number of shares to be determined by
dividing $3,000,000 by the closing "asked" price for the Company's shares on
the date of closing of the acquisition. At closing, the Company is to provide
Telenomics with a loan of $250,000, to be repaid within 12 months. Telenomics
is a provider of telephone accounting and management software. If the
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acquisition closes, the Company will use Telenomics to develop its own billing
system. However, the parties have not entered into any definitive, binding
acquisition agreement and there can be no assurance that any such agreement
will be reached or that any completed acquisition will be successful.
In the near future, the Company hopes to provide its customers a
flat rate long distance calling service throughout the United States. Billing
will occur in six-second increments.
Debit and Prepaid Calling Cards
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The Company offers travel and debit cards with low long distance
rates through either per unit fees or through monthly billing of the end user
subscriber. These cards are utilized in the exact same manner as other
calling cards and there are no "ease of use" disadvantages versus traditional
calling cards. Besides relatively large savings for out of country and
foreign travelers, larger corporations, whose executives and sales personnel
routinely use calling cards, are now pricing these cards at attractively low
prices. The absences of transaction fees per call as well as lower per minute
charges make these cards extremely attractive to both large and smaller users.
Prepaid calling cards offer an additional advantage to the subscriber in that
they limit the liability for lost, stolen or employee abused cards, since the
minutes are preset and added to each card in limited quantities at the
direction of the subscriber. The Company began receiving revenues from these
cards in August, 1999. As of the date of this Registration Statement, the
Company has received total revenues of $1363.25 from this source.
Internet Access
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This product is the newest and fastest growing to telecommunications
providers in general. The Company packages a service which includes domain
registration and services (e.g. design, placement, advertising), Web sites,
monthly access to the Internet for dial-up and dedicated (i.e.,
telecommunications lines reserved for use by particular customers) usage, and
a discounted 800 service to respond and/or reply to the customers' eventual
order flow. It is expected that this package will include E-mail, Web
browser, Internet dialer, and search engines, all priced substantially below
representative major carrier providers for software and initial access. The
Company's pricing for these services will be $16.50 per month as compared to
monthly rates for America Online and other internet service providers ranging
from $19.95 to $21.95 per month. The bundling of these services will provide
a "one-stop" arrangement for the small and middle size business subscriber.
Since many small businesses do not employ computer/software specialists to
serve their systems needs, and are owned or managed by individuals who are
themselves "Internet-deficient", a one-stop approach provides the Company with
easy access to a steadily expanding demand in the marketplace. Management
expects to begin receiving revenues from this service in the fourth quarter of
the 1999 fiscal year.
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Recent Public Announcements
---------------------------
On July 7, 1999, the Company publicly announced that it has signed a
contract with Bell Atlantic Corporation giving the Company the right to
terminate IP long distance and data traffic on Bell Atlantic's network. This
strategic alliance will allow the Company to deliver IP telephony calls
originating outside of Bell Atlantic's region through the Public Service
Telephone Network ("PSTN") 24 hours per day, seven days per week, on Bell
Atlantic's Termination Gateways. The agreement also allows the Company to
sell wholesale termination on Bell Atlantic's lines to third parties and will
make it possible for the Company's calls from anywhere in the world to be
delivered to the Northeast Corridor of the United States via Bell Atlantic's
IP telephony network.
The Company's agreement with Bell Atlantic provides for the Company
to pay Bell Atlantic a rate based on the number of minutes that Bell
Atlantic's Termination Gateways are being used, with a minimum monthly payment
of $4,800. The term of the agreement is one year, with automatic yearly
renewals until either party gives the other notice of non-renewal at least 90
days before the expiration of the current term. See the Exhibit Index, Item
15 of this Registration Statement.
Distribution Methods of the Products or Services
------------------------------------------------
Affinity Groups
- ---------------
The Company is expanding the reseller concept (i.e., transporting
data through a facilities based carrier that bills and collects from the
end-user customers) by targeting its products to specific niche markets. This
entails marketing to large associations whose members form a loyal base and
have an inherent allegiance to their organization and wish to support it
financially. The Company offers these associations discounted long distance
services at wholesale prices, 20-60% below AT&T, MCI/WorldCom and Sprint, and
a portion of the long distance charges will go to the subscribers'
organization (professional associations, alumni associations, etc.) when they
pay their monthly bill. The long distance services are solicited by and
through the subscriber's organization and packaged by Cybertel.
The above strategy should allow the Company to introduce and sell
its services to many more users than it could contact directly, or obtain
through advertising. The sponsoring group has a vested interest in obtaining
all telecommunications business from its affiliated members as it stands to
gain substantial commission dollars, once volume levels are realized. This
strategy also applies to fund raisers and promotional events. The
personalized prepaid calling card also functions as an excellent perceived
benefit or promotion for the sponsoring entity.
Management hopes to increase market share in each market segment of
the Company's business through a combination of direct sales efforts targeted
to corporate and individual clients and through acquisition of strategic
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competitive firms providing value-added services to the core businesses of the
Company. Marketing public relations tactics will be employed not only to
conserve resources, but to increase credibility and visibility in the targeted
marketplace. Tactics to be used include editorial coverage in industry
specific media along with general interest publications.
Other marketing opportunities include: industry trade shows,
membership in professional and business organizations, cross promotional
events, direct mail/lead generated, promotional literature, direct sales and
in-house telemarketing. The Company intends to retain and hire sales and
marketing staff who demonstrably posses the ability to achieve sales levels
that the Company has established. This staff will predominantly include those
who have specific industry experience and maintain existing customer bases
from which to generate above average sales levels. Each market will
be driven by a strong direct response campaign using value-based pricing
(i.e., quality service at a low price) and superior customer service as the
cornerstone in establishing and maintaining customer loyalty. The Company's
customer service representatives are trained to be courteous and helpful and
to realize that customers who call are usually having a problem and are
frustrated. The Company's customer service representatives are able to access
a customer's account instantaneously and bring up the type of information that
will allow them to solve the customer's problem.
To date, the Company has marketed its products primarily through
Affinity Groups. The Company intends to finance its marketing activities in
the short term through equity financing that it is currently pursuing and in
the long term through cash flow and profits.
Internet Protocol Network
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The Company is building a regional telecommunications network in the
western United States. The Company plans to build local networks in cities in
11 western states that will interconnect with a national long distance
network. The Company will focus primarily on the residential market in order
to compliment its Affinity Group Marketing Programs. The Internet Protocol
("IP") based network will provide a full range of communications services
including long distance and data transmission as well as other enhanced
services to the domestic and international markets. Additionally, the Company
will offer a range of Internet access services at varying capacity levels
(e.g., 56 or 395 kilobits per second), and as technology development allows,
at specified levels of quality of service and security to meet the needs of
its residential and business customers. The Company established its first IP
Gateway, which digitizes a communications signal and transports it over the
internet, in San Diego, California, in June, 1999.
The Company has shaped its strategy to build an IP-based network
because of a fundamental shift that is occurring in the communications
industry. Management believes that this shift is as important as that from
the telegraph to the telephone or from mainframe to personal computers. It is
a shift that the Company believes will change the way people communicate.
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The change is a move from the traditional "circuit switched"
networks that were designed primarily for voice communications, and which have
existed form almost a century, to newer "packet switched" networks using IP.
The new technology makes it possible to move information at a much lower cost,
because packet switching technology makes more efficient use of the network
capacity.
The internet is a worldwide communications network of interconnected
computers that share information, generally over high-bandwidth fiber optic
cables. Information that moves over the internet is broken down into pieces
known as "packets." Each packet is coded with address information for
delivery to the proper destination, sent through the internet and reassembled
into its original form so the recipient can use the information upon delivery.
This process is made possible using two important internet communications
protocols: Transmission Control Protocol ("TCP"); and Internet Protocol
("IP"). TCP divides and reassembles the packets. IP ensures that the packets
reach the correct destination.
By contrast, the basic design of the telephone network has not
changed for more than 100 years. The telephone system is a circuit-switched
network. This technology dedicates a fixed amount of capacity (i.e., a
circuit) for the entire duration of the transmission. As a result, a
telephone line ties up an entire circuit for the duration of a call.
In an IP network there is no single, unbroken connection between
sender and receiver. When information is sent, it is broken into small
packets that share lines with other transmissions, over many different routes
at the same time, which are then reassembled at the receiving end. The result
is that the internet is much more efficient than the present circuit-switched
network. By way of analogy, a call on a circuit-switched network is like a
single car taking up an entire stretch of freeway by itself, while an IP
network can fill all lanes of the freeway with hundreds of vehicles, all
destined for different exits.
Major communications carriers would like to add IP-based switching
technology to portions of their networks, but because of the immense
investment that these companies have already made in their existing networks,
they continue to retain extensive networks based on the older and less
efficient circuit switching technology. The Company believes it is well
positioned for the fundamental shift to the new technology because the company
has no investment in, or commitment to, the older technology. Equally
important, the Company plans to design the network to be upgradeable, so that
it can evolve as the technology evolves.
In March, 1999, the Company signed a service agreement with General
Telecom, Inc., a Massachusetts corporation, which allows the Company to use
General Telecom's telecommunications equipment for a one-year term, which is
renewable for five additional one-year periods. The Company's fees will be
based on usage volume and line types, with a minimum monthly payment of $6,500
per month.
The Company executed an agreement with Level 3 Communications on
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<PAGE>
March 12, 1999. Under the agreement, Level 3 agreed to allow the Company to
"co-locate" its internet access equipment and switches in Level 3's switching
centers in all 50 states and use Level 3's state of the art fiber optic
network. This allows the Company to place its telecommunications equipment in
Level 3's co-location cabinets and send voice and data traffic over the
Internet without having to build a fiber optic network of its own. This will
result in substantial cost savings to the Company. The agreement with Level 3
is for a term of three years; the Company pays a flat rate of $2,800 per
month. See the Exhibit Index, Item 15 of this Registration Statement.
On June 28, 1999, the Company and TeleHub Network Services
Corporation, an Illinois corporation ("TeleHub"), entered into a
Telecommunications Service Agreement and a Supplemental Service Agreement
under which TeleHub agreed to provide certain telecommunications services for
the Company to resell. These services include switched domestic and
international outbound long distance telephone service; switched toll-free
service; calling cards; and dedicated outbound and toll-free service. The
per-minute rates for these services vary by geographic area and are set forth
in an attachment to the Supplemental Service Agreement. Charges to the
Company are due and payable within 30 days of the date of invoice. A late
charge of 1-1/2% (or the maximum legal rate, if less) shall apply to any
unpaid balance. TeleHub may also suspend or terminate the service or require
additional security deposits if the Company does not make payments when due.
See the Exhibit Index, Item 15 of this Registration Statement.
The Company has also entered into a contract with Bell Atlantic
Corporation giving the Company the right to terminate IP long distance and
data traffic on Bell Atlantic's network. This strategic alliance will allow
the Company to deliver IP telephony calls originating outside of Bell
Atlantic's region through the Public Service Telephone Network ("PSTN") 24
hours per day, seven days per week, on Bell Atlantic's Termination Gateways.
The agreement also allows the Company to sell wholesale termination on Bell
Atlantic's lines to third parties and will make it possible for the Company's
calls from anywhere in the world to be delivered to the Northeast Corridor of
the United States via Bell Atlantic's IP telephony network. The Company is to
pay all charges within 30 days of Bell Atlantic's invoice, with interest at a
rate of 1.25% per month on all overdue balances. Bell Atlantic also reserves
the right to terminate service, upon seven days' notice, if the Company
becomes more than 30 days delinquent in its account. See the Exhibit Index,
Item 15 of this Registration Statement.
Acquisition Strategy
- --------------------
One of the Company's primary goals is to become a one-stop service
provider for a variety of services. Management believes this can be
established through an acquisition strategy which is intended to (i) enhance
Company's sales force capability, (ii) broaden its service offerings, and
(iii) increase its customer base and revenue.
As discussed in more detail under the heading "Long Distance
Service," the Company has executed a letter of intent with Telenomics, Inc.,
and the holders of all of Telenomics' outstanding shares, whereby the Company
agreed to acquire all of such shares in exchange for shares of the Company's
common stock. However, there can be no assurance that any definitive
acquisition agreement will be reached or that the Company will be able to
identify any other attractive acquisition candidates in the future, that
acquisitions pursued by the Company will be completed, or that, if completed,
such acquisitions will be beneficial to the Company.
14
<PAGE>
Competitive Business Conditions
-------------------------------
The communications and information services industry is highly
competitive. Many of the Company's existing and potential competitors have
financial, personnel, marketing and other resources significantly greater than
those of the Company, as well as other competitive advantages including
customer bases.
The Company is subject to significant competition from other
entities engaged in the telecommunications industry. The Company's principal
competitors include Level 3, IDT, Delta 3 and USA Talks, of which the first
three are national and the last is regional. All of these entities possess
significantly greater financial, sales and marketing, personnel and other
resources than those of the Company and may be able to grow at a more rapid
rate or more profitably as a result. Management of the Company believes that
industry competition will be increased by recent and possibly future
consolidation in the telecommunications industry.
The long distance telecommunications industry is significantly
influenced by the marketing and pricing activities of the major industry
participants, including AT&T, MCI/WorldCom, and Sprint. While the Company
believes that AT&T, MCI/WorldCom and Sprint historically have chosen not to
concentrate their direct sales efforts on small to medium sized businesses,
these carriers control approximately 85% of that market. Moreover, AT&T,
MCI/WorldCom and Sprint have recently introduced new service and pricing
options that are attractive to smaller commercial users, and there can be no
assurance that they will not market to these customers more aggressively in
the future. AT&T and, as an interim measure, the structurally separate
interexchange affiliates of the seven regional Bell operating companies
("RBOCs") have recently been reclassified as non dominant carriers and,
accordingly, have the same flexibility as the Company in meeting competition
by modifying rates and service offerings without pricing constraints or
extended waiting periods. These reclassifications may make it more difficult
for the Company to compete for long distance customers. In addition, a
significant number of large regional long distance carriers and new entrants
in the industry compete directly with the Company by concentrating their
marketing and direct sales efforts on small to medium
sized commercial users. Activities by competitors include, among other
things, national advertising campaigns, telemarketing programs and the use of
cash to contribute to significant customer attrition in the long distance
industry.
The Company will contract for call transmission over networks
operated by suppliers who may also be the Company's competitors. Both the
interexchange carriers ("IXCs", i.e., telecommunications companies that
provide telecommunications services between local exchanges on an interstate
or intrastate basis) and local exchange carriers ("LECs", i.e.,
telecommunications companies that provide telecommunications services in a
geographic area in which calls generally are transmitted without toll charges)
that will be providing transmission services for the Company have access to
15
<PAGE>
information concerning the Company's customers for which they provide the
actual call transmission. Because these IXCs and LECs are potential
competitors of the Company, they could use information about the Company's
customers, such as their calling volume and patterns of use, to their
advantage in attempts to gain such customers' business. The
Telecommunications Act, which became law in 1996, has strengthened the rules
which govern the privacy of customer proprietary information by expressly
prohibiting telecommunications carriers which receive proprietary information
from resale carriers for purposes of providing telecommunications services to
those resale carriers from using such information for their own marketing
purposes. In addition, the Company's future success will depend, in part, on
its ability to continue to buy transmission services and access from these
carriers at a significant discount below the rates these carriers otherwise
make available to the Company's targeted customers.
Regulatory trends have had, and may have in the future, a
significant impact on competition in the telecommunications industry. As a
result of the recently enacted Telecommunications Act, the RBOCs are now
permitted to provide, and are providing or have announced their intention to
provide, long distance service originating (or in the case of "800" service,
terminating) outside their local service areas or offered in conjunction with
other ancillary services, including wireless services. Following application
to and upon a finding by the Federal Communications Commission (the "FCC")
that an RBOC faces facilities based competition and has satisfied a
congressionally mandated "competitive checklist" of interconnection and access
obligations, an RBOC can provide long distance service within its local
service area. The entry of these well-capitalized and well known entities
into the long distance service market could significantly alter the
competitive environment in which the Company operates.
The Telecommunications Act also removes all legal barriers to
competitive entry into the local telecommunications market and directs
incumbent local exchange carriers ("ILECs", i.e., companies historically
providing local telephone service) to allow competing telecommunications
service providers (of which the Company will be one) to interconnect their
facilities with the local exchange network, to acquire network components on
an unbundled basis and to resell local telecommunications services. Moreover,
the Telecommunications Act seeks to facilitate the development of local
telecommunications competition by requiring ILECs, among other things, to
allow end users to retain their telephone numbers when changing service
providers and to place short haul toll calls without dialing lengthy access
codes. In response to these regulatory changes, MCI/WorldCom and AT&T have
each announced their intention to enter the local telecommunication market,
including MCI/WorldCom's announcement that it will invest more than $2.0
billion in fiber optic rings and local switching equipment in major
metropolitan markets throughout the United States, and AT&T's announcement
that it filed applications in all 50 states to provide local
telecommunications services.
While the Telecommunications Act opens new markets to the Company,
the nature and value of the resultant business opportunities will be dependent
16
<PAGE>
in large part upon subsequent regulatory interpretation of the statute's
requirements. The FCC has recently promulgated rules implementing the local
competition provisions of the Telecommunications Act; each state must now
individually adopt regulations applying the new national guidelines. The
Company anticipates that ILECs will actively resist competitive entry into the
local telecommunications market and will seek to undermine the operations and
the service offerings of competitive providers, leaving carriers such as the
Company which are dependent on ILECs for network services vulnerable to anti
competitive abuses. No assurance can be given that the local competition
provisions of the Telecommunications Act will be implemented and enforced by
federal and state regulators in a manner which will permit the Company to
successfully compete in the local telecommunications market or that subsequent
legislative and/or judicial actions will not adversely impact the Company's
ability to do so. Moreover, federal and state regulators are likely to
provide ILECs with increased pricing flexibility for their services as
competition in the local market increases. If ILECs are allowed by regulators
to lower their rates substantially, engage in excessive volume and term
discount pricing practices for their customers, charge excessive fees for
network interconnection or access to unbundled network elements, or decline to
make services available for resale at wholesale rates, the ability of the
Company to compete in the provision of local service could be materially and
adversely affected.
Telecommunications Act
- ----------------------
On February 8, 1996, Congress enacted the Telecommunications Act,
which effected a sweeping overhaul of the Communications Act of 1934 (the
"Communications Act"). In particular, the Telecommunications Act
substantially governs telecommunications common carriers. The
Telecommunications Act was intended by Congress to open telephone exchange
service markets to full competition, to promote competitive development of new
service offerings, to expand public availability of telecommunications
services and to streamline regulation of the industry. The Telecommunications
Act makes all state and local barriers to competition unlawful, prohibits
state and local governments from enforcing any law, rule or legal requirement
that prohibits or has the effect of prohibiting any person from providing
interstate or intrastate telecommunications services and directs the FCC to
conduct rulemaking proceedings on local competition and other related matters.
Implementation of the provisions of the Telecommunications Act will
be the task of the FCC, the state public utility commissions and a joint
federal/state board. Much of the implementation of the Telecommunications Act
must be completed in numerous rulemaking proceedings with short statutory
deadlines. These proceedings are expected to address issues and proposals
already before the FCC in pending rulemaking proceedings affecting the long
distance industry as well as additional areas of telecommunications regulation
not previously addressed by the FCC and the states. States retain
jurisdiction under the Telecommunications Act to adopt laws necessary to
preserve universal service, protect public safety and welfare, ensure the
continued quality of telecommunications services and safeguard the rights of
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<PAGE>
consumers.
Some specific provisions of the Telecommunications Act which are
expected to affect long distance service providers are summarized below:
Expanded Interconnection Obligations. The Telecommunications Act
establishes a general duty of all telecommunications carriers to interconnect
with other carriers, directly or indirectly. The Telecommunications Act also
contains a detailed list of requirements with respect to interconnection
obligations, including resale, number portability, dialing parity, access to
rights of way and reciprocal compensation.
ILECs have additional obligations including: to negotiate in good
faith; to provide for network interconnection at any technically feasible
point on terms that are reasonable and non discriminatory; to provide non
discriminatory access to facilities, equipment, features, functions and
capabilities on an unbundled basis; to offer for resale at wholesale rates any
service that ILECs provide on a retail basis; and to provide actual
collocation of equipment necessary for interconnection or access. Collocation
refers to the physical location of a telecommunication carrier's equipment in
a local exchange carrier's premises to facilitate the interconnection of their
switching routing equipment.
The Telecommunications Act establishes a framework for state
commissions to mediate and arbitrate negotiations between ILECs and carriers
requesting interconnection services or network elements. The
Telecommunications Act establishes deadlines, policy guidelines for state
commission decision making and federal preemption in the event a state
commission fails to act. While the FCC has recently promulgated rules
implementing these provisions of the Telecommunications Act, the impact of
these rules on the Company cannot be determined at this time.
Provision of Interexchange Services.The Telecommunications Act
eliminates the previous prohibition on RBOC provision of interexchange
services originating (or in the case of "800" service, terminating) outside
their local service areas and all interexchange services associated with the
provision of most commercial mobile wireless services, including services
originating within their local service areas.
In addition, the Telecommunications Act allows RBOCs to provide
landline interexchange services in the states in which they provide landline
local exchange service; provided, however, that before engaging in landline
long distance services in a state in which it provides landline local exchange
service, an RBOC must (i) provide access and interconnection to one or more
unaffiliated competing facilities based providers of telephone exchange
service, unless after 10 months after enactment of the Telecommunications Act
no such competing provider has requested such access and interconnection more
than three months before the RBOC has applied for authority and (ii)
demonstrate to the FCC its satisfaction of the Telecommunications Act's
"competitive checklist."
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<PAGE>
The specific interconnection requirements contained in the
"competitive checklist" include network interconnection and unbundled access
to network elements, including local loops, switching and transport; access to
poles, ducts, conduits and rights of way owned or controlled by them; access
to emergency 911, directory assistance, operator call completion and white
pages; access to telephone numbers, databases and signaling for call routing
and completion; availability of number portability; local dialing parity;
reciprocal compensation arrangements; and resale opportunities.
Review of Universal Service Requirements. The Telecommunications
Act contemplates that interstate telecommunications providers will "make an
equitable and non-discriminatory contribution" to support the cost of
providing universal service, although the FCC can grant exemptions in certain
circumstances. The FCC has promulgated rules to implement these provisions of
the Telecommunications Act, and the outcome of such proceedings and its effect
on the Company cannot be determined.
Limitation on Joint Marketing of Local and Long Distance Services.
Long distance providers that serve greater than five percent of pre-subscribed
access lines in the United States (which includes the nation's three largest
long distance providers) are precluded from jointly marketing local and long
distance service until the RBOCs are permitted to enter the long distance
market, or three years from the date of enactment of the Telecommunications
Act, whichever is sooner. Management is informed and believes that this
prohibition has been extended and is currently attempting to determine when it
will expire.
Deregulation. The FCC is authorized to forebear from applying any
statutory or regulatory provision that is not necessary to keep
telecommunications rates and terms reasonable or to protect consumers. A state
may not apply a statutory or regulatory provision that the FCC decides to
forbear from applying. In addition, the FCC must review its telecommunications
regulations every two years and change any that are no longer necessary.
The ability of the Company to compete effectively in this market
will depend upon its ability to maintain high quality services at prices equal
to or below those charged by its competitors.
The communications and information services industry is subject to
rapid and significant changes in technology. For instance, recent
technological advances permit substantial increases in transmission capacity
of both new and existing fiber, and the introduction of new products or
emergence of new technologies may reduce the cost or increase the supply of
certain services similar to those which the Company plans on providing.
Accordingly, in the future the Company's most significant competitors may be
new entrants to the communications and information services industry, which
are not burdened by an installed base of outmoded equipment.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Payments
or Labor Contracts
------------------
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The Company has trademarked its logo. The Company has no patents,
licenses, franchises, concessions, royalty agreements or labor contracts.
Need for Government Approval of Principal Products or Services
--------------------------------------------------------------
The Company's communications service business will be subject to
varying degrees of federal, state, local and international regulation.
Effect of Existing or Probable Governmental Regulations on Business
-------------------------------------------------------------------
Regulatory Background
- ---------------------
The existing domestic long distance telecommunications industry was
principally shaped by a 1984 court decree (the "Decree") that required the
divestiture by AT&T of its 22 Bell operating companies ("BOCs"), organized the
BOCs under seven regional Bell operating companies ("RBOCs") and divided the
country into some 200 Local Access Transport Areas or "LATAs." The incumbent
local exchange carriers ("ILECs"), which include the seven RBOCs as well as
independent local exchange carriers, were given the right to provide local
telephone service, local access service to long distance carriers and intra
LATA long distance service (long distance service within LATAs), but the RBOCs
were prohibited from providing inter LATA service (service between LATAs).
The right to provide inter LATA service was given to AT&T and the other
interexchange carriers ("IXC"). Conversely, IXCs were prohibited from
providing local telephone service.
A typical inter LATA long distance telephone call begins with the
local exchange carrier ("LEC") transmitting the call by means of its local
network to a point of connection with an IXC. The IXC, through its switching
and transmission network, transmits the call to the LEC serving the area where
the recipient of the call is located, and the receiving LEC then completes the
call over its local facilities. For each long distance call, the originating
LEC charges an access fee. The IXC also charges a fee for its transmission of
the call, a portion of which consists of a terminating fee which is passed on
to the LEC which delivers the call. To encourage the development of
competition in the long distance market, the Decree required LECs to provide
all IXCs with access to local exchange services "equal in type, quality and
price" to that provided to AT&T. These so called "equal access" and related
provisions were intended to prevent preferential treatment of AT&T. As a
result of the Decree, customers of all long distance companies were eventually
allowed to initiate their calls by utilizing simple "1 plus" dialing, rather
than having to dial longer access or identification numbers and codes.
The Telecommunications Act is expected to significantly alter the
telecommunications industry. The Decree has been lifted and all restrictions
and obligations associated with the Decree have been eliminated by the new
legislation. The seven RBOCs are now permitted to provide long distance
service originating (or in the case of "800" service, terminating) outside
their local service areas or offered in conjunction with other ancillary
services, including wireless services. Following application to the FCC, and
upon a finding by the FCC that an RBOC faces facilities based competition and
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<PAGE>
has satisfied a congressionally mandated "competitive checklist" of
interconnection and access obligations, an RBOC will be permitted to provide
long distance service within its local service area, although in so doing, it
will be subject to a variety of structural and nonstructural safeguards
intended to minimize abuse of its market power in these local service areas.
Having opened the interexchange market to RBOC entry, the Telecommunications
Act also removes all legal barriers to competitive entry by interexchange and
other carriers into the local telecommunications market and directs RBOCs to
allow competing telecommunications service providers such as the Company to
interconnect their facilities with the local exchange network, to acquire
network components on an unbundled basis and to resell local
telecommunications services. Moreover, the Telecommunications Act prevents
IXCs that serve greater than five percent of pre-subscribed access lines in
the U.S. (which includes the nation's three largest long distance providers)
from jointly marketing their local and long distance services until the RBOCs
have been permitted to enter the long distance market or for three years,
whichever is sooner. This gives all other long distance providers (which the
Company intends to be) a competitive advantage over the larger long distance
providers in the newly opened local telecommunications market. As a result of
the Telecommunications Act, long distance carriers will face significant new
competition in the long distance telecommunications market, but will also be
afforded significant new business opportunities in the local
telecommunications market.
Legislative, judicial and technological factors have helped to
create the foundation for smaller long distance providers to emerge as
legitimate alternatives to AT&T, MCI/MCIWorldCom and Sprint for long distance
telecommunication services. The FCC has required that all IXCs allow the
resale of their services, and the Decree substantially eliminated different
access arrangements as distinguishing features among long distance carriers.
In recent years, national and regional network providers have substantially
upgraded the quality and capacity of their domestic long distance networks,
resulting in significant excess transmission capacity for voice and data
communications. The Company believes that, as a result of digital fiber optic
technology, excess capacity has been, and will continue to be, an important
factor in long distance telecommunications. As a consequence, not only have
smaller long distance service providers received legal protection to compete
with the network based carriers, they also represent a source of traffic to
carriers with excess capacity. Thus, resellers have become an integral part
of the long distance telecommunications industry.
Federal
- -------
The Company is classified by the FCC as a non-dominant carrier and
therefore is subject to relaxed regulation. Historically, the FCC has
generally either excused or presumed compliance by non dominant carriers with
many of the statutory requirements and regulations to which dominant carriers
are subject, including most reporting, accounting and record keeping
obligations. However, a number of these requirements are imposed, at least in
part, on non-dominant carriers whose annual operating revenues exceed $100
21
<PAGE>
million. The FCC retains the jurisdiction to impose fines or other penalties
on, or to act upon complaints against, any common carrier, including non-
dominant carriers, for failure to comply with its statutory or regulatory
obligations. The FCC also has the authority to impose more stringent
regulatory requirements on the Company and change its regulatory
classification. In the current regulatory atmosphere, however, the Company
believes that the FCC is unlikely to do so. Non dominant carriers are also
subject to a variety of miscellaneous regulations that, for instance, dictate
the materials required to document and the procedures necessary to verify a
consumer's election to change its preferred long distance telephone provider,
mandate disclosure of rate and other data associated with the provision of
operator services and require contribution to a variety of FCC mandated funds
and payment of various regulatory and other fees. There has generally been
increased enforcement activity by the FCC and the states with respect to such
regulations, particularly with respect to those regulations governing the
verification of consumer elections to change long distance service providers.
Among domestic carriers, only the ILECs are classified as dominant
carriers, although ILECs currently would only be classified as dominant in
their provision of long distance telecommunications services if they were to
provide such services other than through structurally separate affiliates. As
a consequence, the FCC regulates many of their rates, charges and services to
a greater degree than the Company's, although the FCC is currently evaluating
proposals to streamline and otherwise relax its regulation, the structurally
separate inter-exchange affiliates of the RBOCs have recently been
reclassified as non dominant carriers and, accordingly, have the same
flexibility as the Company in meeting competition by modifying rates and
service offerings without pricing constraints or extended waiting periods.
The impact on the Company of the reclassification of AT&T and the RBOC
interchange affiliates as non dominant carriers cannot be determined at this
time, but it could make it more difficult for the Company to compete for long
distance customers.
With the passage of the Telecommunications Act, the RBOCs are now
free to offer local service outside their respective local telephone service
areas as well as local service bundled with wireless, enhanced and other
ancillary services. Following application to and upon a finding by the FCC
that an RBOC faces facilities-based competition and has satisfied a
congressionally mandated "competitive checklist" of interconnection and access
obligations, the RBOC will be permitted to provide long distance service
within its local service area, although in so doing, it will be subject to a
variety of structural and nonstructural safeguards intended to minimize abuse
of its market power in these local service areas. As a result of the removal
of the legal barriers to competitive entry into the local market, long
distance carriers like the Company will be allowed to compete with the RBOCs
in the provision of local service. It is impossible to predict the impact of
RBOC entry into the long distance telecommunications market on the Company's
business and prospects, but it could make it more difficult for the Company to
compete for long distance customers.
The Company has all necessary authority to provide domestic
22
<PAGE>
interstate telecommunications services under current laws and regulations.
The Company has been granted authority by the FCC to provide international
telecommunications services through the resale of switched services of U.S.
facilities based carriers. The FCC reserves the right to condition, modify or
revoke such international authority for violations of federal law or rules, as
well as to approve assignments and transfers of control of such international
authority. Both domestic and international non-dominant carriers must maintain
tariffs on file with the FCC. Although the tariffs of non-dominant carriers,
and the rates and charges they specify, are subject to FCC review, they are
presumed to be lawful and are seldom contested. As a domestic non-dominant
carrier, the Company is permitted to make tariff filings on a single day's
notice and without cost support to justify specific rates. As an
international non dominant carrier, the Company has always been required to
include, and has included, detailed rate schedules in its international
tariffs, but, as a result of recent FCC action, is now permitted to make
tariff filings on a single day's notice. Prior to a 1995 court decision,
Southwestern Bell v. FCC, 43 F.3rd 1515 (D.C.Cir. 1995), domestic non dominant
carriers were permitted by the FCC to charge a "reasonable range of rates"
instead of the detailed schedules of individual charges required of dominant
carriers. In reliance on the FCC's past practice of allowing relaxed tariff
filing requirements for non dominant domestic carriers, the Company and most
of its competitors did not maintain detailed rate schedules for domestic
offerings in their tariffs. Until the two year statute of limitation expires,
the Company could be held liable for damages for its failure to do so,
although it believes that such an outcome is highly unlikely and would not
have a material adverse effect on the Company's operations.
To date, the FCC has exercised its regulatory authority to set rates
only with respect to the rates of dominant carriers, and it has increasingly
relaxed its control in this area. Thus, the FCC does not regulate the rates
of the Company or any other long distance telecommunications provider,
including AT&T, although it would regulate the rates charged by any ILEC that
elected to provide interexchange services other than through a structurally
separate affiliate. While the FCC continues to cap the prices that determine
interstate calls, it has afforded the ILECs a modicum of geographically
restricted pricing flexibility when they face competition in a given market.
The FCC has indicated that it will initiate in the near future a comprehensive
review of its access charge structure, evaluating embedded costs and subsidies
that produce current access charge levels. The FCC is currently conducting a
rulemaking procedure to implement the universal service provisions of the
Telecommunications Act and will be determining in that proceeding the
contributions that telecommunications companies such as the Company will be
required to make to support universal service. The FCC also has recently
completed a rulemaking proceeding to implement the local competition
provisions of the Telecommunications Act. In that proceeding, the FCC has set
forth comprehensive national rules and guidelines for states and local
competitors to follow that, among other things, govern the interconnection
obligations among telecommunications carriers, including interconnection with
the local exchange network, and access to a minimum set of unbundled network
elements, as required by the Act. The FCC also has set forth pricing
methodologies for both the FCC and the states to follow in implementing the
23
<PAGE>
Telecommunications Act's requirement that interconnection and access to
unbundled network elements be made available by ILECs at cost-based rates with
a reasonable profit.
The FCC-styled "trilogy" of access charge reform, universal service
and local competition proceedings comprise the FCC's effort to respond to the
Telecommunications Act's goal of transitioning telecommunications markets to
full competition. The FCC does not expect this framework to be complete until
state public service commissions complete their own efforts to implement and
supplement the Telecommunications Act's provisions. Until the FCC's "trilogy"
of proceedings is completed, and until such state actions are taken, the
impact of the FCC's arrangements or access charge obligations, or more
broadly, on the Company's operations in general, cannot be determined at this
time.
The Telecommunications Act grants the FCC authority to forbear from
applying any statutory requirement or regulation to classes of carriers or
services upon a determination that such application is unnecessary and no
longer in the public interest. Utilizing this newly granted authority, the FCC
has already reduced, and has proposed further reductions in, its regulation of
non dominant IXCs such as the Company. Among other things, the FCC has
proposed "mandatory de-tariffing" for the domestic offerings of non-dominant
IXCs. This proposed rule, if adopted, would not only relieve the Company of
its obligation to file tariffs applicable to its domestic interexchange
offerings, but would prohibit all non dominant IXCs, including AT&T, Sprint
and MCI/WorldComm, from filing such tariffs. The magnitude of the impact on
the Company of mandatory de-tariffing of its principal suppliers and
competitors cannot be determined at this time, although such an action would,
if adopted, render enforcement of the FCC's resale and nondiscrimination
requirements more difficult.
State
- -----
The Company's intrastate long distance telecommunications operations
are also subject to various state laws and regulations, including initial
certification, registration and/or notification, as well as various tariffing
and reporting requirements. The Company is certified in 23 states and is
going through the certification process in the remaining 27 states. The
Company intends to continuously monitor regulatory developments in all 50
states and intends to obtain licenses wherever feasible. Once it becomes
certified, the Company will have to file an annual statement with each state's
Public Utilities Commission.
Research and Development
------------------------
Other than developing and expanding its telecommunications network,
the Company does not intend to undertake any activities that may be
characterized as research and development. The Company has not incurred any
research and development expenses since its inception.
24
<PAGE>
Number of Employees
-------------------
The Company presently employs seven full-time employees and no part-
time employees. During the next 12 months, management intends to hire up to
33 additional employees, subject to receipt of sufficient revenues to pay
them.
Item 2. Management's Discussion and Analysis or Plan of Operation.
- -------------------------------------------------------------------
Plan of Operations.
- -------------------
The Company began actively marketing in April, 1999. It is
anticipated that it will produce approximately $4,390,000 in revenue in the
1999 fiscal year and approximately $12,762,000 in fiscal 2000. Gross profit
would be approximately $175,394, and $3,185,280, respectively. In
the next 12 months, the Company intends to employ 10 IP Gateways throughout
the western United States in order to transport long-haul Voice Over the
Internet traffic ("VOIP," i.e., long distance voice traffic transported as
digital electronic data packets over the internet), both domestically and
internationally. The Company's financing requirements in this regard are
discussed under the heading "Liquidity," below.
As discussed under the heading "Internet Protocol Network," the
Company's Strategic Partnership Agreements with Bell Atlantic and Level 3
Communications allow it to collocate its Gateway equipment and terminate
traffic in areas that the Company has not or does not intend to locate
Gateways. The Company has very actively begun to employ its Affinity Group
Marketing strategy and has contracted with three of its seven targeted groups;
it is negotiating with the remaining four. The total membership population of
the Company's seven targeted groups is over 40 million. Management expects
that its marketing efforts will be financed through its proposed fundraising,
as discussed under the heading "Liquidity," below.
The three groups with which the Company has contracted are: the
Tailhook Association; Miles Ahead Ministries; and the Marine Corps Reserve
Officers Association. Each agreement requires each group to forward a
marketing piece to its members; the marketing pieces will recommend a
telecommunications plan to the members, which will include long distance, toll
free service, paging, cellular service, internet access, pre-paid and regular
calling cards and other telecommunications services. The Company will provide
each group with a billing summary of all participants' accounts each month and
pay each group a percentage of each participant's net telephone bill. The
contracts will be in place for periods of time ranging from 12 months to 36
months, with each group having an option to renew for an additional term.
The Company also intends to build a captive agent network for direct
marketing purposes to supplement its Affinity Group Marketing programs. The
Company has retained the Southwestern Companies to conduct door-to-door
residential solicitation of new customers. These operations began on October
3, 1999. The Company has also begun its telemarketing efforts, which entail
25
<PAGE>
contacting members of the Marine Corps Reserve Officers Association and the
Tailhook Association. The Southwestern Companies are entitled to a commission
of 20% of gross sales from its efforts. As of the date of this Registration
Statement, the Company and the Southwestern Companies do not have a written
contract.
Management is also seeking viable acquisition candidates. Several
synergistic targets have been identified and initial contacts are being made.
The Company intends to make acquisitions that will allow it to offer value-
added services and products to its customer base. There can be no assurance
that the Company will be successful in locating and completing the acquisition
of any suitable candidate. Even if the Company is successful in this regard,
it can provide no assurance that any acquisition will be profitable.
The Company's projections are based on the following assumptions and
limitations:
The Company's business plan details a stair step process whereby it
will lease telecommunications services that can be marketed directly to its
primary affinity groups. The Company currently has contracts with three of
the seven affinity organizations originally targeted. The combined membership
of the three contracted affinity groups is 25,000 members. The Company has
just begun contacting affinity group members and is realizing a 38% acceptance
rate. This acceptance rate substantially exceeds the 12.5% rate detailed in
the business plan. The Company is currently in contract discussions with
three more affinity groups. It is anticipated that all seven groups will be
contracted by year end, although the Company can make no assurances in this
regard. The total membership of the seven affinity groups is 40,000,000
members. The Company believes this population and its current acceptance rate
should provide the revenues detailed in the projections. Additionally, the
affinity group marketing plan is only one of several currently being test
marketed.
The second revenue source detailed is the wholesaling of
telecommunications services. The Company is buying international
telecommunication services from Flat Rate Communications and selling these
services to LD Exchange.Com, Inc. The Company is currently pursuing other
wholesale agreements as well. The profit margin is 3% to 4% on the
wholesaling of telecommunications services.
Management projects that 1999 revenues from its affinity group
program will total $90,000, with revenues from its wholesaling operations
totaling $4,300,000. For the 2000 fiscal year, management projects these
revenues to be $6,762,000 and $6,000,000, respectively.
In arriving at its revenue projections for its affinity groups
program, the Company assumes that on average each residential customer will
use approximately 200 minutes per month at a cost to the customer of
approximately $0.10 per minute, and that the number of residential customers
will increase from approximately 600 in September, 1999, to approximately
60,300 in December, 2000.
The cost of goods sold currently reflects the cost of a leased
network whereby the Company can transmit customer calls. The cost of goods
26
<PAGE>
reflects the use of the telephone lines, billing and collections and customer
service. The rate used in the projections to reflect these costs is $0.07.
To control cost, the Company has entered into subcontract arrangements to
facilitate billing and collections and customer service. These costs are a
calculation of the services provided. As such they are a true marginal cost.
The Company's projections for its wholesaling operations assume
volume of 2,000,000 monthly minutes through December 2000, at an average rate
of $0.25 per minute. Projected cost of goods sold will be $0.25 per minute
through December 2000.
The Company has commenced the development of its own Internet
Protocol Network. It is anticipated that the planned network will be
operational by early 2000. With this network in place, the Company will have
control of its pricing for the transmission of telecommunications services.
The projection reflects a modest decrease in the cost of goods sold when the
network is operational. The Company believes the reduction of cost will be
more substantial but is reflecting a modest reduction to be conservative.
The Company's selling, general and administrative costs will be
reduced by management's intentions to subcontract significant services such as
billing and collections and customer service. The fundamental costs will be
1)the maintenance of the Company's own Internet Protocol Network and 2)the
marketing to and maintenance of affinity group relationships. The projections
reflect a management group that is primarily marketing driven and that will
target and service National Affinity Groups. The remainder of management will
monitor the subcontractor relationships to maintain the quality of service the
Company intends to provide.
The telecommunication industry holds a certain amount of risk due to
the highly competitive nature of the industry and capital required. The
reason the Company is building its own IP Network is to be in control of its
destiny with regard to price competition. To build this network the Company
has sought out the technology that is compatible with internet requirements.
The Company currently has agreements to provide sufficient funding in the
short term. The company is currently negotiating with Schwartz Institutional
Finance, National Capital and Capital Growth Planning to provide the long term
resources necessary to complete the Internet Protocol Network and the
infrastructure required to support the Company's planned customer base.
The foregoing contains "forward-looking" statements and information,
all of which is modified by reference to the caption "Risk Factors," Item 1.
Actual results may differ materially from those projected in such forward-
looking statements and there is no assurance that the projected results will
be obtained.
Results of Operations.
- ---------------------
The Company has undergone significant changes since its
incorporation on June 13,1996. The fiscal year ended December 31, 1996
27
<PAGE>
represented a period of time where the Company was first founded and the basic
business plan was being developed.
The fiscal year ended December 31, 1997 brought about the first
revenues the Company. These revenues were commissions earned as a result of
the company entering the telecommunications marketplace as an agent for other
communications companies. The two principal communications companies the
company served as an agent were Eagle InterCommunications, Inc. and TTI. The
Company began pursuing this revenue stream initially as it allowed the Company
to earn some revenue while it began to implement its business plan. The
business plan calls for a stair step approach to build the Company into a
telecommunications company with its own Internet Protocol Network. The fiscal
year ended December 31, 1998 resulted in the same type of agent commission
income.
Commission income decreased from $25,962 in fiscal 1997 to $16,004
in fiscal 1998. The reason this commission revenue decreased was that
management was focusing on implementing the next steps in the business plan.
The next steps in the business plan include becoming a wholesaler of
telecommunications services, direct selling of telecommunication services to
be transmitted over a leased network, and ultimately the selling of
communications services transmitted over its own Internet Protocol Network.
The commission income was pursued only as a revenue source during this
beginning period. Management did not see this revenue source as a key
component of the future revenues of the Company.
Beginning in March of 1999, the Company began wholesaling, which was
the next step in building its revenue stream. The Profit and Loss statement
for the six month period ended June 30, 1999 shows revenues from wholesaling
of $1,300,927 and cost of goods sold from wholesaling of $1,269,143. The
company is buying international telecommunication services from Flat Rate
Communications and selling these services to LD Exchange.Com, Inc. The
Company is currently pursing other wholesale agreements.
The financial statements for Fiscal 1996 reflect the initial
capitalization of the company along with minimal expenses for start up costs,
office rent and utilities. During fiscal 1997 and 1998 the operating expenses
of the company reflect the implementation of the business plan by management.
One charge to earnings that is substantial is the issuance of stock for
services totaling $512,718 during fiscal 1998. The charge related to the
issuance of stock for services during fiscal 1997 was $10,000. The other
operating expenses relate to rent, travel, insurance, legal, general office
expenses and utilities. The selling costs during the periods discussed relate
principally to commissions that are paid to the Company's agents for the
acquisition of the commission income.
The Company's fiscal 1999 financial statements reflect the same
basic categories of expenses as in prior periods. As of the six-month period
ended June 30, 1999 the company has a charge to earnings of $1,121,500 for
stock issued for services. During 1999, the Company began paying salaries to
management. Additionally the Company has begun to increase personnel. Other
28
<PAGE>
significant cost categories are travel, legal, and marketing. These costs
have been incurred to progress the items in the following paragraph.
The future financial condition of the Company is grounded in the
progress it has made to date with its business plan. The wholesaling business
has begun and will be a continuing source of revenue for the Company into the
future. The completion of agreements with companies such as Level 3 and Bell
Atlantic allows the Company to currently market telecommunications services to
its three existing affinity marketing groups as well as the general public.
During this time period, the Company has entered into an agreement with
Capital Growth Resources to raise $5,000,000 in a private placement of
restricted securities to complete its Internet Protocol Network and provide
additional working capital.
The Company has designed its business plan to outsource a
significant portion of the services required to service future customers. As
such, the Company will be able to show substantial control over its overhead
costs. The key services that are currently outsourced are billing of
residential customers and customer service.
Liquidity.
- ----------
The Company's current cash reserves are not sufficient to complete
its business plan. The Company does have sufficient resources in the short
term. On a long term basis, the Company is negotiating agreements with Swartz
Private Equity, LLC; Oxford International and Capital Growth Planning to
provide at least $5,000,000 in a private placement of restricted securities to
complete its Internet Protocol Network and provide additional working capital.
The Company is forecasting a net loss before taxes of $753,314 for fiscal
1999.
The Company's cash reserves and accounts receivable net of accounts
payable as of June 30, 1999 was $591,708. Accordingly, the Company does have
sufficient resources in the short term to maintain its operations.
As stated above, the Company is currently negotiating additional
funding of at least $5,000,000 to be used for capital equipment and working
capital.
The capital equipment is comprised of IP Gateways, which will be
purchased during November 1999. This equipment purchase will allow the
Company to complete its Internet Protocol Network. Each gateway is
anticipated to cost $250,000. Upon completion, the gateways will have to be
certified by regulatory authorities. This certification process will cost the
Company approximately $200,000. The personnel required to maintain the
network will cost the company $500,000 annually.
The Company will use the balance ($2,300,000) of the funds currently
being negotiated as working capital and for strategic acquisitions yet to be
29
<PAGE>
identified.
Net revenues from inception have been a relatively small component
of the Company's liquidity.
Fiscal 1996 $0
Fiscal 1997 25,962
Fiscal 1998 16,004
Six months ended
June 30, 1999 45,797
During fiscal 1997, the capital requirements of the Company were not
significant. The funds required were for office expenses, travel and legal
fees. At this time the company was negotiating agreements with affinity
marketing groups and arranging a leased network that would transmit
telecommunications services.
In order to implement its business plan, the Company required
additional capital resources. Accordingly, the Company commenced an offering
of securities pursuant to Rule 504 of Regulation D of the Securities and
Exchange Commission in late 1997. This offering consisted of 125,000 units,
with each unit including one share of common stock and three warrants to
purchase a total of three additional shares of common stock at $2.00 each. In
1998, the Company raised $250,000 from this offering. Additionally the
company raised $16,492 in a transaction believed to be exempt from
registration under Section 4(2) of the Securities Act. This capital, along
with a loan of $12,700 from the President of the Company provided the working
capital required.
During fiscal 1998, the capital requirements of the Company began to
increase as the company progressed with its business plan. The capital to
meet these commitments was provided principally by the offering under Rule 504
of the Securities and Exchange Commission, as discussed above. A second
offering under Rule 504, consisting of 350,000 shares of common stock at a
purchase price of $0.13 per share was made available in March, 1998. All
350,000 shares were sold under this offering, for gross proceeds of $45,500.
These funds provided the company the resources necessary during fiscal 1998.
Stock issued for services such as consulting and business development, less
the amount charged to equity because the charges related to fundraising,
totaled $542,718.
As of June 30, 1999 each of the offerings under Rule 504 were fully
subscribed and warrants issued under the Company's first offering were
exercised in exchange for $737,100. Additional "unregistered" and
"restricted" shares were sold to qualified investors. The total raised during
this period was $907,400. Stock was also issued for services during this
period. The stock issued for services was compensation for consulting and
business development services. The equipment purchased of $33,979 is required
for the Company to build its Internet Protocol Network. The substantial
increase in both accounts receivable and accounts payable is directly
attributable to the implementation of the wholesaling business.
30
<PAGE>
Revenues during the calendar year ended December 31, 1998, totaled
$16,004, as compared to $25,962 in the calendar year ended December 31, 1997.
Net loss for these periods were $730,241 and $72,405, respectively. The
increased loss in the 1998 calendar year was due principally to increased
general and administrative expenses of $716,479.
The ability to complete the IP Gateway construction and employ
marketing executives to service the Affinity Groups depends on the Company's
success in obtaining adequate financing. The Company has signed a letter of
intent for a $20 million equity line with Swartz Institutional Finance.
The Swartz letter of intent provides for Swartz to purchase $20
million of the Company's common stock at 91% of the market price, and to sell
the shares by prospectus under applicable provisions of Regulation D of the
Securities and Exchange Commission. The parties may agree to increase the
amount purchased to $40 million.
Subject to an effective registration statement, for the first 36
months after Swartz' execution of a subscription agreement for the shares, the
Company shall have the right to put to Swartz up to $3 million of its common
stock. For each put, Swartz will receive an option to purchase 7% of the
number of shares purchased under the put at 115% of the market price for the
Company's common stock. As consideration for its commitment, subject to
execution of a definitive agreement, Swartz is to receive a warrant to
purchase 220,000 shares of the Company's common stock at the lesser of the
market price on the date of the execution of the letter of intent (July 8,
1999) or the market price on the day that the parties sign the closing
documents relating to the equity line transaction. Swartz has agreed not to
exercise the warrant for a period of six months from July 8, 1999, unless the
Company is purchased during that period. On each anniversary of the equity
line term, the Company is to issue additional warrants to Swartz such that the
total number of warrants issued to Swartz will equal 4.3% of the fully diluted
shares of the Company on such date.
Upon execution of an investment agreement and associated closing
documents, Swartz is to receive $25,000 to cover its legal and due diligence
expenses associated with the transaction. If the Company does not put to
Swartz $1 million during each six month period of the equity line term, it is
to pay Swartz a "non-usage fee" of $100,000 minus 10% of the dollar amount put
to Swartz during that six month period. All warrants issued to Swartz are to
have piggyback registration rights, reset provisions, will be non-dilutive due
to reverse stock splits and are to have a five-year term. There can be no
assurance that the Company will enter into any definitive agreement with
Swartz. A copy of the letter of intent with Swartz is attached hereto and
incorporated herein by reference.
The Company is in negotiations with Oxford International for a $5
million equity financing under which Oxford would use its best efforts to
raise such funding under Regulation A of the Securities and Exchange
Commission. The Company would be required to pay (i) an engagement fee of
$25,000; (ii) a consulting fee of 4% of the gross proceeds of any financing
31
<PAGE>
and 1% of the stock of the offering; and (iii) a sales commission equal to 5%
of the gross proceeds of the offering. The parties have not entered into any
letter of intent or binding agreement with respect to this fundraising. There
can be no assurance that any such agreement will be reached or that, any such
agreement will be on the terms set forth above.
The Company is also negotiating a loan of approximately $8,200,000
with Braveheart, Inc., a Delaware corporation, at a rate of 3% simple interest
per annum, and with the loan to be secured by shares of the Company's common
stock. In addition, the Company is in discussions with Capital Growth
Planning for a potential equity financing of approximately $5,000,000, to be
preceded by a bridge loan of $400,000 at 14% per annum, payable in six months.
However, the Company has not entered into any definitive agreements with
either of these entities and there can be no assurance that any such
agreements will be completed or that they will be entered into on the terms
set forth above.
The proceeds from the Company's anticipated fundraising efforts will
allow it to build out its IP Network and build infrastructure to manage it,
and to market the Company's services. The Company believes that the net
proceeds from its previous financings, as discussed above, will allow the
Company to carry on operations until the above-referenced financings are
complete.
Year 2000
---------
The Company uses a 16-line Triad System Star Plus Modavi, which is a
digital telecommunications system that can be used for both voice and data.
In addition, the Company uses Dell personal computers in its office. It has
determined that both its telecommunications system and its personal computer
system are Year 2000 compliant.
The Company's system vendors have given verbal assurance that their
systems are Year 2000 compliant. System vendors for the Company's IP telephony
operations are Cisco and Inter-Tel, both of which NASDAQ listed firms. None of
the Company's IP telephony systems are main frame based; they are PC based.
The two digit date problem is not a PC issue per se, and if it is a PC issue
it is resolved at little cost by readjusting the Bios inherent in the PC
motherboard.
Level 3 Communications and MCI/WorldComm are other providers. Both
of these companies have given the Company verbal assurances that they are in
Year 2000 compliance.
The worst case scenario, as management sees it, is that the power
grid could fail and the Company's telephony systems would not have power. This
has been resolved by Level3 and MCI/World Com by diesel powered back up
generator systems that are in stand-by mode ready to supply power to the
telephony systems in case of short term power failure. These backup power
generating systems have the capability to sustain power generation for long
32
<PAGE>
periods of time as long as fuel is available. A considerable amount of diesel
fuel is stored at both Level 3 and MCI/WorldComm facilities. The Company's
contingency plan is to continue to monitor the backup power systems at the
switching sites along with monitoring the diesel fuel supplies.
Item 3. Description of Property.
- ---------------------------------
The Company leases its principal executive offices, which are
located at 4275 Executive Square, Suite 510, La Jolla, California. These
offices consist of approximately 1500 square feet of office space. Rent
obligations are $2,525 per month. The lease will expire on December 31, 1999,
but the Company has an option to renew it for an additional one-year term, on
the same terms and conditions as the existing lease. Management is currently
seeking a larger facility and does not expect to renew its existing lease.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
- ------------------------------------------------------------------------
The following table sets forth the share holdings of the Company's
directors and executive officers and those persons who own more than five
percent of the Company's common stock as of the date hereof. Information
regarding the capacities in which each director and executive officer serves
for the Company is contained in Item 5.
<TABLE>
<CAPTION>
Number of Shares Percentage
Name and Address Beneficially Owned of Class(1)
- ---------------- ------------------ --------
<S> <C> <C>
6M Family Trust (1) 582,000 17.1%
4275 Executive Square
Suite 510
La Jolla, California
92037
Paul J. Mills 385,000 (2) 11.3%
4275 Executive Square
Suite 510
La Jolla, California
92037
John E. Jordan 25,000 (3) 0.7%
4275 Executive Square
Suite 510
La Jolla, California
92037
James D. Boring -0- -0-
33
<PAGE>
4275 Executive Square
Suite 510
La Jolla, California
92037
</TABLE>
(1) The 6M Family Trust is controlled by the family of the Company's
President, Richard D. Mangiarelli.
(2) A total of 190,000 of these shares are held of record by
Mr. Mills' adult children; Mr. Mills may be deemed to have
voting control over these shares.
(3) These shares are held of record by Jordan Family Trust, which
is controlled by Mr. Jordan.
Changes in Control.
- -------------------
On July 19, 1999, the Roman J. Kownacki, M.D. Pension Fund; and
Roman J. Kownacki and Mary Jean Kownacki, as Trustees of the Kownacki Family
Trust dated February 8, 1972 (collectively, "Kownacki"), filed a Complaint for
Judgment Debtor's Interest in Property or Debt to Satisfy Money Judgment in
the Superior Court of the State of California for the County of San Diego (the
"Complaint"). The case was designated Case No. EC18601.
The Complaint sought (i) a declaration that Company securities held
directly or beneficially by the Company's President, Richard D. Mangiarelli,
are the property of Kownacki; (ii) an order that the securities be delivered
to the marshal of the County of San Diego for satisfaction of a judgment in
the amount of $170,470.82 that Kownacki had obtained against Mr. Mangiarelli
on May 28, 1997; (iii) an order to show cause why the Company should not be
enjoined from transferring such securities to any person or otherwise
disposing of the securities; (iv) a temporary restraining order and a
preliminary injunction to that effect; and (v) Kownacki's costs of suit and
attorney's fees and such other relief as the Court deemed proper.
On August 5, 1999, the Court entered an Order (i) enjoining the
Company, during the pendency of the action, from transferring to Mr.
Mangiarelli, concealing, selling or otherwise changing the form of title on
Mr. Mangiarelli's securities; (ii) requiring the Company to transfer all such
securities in its possession to the Marshal of the County of San Diego upon
demand, for application to the satisfaction of the judgment in favor of
Kownacki; (iii) that the Company disclose the existence of the Order to anyone
who inquires as to Mr. Mangiarelli's ownership interest in the Company's
securities; (iv) not accept any lien or other encumbrance upon Mr.
Mangiarelli's stock, options or right to exercise stock options or acquire
shares as a condition to his employment with the Company; and (v) advise the
Securities and Exchange Commission of the restrictions placed upon such stock
on or before August 10, 1999.
34
<PAGE>
In the event that any shares that are beneficially owned by Mr.
Mangiarelli are transferred to Kownacki, Kownacki would have the right to vote
those shares at any meeting of the Company's stockholders. The Company has
not received any indication of how Kownacki would vote the shares. However,
management does not anticipate that any such transfer would effect a change in
control of the Company, since Mr. Mangiarelli does not directly own any shares
of the Company's common stock and the 6M Family Trust, which is controlled by
Mr. Mangiarelli's family, owns only 17% of the Company's outstanding shares.
Accordingly, management does not believe that such transfer would have any
effect on its existing contracts or its future operations. Regardless of the
outcome of this matter, Mr. Mangiarelli intends to remain as a director and
executive officer of the Company and to continue with his present managerial
responsibilities.
Item 5. Directors, Executive Officers, Promoters and Control Persons.
- ---------------------------------------------------------------------
Identification of Directors and Executive Officers.
- ---------------------------------------------------
The following table sets forth the names of all current directors
and executive officers of the Company. These persons will serve until the
next annual meeting of the stockholders or until their successors are elected
or appointed and qualified, or their prior resignations or terminations.
<TABLE>
<CAPTION>
Date of Date of
Positions Election or Termination
Name Held Designation or Resignation
- ---- ---- ----------- --------------
<S> <C> <C> <C>
Richard D. CEO 6/96 *
Mangiarelli President 6/96 *
Director 6/96 *
Paul J. Mills Chairman 6/96 *
Director 6/96 *
Secretary 6/96 *
John E. Jordan Director 6/96 *
James D. Boring Vice Pres., 8/99 *
Operations
</TABLE>
* These persons presently serve in the capacities indicated.
Business Experience.
- --------------------
35
<PAGE>
Richard D. Mangiarelli, Chief Executive Officer, President and
Director. Mr. Mangiarelli is 59 years old. In 1985, he founded USA Energy
Corporation, a licensed general and electrical contractor dedicated to energy
conservation contracting. He was the Chief Operating Officer of Fulham
Company, an electronic ballast manufacturer, from 1993 to 1995. Mr.
Mangiarelli holds a BA degree from the University of Connecticut and an MBA
degree from Pepperdine University. He is a licensed general contractor and
licensed electrical contractor and is retired from the United States Marine
Corps at the rank of Colonel.
Paul J. Mills, Secretary and Chairman of the Board of Directors.
Mr. Mills, age 77, has been a principal in Mills and Associates, a management
and consulting firm since 1985. Prior thereto, he founded and served as
president of a marketing company called Southwest Solar Products, Inc. from
1980 to 1986.
John E. Jordan, Director. Mr. Jordan is 63 years of age. In 1959,
he founded the Jordan Companies, a group of privately held, diversified
companies engaged in energy related engineering, manufacturing and marketing
activities, defense and aerospace consulting and international negotiations
and representation. He has served as chief executive officer and president of
these companies for over 20 years. Mr. Jordan is a graduate of Stanford
University, the Marine Corps Command and Staff College, the National Defense
University-Industrial College of the Armed Force program, the Naval War
College, and served as an Officer in both the U.S. Air Force and the Marine
Corps.
James D. Boring, Vice President, Operations. Mr. Boring, age 52, is
a 1971 graduate of Kansas State University. He has been actively involved in
the telecommunications industry since 1983. Mr. Boring was employed by Access
America Telemanagement, Inc., from 1990 to 1996, and served as Vice President
of Field Operations for that company from 1991 to 1996. After a one-year
sabbatical, Mr. Boring became President of Tritel Communications, LLC in June,
1997, and served in that capacity until February, 1999. At that time, Mr.
Boring began working for the Company.
Significant Employees.
- ----------------------
The Company does not currently have any employees who are not
executive officers, but who are expected to make a significant contribution to
its business.
Family Relationships.
- ---------------------
There are no family relationships between any director or executive
officer.
Involvement in Certain Legal Proceedings.
- -----------------------------------------
36
<PAGE>
During the past five years, no present or former director, executive
officer or person nominated to become a director or an executive officer of
the Company:
(1) was a general partner or executive officer of any business
against which any bankruptcy petition was filed, either at the time of the
bankruptcy or two years prior to that time;
(2) was convicted in a criminal proceeding or named subject to a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise
limiting his involvement in any type of business, securities or banking
activities; or
(4) was found by a court of competent jurisdiction (in a civil
action), the Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment
has not been reversed, suspended or vacated.
Item 6. Executive Compensation.
- --------------------------------
The following table sets forth the aggregate compensation paid by
the Company for services rendered during the periods indicated:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Secur-
ities All
Name and Year or Other Rest- Under- LTIP Other
Principal Period Salary Bonus Annual rictedlying Pay- Comp-
Position Ended ($) ($) Compen-Stock Optionsouts ensat'n
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard 12/31/97 -0- -0- -0- -0- -0- -0- -0-
Mangiarelli 12/31/98 -0- -0- -0- -0- -0- -0- -0-
CEO, Pres. 6/30/99 18,750 -0- -0- -0- -0- -0- -0-
and Director
37
<PAGE>
Paul J. 12/31/97 -0- -0- -0- -0- -0- -0- -0-
Mills 12/31/98 -0- -0- -0- -0- -0- -0- -0-
Secretary 6/30/99 -0- -0- -0- -0- -0- -0- -0-
and Chairman
John E. 12/31/97 -0- -0- -0- -0- -0- -0- -0-
Jordan 12/31/98 -0- -0- -0- -0- -0- -0- -0-
Director 6/30/99 -0- -0- -0- -0- -0- -0- -0-
James D. 12/31/97 -0- -0- -0- -0- -0- -0- -0-
Boring 12/31/98 -0- -0- -0- -0- -0- -0- -0-
VP, Oper- 6/30/99 40,000 -0- -0- -0- -0- -0- -0-
ations
</TABLE>
No cash compensation, deferred compensation or long-term incentive
plan awards were issued or granted to the Company's management during the
year ended December 31, 1998, or the period ended March 31, 1999. In April,
1999, the Company began paying its Chief Executive Officer and President,
Richard D. Mangiarelli, an annual salary of $75,000; as of June 30, 1999, Mr.
Mangiarelli has been paid $18,750 in salary. James D. Boring was paid a
monthly salary of $5,000 in February and March, 1999; this salary was
increased to $6,000 per month in April, 1999.
On May 11, 1998, the Company authorized the granting of options to
Mr. Mangiarelli to purchase up to 1,500,000 shares of the Company's common
stock. However, these options were deemed to be "non-qualified" for purposes
of the Internal Revenue Code, and both the Company and Mr. Mangiarelli have
determined that it would be in the best interests of the Company to rescind
these options and adopt a "qualified" option plan for Mr. Mangiarelli in the
future. As of the date of this Registration Statement, Mr. Mangiarelli does
not have any options to purchase shares of the Company.
The Board of Directors has informally determined to grant Mr. Mills
an option to acquire 250,000 shares of the Company's common stock, subject to
Mr. Mills' meeting certain performance criteria. The Board of Directors has
determined to cancel these options and re-grant options pursuant to a
"qualified" option plan in the future. As of the date of this Registration
Statement, Mr. Mills does not have any options to purchase the Company's
shares.
In November 1996, the Board of Directors and majority stockholders
of the Company adopted an employee stock option plan under which 125,000
shares of common stock have been reserved for issuance upon performance of as
yet unspecified performance criteria. As of the date of this Registration
Statement, no options have been granted pursuant to such plan and the Company
has no present plans for the issuance thereof. The Company does not have a
defined benefit plan or any retirement or long-term incentive plan.
As of the date of this Registration Statement, the Company has not
reduced its option arrangements to writing.
38
<PAGE>
Compensation of Directors.
- --------------------------
There are no standard arrangements pursuant to which the Company's
directors are compensated for any services provided as a director. No
additional amounts are payable to the Company's directors for committee
participation or special assignments.
Employment Contracts and Termination of Employment and Change in Control
Arrangements.
- -------------
There are no employment contracts, compensatory plans or
arrangements, including payments to be received from the Company, with respect
to any director or executive officer of the Company which would in any way
result in payments to any such person because of his or her resignation,
retirement or other termination of employment with the Company or its
subsidiaries, any change in control of the Company, or a change in the
person's responsibilities following a change in control of the Company.
Item 7. Certain Relationships and Related Transactions.
- --------------------------------------------------------
The only transactions between members of management, nominees to
become a director or executive officer, 5% stockholders, or promoters or
persons who may be deemed to be parents of the Company are:
- On August 1, 1996, issued a total of 612,000 shares of the
Company's common stock to the 6M Family Trust, which is controlled
by Mr. Mangiarelli's family, in consideration of services valued
at $12,250;
- On August 1, 1996, issued a total of 612,000 shares of the
Company's common stock to Paul J. Mills in consideration of
services valued at $12,250;
- Issued 90,000 shares of common stock to Paul J. Mills on June 1,
1997, for services valued at $180,000;
- On September 28, 1998, issued a total of 25,000 shares of the
Company's common stock to the Jordan Family Trust, which is
controlled by John E. Jordan in consideration of services valued
at $50,000; and
- Issued 30,000 shares to the 6M Family Trust on March 29, 1999, in
consideration of $3,900.
See the caption "Security Ownership of Certain Beneficial Owners and
Management" of this Registration Statement.
Item 8. Legal Proceedings.
- ---------------------------
39
<PAGE>
The Company is a party to Case No. EC18601, which is pending in the
Superior Court of the State of California for the County of San Diego. For a
description of this proceeding, see the heading "Changes in Control" of the
caption "Security Ownership of Certain Beneficial Owners and Management."
To the knowledge of management, no federal, state or local
governmental agency is presently contemplating any proceeding against the
Company. No director, executive officer or other person who may be deemed to
be an "affiliate" of the Company or owner of record or beneficially of more
than five percent of the Company's common stock is a party adverse to the
Company or has a material interest adverse to the Company in any proceeding.
Item 9. Market Price of and Dividends on the Company's Common Equity and
Other Stockholder Matters.
- --------------------------
Market Information.
- -------------------
Quotation of the Company's common stock on the OTC Bulletin Board of
the NASD only commenced August 3, 1998; no assurance can be given that any
established market for the Company's common stock will develop or be
maintained. For any market that develops for the Company's common stock, the
sale of "restricted securities" (common stock) pursuant to Rule 144 of the
Securities and Exchange Commission by members of management or any other
person to whom any such securities may be issued in the future may have a
substantial adverse impact on any such public market. Information about the
date when current holders' holding period of "restricted securities" commenced
can be found under the caption "Recent Sales of Unregistered Securities," Item
10. A minimum holding period of one year is required for resales under Rule
144, along with other pertinent provisions, including publicly available
information concerning the Company (this requirement will be satisfied by the
filing and effectiveness of this Registration Statement, the passage of 90
days and the continued timely filing by the Company of all reports required to
be filed by it with the Securities and Exchange Commission; limitations on the
volume of "restricted securities" which can be sold in any 90 day period; the
requirement of unsolicited broker's transactions; and the filing of a Notice
of Sale on Form 144.
The following quotations were provided by the National Quotations
Bureau, LLC, and do not represent actual transactions; these quotations do not
reflect dealer markups, markdowns or commissions.
<TABLE>
<CAPTION>
STOCK QUOTATIONS*
CLOSING BID
Quarter ended: High Low
- -------------- ---- ---
40
<PAGE>
<S> <C> <C>
August 3, 1998 2.125 1.375
(first available date)to
September 30, 1998
December 31, 1998 2 1.01
March 31, 1999 8.375 1.65625
June 30, 1999 6.1875 3.875
</TABLE>
Holders.
- --------
The number of record holders of the Company's securities as of the
date of this Registration Statement is approximately 143.
Dividends.
- ----------
The Company has not declared any cash dividends with respect to its
common stock or its preferred stock, and does not intend to declare dividends
in the foreseeable future. The future dividend policy of the Company cannot
be ascertained with any certainty, and if and until the Company completes any
sales of its products, no such policy will be formulated. There are no
material restrictions limiting, or that are likely to limit, the Company's
ability to pay dividends on its securities.
Item 10. Recent Sales of Unregistered Securities.
- -------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
------------
Date Number of Aggregate
Name Acquired Shares Consideration
---- -------- --------- -------------
<S> <C> <C> <C>
Founders 8/1/96 2,000,000 (1)
Subscribers of
offering under
Rule 504 (2) 125,000 (3) $250,000
Subscribers under (4) 350,000 $ 45,500
second Rule 504
offering
41
<PAGE>
Kaplan Trust 6/1/97 50,000 $ 10,000
Paul Ferandell 6/1/97 50,000 $ 25,000
Tony Cesare 6/1/97 10,000 $ 2,500
Four consultants 8/17/98 133,000 Services
valued at
$266,000 (5)
Jimmy Villalobos 8/17/98 3,000 $ 750
Daniel J. Sevier 8/17/98 4,000 $ 1,000
Five consultants 8/21/98 36,800 Services
valued at
$73,600 (6)
Southwest Products 12/23/98 25,000 $ 50,000
Southwest Products 1/21/99 10,000 $ 20,000
Two consultants 2/2/99 9,000 Services
valued at
$18,000 (7)
National Capital
Merc. 2/19/99 16,000 $ 40,800
National Capital
Merc. 3/25/99 20,000 $110,000
Rufus Young, Jr. 3/26/99 3,300 Legal
services
valued at
$16,500
Jeffery Rush 4/20/99 10,000 Services
valued at
$20,000
(Installation
of local area
network)
Telebil 4/20/99 100,000 Services
valued at
$200,000
(establishing
wholesale
division)
26 consultants 5/27/99 97,400 Services
valued at
$194,800 (8)
Holders of warrants
issued under Rule
504 offering (9) 375,000 $737,100
Three consultants (10) Warrants to Services
purchase valued at
195,077 $390,154 (11)
shares
42
<PAGE>
(1) Of this amount, a total of 1,783,000 were authorized for
issuance on August 1,1996, and were issued on April 16, 1998,
for a combination of cash and services.
(2) Subscriptions under this offering were made at various times
from January, 1998 through July, 1998.
(3) This offering was of 125,000 units, at a price of $2.00 per
unit. Each unit consisted of one share of the Company's
common stock and warrants to purchase up to three additional
shares at a price of $2.00 per share. As of the date of this
Registration Statement, all or substantially all of these
warrants have been exercised.
(4) This offering was subscribed by various persons in March, 1998.
(5) These services included preparation of the Company's Form 211;
investment banking; and investor relations services.
(6) These services included television and radio marketing and
preparation of the Company's Form 211.
(7) These services included telephone card marketing and television
marketing.
(8) These services included computer consulting; legal services;
investment banking; marketing services; and capital raising.
(9) These warrants were exercised over a period of time ranging from
approximately February 19, 1999, to February 28, 1999.
(10) These warrants were issued from June, 1997 to February, 1998.
They expired on or about March 10, 1999.
(11) These services included preparation of the Company's Form 211;
investor relations; and investment banking.
</TABLE>
Management believes each of the foregoing persons or entities was
either an "accredited investor," or "sophisticated investor" as defined in
Rule 506 of Regulation D of the Securities and Exchange Commission. Each had
access to all material information regarding the Company prior to the offer,
sale or issuance of these "restricted securities." The Company believes these
shares were exempt from the registration requirements of the Securities Act of
1933, as amended (the "1933 Act"), pursuant to Section 4(2) (with respect to
all issuances other than issuances as part the Company's offerings under Rule
504) or 3(b) thereof (with respect to the issuances under the Rule 504
offerings).
The Company has taken the following factors into account in
determining the valuations of the above-referenced shares: (i) the fact that
the shares are "restricted" (with the exception of the shares issued under
Rule 504 of the Securities and Exchange Commission); (ii) the limited market
for the Company's common stock on the OTC Bulletin Board of the NASD; (iii)
the low book value per share ($0.038 at December 31, 1998); and (iv) the
Company's history of limited revenues ($25,962 and $16,004 in 1997 and 1998,
respectively).
Item 11. Description of Securities.
- -----------------------------------
Common Stock
------------
The Company has two classes of securities authorized, consisting of
(i) 20,000,000 shares of common voting stock having a par value of one mill
($0.001) per share; and (ii) 5,000,000 shares of preferred stock having a par
43
<PAGE>
value of one mill ($0.001) per share. The holders of the Company's common
stock are entitled to one vote per share on each matter submitted to a vote at
a meeting of stockholders. The shares of common stock do not carry cumulative
voting rights in the election of directors.
The Company's preferred stock shall contain such rights and
preferences as the Board of Directors may authorize. As of the date of this
Registration Statement, the Board of Directors has not assigned any rights or
preferences to the preferred stock and no shares of preferred stock have been
issued.
Stockholders of the Company have no pre-emptive rights to acquire
additional shares of common stock or other securities. The common stock
carries no subscription or conversion rights. All shares of common stock now
outstanding are fully paid and non-assessable.
Outstanding Options, Warrants and Calls
---------------------------------------
See the caption "Executive Compensation" of this Registration
Statement for a description of all options to purchase shares of the Company's
common stock. There are presently no outstanding warrants or calls.
No Provisions Limiting Change of Control
----------------------------------------
There is no provision in the Company's Articles of Incorporation or
Bylaws that would delay, defer, or prevent a change in control of the Company.
Item 12. Indemnification of Directors and Officers.
- ---------------------------------------------------
Section 78.751(1) of the Nevada Revised Statutes ("NRS")
authorizes a Nevada corporation to indemnify any director, officer, employee,
or corporate agent "who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, except an action by or
in the right of the corporation" due to his or her corporate role. Section
78.751(1) extends this protection "against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with the action, suit or proceeding if he
or she acted in good faith and in a manner which he or she reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful."
Section 78.751(2) of the NRS also authorizes indemnification of
the reasonable defense or settlement expenses of a corporate director,
officer, employee or agent who is sued, or is threatened with a suit, by or in
the right of the corporation. The party must have been acting in good faith
and with the reasonable belief that his or her actions were not opposed to the
44
<PAGE>
corporation's best interests. Unless the court rules that the party is
reasonably entitled to indemnification, the party seeking indemnification must
not have been found liable to the corporation.
To the extent that a corporate director, officer, employee, or
agent is successful on the merits or otherwise in defending any action or
proceeding referred to in Section 78.751(1) or 78.751(2), Section 78.751(3) of
the NRS requires that he be indemnified "against expenses, including
attorneys' fees, actually and reasonably incurred by him or her in connection
with the defense."
Section 78.751 (4) of the NRS limits indemnification under
Sections 78.751 (1) and 78.751(2) to situations in which either (1) the
stockholders, (2)the majority of a disinterested quorum of directors, or (3)
independent legal counsel determine that indemnification is proper under the
circumstances.
Pursuant to Section 78.751(5) of the NRS, the corporation may
advance an officer's or director's expenses incurred in defending any action
or proceeding upon receipt of an undertaking. Section 78.751(6)(a) provides
that the rights to indemnification and advancement of expenses shall not be
deemed exclusive of any other rights under any bylaw, agreement, stockholder
vote or vote of disinterested directors. Section 78.751(6)(b) extends the
rights to indemnification and advancement of expenses to former directors,
officers, employees and agents, as well as their heirs, executors, and
administrators.
Regardless of whether a director, officer, employee or agent has
the right to indemnity, Section 78.752 allows the corporation to purchase and
maintain insurance on his behalf against liability resulting from his or her
corporate role.
Article IX of the Company's Articles of Incorporation limits the
personal liability of a director or executive officer for damages for breach
of fiduciary duty to acts or omissions involving intentional misconduct, fraud
or a knowing violation of law. In addition, Article X provides for
indemnification of the Company's directors and executive officers to
substantially the same extent as the NRS. See the Exhibit Index, Item 15 of
this Registration Statement.
Item 13. Financial Statements and Supplementary Data.
45
<PAGE>
CYBERTEL, COMMUNICATIONS CORP.
FINANCIAL STATEMENTS
Two Years Ended December 31, 1998
June 23, 1999
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cybertel, Communications Corp.
Las Vegas, Nevada
We have audited the accompanying balance sheet of Cybertel, Communications
Corp. as of December 31, 1998, and the related statements of income,
stockholders' equity and cash flows for the two years then ended. 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 audit.
We conducted our audit 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cybertel, Communications
Corp. as of December 31, 1998, and the results of its operations and its cash
flows for the two years then ended.
MALONE & BAILEY, PLLC
June 23, 1999
Houston, Texas
<TABLE>
<PAGE> CYBERTEL, COMMUNICATIONS CORP.
BALANCE SHEET
December 31, 1998
<CAPTION>
<S> <C>
ASSETS
Current Assets
Cash $ 50,344
Accounts receivable 1,278
Subscriptions receivable 34,500
Total Current Assets 86,122
Equipment, net of $2,612 accumulated depreciation 8,085
Deposits 4,500
TOTAL ASSETS $ 98,707
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt $ 2,554
Accounts payable 2,241
Accrued interest 1,673
Loan from a founding stockholder 12,700
Total Current Liabilities 19,168
Long-term Debt 2,575
Total Liabilities 21,743
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares
authorized, no shares issued or outstanding
Common stock, $.001 par value, 20,000,000
shares authorized, 2,806,659 shares
issued and outstanding 2,807
Paid in capital 1,626,813
Stock subscriptions receivable ( 113,500)
Retained (deficit) (1,439,156)
TOTAL STOCKHOLDERS' EQUITY 76,964
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 98,707
</TABLE>
See accompanying accounting policies
and notes to financial statements.
2
<TABLE>
CYBERTEL, COMMUNICATIONS CORP.
INCOME STATEMENTS
For the Years Ended December 31, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
Revenues $ 16,004 $ 26,862
Operating Expenses
Selling 26,657 12,851
General and administrative
- paid in cash 174,661 74,275
- paid in stock 976,218 180,000
Depreciation 2,400 212
Interest (income) (1,553) ( 236)
Interest expense 2,262 975
Total Operating Expenses 1,180,645 268,077
NET INCOME (LOSS) $(1,164,641) $(241,215)
Net (loss) per common share $(0.51) $(0.13)
Weighted average common shares
outstanding 2,298,053 1,858,025
</TABLE>
See accompanying accounting policies
and notes to financial statements.
3
<TABLE>
CYBERTEL, COMMUNICATIONS CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<CAPTION>
Stock
Common Stock Subscrip. Paid in Retained
Shares $ Receivable Capital Deficit Totals
<S> <C> <C> <C> <C> <C> <C>
Balances,
December 31, 1996 2,000,000 $2,000 $(3,900) $ 38,000 $( 33,300) $ 2,800
Stock certificates
canceled ( 558,500) (559) 3,900 ( 3,341)
Cash contribution from
founding shareholder 8,702 8,702
Stock issued
- for cash 134,550 135 81,465 81,600
- less subscriptions
rec. (25,000) (25,000)
- for services 140,000 140 279,860 280,000
- less costs of
fundraising (100,000) (100,000)
Net (loss) (241,215) (241,215)
Balances,
December 31, 1997 1,716,050 1,716 (25,000) 304,686 (274,515) 6,887
Stock issued
- for cash 393,750 394 376,606 377,000
- less: subscriptions
rec. (88,500) (88,500)
- for services 696,859 697 1,393,021 1,393,718
- less costs of
fundraising
- in cash paid (30,000) (30,000)
- in stock issued (417,500) (417,500)
Net (loss) (1,164,641)(1,164,641)
Balances,
December 31, 1998 2,806,659 $2,807$(113,500)$1,626,813$(1,439,156) $ 76,964
</TABLE>
See accompanying accounting policies
and notes to financial statements.
4
<TABLE>
CYBERTEL, COMMUNICATIONS CORP.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES
Net income (loss) $(1,164,641) $(241,215)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 2,400 212
Stock issued for services 1,393,718 180,000
Less: amount charged to equity ( 417,500)
Changes in
Accounts receivable 15,195 ( 16,473)
Accounts payable ( 1,477) 3,718
Accrued interest 762 910
NET CASH USED BY OPERATING ACTIVITIES ( 171,543) ( 72,848)
CASH FLOWS USED BY INVESTING ACTIVITIES
Purchase of equipment ( 3,073) ( 7,624)
Deposits acquired ( 4,500)
NET CASH USED BY INVESTING ACTIVITIES ( 3,073) ( 12,124)
CASH FLOWS FROM FINANCING ACTIVITIES
Debt proceeds 7,624
Repayment of debt ( 2,127) ( 367)
Loan from a shareholder 12,700
Sales of common stock, net of
costs of fundraising 224,000 65,302
NET CASH FLOWS FROM FINANCING ACTIVITIES 221,873 85,259
NET INCREASE IN CASH 47,257 287
CASH BALANCES
- Beginning of period 3,087 2,800
- End of period $ 50,344 $ 3,087
SUPPLEMENTAL DISCLOSURES
Interest paid $ 1,500 $ 64
Income taxes paid 0 0
</TABLE>
See accompanying accounting policies
and notes to financial statements.
5
NOTE 1 - ACCOUNTING POLICIES
Nature of Business. Cybertel, Communications Corp. ("Company") was
incorporated in Nevada in June, 1996. The Company sells telecommunications
services to commercial customers and began operations in 1997.
Estimates and assumptions. Preparing financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue and expenses at the balance sheet date and for the period then ended.
Actual results could differ from these estimates.
Revenue recognition occurred when commercial businesses are signed up with
various commercial carriers, and incur long-distance bills. The Company earns
a fractional portion of these charges as a referral fee. Beginning May 1999,
the Company began purchasing time from carriers and reselling it to its
customers.
Equipment is computer-related and is stated at cost. Depreciation is computed
by the straight-line method using rates based on an estimated 3-year life of
the related assets.
Income taxes are computed using the tax liability method of accounting,
whereby deferred income taxes are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates that will be in effect when the differences
reverse.
Loss per share is reported under Statement No. 128 of the Financial Accounting
Standards Board ("FAS 128"). FAS 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share exclude any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share are very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where appropriate, restated to conform to the FAS 128
requirement. For 1998, warrants outstanding are not included in the earnings
calculation because their effect in a loss year would be antidilutive.
NOTE 2 - INSTALLMENT DEBT
The Company capitalized two equipment leases payable in 24 equal remaining
installments of $246, beginning December 1997, using a 10% discount factor.
The debt is secured by the equipment, valued at about $4,000. Total debt of
$5,129 is due $2,554 in 1999 and $2,575 in 2000.
NOTE 3 - LOAN FROM A FOUNDING STOCKHOLDER
In 1997, a founding shareholder loaned $12,700 to the Company. This loan is
repayable on demand, and bears no interest.
NOTE 4 - INCOME TAXES
As of December 31, 1998, the Company has approximately $0,000 in unused net
operating loss carryforwards which expire in 2018.
NOTE 5 - COMMON STOCK
During 1998, the Company sold 393,750 shares of stock for $376,100 pursuant to
a placement offering exempt from registration under Rule 504 of the Securities
and Exchange Commission. Of this amount, $253,100 was collected during 1998
and another $34,500 was collected in 1999 prior to June 23, 1999, and is
recorded as an asset "Subscriptions receivable." The $88,500 balance is shown
as a reduction in Stockholders' Equity. The Company raised another $907,400
both through additional stock sales and through the exercise of warrants at $2
per share issued with the 1998 and 1999 stock sales through June 23, 1999 and
services worth another $986,800. Total stock issued in 1999 through June 23
is 777,250 shares.
570,077 warrants to purchase Company common stock at $2 were issued in
connection with this offering and other 1998 issuances. 368,550 have been
exercised in 1999 through June 23, 1999. 1999 sales of stock through June 23,
1999 totaled 777,250 shares for net cash proceeds of $907,400 and services
valued at $986,800.
NOTE 6 - OPERATING LEASES
The Company's office in La Jolla, California has 1,500 square feet. Rent
obligations are $2,525 per month for 11 remaining months in 1999.
NOTE 7 - SUBSEQUENT EVENTS
The Company is spending its 1999 stock sales proceeds to acquire equipment to
scale up its implementation of providing long distance and data
telecommunications services. In March 1999, the Company signed a service
agreement with General Telecom, Inc. to use its telecommunications equipment
for a one year term, with five renewable one-year options. Contract pricing
is per the agreement and is based on usage volume and line types, beginning at
$6,500 per month. Total equipment purchases to date are $37,909.
<PAGE>
<TABLE>
CYBERTEL COMMUNICATIONS CORPORATION
BALANCE SHEET
JUNE 30, 1999 AND JUNE 30, 1998
<CAPTION>
June 30, '99 June 30, '98
<S> <C> <C>
ASSETS
Current Assets
Cash $ 497,192 $ (841)
Accounts Receivable 135,083 500
Total Current Assets 632,275 (341)
Fixed Assets
Equipment 52,606 10,697
Accumulated Depreciation (4,179) (212)
Total Fixed Assets 48,427 10,485
Other Assets
Deposits 4,500 4,500
Total Other Assets 4,500 4,500
TOTAL ASSETS $ 685,202 14,644
LIABILITIES & EQUITY
Liabilities
Current Liabilities
Other Current Liabilities
Accounts Payable $ 40,567 3,718
Accrued Interest 1,673 910
Loans from founding stockholder 12,700 12,700
Current portion-long term debt 2,554 2,312
Total Other Current Liabilities 57,494 19,640
Total Current Liabilities 57,494 19,640
Long Term Liabilities
Long term debt 2,575 4,945
Total Long Term Liabilities 2,575 4,945
Total Liabilities 60,069 24,585
Equity
Retained Earnings (1,439,156) (274,515)
Net Income (513,455) (101,828)
Capital Stock 3,409 1,831
Stock Subscription Receivable (113,500) (25,000)
Paid in capital 2,687,835 389,571
Total Equity 625,133 (9,941)
TOTAL LIABILITIES & EQUITY $ 685,202 14,644
</TABLE>
UNAUDITED
<PAGE>
<TABLE>
CYBERTEL COMMUNICATIONS CORPORATION
PROFIT AND LOSS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
<CAPTION>
For the six months ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Revenues $ 1,314,940 $ 0
Cost of Goods Sold 1,269,143 0
Gross Profit 45,797 0
Operating Expenses
Selling 11,844 0
General and Administrative 551,696 100,328
Depreciation 1,567 0
Interest (income) (6,355) 0
Interest Expense 500 1,500
Total Operating Expenses 559,252 101,828
NET INCOME (LOSS) $ (513,455) $ (101,828)
Net (loss) per common share $ (0.17) $ (0.06)
Weighted average common shares
outstanding 3,020,284 1,766,050
</TABLE>
UNAUDITED
<PAGE>
<TABLE>
CYBERTEL COMMUNICATIONS CORPORATION
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
<CAPTION>
For the six months ended
June 30, 1999 June 30, 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net Income (513,455) (101,828)
Adjustments to reconcile Net Income
to net cash provided by operations:
Accounts Receivable (133,804) 15,973
Subscriptions receivable 34,500 0
Financing Costs 0 (30,000)
Accounts Payable 38,325 0
Stock Issued for Services 160,250 0
Net cash provided by Operating Activities (414,184) (115,855)
INVESTING ACTIVITIES
Equipment (41,911) (3,073)
Accumulated Depreciation 1,567 0
Net cash provided by Investing Activities (40,344) (3,073)
FINANCING ACTIVITIES
Capital Stock 602 115
Paid in capital 900,774 114,885
Net cash provided by Financing Activities 901,376 115,000
Net cash increase for period 446,848 (3,928)
Cash at beginning of period 50,344 3,087
Cash at end of period 497,192 841
</TABLE>
UNAUDITED
<PAGE>
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- ---------------------
During the Company's two most recent calendar years, and to the date
of this Registration Statement, the Company's principal independent accountant
has not resigned, declined to stand for re-election or been dismissed.
Item 15. Financial Statements and Exhibits
- -------------------------------------------
(a)
Malone & Bailey, PLLC
Index to Financial Statements
Independent Auditor's Report
Financial Statements
- --------------------
Audited Financial Statements as of December
31, 1998, and the two years then ended
--------------------------------------
Independent Auditors' Report
Balance Sheet
Income Statements
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
Unaudited Financial Statements as of June
30, 1999, and June 30, 1998 and the six
months then ended
----------------------------------------
Balance Sheet
Profit and Loss
Statement of Cash Flows
(b) The following exhibits are filed as a part of this Registration
Statement:
<TABLE>
<CAPTION>
Exhibit
Number Description*
- ------ ------------
<S> <C>
46
<PAGE>
3.1 Articles of Incorporation dated June 13, 1996**
3.2 Bylaws**
10.1 Bell Atlantic IP Telephony Network Services Termination
Agreement**
10.2 TeleHub Network Services Corporation Telecommunications
Service Agreement**
10.3 Customer Order Form with Level 3 Communications**
10.4 Letter of Intent with Swartz Private Equity, LLC**
27 Financial Data Schedule
</TABLE>
* Summaries of all exhibits contained within this
Registration Statement are modified in their
entirety by reference to these Exhibits.
** These documents and related exhibits have been
previously filed with the Securities and Exchange
Commission and are incorporated herein by reference.
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of
1934, the Registrant has caused this Registration Statement to be signed on
its behalf by the undersigned, hereunto duly authorized.
CYBERTEL, COMMUNICATIONS CORP.
Date: Oct. 15, 1999 By: /s/ Richard D. Mangiarelli
-------------- --------------------------
Richard D. Mangiarelli
CEO, President and Director
Date: Oct. 15, 1999 By: /s/ Paul J. Mills
-------------- ------------------------
Paul J. Mills
Secretary and Director
Date: Oct. 15, 1999 By: /s/ John E. Jordan
-------------- ------------------------
John E. Jordan
Director
47
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1999
<CASH> 50344
<SECURITIES> 0
<RECEIVABLES> 35778
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 86122
<PP&E> 10697
<DEPRECIATION> 2612
<TOTAL-ASSETS> 98707
<CURRENT-LIABILITIES> 19168
<BONDS> 0
0
0
<COMMON> 2632
<OTHER-SE> 74332
<TOTAL-LIABILITY-AND-EQUITY> 98707
<SALES> 16004
<TOTAL-REVENUES> 16004
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1179936
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2262
<INCOME-PRETAX> (1164641)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1164641)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
