As filed with the Securities and Exchange Commission on January 11, 2001
Registration No. 333-50200
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Amendment No. 3
UNDER THE SECURITIES ACT OF 1933
PRIME COMPANIES, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 4812 52-2031531
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(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification
Number)
409 Center Street
Yuba City, California 95991
(530) 755-3580
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(Address and Telephone Number of Principal Executive Offices and Principal
Place of Business)
Norbert J. Lima, Chief Executive Officer
Prime Companies, Inc.
409 Center Street
Yuba City, California 95991
(530) 755-3580
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(Name, Address and Telephone Number of Agent for Service)
Copies to:
Irving Pfeffer, Esq.
Pfeffer & Williams, PC
155 Montgomery Street, Suite 609
San Francisco, CA 94104
(415) 296-7272
(415) 296-8780 - Facsimile
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Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |-| ---------------
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |x|
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_| ___________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
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CALCULATION OF REGISTRATION FEE
Proposed
Maximum Proposed
Offering Maximum
Title of Each Class of Amount to be Price Per Aggregate Amount of
Securities to be Registered Registered Unit Offering Price Registration Fee
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<S> <C> <C> <C> <C>
Common stock 23,903,982 $0.375(1) $ 8,963,993(1) $ 2,492
Common stock(2) 1,521,000 $0.531(2) $ 807,651 $ 225
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Total Registration Fee 25,424,982 $ 9,771,644 $ 2,717(3)
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(1) Based upon the closing price of Prime Companies, Inc. common stock as
reported on the OTC Bulletin Board on November 17, 2000, pursuant to Rule
457(c) of the Securities Act of 1933.
(2) Issuable upon the exercise of a commitment warrant issued to Swartz on
September 8, 2000. The initial exercise price of the warrants is $0.531 per
share.
(3) The Registration Fee was paid with the original Form SB-2 registration
filing on November 17, 2000.
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The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
Prime Companies, Inc. Common Stock
25,424,982 shares of common stock
---------------------------------
This prospectus relates to the resale by the selling stockholders of up
to 8,903,982 shares of common stock and the resale of up to 16,521,000 shares of
common stock by Swartz Private Equity LLC.
Of the shares offered,
o 7,403,982 shares are presently outstanding and are being sold by current
shareholders
o 1,500,000 shares are pending issuance per an agreement to acquire New Wave
Networks LLC and are being sold by the shareholders of New Wave Networks
LLC
o 1,521,000 shares are under a commitment warrant issued to Swartz Private
Equity LLC on September 8, 2000. The offering of these shares is an
indirect primary offering by Prime, and Swartz Private Equity LLC is the
underwriter of these shares. We will receive the proceeds from the sale of
the shares to Swartz.
o up to 15,000,000 shares are under the agreement entered into with Swartz on
October 3, 2000. The offering of these shares is an indirect primary
offering by Prime, and Swartz Private Equity LLC is the underwriter of
these shares. We will receive the proceeds from the sale of the shares to
Swartz.
We will receive no proceeds from the sale of the shares by the selling
stockholders, or from the sale of the shares by the shareholders of New Wave
Networks LLC.
Our common stock is quoted on the OTC Bulletin Board under the symbol
PRMC. On December 29, 2000, the closing price of the common stock on the Over
the Counter Bulletin Board was $0.21875 per share.
Investing in the common stock involves a high degree of risk. You
should invest in the common stock only if you can afford to lose your entire
investment. See "Risk Factors" beginning on page 9 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is January 11, 2001
<PAGE>
The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.
Table of Contents
Page
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Prospectus Summary 4
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Investment Agreement 5
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Summary Financial Data 9
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Risk Factors 9
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Dividend Policy 11
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Selling Shareholders 14
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Plan of Distribution 18
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Legal Matters 18
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Management 19
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Principal Shareholders 21
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Experts 23
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Where You Can Find More Information 24
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Business 26
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Financial Condition and Results of Operations 32
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Executive Compensation 40
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Index to Financial Statements F-1
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3
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Prospectus Summary
------------------
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, including the "Risk Factors"
section.
Our Business
We were originally incorporated in 1999 in Delaware under the name Worldnet
Tel.com Inc. Pursuant to a stock purchase agreement between Prime Companies,
Inc., a Delaware Corporation, a nonoperating public shell, and Worldnet,
Worldnet was merged into Prime through a merger effective August 11, 1999. Our
principal executive offices are located at 409 Center Street, Yuba City, CA
95991 and our telephone number is (530) 755-3580.
We operate our company as Prime Companies, Inc. , a holding company, with three
wholly owned operating subsidiaries. An interconnect telephone and paging
business served as the basis for entry into the telecommunications industry.
Local multipoint distribution service is now Prime's primary focus and will
serve as our core business. This is a new type of fixed, non-mobile, broadband
technology, designed for the mass subscriber marketplace and is based on
millimeter microwave frequencies at 28 GHz to 31 GHz. This is a method of
distributing TV signals to households in a local community and uses broadcast
microwave (or sometimes FM) signals to contact local dishes, typically installed
on the top of apartment buildings. The received signal is then distributed
through the building's central wiring system.
Prime currently provides telecommunications services to both commercial and
consumer customers with a significant presence in the California market. Current
revenue generating services offered include: prepaid residential and long
distance service; business telephone interconnect services; wireless digital
subscriber line services; local multipoint distribution services; paging; and
voicemail services.
Prime operates as a competitive local exchange carrier in California,
Pennsylvania and New York State. This status allows Prime to take advantage of
the provisions of the Telecommunications Act of 1996, where the regional Bell
operating companies were ordered to allow competitive local exchange carriers
access to their networks at wholesale prices.
Prime has a limited operating history, significant losses, and substantial
future capital requirements. Prime also has an expectation of continued
significant losses until local multipoint distribution service revenues are
generated.
4
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INVESTMENT AGREEMENT
--------------------
OVERVIEW. On October 3, 2000, we entered into an investment agreement with
Swartz Private Equity, LLC. The Swartz investment agreement entitles us to issue
and sell up to $30 million of our common stock to Swartz, subject to a formula
based on average stock price and average trading volume, from time to time over
a three year period following the effective date of this registration statement.
We refer to each election by us to sell stock to Swartz as a put. Swartz will
sell our stock in the open market, sell our stock to other investors through
negotiated transactions or hold our stock in its own portfolio.
In addition, on September 8, 2000, we issued to Swartz a commitment warrant to
purchase 1,521,000 shares of our common stock, exercisable for a period of five
years from September 8, 2000, with an initial exercise price equal to $.531,
which was the lowest closing bid price for the five trading days before October
3, 2000. The warrants will have semi-annual reset provisions. The commitment
warrant is exercisable as to 1,014,000 shares as of October 3, 2000. The
commitment warrant is exercisable as to the remaining 507,000 shares on the
earlier of March 8, 2001, or the date the Securities and Exchange Commission
declares the Registration Statement effective.
We may issue additional warrants under the terms of the Swartz investment
agreement, as described below.
PUT RIGHT. In order to invoke a put right, we must have an effective
registration statement on file with the SEC registering the resale of the common
shares which may be issued as a consequence of the invocation of that put right.
Additionally, we must give at least ten but not more than twenty business days'
advance notice to Swartz of the date on which we intend to exercise a particular
put right, and we must indicate the number of shares of common stock we intend
to sell to Swartz. At our option, we may also designate a maximum dollar amount
of common stock (not to exceed $2 million) which we will sell to Swartz during
the put and/or a minimum purchase price per common share at which Swartz may
purchase shares during the put. The number of common shares sold to Swartz may
not exceed 15% of the aggregate daily reported trading volume, excluding block
trades of 20,000 or more shares of common stock, during a period which begins on
the business day immediately following the day we invoked the put right and ends
on and includes the day which is twenty business days after the date we invoked
the put right, and may not exceed 15% of the aggregate daily reported trading
volume, excluding block trades of 20,000 or more shares of common stock, for the
20 business days immediately preceding the day we invoked the put right.
Swartz will pay us 91% of the market price for each share of common stock under
the put. Market price is defined as the lowest closing bid price for the common
stock during the pricing period for the applicable put, which consists of the
twenty business-day period following the date notice of the put which was
provided to Swartz. However, the market price may not be less than the
designated minimum per share price, if any, that we indicated in our notice.
5
<PAGE>
WARRANTS. Within five business days after the end of each pricing period, we are
required to issue and deliver to Swartz a warrant to purchase a number of shares
of common stock equal to 10% of the common shares issued to Swartz in the
applicable put. Each warrant will be exercisable at a price that will initially
equal the market price for the applicable put. The warrants will have
semi-annual reset provisions. Each warrant will be immediately exercisable and
have a term beginning on the date of issuance and ending five years thereafter.
LIMITATIONS AND CONDITIONS PRECEDENT TO OUR PUT RIGHTS. Swartz is not required
to acquire and pay for any common shares with respect to any particular put for
which:
o we have announced or implemented a stock split or combination of our common
stock;
o we have paid a common stock dividend or set a record date for the payment
of a dividend;
o we have made a distribution of our common stock or of all or any portion of
our assets between the put notice date and the date the particular put
closes; or
o we have announced or consummated a major transaction (including a
transaction which constitutes a change of control) between the advance put
notice date and the end of the pricing period for that put.
SHORT SALES. Swartz and its affiliates are prohibited from engaging in short
sales of our common stock unless they have received a put notice and the amount
of shares involved in a short sale does not exceed the number of shares
specified in the put notice.
CANCELLATION OF PUTS. We must cancel a particular put if, between the dates of
the advance put notice and the last day of the pricing period:
o we discover an undisclosed material fact relevant to Swartz's investment
decision;
o the registration statement registering resales of the common shares becomes
ineffective; or
o shares are delisted from the then primary exchange.
However, the put will remain in effect for the number of shares specified in the
put notice for the shortened pricing period that will end on the day prior to
the date of delivery of the put cancellation notice.
SHAREHOLDER APPROVAL. We may currently issue more than 20% of our outstanding
shares. If we become listed on the Nasdaq Small Cap Market or Nasdaq National
Market, then we must get shareholder approval to issue more than 20% of our
outstanding shares. Since we are currently a bulletin board company, we do not
need shareholder approval.
6
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TERMINATION OF INVESTMENT AGREEMENT. We may also terminate our right to initiate
further puts or terminate the investment agreement by providing Swartz with
notice of such intention to terminate; however, any such termination will not
affect any other rights or obligations we have concerning the investment
agreement or any related agreement.
RESTRICTIVE COVENANTS. During the term of the investment agreement and for a
period of 60 days thereafter, we are prohibited from certain transactions. These
include the issuance of any debt or equity securities in a private transaction
that are convertible or exercisable into shares of common stock and the issuance
of certain other equity securities. We are also prohibited from entering into
any private equity line type agreements similar to the investment agreement
without obtaining Swartz's prior written approval.
RIGHT OF FIRST REFUSAL. Swartz has a right of first refusal to purchase any
equity securities or convertible debt securities offered by us in any private
transaction that closes on or prior to 60 days after the termination of the
investment agreement.
SWARTZ'S RIGHT OF INDEMNIFICATION. We are obligated to indemnify Swartz
(including their shareholders, officers, directors, employees and agents) from
all liability and losses resulting from any misrepresentations or breaches we
made in connection with the investment agreement, our registration rights
agreement, other related agreements, or the registration statement.
Additional Shares We Are Registering
In 2000, through a Regulation D offering, we sold an aggregate of 6,569,444
shares of common stock to certain private investors. Additionally, we issued
273,427 shares of common stock to certain private investors in connection with
the Regulation D offering. This prospectus covers the resale of the common stock
by these private investors.
On December 29, 2000 the Company entered into an agreement to acquire 100%
of the ownership units of New Wave Networks LLC, another local multipoint
distribution service license holder, in exchange for $600,000 cash and 1,500,000
shares of common stock, which are covered by this prospectus. The transaction is
contingent upon the Company having access to funds from the above described
investment agreement with Swartz. The transaction is anticipated to close prior
to April 20, 2001.
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7
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Key Facts
<S> <C>
Total shares outstanding prior to the offerings 26,717,296(1)
Shares being offered for resale to the public 25,424,982(2)
Total shares outstanding after the offering 43,217,296(3)
Price per share to the public Market price at time of resale.
Total proceeds raised by offering None; however, we have received proceeds from the
sale of shares that are presently outstanding, we
may receive up to $30 million from the sale of
shares to Swartz, and we may receive up to $807,651
from the sale to Swartz of shares issuable upon the
exercise of a commitment warrant issued to Swartz
pursuant to the investment agreement, and we may
receive additional amounts upon the sale of shares
through the exercise of purchase warrants to be
periodically issued to Swartz pursuant to the
investment agreement.
Use of proceeds from the sale of We plan to use the proceeds for working capital and
the shares to Swartz general corporate purposes.
OTC NASDAQ Bulletin Board Symbol PRMC
(1) Balance outstanding as of September 30, 2000.
(2) Includes
(i) 7,403,982 shares that are presently outstanding,
(ii) up to 13,636,364 shares that may be issued to Swartz pursuant to the
investment agreement,
(iii)up to 1,521,000 shares underlying warrants issued to Swartz in
connection with the investment agreement,
(iv) up to 1,363,636 shares underlying warrants that we may issue to Swartz
in the future pursuant to the investment agreement, and
(v) 1,500,000 shares which may be issued per an agreement to acquire New
Wave Networks LLC.
(3) Includes up to 15,000,000 shares that may be issued to Swartz pursuant to
the investment agreement, and 1,500,000 shares which may be issued per an
agreement to acquire New Wave Networks LLC.
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8
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Summary Consolidated Financial Data
-----------------------------------
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months Ended September 30,
--------------------------- -------------------------------
1998 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue ......................... $ 209,823 $ 441,663 $ 199,860 $ 373,563
Operating Expenses .............. 264,168 1,191,218 271,085 1,529,684
Net loss from operations ........ (54,345) (749,555) (71,225) (1,156,121)
Net Loss ........................ (69,141) (953,944) (103,083) (4,200,197)
Net (loss) per common share ..... $ (.02) $ (.06) $ (.01) $ (.14)
Weighted average number of common
shares outstanding ......... 4,500,000 16,680,764 14,500,000 29,112,248
At December 31, At September 30,
---------------------------- ---------------------------
1998 1999 1999 2000
---- ---- ---- ----
Balance Sheet Data:
Working capital (deficit)........ $ (7,542) $ (61,836) $ (196,870) $ 358,341
Total assets .................... 93,532 1,661,429 4,464,553 1,880,223
Total long term debt ............ 25,500 1,240,216 932,194 -0-
Shareholders' equity (deficit) .. $ 33,042 $ (613,683) $ 25,624 $ 1,051,234
</TABLE>
RISK FACTORS
------------
Offering Risk Factors
Prime has Limited Operating History. The ultimate success of Prime will, among
other things, depend on its ability to build, install and implement the
telecommunication systems necessary to provide high speed telecommunications
services. The likelihood of the success of Prime must be considered in light of
the problems, expenses, difficulties, complications and delays frequently
encountered in connection with the development of a new business enterprise, and
the competitive environment in which Prime operates. If Prime does not
successfully build, install, and implement its telecommunication systems, it
will incur continued losses, and may not be able to remain in business.
9
<PAGE>
Revenues are Contingent upon Certain Events. Prime's revenues will be derived
primarily from customer fees that are contingent upon certain transactions (i.e.
financings, system build-outs, acquisitions, etc.) being successfully
consummated by Prime.
The Telecommunications Industry is Highly Competitive. The telecommunications
industry is highly competitive. There are a number of corporations offering
competing technologies and services in Prime's target areas. Accordingly, Prime
competes with several entities for a share of the market, some of which have
more financial resources and experience than Prime which enable them to better
withstand the impact of risks associated with a highly competitive industry.
Prime has Limited Working Capital. Even if all of the shares being offered are
sold, Prime may seek additional financing in the future from outside sources,
either through additional sales of equity in Prime or by borrowing. Such
financing may be sought to complete the build out of Prime's telecommunications
systems, expand upon the newly built and operating systems, or for the marketing
of the telecommunications services provided by Prime's systems. Additional
financing may not be available to Prime, or if available it may not be on
attractive terms. Moreover, Prime may have to forfeit some interest in its
future revenues or dilute the equity interest of its shareholders in order to
obtain any such additional financing. If such additional financing is required
but not available, Prime may lose its market share of customers in the
territories in which it has built its systems. The ability of Prime to obtain
additional financing may be dependent on factors over which Prime has no
control, such as the general condition of the financial markets, and the
financial condition of the larger telecommunications companies at the time that
Prime may seek such additional financing.
Prime is Dependent on Key Personnel. Prime's success is highly dependent upon
the skills of a limited number of key management personnel. To reach its
business objectives, Prime will need to hire and retain qualified personnel in
the areas of installation and maintenance of telecommunications systems and
marketing. Prime may not be able to hire or retain such personnel, as Prime must
compete with other companies and government entities. Another factor is that the
secondary and tertiary markets in which Prime is building its telecommunications
systems are generally, in the opinion of the technically educated and
experienced pool of potential employees, not as desirable communities in which
to reside as the primary markets and the high tech areas of the United States.
The loss of any of Prime's key personnel or the failure to attract and retain
necessary new employees could have an adverse effect on Prime's business
operations.
Prime has a History of Losses and a Limited Operating History. Prime has
generated a cumulative net loss of $5,334,909 for the period from its inception
through September 30, 2000. In order to establish profitable operations, Prime
must successfully market its systems and keep its expenditures in line with
moderate revenues. Prime is subject to a number of risks including its ability
to successfully market, distribute and sell its product, intense competition,
and its reliance on a set of important licenses. If Prime does not successfully
build its telecommunication systems and market its services to customers, it
will incur continued losses, and may not be able to remain in business.
Potential Volatility of Stock Price. The stock market has experienced
significant price and volume fluctuations unrelated to the operating performance
of particular companies. In addition, the market price of the company's common
stock has been highly volatile and is likely to continue to be so. Prime's float
(shares available for trading by the public) has been very thin, and the lack of
substantial trading volume tends to increase the volatility of Prime's stock
price. Factors such as Prime's ability to increase revenues, variations in the
company's financial results, and its ability to obtain needed financing,
announcements of technological innovations or new products by Prime or its
competition, comments by securities analysts, adverse regulatory actions or
decisions, any loss of key management, results of Prime's operations or those of
its competition, and changing governmental regulations may have a significant
impact on the market price of Prime's common stock.
10
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Arbitrary Pricing of the Shares. The offering price for the Shares was
arbitrarily determined by Prime and bears no relationship to Prime's assets,
earnings, book value, or any other generally accepted criteria of value.
Investors who purchase shares will incur an immediate dilution of their
investment insofar as it relates to their shares relative to the resulting book
value of Prime after the offering.
Dilution of the Shareholders' Ownership. Prime's expansion and growth strategy
may involve acquisitions of companies whereby some or all of the consideration
may be Common Stock or other equity securities of Prime. Accordingly, in the
event Prime engages in an aggressive acquisition strategy involving a
significant number of companies, the investors in this offering will experience
significant dilution of their ownership interest in Prime. In addition, in the
event that Prime elects to issue additional shares of common stock or other
securities in connection with any future financings, investors in this offering
could experience dilution of their ownership interest in Prime.
Prime will have Broad Discretion in the Use of Proceeds. Prime will have broad
discretion in the application of the proceeds of this offering. If Prime does
not utilize the funds received from this offering to build its telecommunication
systems and market its services to customers, it will incur continued losses,
dilute the existing shareholders interest in Prime, and may not be able to
remain in business. See "Use of Proceeds."
Prime does Not Intend to Declare Dividends. We have not paid any dividends on
our common stock during the past two years. We expect to continue to retain all
earnings generated by our operations for the development and growth of our
business, and do not anticipate paying any cash dividends to our shareholders in
the foreseeable future. The payment of future dividends on the common stock and
the rate of such dividends, if any, will be determined by our Board of Directors
in light of our earnings, financial condition, capital requirements and other
factors. If we do not utilize the funds from earnings to expand our
telecommunication systems and market our services to customers, we will be at
risk to lose our market share of customers in the areas in which we offer our
services.
Industry Risk Factors
Dependence On Network Infrastructure; Establishment and Maintenance of Peering
Relationships; Capacity; Risk of System Failure. Prime's success will depend
upon its ability to implement and to subsequently continue to expand a network
infrastructure and support services in order to supply sufficient geographic
reach, capacity, reliability and security at an acceptable cost. The development
and expansion of Prime's network will require that it enter into agreements, on
acceptable terms and conditions, with the various providers of infrastructure
capacity and equipment and support services. These are referred to as peering
relationships. These requisite agreements may not be able to be obtained on
satisfactory terms and. conditions.
The expansion and adaptation of Prime's network infrastructure will also require
substantial financial operational and managerial resources. Prime may not be
able to expand or adapt the network infrastructure it intends to develop to meet
the industry's evolving standards or its customers' growing demands and changing
requirements on a timely basis, at a commercially reasonable cost, or at all.
Prime may not be able to deploy successfully any expanded and adapted network
infrastructure. Failure to maintain peering relationships or establish new ones,
if necessary, would cause Prime to incur additional operating expenditures which
would have a material adverse effect on Prime's business, financial condition
and results of operations.
Prime is Dependent on Telecommunications Carriers and Other Suppliers. Prime's
suppliers and telecommunications carriers also sell or lease services and
products to Prime's competitors, and some of these carriers are, and in the
future others may become, competitors of Prime. Prime's suppliers and
telecommunications carriers may enter into exclusive arrangements with Prime's
competitors or otherwise stop selling or leasing their services or products to
Prime, which events could have a material adverse effect on Prime. Prime is
currently the largest customer of Alcatel for their local multipoint
distribution service equipment in the United States.
11
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The Telecommunications Industry Experiences Rapid Technological Change. The
market for Prime's services is characterized by rapidly changing technology,
evolving industry standards, changes in customer needs and frequent new service
and product introductions. Prime's future success will depend, in part, on its
ability to use leading technologies effectively, to continue to develop its
technical expertise, to enhance its existing services and to develop new
services that meet changing customer needs on a timely and cost-effective basis
and obtain market acceptance. Any failure on the part of Prime to use new
technologies effectively, to develop its technical expertise and new services or
to enhance existing services on a timely basis, either internally or through
arrangements with third parties, could have a material adverse effect on Prime.
Limited Public Market for Prime Shares. Investors should be aware that there is
a limited market for the shares. Accordingly, it may be difficult to resell the
shares.
Lack of Management Control by Shareholders. The shareholders will have a
minority equity and voting interest in Prime. The shareholders will not take
part in the management or control of Prime's business, which will be the sole
responsibility of Prime's Officers and Directors.
Possible Conflicts of Interest. The transactions that are described in this
prospectus involve potential conflicts of interest. SEE "MANAGEMENT
RELATIONSHIPS AND TRANSACTIONS."
Market and Financial Forecasts. Prime has prepared certain forecasts for use by
management. The conclusions contained in the forecasts may not be attained in
the actual operation of Prime. Actual results of operations may differ
significantly based on certain assumptions concerning facts and events over
which Prime may have no control, including the ability through marketing and
management to obtain the projected revenue levels. Therefore the operating
results forecast may not be achieved, and the assumptions on which the forecasts
are based may not be realized.
The Shares offered hereby are speculative, involve a high degree of risk and
should not be purchased by investors who cannot afford the loss of their entire
investment. In making an investment decision, each prospective investor should
carefully consider the following risk factors inherent in and affecting the
business of Prime and this offering in addition to the other information
contained elsewhere in this prospectus. When used in this Memorandum the words
or phrases "will likely result," "are expected to," "will continue, "is
anticipated," "estimate," "project," "believe" or similar expression are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Reform Act of 1993. Offerees should be aware that all
forward-looking statements are necessarily speculative and not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. Various risks and uncertainties, including, without limitation, regional
and national economic conditions, changes in levels of market interest rates,
credit risks of lending activities, and competitive and regulatory factors,
could affect Prime's financial performance and could cause Prime's actual
results for future periods to differ materially from those anticipated or
projected. The risks highlighted herein should not be assumed to be the only
things that could affect future performance of Prime.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
--------------------------------------------------------------------------------
Certain statements made herein or elsewhere by, or on behalf of, Prime that are
not historical facts are intended to be forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are based on assumptions about
future events and are therefore inherently uncertain.
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Prime cautions readers that the following important factors, among others, could
affect Prime's consolidated results:
1. Whether acquired businesses perform at levels used by management in
the valuation process and whether, and the rate at which, management
is able to increase the profitability of acquired businesses.
2. The ability of Prime to manage its growth in terms of implementing
internal controls and information gathering systems, and retaining or
attracting key personnel, among other things.
3. The amount and rate of growth in Prime's corporate general and
administrative expenses.
4. Changes in interest rates, which can increase or decrease the amount
Prime pays on borrowings.
5. Changes in government regulation, including tax rates and structures.
6. Changes in accounting policies and practices adopted voluntarily or
required to be adopted by generally accepted accounting principles.
Prime cautions readers that it assumes no obligation to update or publicly
release any revisions to forward-looking statements made herein or any other
forward-looking statements made by, or on behalf of, Prime.
Use of Proceeds
We will not receive any proceeds from the sale of the shares by the selling
security holders. However, we have received proceeds from the sale of shares
that are presently outstanding, we will receive up to $30 million from Swartz
upon Swartz's purchase of the shares from us, and we may receive additional
proceeds from the sale to Swartz of shares issuable upon the exercise of
warrants issued or to be issued to Swartz pursuant to the investment agreement.
We intend to use the proceeds from the sale of the shares to Swartz and the
exercise of warrants by Swartz for working capital.
Prime has entered into a $6,500,000 supply agreement with Alcatel USA for a
supply of local multipoint distribution service equipment to be installed at the
various locations for which licenses have been received. We may use up to
$6,000,000 of the proceeds from the sale of the shares to Swartz, and the
exercise of warrants by Swartz, for capital equipment to build and install our
local multipoint distribution service systems.
We may use up to $600,000 of the proceeds from the sale of the shares to
Swartz, and the exercise of warrants by Swartz, for the acquisition of New Wave
Networks LLC.
To the extent that we deem appropriate, we may acquire fully developed
products or businesses that, in our opinion, facilitate our growth and/or
enhance the market penetration or reputation of our products and services. To
the extent that we identify any such opportunities, an acquisition may involve
the expenditure of significant cash and/or the issuance of our capital stock.
Determination of Offering Price
The common shares of Prime Companies, Inc. are traded on the NASDAQ OTC
Bulletin Board but the trading volume has been too light to be relied upon as a
fair measure of the value of the shares.
Market for Common Equity and Related Stockholder Matters
MARKET - Price Range of Common Stock
The Company's Common stock has traded on the NASDAQ OTC Bulletin Board under the
symbol PRMC since May 17, 1998. The following table presents high and low prices
for the Company's common stock published by the National Quotation Service, Inc.
for each quarter for the years 1998 and 1999, and for the first three quarters
of 2000. The quotations represent prices in the over-the-counter-market between
dealers in securities and do not include retail markup, markdown or commissions
and do not necessarily represent actual transactions.
13
<PAGE>
QUARTER ENDING HIGH LOW
----------------------------------------
June 30, 1998 3.00 3.00
September 30, 1998 3.25 0.31
December 31, 1998 3.50 1.00
March 31, 1999 2.50 0.125
June 30, 1999 0.56 0.125
September 30, 1999 0.50 0.22
December 31, 1999 0.50 0.25
March 31, 2000 4.31 0.30
June 30, 2000 2.625 1.00
September 30, 2000 1.25 0.3125
December 31, 2000 0.625 0.16
SHAREHOLDERS
As of October 24, 2000 the number of shareholders of record of common stock,
excluding the number of objecting beneficial owners whose securities are held in
street name, was approximately 1,285. The number of shareholders whose
securities were held in their name was 270 on that date. The number of
non-objecting beneficial owners whose securities were held in street name on
that date was 1,015.
Dilution
The net tangible book value per share before the sale of shares to Swartz
is $0.0393, and after the sale of shares to Swartz upon the exercise of the
commitment warrant will be $0.0658.
The amount of the increase in such net tangible book value per share
attributable to the cash payments made by purchasers of the shares being offered
is $0.0265.
The amount of the immediate dilution from the public offering price that
will be absorbed by such purchasers is $0.4652 per share.
Selling Security Holders
Attached is a list of the selling shareholders showing the amount of
securities owned by each security holder before the offering, the amount to be
offered for the security holder's account, and the amount (if one percent or
more) of the percentage of the class to be owned by such security holder after
the offering is complete.
14
<PAGE>
The following table provides certain information with respect to the selling
shareholders' beneficial ownership of our common stock as of September 30, 2000,
and as adjusted to give effect to the sale of all of the shares offered hereby.
Except for William Turley, a director of Prime, and Martin Sokolowski, a
director of Prime, none of the selling shareholders currently is an affiliate of
ours and none of them has had a material relationship with us during the past
three years. Except for Peter Charles Restivo, Cesare J. Iore Jr., Nick
Liantonio Jr., and Peter J. Sinram, none of the selling shareholders are or were
affiliated with registered broker-dealers. See "Plan of Distribution." The
selling shareholders possess sole voting and investment power with respect to
the securities shown.
<TABLE>
<CAPTION>
Number
Number of Shares
of Shares (& % if greater
Last Name, First Name Beneficially Number than 1%)
Or Owned Before of Shares Owned After
Business Name Offering Offered Offering
--------------------- --------- ---------- ----------
<S> <C> <C>
Abbondanza, Ronald 10,000 10,000
Acosta, Fulvio A. 37,000 37,000
Acosta, Joseph 10,000 10,000
Ahman, Peter 10,000 10,000
Al Mal Islamic Co. 1,000,000 1,000,000
Alarakhia, Alnoor 100,000 100,000
Alarakhia, Gulzar 30,000 30,000
Altman, Ed 110,000 110,000
Altman, Jason 20,000 20,000
Angrest, Jacob 150,000 150,000
Aye, Mg San 20,000 20,000
Barnes, Jeffrey M. 50,000 50,000
Berkenbile, Freny 20,000 20,000
Bickta, Elmer F. & Marion J. 14,000 14,000
Brogan, Kevin 10,000 10,000
Bucher, Steven C. 100,000 100,000
Carpio, Cecilla Carbungco 10,000 10,000
Chartier, Shephane 10,000 10,000
Chu, Hua Fang 20,000 20,000
Cousins, Thomas E. 20,000 20,000
Dahlgren, Lennart 100,000 100,000
Daniels, Scott A. 30,000 30,000
Darland, William F. 20,000 20,000
Dhanik, Yogendra S. 10,000 10,000
Dixon, Michael 10,000 10,000
Dress, Marian Patty 25,000 25,000
Dunn, Sherman 100,000 100,000
El-Zoghbi, Ahmed 10,000 10,000
Emerson, Herbert Lee 10,000 10,000
Fesseha, Youm & Saba Tesfaye 10,000 10,000
Flynn, Kevin T. 10,000 10,000
Gebhardt Family Trust 875,000 875,000
Competitive Consulting Group 40,000 40,000
Blooston, Mordkofsky, Jackson & Dickens 20,000 20,000
MacLellan, Douglas C. 150,000 150,000
Gebhardt, Mike 40,000 40,000
Kearny, Dave 30,000 30,000
Tierny, Gordy 50,000 50,000
Brown, Jim 90,000 90,000
Wiese, Richard 90,000 90,000
Cohen, Fred 15,000 15,000
Warner, Tim 10,000 10,000
Riggs, Craig 90,000 90,000
Gelasio, Alfredo I. 10,000 10,000
Generation Capital Associates 250,000 250,000
George, Mark R. 10,000 10,000
Goodman, Adam L. 160,000 160,000
Gredgorio, Salvatore G. 14,000 14,000
Grenn, Kimberley & Carl Martin 25,000 25,000
Gruebel, Gerald W. 10,000 10,000
15
<PAGE>
Gulzar Ventures, Inc. 50,000 50,000
Gupta, Monica 100,000 100,000
H.I.K. Inc. 20,000 20,000
Ha, Thoai Van 20,000 20,000
Hachim, Dean A. 30,000 30,000
Hamilton, Andrew 20,000 20,000
Ho, Tze Kin 50,000 50,000
Hodel, John 20,000 20,000
Honarvar, John B. 100,000 100,000
Howe, Clarin F. 200,000 200,000
Iori, Cesare J. Jr. 91,142 91,142
Ismati, Habib 20,000 20,000
Jenkins, Larry D. 10,000 10,000
Jordan, Chester 10,000 10,000
Kakaraparthi, Sirharikumar 5,000 5,000
Kaldis, Peter 25,000 25,000
Kannan, Chak D. 20,000 20,000
Katsampes, Peter 20,000 20,000
Knapp, Dennis 20,000 20,000
Konstatntinidis, Bill 10,000 10,000
Koons, Darlene 561,111 561,111
Kovelman, Paul H. 10,000 10,000
Kyeremeh, Kofi 10,000 10,000
La Barbera, Josephine 10,000 10,000
Lavemour, Annette D. 20,000 20,000
Lawhon, Rebecca L. 20,000 20,000
Lee, Frank D. 15,000 15,000
Lee, James D. 10,000 10,000
Lee, Johnson Y 40,000 40,000
Lee, Mark J 100,000 100,000
Lei, Isaac 10,000 10,000
Leinwand, Laurie 10,000 10,000
Leung, Nelson 45,000 45,000
Liantonio, Nick Jr. 91,142 91,142
Luo, Bill Han 40,000 40,000
Lwin, Nyunt 20,000 20,000
Macrae, G. Stuart 10,000 10,000
Mandekich, Robert M. 10,000 10,000
Manickam, John G. 10,000 10,000
Mark, Arie 100,000 100,000
Martin, Stephen J. 10,000 10,000
McShane, Christopher P. 10,000 10,000
Meyers, David 10,000 10,000
Meyyappan, Ashok K. 12,500 12,500
Mitchener, Jared 10,000 10,000
Mittelstadt, David 50,000 50,000
Mores, Matt M 22,000 22,000
Morrone, Concetta 40,000 40,000
Nabera Trade, 20,000 20,000
Nayak, Anne-Marie 20,000 20,000
Nelson, Bryan 20,000 20,000
Nguyen, Bang T. 10,000 10,000
Ni, Daw Ni 10,000 10,000
Nolley, Roy Glenn 23,500 23,500
Nuziale, Hugo 40,000 40,000
Nyunt Lwin Retirement Trust 40,000 40,000
O'Shea, Scott 10,000 10,000
Ornato, Joe 10,000 10,000
Papadimos, Steve J. 25,000 25,000
Parikh, Anjan 10,000 10,000
Patel, Nandu V. 10,000 10,000
Pavlik Investment LLC 30,000 30,000
Pedro, John M 10,000 10,000
Peschek, Ryan 30,000 30,000
Petree, Clarence R. 10,000 10,000
Pham, Rosalyn T. 10,000 10,000
Pierle, Tamy 600,000 600,000
Pinisetti, Kamalesh 10,000 10,000
Pola, Chaya 10,000 10,000
16
<PAGE>
Restivo, Peter Charles 91,143 91,143
Rispoli, Caroline 10,000 10,000
Roy, Ankur 10,000 10,000
S & G Associates LLC 10,000 10,000
Salientes, Armel 10,000 10,000
Sambuchino, Kevin R. 10,000 10,000
Scarfone, Frank A. & Iris M. 100,000 100,000
Schmitt, Elwood G. 20,000 20,000
Schmitt, Gerard 20,000 20,000
Schroeder, William H. III 10,000 10,000
Scott, James L 20,000 20,000
Sefen, Ehab M. 11,000 11,000
Setlin, Jeffrey 50,000 50,000
Shakouri, Jessie Lee 15,000 15,000
Sherman, John L. 10,000 10,000
Shetty, Sanjeev D. 10,000 10,000
Shevlin, Daniel M. 10,000 10,000
Shroff, Adi B. 130,000 130,000
Shroff, Vispi 220,000 220,000
Sinram, Peter 40,000 40,000
Sloter, Julian W. 50,000 50,000
Soe, Minn 40,000 40,000
Sokolowski, Martin 85,000 85,000
Spurrell, Arthur L. 80,000 80,000
Stemberger, Victor J. 20,000 20,000
Stolz, Brian 10,000 10,000
Sun Cal Finance Group, Inc. 40,000 40,000
Sun Cal Fin Gr Inc.-Ret trust 40,000 40,000
Swarna, Bhaskar S. 5,000 5,000
Tang, Ron T. 80,000 80,000
Taufer, Dana A. 30,000 30,000
Teng, Shuhsiang 10,000 10,000
Thein, John 15,000 15,000
Thomas, Benjamin A. 20,000 20,000
Tiwari, Sushilkumar 20,000 20,000
Tran, Hoa 10,000 10,000
Tran, San 10,000 10,000
Trang, Scott 10,000 10,000
Trunzo, Christopher 10,000 10,000
Truong, Rot T. 20,000 20,000
Turley, William 110,000 110,000
Ujhazy, John E. 10,000 10,000
Unchalipongse, Teerawee 30,000 30,000
Vellian, Jomy Kurian 10,000 10,000
Wever Associates MMDS2-Wever, Leo 16,000 16,000
White, Raymond E. 22,222 22,222
Williams, Bruce W. & Mina 10,000 10,000
Wong, Mun Chung 10,000 10,000
Wright, Ian 22,222 22,222
Xie, Roger 10,000 10,000
Yeo, Kyee Wan 10,000 10,000
Zahn, David 20,000 20,000
Zappa, Joann M 10,000 10,000
Zappa, Michael J. 10,000 10,000
Zappa, Mike/Leo, Anthony 10,000 10,000
Zhou, Wen 10,000 10,000
175 investors Total 8,903,982 8,903,982
</TABLE>
17
<PAGE>
Plan of Distribution
Each selling shareholder is free to offer and sell his or her common shares
at such times, in such manner and at such prices as he or she may determine. The
types of transactions in which the common shares are sold may include
transactions in the over-the-counter market (including block transactions),
negotiated transactions, the settlement of short sales of common shares, or a
combination of such methods of sale. The sales will be at market prices
prevailing at the time of sale or at negotiated prices. Such transactions may or
may not involve brokers or dealers. The selling shareholders have advised us
that they have not entered into agreements, understandings or arrangements with
any underwriters or broker- dealers regarding the sale of their shares. The
selling shareholders do not have an underwriter or coordinating broker acting in
connection with the proposed sale of the common shares.
The selling shareholders may sell their shares directly to purchasers or to
or through broker-dealers, which may act as agents or principals. These
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling shareholders. They may also receive compensation
from the purchasers of common shares for whom such broker-dealers may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). Swartz
is, and each remaining selling shareholder and any broker-dealer that assists in
the sale of the common stock may be deemed to be, an underwriter within the
meaning of Section 2(a)(11) of the Securities Act. Any commissions received by
such broker-dealers and any profit on the resale of the common shares sold by
them while acting as principals might be deemed to be underwriting discounts or
commissions. The selling shareholders may agree to indemnify broker-dealers for
transactions involving sales of the common stock against certain liabilities,
including liabilities arising under the Securities Act.
Because Swartz is and the remaining selling shareholders may be deemed to
be "underwriters" within the meaning of Section 2(a)(11) of the Securities Act,
the selling shareholders will be subject to prospectus delivery requirements.
We have informed the selling shareholders that the anti-manipulation rules
of the SEC, including Regulation M promulgated under the Securities and Exchange
Act, may apply to their sales in the market and will provide the selling
shareholders with a copy of such rules and regulations.
Selling shareholders also may resell all or portions of the common shares
in open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.
We are responsible for all costs, expenses and fees incurred in registering
the shares offered hereby. The selling shareholders are responsible for
brokerage commissions, if any, attributable to the sale of such securities.
Legal Proceedings
Prime, on September 21, 2000, reached a settlement in two lawsuits with a former
officer and director claiming payment of $32,000 due for advances made on behalf
of Prime. Prime had filed a cross-complaint seeking to recover 4,500,000 shares
of its common stock held by the plaintiff, and to be reimbursed for legal fees
arising from this action. The settlement was an agreement with the former
officer/director litigant and another former officer/director, and provided for
Prime to receive 5,500,000 common shares back from the two former officers for
cancellation. Prime agreed to disaggregate three of its local multipoint
distribution service licenses and assign one-half of each of the three licenses,
with a total net book value of $125,857 (net of accumulated amortization), to an
entity to be designated by the former officers.
18
<PAGE>
Prime is a defendant in a lawsuit brought by a creditor of Mid-Cal Express Inc.,
a wholly owned subsidiary of Prime, seeking payment of approximately $70,000
owed to it by Mid-Cal. In the opinion of counsel representing Prime in this
matter, Prime is not liable for any of the causes of action set forth in the
Complaint.
There are no other current pending lawsuits involving Prime.
Prime is exposed to routine litigation incidental to its operations in the
telecommunications industry. Prime is also peripherally exposed to routine
litigation incidental to its former trucking business, primarily involving
claims for personal injuries and property damage incurred in the transportation
of freight. Prime has turned these matters over to its insurance carrier and
management believes these matters will not have a material adverse effect on
Prime's financial position or results of operations.
In January 2000 Prime purchased Directors and Officers Liability Insurance with
coverage that Prime's Board of Directors deems sufficient to attract and retain
talented and experienced personnel.
Pfeffer & Williams, PC, 155 Montgomery Street, Suite 609, San Francisco, CA
94104 has passed upon the legality of the securities offered hereby.
Directors, Executive Officers, Directors and Control Persons
Certain information about directors and executive officers of Prime is set forth
below:
OFFICERS AND DIRECTORS
The following table sets forth the names, ages, and positions with Prime as of
December 31, 2000 of all of the officers and directors of the Company. Also set
forth below is information as to the principal occupation and background for
each person in the table.
a) Directors and Executive Officers of the Company
NAME AGE DIRECTOR SINCE POSITION
---- --- -------------- --------
Norbert Lima 54 1999 Chief Executive Officer
Director
Stephen Goodman 57 1999 Chief Financial Officer
Corporate Secretary
Director
Adrian Lima 30 1999 Vice President-Engineering
William Turley 62 2000 Director
Martin Sokolowski 53 2000 Director
Dennis Hinz 46 2000 Director
19
<PAGE>
The following is a brief description of the business background of the executive
officers and directors of the Company.
Norbert Lima has been President and CEO and Director for the Company since
August 1999. Mr. Lima has over thirty years of telecommunications experience,
and will be responsible for implementing the Company's operational systems
across multiple markets. Mr. Lima founded and operated NACC-Tel, a California
interconnect company, from 1984-1994, where he served as Sales Manager,
Technical Services Engineer, and Installation Manager. NACC-Tel merged with
Pagers Plus Cellular in 1994, whereby Mr. Lima served as Vice President of
Engineering, responsible for RF engineering and construction of 220 MHz systems
throughout the US. Under Mr. Lima's direction, Pagers Plus successfully
constructed 150 five-channel 220 MHz systems throughout various states. In early
1998, Mr. Lima re-purchased NACC-Tel, along with certain assets of Pagers Plus
Cellular, which was subsequently acquired by Prime in 1999, and will remain in
operation as its wholly owned subsidiary.
Mr. Lima worked in various positions for Pacific Telephone for nineteen years,
most recently as Engineering Manager from 1981-1983. From 1979-1981, Mr. Lima
was District Manager of Construction, where he was responsible for five
construction divisions with 275 subordinates and an operating budget of
approximately US$16,000,000 per annum. Mr. Lima's career has taken him through
multiple levels of the large telecom company, as he also spent eight years as
Outside Plant Engineer, where he had responsibilities of planning and designing
pole lines, conduit structures, and underground/building cables. Mr. Lima's
success enabled his promotion to Engineering Manager, where he became a
supervisor for several Outside Plant Engineers, and then Staff Manager from
1978-1979, where he was responsible for conducting Outside Plant Engineering
Reviews throughout the states of California and Nevada. Mr. Lima received his BS
in Industrial Technology-Electronics and his BA in Public Administration from
Fresno State University in 1970.
Stephen Goodman has been Chief Financial Officer, Treasurer, and Director for
the Company since August 1999. Mr. Goodman has worked in the telecommunications
industry for over eight years, serving as President for both Secure Cellular,
Inc. and Pagers Plus Cellular, of San Francisco, from 1992-1999. Mr. Goodman had
been responsible for the strategic direction of the companies, and led the
company to be named the 25th fastest-growing company in the San Francisco Bay
area in 1996. Mr. Goodman developed, structured, and negotiated the majority of
the business for the company, which provides prepaid cellular telephone
services, prepaid wireless services, and telephone systems to both consumer and
corporate customers throughout California.
Mr. Goodman is skilled in banking and finance, having accumulated over thirty
years working for various organizations. Mr. Goodman was President of Contra
Costa Financial Services, Inc. from 1989-1992, where he owned and managed this
commercial and residential mortgage brokerage/banking firm. Mr. Goodman was
involved with the FCC while at Contra Costa Financial Services, Inc., applying
to participate in the lottery for a new spectrum of Specialized Mobile Radio
licenses. From 1985-1989, Mr. Goodman worked for various savings & loan
companies, and from 1977-1985 he served as President of Bay Capital Corporation
& House of Money. Mr. Goodman worked in financial public relations on Wall
Street from 1969-1970 and as a stockbroker for Loeb, Rhoades & Company from
1965-1966. Mr. Goodman served as Lieutenant Junior Grade in the US Coast Guard
from 1966-1969. Mr. Goodman received his JD from William Howard Taft University
in 1995, passing the California Baby Bar in 1992. Mr. Goodman received his BS in
Economics from the University of Pennsylvania-Wharton School in 1965, and
received his MBA with distinction in Finance from New York University in 1969.
20
<PAGE>
Adrian Lima has been Vice President of Engineering for the Company since its
merger in 1999. Adrian Lima is the son of Norbert Lima, the Company's CEO and
Chairman of the Board of Directors. Mr. Lima has accumulated, while working for
the NACC-Tel proprietorship during the ten years prior to his employment by
Prime, technical skills and experience through the installation of hundreds of
telecommunications systems manufactured by several different companies. Mr. Lima
is adept at each aspect of interconnect installation, including wire running,
termination, hardware programming, troubleshooting, and training. Upon
NACC-Tel's merger with Pagers Plus Cellular in 1994, Mr. Lima obtained
experience in wireless technologies, enabling him to spearhead the installation
of some 750 channels of two-way 220 MHz radio systems. Mr. Lima's technical
experience will be instrumental in implementing the Company's expansion plans in
the future.
William Turley is President of Communications Engineering Inc., a
well-established provider of telecommunications products and services including
turnkey voice and data solutions; he founded the company in 1992. He has
extensive experience in construction, operations, and engineering in the
telephone industry dating from 1952 both in the private and public sectors. He
holds a Class A & C-7 California Contractor's License and is a member in good
standing of the Building Industrial Consulting Society International (BICSI).
Prior to establishing his business in 1977, he was a science educator at Cal
State University, San Diego City College, and at Kirchenpaur Gymnasium in
Hamburg, Germany. He obtained his M.A. degree in Physical Science in 1971 and
his B.S. degree in Physics in 1969, from California State University in San
Diego. He is a member of Prime's Audit Committee.
Martin Sokolowski has been a Senior Manager of Strategic Planning at Alcatel
USA, Wireless Access Business Unit since June 1999. Prior to this, Mr.
Sokolowski was employed as Technical Services Manager by Bosch Telecom in their
Broadband Wireless Access, Global Deployment Division from December 1997 through
June 1999. From August 1997 to December 1997 he was contracted by MCI Local
Service Delivery to manage the provisioning, engineering, and E911 emergency
service operations for new local service competitive local exchange carrier
customers of MCI. From January 1997 to August 1997 he was employed by Andrew
Corporation as a Manager of RF Systems Engineering and Market Development. From
December 1993 to January 1997 he was employed by Advanced Envirotech Systems,
Inc. as Vice President for Engineering and Customer Field Services. His
engineering experience includes systems engineering, design engineering,
planning and scheduling, prototype and first office applications and new product
deployment and support. Telecom experience includes overall network design,
local telco, wireline and RF wireless systems, LMDS and MMDS point-to-point
wireless networks and telecommunications infrastructure. Mr. Sokolowski has
received a Bachelor of Engineering Science degree from the University of New
York at Stony Brook and a Master of Engineering Administration degree from
George Washington University.
Dennis Hinz is a shareholder in Ten Haken, Hinz and Carlos Accountancy
Corporation. He is a Certified Public Accountant and a Certified Valuation
Analyst. He has been employed in the accounting profession since graduation from
California State University, Chico, in 1976, where he obtained his B.S. in
Business Administration with a concentration in accounting. In 1986 he became a
partner of Marta, Matli, & Thomas CPA's and its successor firms including Ten
Haken, Hinz & Carlos CPA's. He is a member of the American Institute of
Certified Public Accountants, the California Society of Certified Public
Accountants, and the National Association of Certified Valuation Analysts. He
serves as Treasurer of the Kiwanis Club of Yuba City, and he is Chairman of
Prime's Audit Committee.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information about the ownership of
Prime's Common Stock as of December 31, 2000, by (i) those persons known by
Prime to be the beneficial owners of more than 5 percent of the total number of
outstanding shares of any class entitled to vote; (ii) each director and
officer; and (iii) all directors and officers of Prime as a group. The table
includes Common Stock issuable upon the exercise of that are exercisable within
60 days. Except as indicated in the footnotes to the table, the named persons
have sole voting and investment power with respect to all shares of Prime common
stock shown as beneficially owned by them, subject to community property laws
where applicable. The ownership figures in the table are based on the books and
records of Prime.
21
<PAGE>
<TABLE>
<CAPTION>
Name of Amount and
Title of Beneficial Nature of
Class Owner Interest Percentages Address
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 2975 Treat Blvd #C8
Par Value Concord, CA 94518
$0.0001 Stephen Goodman(a)4,620,233 17%
Common Stock 409 Center Street
Par Value Yuba City, CA 95991
$0.0001 Adrian Lima (b) 1,141,384 4%
Common Stock 409 Center Street
Par Value Yuba City, CA 95991
$0.0001 Norbert Lima (c) 3,695,833 14%
Common Stock 155 Montgomery Street, #609
Par Value San Francisco, CA 94104
$0.0001 Irving Pfeffer 2,792,187 10%
Common Stock 120 W 45 Street
Par Value New York, NY 10036
$0.0001 David Shaw 2,677,894 10%
Common Stock 300 Colonial Center Parkway
Par Value Swartz Private Roswell, GA 30076
$0.0001 Equity LLC (d) 1,521,000 6%
Common Stock All Directors
Par Value and
$0.0001 Officers as
a Group (e) 9,762,950 37%
-----------------------------------------------------------------------------------------------
a) Includes options to purchase 101,333 common shares, which are currently
exercisable.
b) Includes options to purchase 68,971 common shares, which are currently
exercisable.
c) Includes options to purchase 95,833 common shares, which are currently
exercisable.
d) Includes 1,014,000 currently exercisable warrants to purchase 1,014,000
common shares and 507,000 warrants that become exercisable at the earlier
of March 8, 2001 or the effective date of this prospectus.
e) Includes options to purchase 326,137 common shares, which are currently
exercisable.
</TABLE>
22
<PAGE>
Description of Securities
Common Stock
Our amended certificate of incorporation authorizes us to issue up to
100,000,000 shares of common stock, par value $.0001 per share. Of the
100,000,000 shares of common stock authorized, 26,717,296 shares are issued and
outstanding as of the date of this prospectus.
Holders of common stock are entitled to receive such dividends as may be
declared by the Board of Directors from funds legally available for such
dividends. We may not pay any dividends on the common stock until cumulative
dividends on the preferred stock have been paid in full. Upon liquidation,
holders of shares of common stock are entitled to a pro rata share in any
distribution available to holders of common stock. The holders of common stock
have one vote per share on each matter to be voted on by stockholders, but are
not entitled to vote cumulatively. Holders of common stock have no preemptive
rights.
Preferred Stock
Our amended certificate of incorporation authorizes us to issue up to
50,000,000 shares of preferred stock, par value $.0001 per share. None are
issued and outstanding.
Warrants
There are outstanding warrants to purchase 1,521,000 shares of our common
stock at a price of $0.531 per share. These warrants were issued to Swartz on
September 8, 2000 in consideration of Swartz's commitment to enter into the
investment agreement. The warrants expire on September 7, 2005. The warrants are
exercisable as to 1,014,000 shares as of October 3, 2000. The warrants are
exercisable as to the remaining 507,000 shares covered by the commitment warrant
on the earlier of March 8, 2001, or the date the Registration Statement is
declared effective by the Securities and Exchange Commission. The holders of the
warrants have the right to have the common stock issuable upon exercise of the
warrants included on any registration statement we file, other than a
registration statement covering an employee stock plan or a registration
statement filed in connection with a business combination or reclassification of
our securities.
Stock Options
There are outstanding options on 681,813 shares to employees and directors. Each
option provides the right to purchase one share of common stock. 165,711 of
these options expire December 31, 2002 and 516,102 of these options expire
December 31, 2003. 105,711 of the options expiring in 2002 are exercisable at
$1.00 per share, and 60,000 of the options expiring in 2002 are exercisable at
$.21875. All of the options expiring in 2003 are exercisable at $.21875.
Experts
Pfeffer & Williams, PC has provided an opinion on the validity of the
securities being registered and upon other legal matters concerning the
registration or offering of securities.
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The consolidated balance sheet as of December 31, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years then ended, included in this prospectus, have been
included herein in reliance on the report of Hein + Associates LLP, independent
Certified Public Accountants, given the authority of that firm as experts in
accounting and auditing.
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. Our SEC filings are
available to the public over the Internet at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549, Seven
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Please call the SEC at
1-800-SEC-0330 for further information about the public reference room.
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act with respect to the securities offered under this prospectus.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement,
certain items of which are omitted in accordance with the rules and regulations
of the SEC. Statements contained in this prospectus as to the contents of any
contract or other documents are not necessarily complete and in each instance
reference is made to the copy of such contract or documents filed as an exhibit
to the registration statement, each such statement being qualified in all
respects by such reference and the exhibits and schedules thereto. For further
information regarding Prime and the securities offered under this prospectus, we
refer you to the registration statement and such exhibits and schedules , which
may be obtained from the SEC at its principal office in Washington, D.C. upon
payment of the fees, prescribed by the SEC.
Disclosure of Commission Position on Indemnification of
Securities Act Liability
The Bylaws of the corporation provide for indemnification for Directors,
Officers and controlling persons of Prime against liability under the Securities
Act. This includes provisions for indemnification of the underwriter or its
controlling persons against such liabilities where a Director, Officer or
controlling person of a small business issuer is such an underwriter, or
controlling person, or a member of any firm that is such an underwriter. In
addition, Prime has procured Directors' and Officers' liability insurance for
acts of the Directors. The SEC has expressed its opinion as disfavoring the use
of indemnification agreements.
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Organization Within Last Five Years
Company History and Past Performance
Prior to February 1999, Prime's business was operated as a sole proprietorship
owned by Norbert J. Lima, the Company's CEO. The business' operations began in
the early 1980's as a business telephone interconnect company. Worldnet Tel.com
Inc. was formed in Delaware in January 1999 when four founders and another
individual funded Worldnet. In February 1999 management formed WNTC Holdings
Inc. in Delaware as a wholly owned subsidiary of Worldnet. In February 1999
management also formed NACC-Tel Corp. in Delaware as a wholly owned subsidiary
of WNTC. At that time the sole proprietorship business operated by Mr. Lima was
contributed to NACC-Tel. Worldnet was merged into Prime through a merger
effective August 11, 1999. This gave us immediate access to the capital markets,
to facilitate the initial and second stage funding of the build out of the local
multipoint distribution service infrastructure. Prior to the merger, Prime had
6,507,742 shares of common stock outstanding held by various individuals.
WorldNet was issued 14,500,000 shares of Prime common stock, and as a result of
the stock exchange, the former shareholders of WorldNet then held 69% of the
outstanding shares of common stock of Prime. On the effective date of the
merger, the officers and directors of WorldNet became the officers and directors
of Prime.
LMDS Communications Inc. (LMDS), a Delaware corporation, was formed in February
1999 as a wholly owned subsidiary of WNTC. LMDS is a telecommunications company
with interests in the fixed broadband wireless sector. LMDS Communications Inc.
obtained local multipoint distribution service licenses at the 1999 Federal
Communications Commission auction and is now deploying broadband fixed wireless
services. In 2000 LMDS Communications obtained competitive local exchange
carrier status in the States of Pennsylvania and New York. The competitive local
exchange carrier status enables LMDS Communications Inc. to connect to the
public switched telephone network and negotiate wholesale rates with incumbent
local exchange carriers. LMDS participated in an auction conducted by the FCC
between April 27, 1999 and May 12, 1999 for 161 local multipoint distribution
service licenses. Prime secured 8 basic trading areas at the auction for
$591,800 (a 45% discount from the gross price of $1,076,010). The price per
population averages out to approximately $0.56. This compares to a high of $5.53
per population and an average net bid of $1.35 per population for the 121 A
Block licenses auctioned in 1999. LMDS had no substantial operations during
1999.
Prepaid Tel.com Inc. (Prepaid), a Delaware corporation, was formed in February
1999 as a wholly owned subsidiary of WNTC. Prepaid is a Competitive Local
Exchange Carrier ("CLEC") certified by the California Public Utility Commission.
Prepaid had no substantial operations during 1999.
Prior to December 30, 1998 Prime operated as a long-haul temperature-controlled
truckload carrier through its wholly-owned subsidiary, Mid-Cal Express, Inc.
Prime also provided logistics operations through its wholly-owned subsidiary,
Mid-Cal Express Logistics, Inc. Effective December 30, 1998, Prime terminated
the operations of these subsidiaries through the sale of substantially all of
the operating assets of Mid-Cal Express, Inc. to Gulf Northern Transport, Inc.
for 400,000 shares of US Trucking, Inc., the parent company of Gulf Northern.
The transaction closed on April 14, 1999, and on April 30, 1999 the Company
entered into an agreement with the Credit Managers Association of Southern
California for the orderly liquidation and payment of the outstanding
liabilities of Mid-Cal Express Inc. These liabilities are to be paid by the
collection of Mid-Cal Express, Inc.'s accounts receivable and by the liquidation
of up to 400,000 shares of US Trucking (traded on the OTC Bulletin Board symbol
USTK), which have been placed in escrow for the benefit of the creditors of
Mid-Cal Express, until the stock is sold on the open market.
Zenith Technologies, Inc. (Zenith), a Delaware Corporation, was formed in
December 1998 as a wholly owned subsidiary of Prime Companies, Inc. To date, it
has no operations.
In September 1999, Prime acquired Olive Tree Image Engineers, a small internet
service provider located in Sacramento, California. In October 1999, Prime
completed the acquisition of Marathon Telecommunications, a commercial telephone
interconnect business based in Sacramento, California. Prime is currently
reviewing several telecommunications acquisition opportunities that have come to
its attention.
Both Marathon and Olivetree operate under fictitious business names of NACC-Tel;
for legal and accounting purposes they have been fully integrated into NACC-Tel.
Organization Chart
[GRAPHIC OMITTED]
Prime Companies, Inc.
---------------------
WNTC Holdings Inc
LMDS Communications Inc.
Prepaid Tel.com Inc.
NACC-Tel Corp.
Zenith Technologies Inc.
Mid-Cal Express Inc.
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DESCRIPTION OF BUSINESS
BUSINESS HISTORY, AND DEVELOPMENT
BACKGROUND
THE BUSINESS
Prime's mission is to provide a single source for a wide range of
telecommunications services to both the consumer and commercial markets. Prime
will derive the majority of its revenues from sales generated by its three
specialized subsidiary corporations. Prime operates as a holding company and
conducts all of its operations through its wholly owned subsidiaries.
Prime's principals comprise an experienced management team with over 50 years of
experience in the telecommunications industry. It is this unusually broad scope
of skills and experience which will enable Prime to establish a balanced and
efficient organization, and to forge strong supplier relationships with major
industry manufacturers, such as Alcatel, Ericsson, Pacific Telephone, Samsung,
and Texas Instruments, as well as established distributors who intend to market
Prime's services. Thus, Prime is well positioned to offer its clients the depth
of knowledge and experience necessary to reach their personal and/or corporate
needs and to execute each transaction efficiently and successfully.
LMDS Communications, Inc. This subsidiary has the FCC local multipoint
distribution service licenses. The licenses encompass an area of western
Pennsylvania and southwestern New York State, and include a population of
approximately 1,050,000 persons and 39,000 businesses. This subsidiary was
incorporated in Delaware in 1999 and is licensed and regulated by the states of
Pennsylvania and New York as a competitive local exchange carrier. The Federal
Communications Commission, an agency of the United States government, also
regulates this subsidiary. LMDS Communications, Inc. is funded by its parent
company, Prime Companies, Inc. This subsidiary's financial results in 1999 and
2000 were not material to the overall operation of Prime. There were no revenues
during 1999, and revenues for the year 2000 were minimal. We have, however,
accepted presubscriptions from a number of customers in locations that were
launched at the end of 2000. LMDS is expected to generate more than
insignificant revenues in 2001.We expect this segment of our business to grow
dramatically, as our local multipoint distribution systems are constructed and
our service offerings are launched within all of our licensed territories.
Prime intends to capitalize on the broadband fixed wireless communications
revolution by providing local multipoint distribution system services to various
markets in which it has purchased exclusive spectrum licenses from the Federal
Communications Commission. Local multipoint distribution service is the
broadband wireless technology used to deliver voice, data, Internet, and video
services. Each license permits us to use multiple radio frequency channels
ranging from 27.5 GHz to 31.225 GHz. We intend to use these radio channels to
build, install, and implement the telecommunication systems and offer some or
all of the following one and two-way broadband services:
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- High-speed Internet access
- Video teleconferencing
- Wireless local loop telephony
- Alternative cable television service
- High-speed data transmission
The flexibility offered by a local multi-point distribution system will allow
Prime to offer a turnkey package of services, including internet and video
teleconferencing, which is what US customers desire: one-stop shopping for their
telecommunications needs.
A local multi-point distribution system is capable of offering subscribers a
variety of one and two-way broadband services, such as video programming
distribution; video teleconferencing; wireless local loop telephony; and
high-speed data transmission, i.e. internet access. Because of its multi-purpose
applications, local multi-point distribution systems have the potential to
become major competitors to local exchange and cable television services.
Local multi-point distribution service systems may consist of multiple cell
systems with return-path capability within the assigned spectrum. Generally,
each cell will contain a centrally located transmitter (hub), multiple receivers
or transceivers and point-to-point links connecting the cell with the central
processing center and/or other cells. Licenses are issued for a ten-year term
from the initial license grant date. At the end of the ten-year period,
licensees are required to submit an acceptable showing to the Federal
Communications Commission demonstrating that they are providing substantial
service to their service area. Licensees failing to demonstrate that they are
providing substantial service will be subject to forfeiture of their licenses.
Our customers pay a fixed monthly charge for the unlimited use of our service.
We can customize the service for each customer. We have a rate schedule and the
monthly charge is based upon the data transmission speed each customer signs up
for. We do not currently charge any fees based upon the customers' specific
usage of the service. As we are the licensed carrier providing service to the
end users, our cost of revenues is primarily depreciation on our capital
infrastructure equipment, and utility connection costs that we have to pay for
access to the public switched telephone network, and our bandwidth providers who
enable us to connect to the internet.
Advantages to the use of LMDS services is that the licensed markets have limited
access to high speed connectivity (broadband services). LMDS provides a
quick-to-market availability. This allows the underserved communities to have
equal access to the internet. Today the disadvantage would be that the
infrastructure required to deploy to an individual business customer is still
somewhat expensive. As volume purchases take place and alternate equipment
vendors come to the market we expect infrastructure costs to reduce and in the
long term eliminate the disadvantages
LMDS Communications, Inc. has received certificates from both Pennsylvania and
New York State to operate as a facilities based competitive local exchange
carrier.
Field trials of local multipoint distribution service technology have been
successfully conducted and the service has been deployed in New Castle, PA. The
second system became operational on December 20, 2000 and the first customer in
Oil City, PA went online on December 21, 2000. Additionally, we have scheduled
the launch of our Meadville, Pennsylvania system for mid January 2001. The
Company has partnered with Alcatel for the local multipoint distribution service
equipment over the next 15 months. Alcatel has more than 100 broadband wireless
customers and over 2500 base station sectors with the same type of service
deployed worldwide. Alcatel builds next generation networks delivering
integrated end-to-end voice and data solutions to carriers, as well as
enterprises and consumers worldwide. Alcatel has 120,000 employees and sales of
EURO 23 billion, and operates in more than 130 countries. Prime is currently the
largest customer of Alcatel for their local multipoint distribution service
equipment in the United States. The cost to build and install a system is
dependent upon the specific configuration ordered for a specific location; the
range for the cost of a single system is from approximately $130,000 to
approximately $300,000. These systems may be funded from up to $6,000,000 of the
proceeds from the sale of the shares to Swartz, and the exercise of warrants by
Swartz. Alternatively, for some of the systems, Prime may utilize equipment
lease financing to fund the cost of some of the capital equipment.
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NACC-Tel Corp. NACC-Tel markets, installs, and maintains business telephone
communications systems Additionally, NACC-Tel provides paging and voicemail
services. NACC-Tel also maintains these systems under service agreements with
its commercial and municipal customers. This subsidiary was incorporated in
Delaware in 1999 and is the successor to a proprietorship previously owned by
Norbert Lima, CEO of Prime. The business is based in Yuba City, California and
also operates from a branch office in New Castle, Pennsylvania. The core
services of this subsidiary will be offered to the customers of the LMDS
Communications, Inc. subsidiary. Prime's personnel who sell and service local
multipoint distribution services will also offer the NACC-Tel core services to
our customers. The NACC-Tel operation generates sufficient cash flow to sustain
its core business. NACC-Tel also offers wireless digital subscriber line service
in Yuba City, California using unlicensed spectrum. It plans to expand this
offering to other communities in California, Pennsylvania, and New York, which
are unable to obtain high-speed access to the internet through the incumbent
local exchange carrier. Funding for the build out of these systems and the
marketing of these services may come from the parent corporation, Prime
Companies, Inc. NACC-Tel does not require a license to offer these services, as
it uses unlicensed spectrum. The Federal Communications Commission issues rules
and regulations for the use and operation of equipment on these frequencies.
The ability for the Company to provide Wireless digital subscriber line service
is a result of our partnering with RC Networks, Inc. The partnering allows us to
deploy digital subscriber line access concentrators in conjunction with wireless
digital subscriber line service and local multipoint distribution system
services. The digital subscriber line application will be deployed by NACC-Tel
Corp and the local multipoint distribution service application will be deployed
by LMDS Communications, Inc. RC Networks, Inc. based in San Diego, CA was
founded in February 1997 and is a privately held company that develops and
markets digital subscriber line driven, high-speed internet access products for
the multi-tenant unit and hospitality markets.
The operations of NACC-Tel during 1999 and 2000 were the core of Prime's
business. We anticipate the wireless service offering by NACC-Tel will
experience substantial growth over the coming years. The core business of
telephone interconnect, voicemail, and paging services is expected to experience
only moderate growth, as Prime's local multipoint distribution system service
offerings come online in more communities.
The advantage to a customer using NACC-Tel is that we are a distributor for
Samsung's business communication systems. One of the requirements defined by
Samsung is that each of their distributors must have factory certified
technicians. This requirement provides the customer with a higher quality of
service because only certified technicians will work on their product. A
disadvantage from the customer point of view is that once they have selected the
Samsung product, they would have a limited choice of servicing companies.
NACC-Tel's cost of revenues are the traditional material costs for the phone
systems it sells, and the labor to install and maintain the systems.
Prepaid Tel.com Inc. Prepaid Tel.com Inc. provides residential consumers an
alternative source for local telephone and long distance services in the State
of California, These consumers pay for the service prior to usage. When
customers buy our residential telephone service, they pay us a setup charge and
a monthly charge. These charges are in accord with the tariff we have filed with
the California Public Utility Commission. When customers buy long distance
telephone service, or phone cards, they pay us in advance of their using the
service. When the amount they have prepaid is used up, they are unable to make
any more long distance calls until they prepay for more long distance phone
service. Our customers in general have either not established credit, or have
poor credit precluding them from traditional phone service access. Most of our
customers pay for our service by cash or money orders. We do, however, accept
checks from our established customers. The disadvantage to the customer who uses
our service is that Prepaid Tel.com purchases its services from the traditional
telephone companies, and this creates a higher cost to the consumer. This
subsidiary was incorporated in Delaware in 1999 and is licensed by the
California Public Utility Commission as a competitive local exchange carrier.
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The customer base for prepaid telecommunications services is large and diverse,
including: credit-impaired customers, who generally cannot meet the initial
deposit requirements for telecommunications services; individuals who prefer to
pay in cash; and individuals who want to re-establish credit. The company
employs a regional business development manager to solicit and service
distributors, who retail Prepaid Tel.com Inc.'s service offerings. The parent
corporation, Prime Companies, Inc, funds this subsidiary's operation. The
operations of this subsidiary in 1999 and 2000 were not material to the overall
operation of Prime. We expect this subsidiary's operations to become a more
important component and contributor to our growth as we increase our marketing
effort to sign on more distributors and provide additional training and
education to the distributors about the service.
EMPLOYEES
Prime had nine full-time employees and one part-time employee at December 31,
1999. On December 31, 2000 Prime had 20 full-time employees and one part-time
employee.
SITUATION OVERVIEW
As highlighted previously, Prime Companies, Inc. conducts
its operations under three main wholly owned subsidiaries:
1. Prepaid Tel. Com, Inc;
2. NACC-Tel Corp. and
3. LMDS Communications, Inc.
Prime operates as a competitive local exchange carrier within three states--
California, Pennsylvania, and New York. Prime has established long-term
relationships with two equipment vendors: Alcatel for the local multi-point
distribution system equipment and RC Networks for the deployment of digital
subscriber line access concentrators in conjunction with wireless digital
subscriber line service and local multi-point distribution service.
Of Prime's subsidiaries, LMDS Communications, Inc. has required our largest
investment. The acquiring of the local multi-point distribution service
licenses, the equipment and the personnel to support these services are
necessary investments to support the operations and implementation of LMDS by
Prime Companies, Inc.
COMPETITION
Small and medium-sized businesses currently face a limited choice of
alternatives for high-speed Internet access. Over the last few years, digital
subscriber line technologies, cable modems, digital transmission links, and
fixed-wireless connections have emerged as alternative technologies for
high-speed, always-on service in our country's major metropolitan areas.
However, these technologies have not yet reached the country's secondary and
tertiary markets; this fact reinforces the viability of the company's strategy
to initially target businesses in the markets where we have local multi-point
distribution service licenses.
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We believe that our solution will receive wide acceptance by our target
customers because our network will provide:
- consistent speed and quality of signal;
- rapid, relatively uncomplicated provisioning of new customers that is
not dependent on another provider of local connectivity;
- symmetrical broadband capacity that will allow us to offer enhanced
business communication services such as full motion video
conferencing;
- scaleable, competitive pricing schemes that are based on the number of
desktops connected to the network; and
- substantially higher speeds and an easy path to increased bandwidth.
The race for delivering broadband internet access is a highly competitive one,
with much at stake. With the growth of the internet's functionality, and the
booming economy, no one really doubts that there will be enormous demand for a
high-speed always-on connection option. A recent article in the Sacramento Bee,
December 20, 2000, quoted Cox News Service entitled Bipartisan Panel Urges High
Speed Access in Schools states "broadband access is absolutely critical to
educating young people and preventing a widening of the gap between rich and
poor students". The same article suggests "what students really need are high
speed broadband connections to the internet". It continues with "The digital
divide is increasing leaving millions of Americans without access to the
internet and millions more lagging behind with outdated and inadequate
technology". These mindsets fuel the growth of high-speed always-on connections.
There are three major competing technologies(7) as primary access methods for
high-speed internet access -- cable modems, digital subscriber line, and
broadband fixed wireless.
Within our local multipoint distribution system service territories we assess a
minimal competitive threat from Bell Atlantic (Verizon) and Adelphia Cable. With
the acquisition of GTE by Bell Atlantic, the predominant incumbent local
exchange carrier throughout this service territory is Verizon with a presence of
Alltel in some localities. Adelphia Cable is headquartered in Bradford, PA,
which is within our Olean, NY-Bradford, PA basic trading area. Adelphia is in
the process of relocating its headquarters to Buffalo, New York about 100 miles
north of our Jamestown service territory.
Verizon has not shown an aggressive marketing campaign in these areas. The
following is quote from a Verizon Communications vice president in the December
11, 2000 issue of Telecom magazine: "Some people are suggesting that large
segments of the population will be disadvantaged because broadband services
won't be available to everyone. But that's like complaining that there isn't an
art museum in every city. We put these things in the places where the most
people will use them." We believe this is due to the lack of incentive for them
to redefine their business. Digital subscriber lines compete with their
dedicated access line product line and Verizon is interested in protecting this
existing market. Additionally, the availability of digital subscriber lines
provided by Verizon in these areas are limited based on the aging infrastructure
of their outside plant and the distance of many businesses out of range of their
central office.
There is also a lack of interest in these secondary and tertiary markets by both
cable and incumbent local exchange carriers due to their focus on primary
markets and the share that they have already lost within these markets. These
companies have concerns with long-time investors and employees - people who want
to see steady profits and jobs. They are not in the position to make large
investments in rural areas and appear to be leaving this market up for grabs for
competitive local exchange carriers and other providers. By the time these
larger telcos notice these areas, Prime will already be there for these
customers, who will come to rely on us for their growing telecom needs. Prime is
relying on the incumbent's slow sometimes-troublesome deployment of wires
broadband services, which will lead to opportunities for us to deliver. By
design, then company is deploying DSL services in either underserved markets or
in areas beyond the range of traditional DSL availability.
----------------------------------------------------------------------
7 T1 is not considered a competing technology because of its high
cost and speed of delivery. Currently there are approximately
550,000 T1 lines in the US.
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MARKETING AND CUSTOMERS
The growth of the Internet is leading to a global society where every business
must obtain access to the internet, or world wide web, and utilize online
functionality in order to fulfill its information needs. Prime will capitalize
on this need by providing these services in its markets.
LMDS now provides vital communications services to regions that heretofore did
not justify wireline services, typically because the inherent costs outweighed
the potential revenues. With the old method, it was difficult to actually lay
the wire and install these systems. Local multi-point distribution service
wireless systems technology enables easy implementation at any business,
requiring installation at the business' building only.
LMDS offers the ability to provide various, vital telecommunications services
via one, efficient, cost-effective medium. Through LMDS' licenses in its various
territories, it will deliver a better package for these businesses and thus
provide them with greater value, as opposed to the need to sign up with several
different suppliers. The company's NACC-Tel subsidiary will readily support and
provide business telephone interconnect services, voicemail, and paging services
to our local multi-point distribution service customers. In some markets we may
also provide our Olivetree internet service provider services such as Internet
web site hosting for our local multi-point distribution service system
customers.
Marketing Strategy
Local multipoint distribution system services are positioned to supply high
speed Internet access and data transfer services to under serviced rural areas
that currently require high-speed broadband access to the internet. Unlike Bell
Atlantic (Verizon), LMDS will build relationships with its customers and provide
superior customer service. We will mirror this customer service position within
our other product lines. Additionally, we will know our customers so that we may
recommend to them the value added services we offer that would enhance their
telecom solutions.
Mission
Prime Companies, Inc. through its various product lines offers a diverse
portfolio of alternative telecommunications services to small through mid-sized
businesses and governmental agencies. Prime Companies, Inc. and its subsidiaries
LMDS Communications, Prepaid Tel.com, and NACC-Tel, promises its customers
quality services that enhance their own technologies to assist them with better
operations and business growth. In rural areas where LMDS Communications does
business, we aspire to be the high-speed broadband service provider of choice
for all businesses.
Marketing Objectives
1 Establish Prime Companies, Inc., its subsidiaries and sales staff as
experts.
2. Establish relationships within the communities we do business. Provide
premier customer service to a once under served and ignored market place.
3. Educate the business community on our products.
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4. Brand -name reference clients. Our market analysis of each of our local
multipoint distribution service territories indicates who the major
employers are. These employers generally have the respect of their
communities and are considered leaders by other businesses. By establishing
service with these businesses first, and referencing them by name and
contact phone number we will gain acceptance and additional business.
5. Maintaining a quality technological edge over our competitors.
The following discussion relates to our actual operating results for the periods
noted. The operating results discussed include the operations of acquired
companies from the effective dates of their acquisitions. Given that each year
includes revenues and expenses from new acquisitions, we believe that the
operating results for 1999 are not directly comparable to the operating results
for 1998.
Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------------
Operation
---------
Results of Operations For the Fiscal Year ended December 31, 1999 Compared to
--------------------------------------------------------------------------------
the Year ended December 31, 1998.
---------------------------------
During the year ended December 31, 1999, Prime's consolidated sales revenue from
continuing operations increased to $441,663 from $209,823 for the corresponding
period of the prior year. The increase in revenue is attributed to increased
marketing by the Company and greater demand as customers continued to upgrade
systems to be Y2K compliant. The Y2K compliance issues necessitated the
replacement of non-Y2K compliant, and obsolete telephone systems, to new systems
that were both state of the art and Y2K compliant. This specific situation
created a greater opportunity for sales generating increased revenues.
Continuing into the future, increased marketing efforts and a greater
geographical presence should allow the growth to continue generating greater
revenues, and ultimately net income. The larger geographical presence is
directly related to the deployment of LMDS services in the aforementioned LMDS
markets.
The consolidated gross margin as a percent of revenues increased to 63% for the
year December 31, 1999 from 42% in the corresponding period of the prior year.
The improvement in the gross margin is due to additional discounts for volume
purchases provided to the Company by its telephone vendors.
Prime's selling, general and administrative expenses for the year ended December
31, 1999 increased to $599,474 from $143,002 for the corresponding period of the
prior year. The increase is attributed to greater marketing efforts and
additional corporate overhead costs associated with the merger with Prime.
During the year ended December 31, 1999, NACC-Tel sales revenue from continuing
operations increased to $441,126 from $209,823 for the corresponding period of
the prior year. The increase in revenue is attributed to increased marketing by
the Company and greater demand as customers continued to upgrade systems to be
Y2K compliant. The Y2K compliance issues necessitated the replacement of non-Y2K
compliant, and obsolete telephone systems, to new systems that were both state
of the art and Y2K compliant. This specific situation created a greater
opportunity for sales generating increased revenues. Continuing into the future,
increased marketing efforts and a greater geographical presence should allow the
growth to continue generating greater revenues, and ultimately net income. The
larger geographical presence is directly related to the deployment of LMDS
services in the aforementioned LMDS markets.
The NACC-Tel gross margin as a percent of revenues increased to 63% for the year
December 31, 1999 from 42% in the corresponding period of the prior year. The
improvement in the gross margin is due to additional discounts for volume
purchases provided to the Company by its telephone vendors.
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NACC-Tel's selling, general and administrative expenses for the year ended
December 31, 1999 increased to $454,701 from $143,002 for the corresponding
period of the prior year. The increase is attributed to greater marketing
efforts and additional corporate overhead costs associated with the merger with
Prime.
During the year ended December 31, 1999, sales revenue from Prepaid Tel.com's
continuing operations increased to $537 from $0 for the corresponding period of
the prior year. The increase in revenue is attributed to the startup of the
business.
Prepaid's gross margin as a percent of revenues was 100% for the year December
31, 1999. There were no operations in 1998 from this segment of our operations.
Prepaid's selling, general and administrative expenses for the year ended
December 31, 1999 was $3,063. There were no operations in 1998 from this segment
of our operations.
LMDS Communications, Inc. had not yet begun operation and therefore had no
revenues in 1999 and 1998.
As a result of the reverse merger with Worldnet in August 1999, Prime recorded a
one-time charge of $428,194 for the cost of the merger, representing Prime's net
liabilities in excess of assets immediately prior to the merger.
Interest expense for the year ended December 31, 1999 increased to $199,089 from
$14,796 for the corresponding period of the prior year. The increase is
attributed to the increased debt assumed in the Worldnet-Prime merger.
Results of Operations For the Nine Month Period ended September 30, 2000
--------------------------------------------------------------------------------
Compared to the Nine Month Period ended September 30, 1999.
-----------------------------------------------------------
During the nine month period ended September 30, 2000, Prime's consolidated
sales revenue increased to $373,563 from $199,860 for the corresponding period
of the prior year. The increase in revenue is attributed to the integration of
Marathon Telecom into NACC-Tel Corp., increased marketing efforts, and to our
being awarded a high percentage of the contract proposals we had bid on.
The consolidated gross margin as a percent of revenues increased to 74% for the
nine months ended September 30, 2000 from 57% in the corresponding period of the
prior year. The increase in the gross margin is due to additional discounts for
volume purchases provided to the Company by its telephone vendors, and a change
in the mix of sales from predominantly service calls in the third quarter of
1999 to service calls and new installations in the third quarter of 2000.
Prime's selling, general and administrative expenses for the nine-month period
ended September 30, 2000 increased to $1,430,762 from $185,726 for the
corresponding period of the prior year. The increase is attributed to increased
marketing efforts, additional corporate overhead costs associated with the
merger of Worldnet with Prime, employee and outside director stock option
programs, and expenses related to the launching of our LMDS systems.
A loss on investment was recorded during the nine month period ended September
30, 2000 in the amount of $1,156,000. This has reflected what is believed to be
a permanent decline in the value of U.S. Trucking. No similar loss was recorded
in the corresponding nine- month period of the prior year.
Interest expense for the nine-month period ended September 30, 2000 increased to
$73,091 from $31,858 for the corresponding period of the prior year. The
increase is attributed to the increased debt assumed in the merger of Worldnet
with Prime, and the beneficial conversion feature of notes that were converted
to common stock, offset by the payoff of most of the Company's liabilities
during the first quarter of 2000. Interest expense during the fourth quarter of
2000 should be minimal, as most of the Company's liabilities were settled during
the three-month period ended March 31, 2000.
33
<PAGE>
At September 30, 2000 approximately $22,880 representing 31% of trade
receivables was due from 2 customers. For the nine-month period ended September
30, 2000 none of our customers accounted for more than 10% of sales.
During the nine month period ended September 30, 2000, NACC-Tel's sales revenue
increased to $361,135 from $199,860 for the corresponding period of the prior
year. The increase in revenue is attributed to the integration of Marathon
Telecom into NACC-Tel Corp., increased marketing efforts, and to our being
awarded a high percentage of the contract proposals we had bid on.
NACC-Tel's gross margin as a percent of revenues increased to 75% for the nine
months ended September 30, 2000 from 57% in the corresponding period of the
prior year. The increase in the gross margin is due to additional discounts for
volume purchases provided to NACC-Tel by its telephone vendors, and a change in
the mix of sales from predominantly service calls in 1999 to service calls and
new installations in 2000.
NACC-Tel's selling, general and administrative expenses for the nine-month
period ended September 30, 2000 decreased to $114,273 from $149,713 for the
corresponding period of the prior year. The decrease is attributed to the
reallocation of certain corporate administrative functions to Prime from the
NACC-Tel subsidiary in 2000.
During the nine month period ended September 30, 2000, Prepaid's sales revenue
increased to $12,028 from $0 for the corresponding period of the prior year. The
increase in revenue is attributed to the startup of the business. The gross
margin as a percent of revenues was 41% for the nine months ended September 30,
2000. There were no operations in the comparable period in 1999 from this
segment of our operations.
Prepaid's selling, general and administrative expenses for the nine-month period
ended September 30, 2000 increased to $11,329 from $0 for the corresponding
period of the prior year. There were no operations in the comparable period in
1999 from this segment of our operations.
During the nine month period ended September 30, 2000, LMDS' sales revenue
increased to $400 from $0 for the corresponding period of the prior year. The
increase in revenue is attributed to the startup of the business. The gross
margin as a percent of revenues was 100% for the nine months ended September 30,
2000. There were no operations in the comparable period in 1999 from this
segment of our operations.
LMDS' selling, general and administrative expenses for the nine-month period
ended September 30, 2000 was $5. There were no operations in the comparable
period in 1999 from this segment of our operations.
Liquidity and Capital Resources For the Fiscal Year ended December 31, 1999
--------------------------------------------------------------------------------
Compared to the Year ended December 31, 1998.
---------------------------------------------
At December 31, 1999, the Company had cash of $237,403 and a working capital
deficit of $61,836. The primary cause of the deficit position resulted from the
assumption of net liabilities in the merger of Worldnet with Prime.
Cash used in operations was $124,970 for the year ended December 31, 1999
compared to $24,986 in 1998. The cash used in operations was primarily
attributed to the net loss offset by noncash charges for depreciation, the
one-time noncash charge related to the merger of Worldnet with Prime, and an
increase in accrued interest.
34
<PAGE>
Cash provided by investing activities, consisting primarily of proceeds from the
sale of property held for sale, was $1,060,211 for the year ended December 31,
1999. Cash used in investing activities, consisting of purchases of property and
equipment, was $7,635 for the period ended December 31, 1998.
Cash used in financing activities was $701,317 for the year ended December 31,
1999 and consisted of $740,565 paid on notes payable (with the proceeds from the
sale of property held for sale) offset by $39,248 of proceeds from notes payable
(used for operating expenses). Cash provided by financing activities was $36,100
for 1998 and consisted of capital contributions.
Liquidity and Capital Resources For the Nine Month Period ended September 30,
--------------------------------------------------------------------------------
2000 Compared to the Nine Month Period ended September 30, 1999.
----------------------------------------------------------------
At September 30, 2000, the Company had cash of $1,073,819 and working capital of
$358,341. The increase during the nine months ended September 30, 2000 was due
primarily to the completion of the Company's Private Placement Offering during
the first quarter of 2000.
Cash used in operations was $936,934 for the nine months ended September 30,
2000 compared to cash provided by operations of $116,788 for the corresponding
period in the prior year. The cash used in operations was primarily attributed
to the overhead costs associated with the merger of Worldnet with Prime and the
development and launching of our LMDS systems.
Cash used in investing activities increased to $203,040 for the nine months
ended September 30, 2000 compared to cash used of $17,324 for the corresponding
period in the prior year. The increase is attributed to the purchase of
equipment associated with the development and launching of our LMDS systems, and
our wireless DSL service.
Cash provided by financing activities was $1,976,390 for the nine months ended
September 30, 2000, compared to cash used of $47,273 for the corresponding
period in the prior year. The cash provided resulted from the completion of the
Company's Private Placement Offering of common stock during the first quarter of
2000, offset by payments on notes payable.
In March 2000, the Company sold 6,569,444 shares of its common stock in private
placement offerings, raising $2.4 million. Additionally, in February 2000
creditors holding $1,240,216 (balance due as of February 28, 2000) of notes
payable, plus accrued interest of $66,971, converted their debt into 2,904,860
restricted common shares of the Company. The market price of the common stock at
the time of conversion was $.75, and the exchange ratio of debt to common stock
was $.45 per share. In March 2000 another creditor converted $143,720 of
short-term debt, plus accrued interest of $107,884, into 561,111 restricted
common shares of the Company. The market price at of the common stock at the
time of conversion was $2.625 and the exchange ratio of debt to common stock was
$.45 per share. The conversion ratio was each dollar of debt was converted into
2.22222 common shares. These notes were converted into common shares at the same
price offered to the investors who purchased common shares through the private
placement that closed March 31, 2000. The offering price was below the market
price at the time, causing a non-cash loss on extinguishment of debt in the
amount of $1,852,595 during the three months ended March 31, 2000. In September,
2000 a creditor converted $100,000 of short-term debt, plus accrued interest of
$9,778, into 312,500 restricted common shares of the Company. The market price
of the common stock at the time of conversion was $.719 and the exchange ratio
of debt to common stock, per the terms of the note, was $.32 per share based
upon the $100,000 principal only. The conversion ratio was each dollar of debt,
including accrued interest, was converted into 2.84655 common shares.
35
<PAGE>
On October 3, 2000 Prime entered into an investment agreement with Swartz
Private Equity, LLC, enabling Prime to sell up to $30 million of its common
stock, over a 36 month period beginning on the date a registration statement
filed with the Securities and Exchange Commission is declared effective by the
SEC. The purchase price per share of common stock is 91% of the market price.
Market price is defined as the lowest closing bid price for the common stock
during the twenty business-day period following the date that notice of Prime's
intention to sell shares is provided to Swartz. However, the market price may
not be less than the designated minimum per share price, if any, that Prime
indicates in the notice. The terms of the agreement limit the number of shares
the Company may sell each month to the lesser of 1.5 million shares, $2,000,000,
or 15% of the volume of its shares traded during the month. Prime is not
obligated to sell any shares to the investor, but the investor's commitment to
purchase shares is irrevocable. The investment agreement provides for a
non-usage fee to be paid by Prime to the investor, up to the amount of $100,000
during each 6 calendar month period, in the event that Prime has not sold at
least $1,000,000 of shares to the investor during the 6 month period. However,
Prime will not be required to pay a non-usage fee for any six month period
during which it has sold to the investor the maximum number of shares, based
upon the above limitations, allowable under the agreement. In the event Prime
terminates the Agreement, a termination fee of up to $200,000 will be due to the
investor. Prime issued the investor a commitment warrant to purchase 1,521,000
shares at $0.531 as consideration for the $30 million investment agreement. None
of the warrants were exercisable on or before September 30, 2000. The warrant is
exercisable as to 1,014,000 shares as of October 3, 2000. The warrant is
exercisable as to the remaining 507,000 shares covered by the commitment warrant
on the earlier of March 8, 2001, or the date the Registration Statement is
declared effective by the Securities and Exchange Commission. Prime is subject
to various covenants contained in the agreement.
Prime's ability to fully develop its local multipoint distribution service
business is dependent upon its ability to obtain financing for the
infrastructure equipment and working capital to develop the market
opportunities. Management believes the cash on hand plus the anticipated
proceeds from the $30 million equity line will be sufficient to sustain its
operations for at least the next 12 months.
Prime has no outstanding material commitments. Prime has entered into a supply
agreement with Alcatel for the supply of local multipoint distribution system
equipment. This agreement enables, but does not obligate, Prime to purchase up
to $6.5 million of equipment. Prime becomes obligated to accept equipment from
Alcatel only upon the issuance by Prime of purchase orders covering specific
equipment for delivery to a specific location.
Impact of Recently Issued Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (FASB133), "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that an entity
recognize all derivatives as assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement was amended
by FASB 137, issued in June 1999, such that it is effective for the Company's
financial statements for the year ending December 31, 2001. The Company does not
believe the adoption of FASB133 will have a material impact on assets,
liabilities or equity.
36
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, entitled "Revenue Recognition in Financial Statements." SAB
101A was issued by the SEC on March 24, 2000 and delays the required
implementation date of SAB 101 until the second quarter of 2000. SAB 101
provides guidance on the recognition, presentation and disclosure of revenue in
the financial statements of public companies. The Company does not believe that
the adoption of SAB 101 will have a material effect on its financial position or
results of operations.
Seasonality and Inflation
Management does not believe the Company's operations are significantly affected
by seasonality or inflation.
Year 2000 Compliance
The Company has experienced no disruption in its operations that management can
attribute to Year 2000 issues. In addition, the Company has seen no Year
2000-related problems itself or received any reports of such problems from
entities with which it transacts business.
Acquisition of Professional Services Firms
In addition to organic growth, a key component of our overall growth strategy is
the acquisition of, or investment in, complementary businesses, technologies,
services and products. We have acquired two companies since 1999 and intend to
continue to pursue opportunities to acquire similar businesses.
We believe our acquisitions have supported our growth and enhanced the quality
of services we offer our clients. Our acquisitions have allowed us to rapidly
build our base of professionals in the context of a tight labor market for
experienced technical and creative professionals. Our broadening Internet
coverage has allowed us to better meet the needs of our national clients and to
attract new clients who seek integrated services across diverse geographic
areas. We have also been able to expand our service offerings through the
acquisition of companies with complementary products and skill sets.
Additionally, we expect to achieve cost synergies by consolidating management
and back-office operations and sharing technical infrastructure.
We evaluate acquisitions based on numerous quantitative and qualitative factors.
Quantitative factors include historical and projected revenues and
profitability, geographic coverage and backlog of projects under contract.
Qualitative factors include strategic and cultural fit, management skills,
customer relationships and technical proficiency. We used our common stock as
the primary consideration. We anticipate that we will use common stock and cash
as the primary form of consideration for future acquisitions.
We strive to integrate all acquired companies into our operating organization.
This integration includes business development, delivery of services, managerial
and administrative support, benefits, purchasing and all other areas.
37
<PAGE>
All of our acquisitions have been accounted for using the purchase method. Under
the purchase method, the financial data of the acquired entities are
consolidated with our financial results from the effective dates of their
acquisition. For each acquisition, a portion of the purchase price is allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed based on their respective fair market values on the acquisition date.
The remaining unallocated portion of the purchase price is allocated to
intangible assets, primarily goodwill, and amortized on a straight-line basis
over the estimated period of benefit, which is currently 10 years. We evaluate
the period of benefit on a company-by-company basis. We expect to incur
acquisition-related amortization expenses as a result of our acquisition
program.
We have incurred recurring operating losses and negative cash flows from
operating activities, but have positive working capital. We believe that our
available equity financing arrangement with Swartz will be sufficient to meet
our working capital and capital expenditure requirements for at least the next
12 months. However, we may not receive financing from Swartz, or we may require
additional financing within this time frame; such additional financing, if
needed, may not be available on terms acceptable to us, if at all.
Description of Property
The Company leases and rents the following facilities as general office,
engineering, and retail space per the terms of the leases or on a month-to-month
basis as applicable:
Location Type Size Annual Rent
--------------------------------------------------------------------------------
Yuba City, Ca* Office, Engineering, 2,240 sq. ft. $ 20,160
ISP, NOC,
Equipment Refurbishing,
Retail
Concord, California Office 700 sq. ft. $ 9,180
Sacramento, California Office 1,200 sq. ft. $ 6,205
Yuba City, California Storage 200sq. ft. $ 900
*An officer and director of the Company is the landlord of this property.
38
<PAGE>
Certain Relationships and Related Transactions
Norbert Lima, a Director and the Company's CEO, owns the real estate in which
the Company's headquarters is located. The Company paid rent of $11,000 in 1999
and 1998 on its headquarters. A three-year lease agreement was authorized by the
Board of Directors in June, 2000 and was entered into and executed that month.
The NACC-Tel proprietorship, which was merged into NACC-Tel Corp., has been
operating at this location since 1986. After the Prime Worldnet merger in August
1999, Prime determined that it would be most cost effective to continue to
operate NACC-Tel from the same location and move Prime Companies, Inc.
headquarters to the Yuba City location. With respect to the current lease on
this building, Mr. Lima allowed preferential benefits to the company under the
following terms: the per square foot cost to Prime is $.75 per month as compared
to an unrelated stock broker tenant in the building paying $.80 per month. Mr.
Lima also allowed a lease-out clause with a 30 day notice to vacate and a
termination fee of $2000. These terms make the Prime lease more favorable than
would be available elsewhere in the market place.
On March 19, 1999, Norbert Lima, as an individual and sole proprietor of the
former NACC-Tel proprietorship, which was subsequently acquired by NACC-Tel
Corp., acquired the assets of Marathon Telecom from an unrelated party in
exchange for the assumption of certain liabilities totaling approximately
$40,000 and consideration paid to the seller of $5,500. On April 1, 1999,
Norbert Lima assigned to his son, Adrian Lima, who was an employee of the
NACC-Tel proprietorship, his 100% ownership of Marathon with no consideration to
be paid to Norbert Lima.
During the period between March 19, 1999 through October 15, 1999, Adrian Lima
operated Marathon independently of Norbert Lima and the NACC-Tel proprietorship.
Marathon generated revenues of approximately $99,000 (unaudited) and had net
income of approximately $28,000 (unaudited). Financial information for Marathon
prior to March 19, 1999 is not available.
On October 15, 1999, Prime acquired the assets of Marathon from Adrian Lima, a
sole proprietor, in exchange for 517,241 shares of Prime's common stock. This
stock issuance was valued at the average of the closing bid and ask prices for
three days before and after the acquisition was agreed to by Prime and Marathon.
The transaction was accounted for as a purchase and accordingly, the inclusion
of the operations of Marathon in the consolidated operations commenced on the
acquisition date. The resulting purchase price was $196,552 which consists of
$188,602 stock based compensation for the 517,241 shares of common stock issued
to Adrian Lima and $7,950 in fixed assets.
Irving Pfeffer, PhD, LLB, a principal in Pfeffer & William, P.C., and a member
of the State Bar of California, is counsel to Prime. He is the former Chairman
of the Board of Prime, and remains a significant shareholder of Prime. He
resigned as an officer and director when the Prime Worldnet merger was
consummated in August 1999.
39
<PAGE>
Executive Compensation
The following table sets forth the aggregate cash compensation paid to all
officers of the Company. The officers received no other compensation from the
Company:
Name and Principal Position Year Salary
---------------------------------------------------------
Norbert Lima, CEO 2000 (a) $ 95,833
1999 28,850
1998 6,752
Stephen Goodman, CFO. 2000 (b) 95,833
1999 (c) 5,500
Adrian Lima, VP-Engineering 2000 (d) 68,971
1999 54,347
1998 37,642
(a) Excludes 95,833 options granted under the Year 2000 Employee Stock Option
Program, which became exercisable January 1, 2001 at $.21875, the closing
price for the stock on the last business day of 2000.
(b) Excludes 5,500 options, which are currently exercisable, granted under the
Year 1999 Employee Stock Option Program and 95,833 options granted under
the Year 2000 Employee Stock Option Program, which became exercisable
January 1, 2001. The exercise price for the 1999 program is $1.00 per
share. The exercise price for the 2000 program is $.21875, the closing
price for the stock on the last business day of 2000.
(c) Mr. Goodman's compensation in 1999 was from August through December.
(d) Excludes 54,346 options, which are currently exercisable, granted under the
Year 1999 Employee Stock Option Program and 68,971 options granted under
the Year 2000 Employee Stock Option Program, which became exercisable
January 1, 2001. The exercise price for the 1999 program is $1.00 per
share. The exercise price for the 2000 program is $.21875, the closing
price for the stock on the last business day of 2000.
EMPLOYMENT AGREEMENTS
In accordance with the Commission Rules, the following is a list of all
Compensatory Plans or Arrangements of the Company:
Prime Companies 401(k)
Prime Companies, Inc. Incentive Stock Option Plan
On January 14, 2000, the Company approved compensation for its CEO and CFO each
at the rate of $8,333 per month for the year 2000. In April 2000 the Company
approved compensation for its Vice-President - Engineering at the rate of $6,000
per month. Messrs. Lima and Goodman were awarded employment agreements in
September 2000.
40
<PAGE>
STOCK OPTIONS
On January 1, 2001 there were outstanding options on 681,813 shares to various
individuals. Each option provides the right to purchase one share of common
stock. 165,711 of these options expire December 31, 2002 and 516,102 of these
options expire December 31, 2003. Of the 165,711 options granted, 105,711
options expiring in 2002 are exercisable at $1.00 per share, and 60,000 options
expiring in 2002 are exercisable at $.21875, the closing price of the common
stock on the last business day of 2000. All of the options expiring in 2003 are
exercisable at $.21875, the closing price of the common stock on the last
business day of 2000. Mr. Goodman, Mr. Adrian Lima, and Mr. Norbert Lima have
rights under the Year 2000 and the Year 1999 Employee Stock Option Programs.
Messrs. Turley, Sokolowski, and Hinz each have 20,000 options under the Year
2000 Outside Director Stock Option Program. These options are currently
exercisable and expire December 31, 2002. There are no other warrants, rights,
conversion, privileges, or other rights pursuant to which Mr. Goodman, Mr.
Adrian Lima or Mr. Norbert Lima or any other current Officer or Director has the
right to acquire further shares in the Corporation.
There were no stock options granted in 1999. Options under the Year 1999
Employee Stock Option Program were granted in March 2000.
In March 2000, the Board of Directors approved an employee stock option program
for all employees on staff as of January 31, 2000, whereby each employee is
granted the right to purchase the number of shares equal to 1999 gross earnings
(at Prime or any of its subsidiaries) at $1.00 per share; the options vest
immediately and expire December 31, 2002. The Company granted 105,711 options to
purchase common stock and recorded compensation expense of $109,014 in
connection with the 1999 Employee Stock Option Program during the nine months
ended September 30, 2000.
In March 2000, the Board of Directors also approved an employee stock option
program for all employees employed by Prime in 2000 and on staff at December 31,
2000, whereby each employee is granted the right to purchase the number of
shares equal to 2000 gross earnings (at Prime or any of its subsidiaries) at
$1.50 per share; the options are to expire December 31, 2003, and do not vest
until December 31, 2000. On December 13, 2000 the Board of Directors repriced
the exercise price of these options to the closing price of the common stock on
the last business day of 2000, December 29, 2000, which was $.21875. On December
31, 2000 516,102 options were automatically granted and vested under the 2000
Employee Stock Option Program.
In March 2000, the Board of Directors also approved a stock option program
whereby each outside director was granted 20,000 options for the year 2000, to
expire December 31, 2002, at $1.00 per share. The options vest on January 1,
2001 to each current outside director who is still a director on that date. As
of September 30, 2000, Prime incurred additional consulting expense of $15,450
for this stock option program. On December 13, 2000 the Board of Directors
repriced the exercise price of these options to the closing price of the common
stock on the last business day of 2000, December 29, 2000, which was $.21875. On
December 13, 2000 the Board of Directors also amended the plan to include each
current outside director who is still a director on December 31, 2000. On
January 1, 2001 60,000 options were automatically granted and vested under the
2000 Outside Directors Stock Option Program.
41
<PAGE>
<TABLE>
<CAPTION>
Employee and Director Stock Options
------------------------------------
1999 1999 2000 2000 Total Total
Name options options options options options options
granted exercised granted exercised granted exercised
--------------------- ---------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Eduardo Alcantar 4,474 4,474
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Jack Alden 21,977 28,841 50,818
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Dale Anderson 5,114 33,435 38,549
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Kathleen Criswell 2,265 9,548 11,813
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Joseph Field 10,005 10,005
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Karen Fischer 15,924 15,924
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Stephen Goodman 5,500 95,833 101,333
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Rodney Hamilton 8,723 22,495 31,218
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Kenneth Harding 20,219 20,219
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Sondra Harrison 12,756 12,756
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Brian Held 15,654 15,654
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Dennis Hinz 20,000 20,000
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Lynn Judd 2,022 25,032 27,054
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Samuel Kyeremeh 1,600 1,600
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Adrian Lima 54,346 68,971 123,317
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Damian Lima 4,975 4,975
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Laura Lima 4,164 4,164
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Norbert Lima 95,833 95,833
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Leah Mazar 3,742 3,742
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Jane McMillan 18,802 18,802
--------------------- ---------- ----------- --------- ----------- ----------- -----------
David Miller 769 769
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Jimmie Needles 3,623 3,623
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Dan Raybuck 17,182 17,182
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Martin Sokolowski 20,000 20,000
--------------------- ---------- ----------- --------- ----------- ----------- -----------
William Turley 20,000 20,000
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Justin Werner 7,989 7,989
--------------------- ---------- ----------- --------- ----------- ----------- -----------
Total 105,711 576,102 681,813
===================== ========== =========== ========= =========== =========== ===========
</TABLE>
42
<PAGE>
DIRECTOR COMPENSATION
The Company's directors will be reimbursed for any out-of-pocket expenses
incurred by them for attendance at meetings of the Board of Directors or
committees thereof. The Company compensates directors $500 for each meeting of
the Board attended by such director.
In August, 2000, the Board of Directors authorized compensation to members of
the Audit Committee at the rate of $500.00 per meeting.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
The following documents are filed as part of this report:
1) Financial statements.
2) Financial statement schedules. Schedules have been omitted because the
information required to be set forth therein is not applicable or is shown
in the consolidated financial statements or notes thereto incorporated by
reference herein.
43
<PAGE>
3) Exhibits.
Exhibit Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company
3.2 Bylaws of the Registrant as Amended
4.1 Specimen - Common Stock Certificate of the Registrant
4.2 Registration Rights as Amended
4.3 Copy of License Agreement Issued By FCC
4.4 Swartz Investment Agreement
4.5 Warrant to Purchase Common Stock issued to Swartz
5.1 Opinion Letter
10.1 Binding Letter of Intent with New Wave Networks LLC
10.11 Definitive Agreement with New Wave Networks LLC
10.22 Employment Agreement of Norbert J. Lima
10.23 Employment Agreement of Stephen Goodman
10.24 Lease Agreement made between the Registrant and Norbert J. Lima
21.2 List of Subsidiaries
23.1 Consent of Hein + Associates LLP
4) Reports on Form 8-K
NONE
RECENT SALES OF UNREGISTERED SECURITIES
In February 2000 creditors holding $1,240,216 (balance due as of February 28,
2000) of notes payable, plus accrued interest of $66,971, converted their debt
into 2,904,860 restricted common shares of Prime.
44
<PAGE>
In March 2000, Prime sold 6,569,444 shares of its common stock in private
placement offerings to 161 investors, under an exemption offered by Regulation D
of the Securities and Exchange Act, raising $2.4 million. Four of the investors
who purchased a total of 265,000 shares are or have been directors of Prime.
Additionally, in March 2000 another creditor converted $143,720 of short-term
debt, plus accrued interest of $108,750, into 561,111 restricted common shares
of Prime. These notes were converted into common shares at the same $.45 per
common share price offered to the investors who purchased common shares through
the private placement that closed March 31, 2000. The conversion ratio was each
dollar of debt was converted into 2.22222 common shares. The offering price was
below the market price at the time, causing a non-cash loss on extinguishment of
debt in the amount of $1,852,595 during the three months ended March 31, 2000.
In April 2000, Prime issued 1,000 shares of common stock at a price of $2.00 per
share for an internet domain name.
In June 2000 Prime issued 12,829 shares of common stock, at market value on the
date of issuance, to a consultant for services rendered related to market
research conducted in its local multipoint distribution service markets.
In June 2000 Prime issued 273,427 shares of common stock, at market value on the
date of issuance, for services rendered related to the private placement that
closed on March 31, 2000.
In September 2000 the creditor of a $100,000 convertible note due October 1,
2000 converted the balance then due of $109,778 (including accrued interest of
$9,778) into 312,500 shares of Prime's common stock, which have been issued in
full satisfaction of the note. Prime incurred additional interest expense of
$40,625 due to a beneficial conversion feature of the note.
In September 2000 Prime entered into an agreement with two former officers,
directors, and shareholders to settle two lawsuits between the parties. As part
of the settlement, Prime will receive 5,500,000 common shares back from the two
former officers for cancellation. Prime will disaggregate three of its local
multipoint distribution service licenses and assign one-half of each of the
three licenses, with a total net book value of $125,857 (net of accumulated
amortization), to an entity to be designated by the former officers. Due to the
related party nature of the transaction, Prime recorded the settlement based on
its historical cost because recording the transaction at the fair market value
of the shares would have resulted in a material gain between related parties.
The application to disaggregate the three licenses was filed with the FCC on
December 27, 2000; it was accepted by the FCC and put on public notice on
January 3, 2001.
Undertakings
(a) The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
45
<PAGE>
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any additional or changed material information
on the plan of distribution;
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or
497 (h) under the Securities Act as part of this registration statement as
of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
46
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in Yuba City, California
on January 11, 2001.
PRIME COMPANIES, INC.
By: /s/ Norbert J. Lima
----------------------------------
Norbert J. Lima, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
Signature Title Date
--------- ------- -------
/s/ Norbert J. Lima President, Director,
-------------------- Chief Executive Officer
Norbert J. Lima (Principal Executive Officer) January 11, 2000
/s/ Stephen Goodman Chief Financial Officer, Secretary,
-------------------- Treasurer, Director
Stephen Goodman (Principal Financial Officer) January 11, 2000
/s/ William Turley Director
-------------------
William Turley January 11, 2000
/s/ Martin Sokolowski Director
--------------------- January 11, 2000
Martin Sokolowski
/s/ Dennis Hinz Director
--------------------- January 11, 2000
Dennis Hinz
47
<PAGE>
PRIME COMPANIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1999 and For the
NINE Months Ended SEPTEMBER 30, 1999 and
2000 (unaudited)
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................................................F-2
Consolidated Balance Sheet - December 31, 1999 and September 30, 2000 (unaudited)..................................F-3
Consolidated Statements of Operations - For the Years Ended December 31, 1998 and 1999, and
For the Nine Months Ended September 30, 1999 and 2000 (unaudited).............................................F-4
Consolidated Statement of Stockholders' Equity (Deficit) - For the Years Ended December 31,
1998 and 1999, and For the Nine Months Ended September 30, 2000 (unaudited)...................................F-5
Consolidated Statements of Cash Flows - For the years ended December 31, 1998, and 1999, and.......................F-6
For the Nine Months Ended September 30, 1999 and 2000 (unaudited)
Notes to Consolidated Financial Statements.........................................................................F-7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Prime Companies, Inc.,
Yuba City, California
We have audited the accompanying consolidated balance sheet of Prime Companies,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the years ended December 31, 1999 and 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Prime Companies,
Inc. and subsidiaries at December 31, 1999, and the results of their operations
and their cash flows for the years ended December 31, 1999 and 1998 in
conformity with generally accepted accounting principles.
/s/HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
April 20, 2000, except for paragraphs 2 through 4 of Note 4 which are as of
August 31, 2000.
F-2
<PAGE>
<TABLE>
<CAPTION>
PRIME COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
1999 2000
---------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 237,403 $ 1,073,819
Accounts receivable 28,405 72,891
Inventory 13,850 37,589
Deposits and other current assets 31,700 3,031
Net assets held for sale 661,702 -
---------------- ----------------
Total current assets 973,060 1,187,330
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$31,308 and $57,104 (unaudited), at December 31, 1999
and September 30, 2000, respectively 103,671 278,212
LICENSES, net of accumulated amortization of $30,774 and $58,954
(unaudited), at December 31, 1999 and September 30, 2000, 584,698 412,681
respectively
INTANGIBLE - 2,000
----------------- ----------------
TOTAL ASSETS $ 1,661,429 $ 1,880,223
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------
CURRENT LIABILITIES:
Current portion of notes payable to related parties $ 180,500 $ -
Convertible notes payable 496,220 -
Accounts payable 159,715 84,382
Accrued interest 167,110 -
Other accrued expenses and liabilities 31,351 117,868
Liabilities in excess of assets held for sale - 626,739
---------------- ----------------
Total current liabilities 1,034,896 828,989
NOTES PAYABLE TO RELATED PARTIES, less current portion 1,240,216 -
---------------- ----------------
Total liabilities 2,275,112 828,989
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 12) - -
<
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.0001 par value, 50,000,000 shares authorized, none
issued and outstanding - -
Common stock, $.0001 par value, 100,000,000 shares authorized,
21,582,125 and 26,717,296 (unaudited), issued and outstanding a
December 31, 1999 and September 30, 2000, respectively 2,158 2,672
Additional paid-in capital 282,244 6,383,471
Unrealized gain on available-for-sale securities 125,000 -
Accumulated deficit (1,023,085) (5,334,909)
----------------- ----------------
Total stockholders' equity (deficit) (613,683) 1,051,234
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,661,429 $ 1,880,223
================ ================
</TABLE>
See accompanying notes to these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
PRIME COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------- ---------------------------------
1998 1999 1999 2000
--------------- ---------------- --------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
SALES REVENUES $ 209,823 $ 441,663 $ 199,860 $ 373,563
--------------- ---------------- --------------- ---------------
COSTS AND EXPENSES:
Cost of sales 121,166 163,550 85,359 98,922
Selling, general, and administrative expenses 143,002 599,474 185,726 1,430,762
Expense recognized for net liabilities assumed in
reverse merger - 428,194 - -
--------------- ---------------- --------------- ---------------
Total costs and expenses 264,168 1,191,218 271,085 1,529,684
--------------- ---------------- --------------- ---------------
INCOME (LOSS) FROM OPERATIONS (54,345) (749,555) (71,225) (1,156,121)
--------------- ---------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest income - - - 37,610
Interest expense (14,796) (199,089) (31,858) (73,091)
Loss on securities available for sale - - - (1,156,000)
--------------- ---------------- --------------- ----------------
Net other income/(expense) (14,796) (199,089) (31,858) (1,191,481)
NET LOSS BEFORE TAXES & EXTRAORDINARY ITEM (69,141) (948,644) (103,083) (2,347,602)
Provision for taxes - 5,300 - -
--------------- ---------------- --------------- ----------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (69,141) (953,944) (103,083) (2,347,602)
EXTRAORDINARY LOSS ON EXTINGUISHMENT
OF DEBT - - - 1,852,595
--------------- ---------------- --------------- ---------------
NET LOSS $ (69,141) $ (953,944) $ (103,083) $ (4,200,197)
================ ================= ================ ================
BASIC & DILUTED PER SHARE INFORMATION:
Loss before extraordinary item $ (0.02) $ (0.06) $ (0.01) $ (0.08)
Extraordinary loss on extinguishment of debt - - - (0.06)
---------------- ---------------- --------------- ----------------
Net loss $ (0.02) $ (0.06) $ (0.01) $ (0.14)
=============== ================= ================ ================
WEIGHTED AVERAGE SHARES OUTSTANDING 4,500,000 16,680,764 14,500,000 29,112,248
=============== ================ =============== ===============
</TABLE>
See accompanying notes to these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PRIME COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999 AND NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
UNREALIZED GAIN
(LOSS) ON
COMMON STOCK ADDITIONAL AVAILABLE-FOR-
---------------------------- PAID-IN SALE
SHARES AMOUNT CAPITAL SECURITIES
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCES, January 1, 1998 -- $ -- $ -- $ --
Capital contributions 4,500,000 450 35,650 --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, December 31, 1998 4,500,000 450 35,650 --
Shares issued for services 10,517,241 1,051 220,341 --
Shares issued in merger transaction 6,507,742 651 (651) --
Stock issued in acquisitions 57,142 6 26,904 --
Comprehensive loss:
Net Loss -- -- -- --
Unrealized gain on available-for-sale
securities -- -- -- 125,000
Total comprehensive loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, December 31, 1999 21,582,125 $ 2,158 $ 282,244 $ 125,000
----------- ----------- ----------- -----------
Shares returned per settlement (unaudited) (5,500,000) $ (550) $ (13,680) $ --
Issuance of common stock in connection with
conversion of debt (unaudited) 3,778,471 379 3,562,306 --
Issuance of common stock, net of offering
costs (unaudited) 6,842,871 684 2,408,706 --
Compensation expense recognized upon
issuance of stock options (unaudited) -- -- 124,464 --
Shares issued for purchase of other assets
(unaudited) 1,000 -- 2,000 --
Shares issued for services (unaudited) 12,829 1 17,431 --
Comprehensive loss:
Net Loss (unaudited) -- -- -- --
Reclassification adjustment on available
for-sale securities (unaudited) -- -- -- (125,000)
Total comprehensive loss (unaudited)
----------- ----------- ----------- -----------
BALANCE, September 30, 2000 (unaudited) 26,717,296 $ 2,672 $ 6,383,471 $ --
=========== =========== =========== ===========
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------ -----------
BALANCES, January 1, 1998 $ -- $ --
Capital contributions -- 36,100
Net loss (69,141) (69,141)
----------- -----------
BALANCE, December 31, 1998 (69,141) (33,041)
Shares issued for services -- 221,392
Shares issued in merger transaction -- --
Stock issued in acquisitions -- 26,910
Comprehensive loss:
Net Loss (953,944)
Unrealized gain on available-for-sale
securities --
Total comprehensive loss -- (828,944)
----------- -----------
BALANCE, December 31, 1999 $(1,023,085) $ (613,683)
----------- -----------
Shares returned per settlement (unaudited) $ (111,627) $ (125,857)
Issuance of common stock in connection with
conversion of debt (unaudited) -- 3,562,685
Issuance of common stock, net of offering
costs (unaudited) -- 2,409,390
Compensation expense recognized upon
issuance of stock options (unaudited) -- 124,464
Shares issued for purchase of other assets
(unaudited) -- 2,000
Shares issued for services (unaudited) -- 17,432
Comprehensive loss:
Net Loss (unaudited) (4,200,197) --
Reclassification adjustment on available
for-sale securities (unaudited) -- --
Total comprehensive loss (unaudited) (4,325,197)
----------- -----------
BALANCE, September 30, 2000 (unaudited) $(5,334,909) $ 1,051,234
=========== ===========
</TABLE>
See accompanying notes to these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
PRIME COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FOR THE YEARS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1999 1999 2000
------------- ------------- ------------- ------------
(unaudited) (unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net loss $ (69,141) $ (953,944) $ (103,083) $(2,347,602)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Bad debt -- -- -- 6,233
Depreciation and amortization 11,526 49,506 11,222 73,007
Impairment on investment -- -- -- 1,156,000
Interest related to beneficial conversion feature
of note payable/convertible debenture -- -- -- 40,625
Compensation recognized upon issuance of stock
and stock options -- -- -- 124,464
Stock issued for services -- 221,392 -- 17,432
Noncash expense recognized upon reverse merger
-- 428,193 219,383 --
Changes in operating assets and liabilities:
Accounts receivable (10,158) (17,247) 1,591 (50,719)
Inventory 12,779 (7,620) (12,320) (23,739)
Prepaid expenses and other current assets (350) (22,878) (3,447) 30,321
Change in liabilities in excess of assets held
for sale -- -- -- 7,441
Accounts payable 30,358 (10,965) 12,225 (75,334)
Accrued liabilities -- 188,593 25,000 104,937
Due to/from owner -- -- (33,783) --
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities (24,986) (124,970) 116,788 (936,934)
----------- ----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of property and equipment (7,635) (14,744) (17,324) (203,040)
Sale of property held for sale -- 1,074,955 -- --
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities (7,635) 1,060,211 (17,324) (203,040)
----------- ----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Capital contributions 36,100 -- -- --
Proceeds from sale of stock -- -- -- 2,409,390
Principal borrowings on notes payable -- -- --
Proceeds from notes payable -- 39,248 10,000 --
Principal payments on notes payable and
long-term debt -- (740,565) (57,273) (433,000)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities 36,100 (701,317) (47,273) 1,976,390
----------- ----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 3,479 233,924 52,191 836,416
CASH AND CASH EQUIVALENTS, beginning of year -- 3,479 3,479 237,403
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year $ 3,479 $ 237,403 $ 55,670 $ 1,073,819
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for:
Interest $ 14,796 $ 31,979 $ -- $ --
=========== =========== =========== ===========
Income taxes $ -- $ -- $ -- $ --
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
TRANSACTIONS:
Assets acquired for assumption of debt $ 94,573 $ -- $ -- $ --
=========== =========== =========== ===========
Notes payable issued to acquire licenses $ -- $ 615,472 $ -- $ --
=========== =========== =========== ===========
Note payable issued to acquire property and
equipment $ -- $ 10,076 $ -- $ --
=========== =========== =========== ===========
Net assets acquired in exchange for stock $ -- $ 26,910 $ -- $ --
=========== =========== =========== ===========
Contributions by stockholder $ -- $ -- $ 40,091 $
=========== =========== =========== ===========
Conversion of Note Payable and Accrued Interest
to Common Stock $ -- $ -- $ -- $ 1,669,466
=========== =========== =========== ===========
Issuance of Common Stock for intangible asset $ -- -- $ -- $ 2,000
=========== =========== =========== ===========
Return of 5,500,000 shares of Common Stock $ -- $ -- $ -- $ 125,857
=========== =========== =========== ===========
per settlement agreement
</TABLE>
See accompanying notes to these financial statements.
F-6
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
1. ORGANIZATION AND NATURE OF OPERATIONS:
--------------------------------------
The consolidated financial statements include the accounts of Prime
Companies, Inc. and its wholly owned subsidiaries (collectively, "the
Company"). On February 20, 1998, Bert Lima (the Company's CEO)
acquired certain assets of Pagers Plus, Inc. (an entity for which Bert
Lima served as an officer) in exchange for the assumption of specified
liabilities. Mr. Lima contributed the operations of Pagers Plus to
NACC-Tel, a sole proprietorship. In February 1999, Mr. Lima assigned
interests in NACC-Tel to three principals in exchange for services to
be provided for the further development of the operations. NACC-Tel
recorded compensation expense equal to the fair market value of the
interests in the year ended December 31, 1999. NACC-Tel provides
paging services and installation and servicing of interconnect and
business communication systems
In February 1999, Mr. Lima, along with three principals, formed
Worldnet Tel.com, Inc. (Worldnet), a Delaware corporation, to form the
legal structure for the Company's further development with each owner
contributing their respective interests in NACC-Tel to Worldnet.
Subsequently, Worldnet contributed the operations of its wholly owned
subsidiary, NACC-Tel, to NACC-Tel Corp., a Delaware corporation formed
as a wholly-owned subsidiary of WNTC Holdings, Inc., which was formed
as a wholly-owned holding company subsidiary of Worldnet. For
financial statement purposes, the operations of NACC-Tel are
considered the business of Worldnet and the financial statements
reflect the historical financial position and results of operations
and cash flows of NACC-Tel.
Pursuant to a Stock Purchase Agreement (the "Agreement") between Prime
Companies, Inc. ("Prime"), a Delaware Corporation, a nonoperating
public shell, and Worldnet, Worldnet was merged into Prime through a
merger effective August 11, 1999.
For financial statement purposes, Worldnet was considered the
acquiring company, and Worldnet has treated this transaction as an
acquisition of Prime. For legal purposes, however, Prime remained the
surviving entity. Therefore, the combined entity retained Prime's
capital structure. Prior to the merger, Prime had 6,507,742 shares of
common stock outstanding held by various individuals. Pursuant to the
agreement, Worldnet stockholders were issued 14,500,000 shares of
Prime common stock. As a result of the stock exchange, the former
shareholders of Worldnet hold 69% of the outstanding shares of common
stock of Prime. At the time of the merger, Prime had liabilities in
excess of net assets of $428,194. This amount was been charged to
operations on the date of the merger as a cost of the reorganization.
The accompanying financial statements the Company reflect the
operations of Worldnet and its subsidiaries and consolidate the
operations of Prime and its subsidiaries commencing on the date of the
merger.
The Company's other wholly-owned subsidiaries as described below:
Prepaid Tel.com Inc. (Prepaid), a Delaware corporation, was formed in
February 1999 as a wholly-owned subsidiary of WNTC. Prepaid is a
Competitive Local Exchange Carrier ("CLEC") certified by the
California Public Utility Commission. Prepaid had no substantial
operations during 1999.
F-7
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
LMDS Communications Inc. (LMDS), a Delaware corporation, was formed in
February 1999 as a wholly-owned subsidiary of WNTC. LMDS is a
telecommunications company with interests in the fixed broadband
wireless sector. LMDS had no substantial operations during 1999.
Mid-Cal Express, Inc. and Mid-Cal Express Logistics, Inc.
(collectively, Mid-Cal) are wholly-owned subsidiaries of Prime.
Mid-Cal ceased operations in December 1998 (prior to the acquisition
by Worldnet) and is in the process of liquidating its assets and
settling outstanding liabilities.
Zenith Technologies Inc. (Zenith), a Delaware Corporation, was formed
in December 1998 as a wholly-owned subsidiary of Prime Companies, Inc.
To date, it has had no operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Principles of Consolidation - The consolidated financial statements
include the accounts of Prime Companies, Inc. and its wholly owned
subsidiaries (collectively, "the Company"). All significant
intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents - For purposes of the statements of cash
flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventory - Inventory of installation equipment and materials are
stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization of property and equipment is calculated
using the straight-line method over the estimated useful lives
(ranging from 5 to 7 years) of the respective assets. The cost of
normal maintenance and repairs is charged to operating expenses as
incurred. Material expenditures which increase the life of an asset
are capitalized and depreciated over the estimated remaining useful
life of the asset. The cost of properties sold, or otherwise disposed
of, and the related accumulated depreciation or amortization are
removed from the accounts, and any gains or losses are reflected in
current operations.
Intangibles - Intangibles include the amounts paid to the FCC to
purchase licenses for Local Multipoint Distribution Services in
certain markets. The licenses are being amortized on a straight-line
basis over the initial term of the license, which is ten years.
Impairment of Long-Lived and Intangible Assets - In the event that
facts and circumstances indicate that the cost of long lived assets
may be impaired, an evaluation of recoverability would be performed.
If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's
carrying amount to determine if a write-down to market value or
discounted cash flow value is required.
F-8
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
Revenue Recognition - Revenue is generated from installation of
business phone systems recognized as installations are completed.
Income Taxes - The Company accounts for income taxes under the
liability method which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under
this method, deferred tax assets and liabilities are determined, based
on the difference between the financial statements and tax basis of
assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Net Assets (Liabilities in excess of assets) Held for Sale - Net
assets (liabilities in excess of assets) held for sale include 400,000
shares of common stock of US Trucking, Inc., and cash of Mid-Cal
Express, Inc. (the Company's inactive trucking subsidiary) net of
payables to unsecured creditors of Mid-Cal Express Inc. The assets are
pledged as security for the unsecured creditors and are being held in
escrow pending final settlement of the claims. As of September 30,
2000, the liabilities of Mid-Cal Express, Inc. exceeded the assets by
$626,739 (unaudited). Refer to Note 5.
Earnings Per Share - Basic earnings per share excludes dilution and is
computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity. Common
stock equivalents as of December 31, 1998 and 1999 and September 30,
1999 and 2000 were anti-dilutive and excluded from the earnings per
share computation.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. The
actual results could differ from those estimates.
The Company's financial statements are based upon a number of
significant estimates including the allowance for doubtful accounts,
the estimated lives of property and equipment, licenses, and
intangibles, and the realizability of deferred tax assets. Due to the
uncertainties inherent in the estimation process, it is at least
reasonably possible that these estimates will be further revised in
the near term and such revisions could be material.
Investments - The U.S. Trucking stock included in net assets
(liabilities in excess of assets) held for sale is considered
available for sale. These securities are carried at fair value with
unrealized gains or losses, net of tax, reported as a separate
component of stockholders' equity. The change in unrecognized gain on
available-for-sale securities during 2000 includes reclassification
adjustments for $1,156,000 of losses recognized in income from a
permanent impairment taken against the investment due to a significant
decrease in the market value of the shares.
Stock-Based Compensation - The Company has elected to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB25) and related interpretations in accounting
for its employee stock options. In accordance with FASB Statement No.
123 "Accounting For Stock-Based Compensation" (FASB123), the Company
will disclose the impact of adopting the fair value accounting of
employee stock options. Transactions in equity instruments with
non-employees for goods or services have been accounted for using the
fair value method prescribed by FASB123.
F-9
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
Concentrations of Credit Risk - Credit risk represents the accounting
loss that would be recognized at the reporting date if counterparties
failed to perform as contracted. Concentrations of credit risk
(whether on or off balance sheet) that arise from financial
instruments exist for groups of customers or groups of counterparties
when they have similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly effected by
changes in economic or other conditions. In accordance with FASB
Statement No. 105, "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," financial instruments that subject the
Company to credit risk are primarily accounts receivable. The credit
risk amounts shown do not take into account the value of any
collateral or security.
The customers of the Company's primary operations are located
primarily in California. At December 31, 1999 and September 30, 2000,
approximately $13,800 and $22,880 representing 48% and 31% of trade
receivables was due from two customers. No other customers accounted
for more than 10% of the Company's trade receivables at December 31,
1999 and September 30, 2000.
Fair Value of Financial Instruments - The estimated fair values for
financial instruments under FASB Statement No. 107, "Disclosures about
Fair Value of Financial Instruments," are determined at discrete
points in time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision.
The following methods and assumptions were used in estimating the
indicated fair values of the Company's financial instruments:
Cash and cash equivalents: The carrying amount approximates
fair value because of the short maturity of those instruments.
Long-term and other debt: The fair value of the Company's debt
is estimated based on current rates offered to the Company for
debt with similar terms and maturities and approximates
carrying value.
Impact of Recently Issued Standards - In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133 (FASB133), "Accounting for Derivative Instruments
and Hedging Activities." This statement requires that an entity
recognize all derivatives as assets or liabilities in the statement of
financial position and measure those instruments at fair value. This
statement was amended by FASB 137, issued in June 1999, such that it
is effective for the Company's financial statements for the year
ending December 31, 2001. The Company does not believe the adoption of
FASB133 will have a material impact on assets, liabilities or equity.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No 101, entitled "Revenue Recognition in Financial
Statements." SAB101A and SAB101B were issued by the SEC and delay the
required implementation date of SAB101 until the fourth quarter of
2000. SAB 101 provides guidance on the recognition, presentation and
disclosure of revenue in the financial statements of public companies.
The Company does not believe that the adoption of SAB 101 will have a
material effect on its financial position or results of operations.
F-10
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
Interim Financial Information - The September 30, 1999 and 2000
financial statements have been prepared by the Company without audit.
In the opinion of management, the accompanying financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary for a fair presentation of the Company's financial position
as of September 30, 2000 and the results of operations and cash flows
for the nine months ended September 30, 1999 and 2000. The results of
operations for the nine months ended September 30, 2000 are not
necessarily indicative of those that will be obtained for the entire
fiscal year.
3. BASIS OF PRESENTATION:
----------------------
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the accompanying consolidated financial statements, the Company has
recorded losses for the year ending December 31, 1999, resulting in an
accumulated deficit of $1,023,085, as of December 31, 1999. Cash used
in operations during the year ended December 31, 1999 was $24,986.
Management expects to achieve profitable operations as its CLEC and
Internet subsidiaries begin operations during 2000. Until profitable
operations can be achieved, management had taken steps to obtain
additional working capital for the Company. Subsequent to December 31,
1999, the Company converted approximately $1.7 million of debt and
accrued interest to common stock and completed a private placement of
an additional 6,842,871 shares of common stock for net proceeds of $2.4
million (see note 13). Management believes, based on its current and
planned level of operations it has sufficient resources to continue as
a going concern for at least the next twelve months.
Accordingly, the financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amount and classification of liabilities or any other
adjustment that might be necessary should the Company be unable to
continue as a going concern.
4. ACQUISITIONS:
-------------
In September 1999, the Company acquired all of the assets of Olive Tree
Image Engineers (a sole proprietorship) (Olive Tree) in exchange for
57,142 shares of the Company's common stock. This stock issuance was
valued at the average of the closing bid and ask prices for three days
before and after the acquisition was agreed to by the Company and Olive
Tree. The transaction was accounted for as a purchase and the resulting
purchase price of $26,910 was assigned to property and equipment
acquired. Olive Tree had no substantial operations prior to the
acquisition by the Company.
F-11
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
On March 19, 1999, Bert Lima, as an individual and sole proprietor of
NACC-Tel, acquired the assets of Marathon Telecom (Marathon) from an
unrelated party in exchange for the assumption of certain liabilities
totaling approximately $40,000 and consideration paid to the seller of
$5,500. On April 1, 1999, Bert Lima assigned to his son, Adrian Lima
who was an employee of NACC-Tel, his 100% ownership of Marathon with
no consideration to be paid to Bert Lima. This transaction was in
recognition of Adrian Lima's services provided to NACC-Tel without
appropriate compensation.
During the period between March 19, 1999 through October 15, 1999,
Adrian Lima operated Marathon independently of Bert Lima and NACC-Tel.
Marathon generated revenues of approximately $99,000 (unaudited) and
had net income of approximately $28,000 (unaudited) during this
period. Financial information for Marathon prior to March 19, 1999 is
not available.
On October 15, 1999, the Company acquired the assets of Marathon from
Adrian Lima, a sole proprietor, in exchange for 517,241 shares of the
Company's common stock. This stock issuance was valued at the average
of the closing bid and ask prices for three days before and after the
acquisition was agreed to by the Company and Marathon. The transaction
was accounted for as a purchase and accordingly, the inclusion of the
operations of Marathon in the consolidated operations commenced on the
acquisition date. The resulting purchase price was $196,552 which
consists of $188,602 stock based compensation for the 517,241 shares
of common stock issued to Adrian Lima and $7,950 in fixed assets.
<TABLE>
<CAPTION>
Pro Forma
Prime Marathon Adjustments Consolidated
----- -------- ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales revenue $ 441,663 $ 98,953 $ - $ 540,616
=============== ============ ============ ===============
Net income (loss) before taxes and
extraordinary item $ (760,042) $ 27,688 $ (188,602) $ (920,956)
=============== ============ ============ ===============
Net income (loss) $ (765,342) $ 27,688 $ (188,602) $ (926,256)
=============== ============ ============ ===============
Weighted average shares outstanding
$ 16,163,523 $ - $ 517,241 $ 16,680,764
=============== ============ ============ ===============
Earnings per share $ (0.05) $ - $ (0.36) $ (0.06)
============== ============ ============ ===============
</TABLE>
5. NET ASSETS (LIABILITIES IN EXCESS OF ASSETS) HELD FOR SALE:
----------------------------------------------------------
Mid-Cal Express, Inc., ceased operations in December 1998 and its
assets have been pledged as security for the settlement of claims by
its unsecured creditors. The assets are held by the Credit Managers
Association of Southern California who is in the process of liquidating
the assets and making final distribution to the creditors. The net
assets (liabilities in excess of assets) held for sale consisted of the
following:
F-12
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
-------------------- ---------------------
Assets:
<S> <C> <C>
Cash in escrow $ 83,079 $ 6,892
Investments 1,425,000 144,000
Accounts Receivable - 6,999
---------------- ----------------
Total Assets 1,508,079 157,891
Unsecured Creditors (846,377) (784,630)
----------------- -----------------
Net Assets(Liabilities) of Discontinued
Operations $ 661,702 $ (626,739)
================ =================
</TABLE>
F-13
<PAGE>
6. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
Property and equipment at consisted of the following:
DECEMBER 31, 1999 ESTIMATED
SEPTEMBER 30, 2000 USEFUL LIVES
--------------------- -------------------- ------------------
<S> <C> <C> <C>
Offices furniture and equipment $ 46,745 $ 75,572 3 years
Vehicles 16,470 48,360 3 years
Paging terminals 71,764 71,764 7 years
Lower of 5 years
of the lease life
Site Improvements - 18,212
LMDS Equipment - 121,408 7 years
----------------- ----------------
Total Property and equipment 134,979 335,316
Less accumulated depreciation and
amortization (31,308) (57,104)
---------------- -----------------
$ 103,671 $ 278,212
================ ================
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1998 and 1999 and nine months ended September 30, 1999 and 2000 was
$11,526, $18,731, $9,868 and $26,847, respectively.
7. NOTES PAYABLE TO RELATED PARTIES:
---------------------------------
In connection with the merger between Prime and Worldnet, the Company
assumed notes payable to related parties. The Company had the following
notes payable outstanding to related parties:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30,
2000
--------------------- ------------------
<S> <C> <C> <C>
Unsecured notes payable to shareholders; interest at 10% accruing
through January 15, 2000, thereafter interest payments due monthly
beginning January 15, 2000; principal due July 31, 2001
$ 1,240,216 $ -
Unsecured notes payable to a shareholder, former officer and director;
interest at 10%; principal and interest due at various
dates throughout 2000 155,000 -
Note payable to a relative of the Chief Executive Officer;
non-interest bearing; due April 15, 2000 25,500 -
---------------- ------------------
1,420,716 -
Less: current portion (180,500) -
---------------- ------------------
Long term portion $ 1,240,216 $ -
================ ==================
</TABLE>
F-14
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
Interest expense to related parties was $60,954, for the year ended
December 31, 1999 and $199,089 and $24,546 for the nine months ended
September 30, 1999 and 2000, respectively. In addition, accrued
interest on notes payable to related parties was $55,830 at December
31, 1999 and $199,089 at September 30, 1999.
In February 2000, notes in the principal amount of $1,240,216, plus
accrued interest of $66,971 were settled by the issuance of 2,904,860
shares of the Company's common stock. The debt was converted at a price
per share less than market value which created a $1,852,595 loss on
debt extinguishment.
8. CONVERTIBLE NOTES PAYABLE:
--------------------------
During 1999, the Company issued unsecured notes payable to an
individual for cash and licenses. At December 31, 1999, principal of
$496,220 and accrued interest of $111,280 were due on these notes.
During the nine months ended September 30, 2000, the Company settled
notes in the principal amount of $396,220 and accrued interest in the
amount of $108,750 with cash payments of $252,500 and issuance of
561,111 shares of the Company's common stock.
In September 2000, the Company converted the remaining note with a face
value of $100,000 and accrued interest of $9,778 into 312,500 shares of
the Company's common stock. The Company recognized additional interest
expense of $40,625 upon the conversion of the note due to the
beneficial conversion feature of the note.
9. COMMON STOCK:
-------------
The Board of Directors has approved increasing authorized common and
preferred stock to 100 million and 50 million, respectively. The
authorized increases will be submitted to the shareholders at the
annual meeting for their approval.
In March 2000, the Company completed a private placement offering of
its common stock and sold 6,569,444 shares for $2.4 million (net of
commissions of approximately $547,000). In connection with the private
placement, the Company issued 273,427 common shares as commission.
10. STOCK OPTIONS PLANS:
--------------------
In March 2000, the Company adopted the 1999 Employee Stock Option Plan
(the 1999 Plan). Under the 1999 Plan, employees on the Company payroll
as of January 31, 2000 are granted options to purchase the number of
shares of common stock equal to their respective 1999 gross earnings
(at Prime or any of its subsidiaries) at an exercise price equal to
$1.00 per share. The options vest immediately and expire December 31,
2002.
F-15
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
On March 16, 2000, under the 1999 Plan, the Company granted 105,711
options to purchase common stock to all employees employed by the
Company on January 31, 2000. The options were granted at an exercise
price of $1.00 which was less than the market value of the stock on the
date of grant and the Company recognized compensation expense $109,014
for services provided.
Also in March 2000, the Company adopted the 2000 Employee Stock Option
Plan (the 2000 Plan). Under the 2000 Plan, employees on staff on
December 31, 2000 are entitled to receive options to purchase the
number of shares equal to their respective 2000 gross earnings (at
Prime or any of its subsidiaries) at an exercise price equal to $0.22
per share. On December 29, 2000, the Company issued options to purchase
516,102 shares of common stock with an exercise price equal to the
market price on the date of grant. The options vest immediately and
expire December 1, 2003.
In March 2000, the Company granted 20,000 shares to each of its
Directors for services on the Board of Directors during the year ending
December 31, 2000. The options were granted with an exercise price
equal to $1.00 which was less than the market value of the stock on the
date of grant and the Company recognized compensation expense of
$15,450 for the services. The options vest on January 1, 2001 and
expire in 2002. In December 2000, the Board of Directors reduced the
exercise price of the options granted to Directors from $1.00 per share
to $0.22 per share which equaled the market price on December 29, 2000.
In December 2000, the Board of Directors granted options to purchase
60,000 shares of common stock to Directors on the Board of Directors at
December 31, 2000. The options have an exercise price equal to the
market price on the date of grant, vest on January 1, 2001 and expire
in December 2002.
The following table sets forth the activity for all options granted
during the nine months ended September 30, 2000. No options were
granted, exercised, or canceled during 1998 or 1999.
<TABLE>
<CAPTION>
AVERAGE EXERCISE
NUMBER OF SHARES PRICE PER SHARE
------------------- ---------------------
<S> <C> <C>
Balance, December 31, 1999 2,555,209 $ 2.32
Granted 165,711 1.00
Canceled/Expired/Forfeited (40,000) 1.00
---------------- -------------------
Balance, September 30, 2000 2,680,920 $ 2.00
================ ===================
</TABLE>
At September 30, 2000, the Company has options to purchase 1,502,086
shares exercisable at the price of $1.00, options to purchase 1,038,834
shares were exercisable at the price of $3.00, and options to purchase
120,000 shares were exercisable at the price of $6.00 per share. The
remaining options become exercisable in 2001.
F-16
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
If not previously exercised, canceled or forfeited, the outstanding
options will expire as follows:
AVERAGE EXERCISE
PERIOD ENDED SEPTEMBER 30, NUMBER OF SHARES PRICE PER SHARE
----------------- ------------------
2001 2,555,209 $ 2.32
2002 125,711 1.00
---------------- ---------------
Balance, September 30, 2000 2,680,920 $ 2.00
================ ===============
As noted in Note 2, the Company has not adopted the fair value
accounting prescribed by FASB123 for employees. Had compensation cost
for stock options issued to employees been determined based on the fair
value at grant date for options awarded in 2000 consistent with the
provisions for FASB123, the Company's net loss and net loss per share
would have been adjusted to the proforma amounts indicated below:
NINE MONTHS ENDED
SEPTEMBER 30, 2000
-------------------
Net Loss $ (4,264,156)
=================
Basic and diluted net loss per common share $ (0.15)
=================
The fair value of each option was estimated on the date of grant using
the Black-Scholes option-pricing model using the following assumptions:
a risk-free interest rate of 6.48%, expected life of three years,
dividend yield of 0%, and expected volatility of 206.2%. The
weighted-average fair value of the options granted during the nine
months ended September 30, 2000 was $0.61.
11. INCOME TAXES:
-------------
The provision for taxes for 1999 consists of state franchise taxes. The
actual income tax expense differs from the "expected" tax expense
computed by applying the U.S. federal corporate income tax rate of 34%
because of the state taxes and changes in the valuation allowance of
deferred tax assets.
F-17
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
The components of the net deferred tax assets are as follows at
December 31, 1999:
Noncurrent deferred tax assets:
Net operating loss carryforward $ 3,292,227
Valuation allowance (3,292,227)
----------------
Net noncurrent deferred tax assets $ -
================
As of December 31, 1999, the Company has available net operating loss
carryforwards for income tax purposes of $8,551,000 which expire
through 2019. The Company has state net operating loss carryforwards of
$4,140,000 which expire through 2004. Due to the change in control of
Prime, the benefit of the net operating losses generated by Prime prior
to the acquisition by Worldnet will be limited by certain consolidated
return filing regulations and limitations under Section 382. This
limitation would prevent the use of pre-acquisition net operating
losses against the activities of Worldnet or any of its subsidiaries.
12. EMPLOYEE DEFINED CONTRIBUTION PLAN:
-----------------------------------
Effective January 1, 1998, the Company adopted a 401K Profit Sharing
Plan (the "Plan") covering all employees. To be eligible to participate
in the Plan, employees must be age 21 and must complete at least 83.33
hours of service per month for at least 6 months. Contributions to the
Plan are invested at the direction of the participant. The Company made
no matching contributions to the Plan during the years ended December
31, 1999 or 1998 or nine month period ended September 30, 2000.
13. COMMITMENTS AND CONTINGENCIES:
------------------------------
Leases
------
The Company's headquarters is located on property owned by the
Company's CEO. The Company paid rent of $11,000 for each of the years
ended December 31, 1998 and 1999 and $8,250 and $17,000 during the nine
months ended September 30, 1999 and 2000 to the Company's CEO for use
of this space.
In June 2000, the Company entered into a three year lease agreement
with the Company's CEO for the Company's headquarters. The lease
agreements allowed the Company to remain in the current location with
monthly rental payments equal to 6% below the market value and a 30 day
lease termination clause.
Employment Contracts
--------------------
In September 2000, the Company executed employment agreements with both
the President and CFO. The contracts are effective retroactively to
January 1, 2000 for a period of three years and an annual salary of
$100,000 for the President and CFO. The contract extends on an annual
basis and may be cancelled by either party with 3 months written
notice. A nine month salary severance package is included in the
contract should the President or CFO be terminated.
F-18
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
Litigation and other claims
---------------------------
In September 2000, the Company reached a settlement in two lawsuits
with former officers and directors seeking payment of $32,000 due for
advances made on behalf of the Company. The Company had filed a
cross-complaint claiming the advance were capital contributions and is
seeking to recover 4,500,000 shares of its common stock held by the
plaintiff and to be reimbursed for legal fees arising from this action.
The settlement and agreement with the former officers and directors
provides for the Company to receive 5,500,000 common shares back from
the two former officers for cancellation. In addition, the Company
disaggregated three of its eight LMDS licenses and assign one-half of
three licenses, with a total net book value of $125,857 (net of
accumulated amortization), to an entity to be designated by the former
officers. Due to the related party nature of the transaction, the
Company recorded the settlement based on its historical cost because
recording the transaction at the fair market value of the shares would
have resulted in a material gain between related parties.
The Company is a defendant in a lawsuit brought by a creditor of
Mid-Cal Express Inc., a wholly-owned subsidiary of the Company, seeking
payment of approximately $70,000 owed to it by Mid-Cal. In the opinion
of counsel representing the Company in this matter, the Company is not
liable for any of the causes of action set forth in the complaint.
F-19
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
14. SEGMENT REPORTING:
------------------
The Company has identified its segments based upon its geographic
operations. These segments are represented by each of the Company's
individual legal entities: Prime Companies, Inc.(Prime), Prepaid
Tel.com Inc.(Prepaid), Nacc-Tel Corp.(Nacc-Tel), and LMDS
Communications, Inc.(LMDS). Segment operations are measured consistent
with accounting policies used in these consolidated financial
statements. Segment information is as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
All
Prime Prepaid Nacc-Tel LMDS Others Elimination Totals
----- ------- --------- ---- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $ 209,823 $ - $ - $ - $ 209,823
============ ============ ============ =========== =========== ============ ============
Intersegment
Revenues $ - $ - $ - $ - $ - $ - $ -
============ ============ ============ =========== =========== ============ ============
Interest Income $ - $ - $ - $ - $ - $ - $ -
============ ============ ============ =========== =========== ============ ============
Interest Expense $ - $ - $ 14,796 $ - $ - $ - $ 14,796
============ ============ ============ =========== =========== ============ ============
Depreciation
/Amortization $ - $ - $ 11,526 $ - $ - $ - $ 11,526
============ ============ ============ =========== =========== ============ ============
Income Tax Expense $ - $ - $ - $ - $ - $ - $ -
============ ============ ============ =========== =========== ============ ============
Net Income (Loss) $ - $ - $ (69,141) $ - $ - $ - $ (69,141)
============ ============ ============ =========== =========== ============ ============
Segment Assets $ - $ - $ 93,532 $ - $ - $ - $ 93,532
============ ============ ============ =========== =========== ============ ============
Expenditures for Segment
Assets $ - $ - $ 102,208 $ - $ - $ - $ 102,208
============ ============ ============ =========== =========== ============ ============
</TABLE>
F-20
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
<TABLE>
<CAPTION>
December 31, 1999
-----------------
All
Prime Prepaid Nacc-Tel LMDS Others Elimination Totals
----- ------- --------- ---- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ - $ 537 $ 441,126 $ - $ - $ - $ 441,663
============ ============ ============ =========== ============ ============ ============
Intersegment
Revenues $ - $ - $ - $ - $ - $ - $ -
============ ============ ============ =========== ============ ============ =============
Interest Income $ - $ - $ - $ - $ - $ - $ -
============ ============ ============ =========== ============ ============ =============
Interest Expense $ 162,257 $ - $ 36,832 $ - $ - $ - $ 199,089
============ ============ ============ =========== ============ ============ ============
Depreciation
/Amortization $ 30,774 $ - $ 18,732 $ - $ - $ - $ 49,506
============ ============ ============ =========== ============ ============ ============
Income Tax Expense $ 5,300 $ - $ - $ - $ - $ - $ 5,300
============ ============ ============ =========== ============ ============ ============
Net Loss $ (737,461) $ (2,526) $ (213,957) $ - $ - $ - $ (953,944)
============ ============ ============ =========== ============ ============ ============
Segment Assets $ 5,266,138 $ (2,526) $ (49,796) $ - $ 210,354 $(3,762,741) $ 1,661,429
============ ============ ============ =========== ============ =========== ============
Expenditures for Segment
Assets $ 652,458 $ - $ 14,744 $ - $ - $ - $ 667,202
============ ============ ============ =========== ============ ============ ============
</TABLE>
F-21
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
<TABLE>
<CAPTION>
September 30, 1999
------------------
All
Prime Prepaid Nacc-Tel LMDS Others Elimination Totals
----- ------- --------- ---- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ - $ - $ 199,860 $ - $ - $ - $ 199,860
============ ============ ============ =========== =========== ============ ============
Intersegment
Revenues $ - $ - $ - $ - $ - $ - $ -
============ ============ ============ =========== =========== ============ ============
Interest Income $ - $ - $ - $ - $ - $ - $ -
============ ============ ============ =========== =========== ============ ============
Interest Expense $ 15,750 $ - $ 16,108 $ - $ - $ - $ 31,858
============ ============ ============ =========== =========== ============ ============
Depreciation
/Amortization $ 1,354 $ - $ 9,868 $ - $ - $ - $ 11,222
============ ============ ============ =========== =========== ============ ============
Income Tax Expense $ - $ - $ - $ - $ - $ - $ -
============ ============ ============ =========== =========== ============ ============
Net Loss $ (51,320) $ - $ (51,763) $ - $ - $ - $ (103,083)
============ ============ ============ =========== =========== ============ ============
Segment Assets $ 4,058,739 $ - $ 405,814 $ - $ - $ - $ 4,464,553
============ ============ ============ =========== =========== ============ ============
Expenditures for Segment
Assets $ - $ - $ 17,324 $ - $ - $ - $ 17,324
============ ============ ============ =========== =========== ============ ============
</TABLE>
F-22
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
<TABLE>
<CAPTION>
September 30, 2000
------------------
All
Prime Prepaid Nacc-Tel LMDS Others Elimination Totals
----- ------- --------- ---- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ - $ 12,028 $ 361,135 $ 400 $ - $ - $ 373,563
============ =========== ============ ========= ============ =========== =============
Intersegment
Revenues $ - $ - $ - $ - $ - $ - $ -
============ =========== ============ ========== ============ =========== =============
Interest Income $ 33,395 $ 2,742 $ 1,458 $ 1 $ 14 $ - $ 37,610
============ =========== ============ ========== ============ =========== =============
Interest Expense $ 73,091 $ - $ - $ - $ - $ - $ 73,091
============ =========== ============ ========== ============ =========== =============
Depreciation
/Amortization $ 53,932 $ - $ 19,075 $ - $ - $ - $ 73,007
============ =========== ============ ========== ============ =========== =============
Loss on Securities Available For
Sales $ 1,156,000 $ - $ - $ - $ - $ - $ 1,156,000
============ =========== ============ ========== ============ =========== ============
Income Tax Expense $ - $ - $ - $ - $ - $ - $ -
============ =========== ============ ========== ============ =========== ============
Extraordinary Loss on
Extinguishment of Debt $ 1,852,595 $ - $ - $ - $ - $ - $ 1,852,595
=========== =========== ============ ========== ============ =========== ============
Net Income (Loss) $(3,191,728) $ (3,658) $ 158,257 $ 396 $(1,163,464) $ - $ (4,200,197)
=========== ============ ============ ========== ============ =========== =============
Other Significant Non-Cash Items:
Conversion of Notes Payable &
Accrued Interest $ 1,669,466 $ - $ - $ - $ - $ - $ 1,669,466
============ =========== ============ ========== ============ =========== =============
Return of Common Stock per
Settlement Agreement $ 125,857 $ - $ - $ - $ - $ - $ 125,857
============ =========== ============ ========== ============ =========== =============
Segment Assets $ 6,129,278 $ 119,626 $ 294,438 $ 7,437 $ 158,266 $(4,828,822) $ 1,880,223
============ =========== ============ ========== ============ =========== ============
Expenditures for Segment Assets
$ 200,300 $ - $ 2,740 $ - $ - $ - $ 203,040
============ =========== ============ ========== ============ =========== =============
</TABLE>
F-23
<PAGE>
PRIME COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information Subsequent to December 31, 1999 is unaudited)
15. SUBSEQUENT EVENTS:
------------------
On October 3, 2000, the Company entered into an Investment Agreement
with an institutional investor, providing the Company with a $30
million put on its common stock; over a 36-month period beginning on
the date a registration statement to be filed with the Securities and
Exchange Commission is declared effective by the SEC. The terms of the
Agreement limit the number of shares the Company may sell each month to
the lesser of 1.5 million shares, $2,000,000, or 15% of the volume of
its shares traded during the month.
In addition, the Company granted the investor a warrant to purchase
1,521,000 shares of common stock with an exercise price equal to
$0.531. The warrants vest in three stages depending on the completion
and execution of the agreement. None of the warrants were exercisable
at September 30, 2000 and expire in 2005.
On October 27, 2000 the Company entered into a binding Letter of Intent
to acquire New Wave Networks LLC (NWN"). NWN's sole assets are five
LMDS licenses in Missouri. A definitive Agreement was signed on
December 29, 2000, and the transaction is to close no later than April
20, 2001. The transaction is contingent upon a the Company having
access to funds from the above described Investment Agreement and the
completion of an audit of the financial statements of NWN. .
On December 20, 2000, the Board of Directors approved the leasing of
$275,000 of equipment to be used in the development of the LMDS
segment. The lease is for 63 months and has an annual interest rate of
approximately 34%.
