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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission File Number: 333-93919
PAYSTAR COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in charter)
NEVADA 86-0885565
State or other jurisdiction of I.R.S. Employer I.D. No.
incorporation or organization
1110 WEST KETTLEMAN LANE, SUITE 48, LODI, CA 95240
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (209) 339-0484
Check whether the Issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such fling requirements for the past 90 days. (1) Yes
[X] No [ ] (2) Yes [ ] No [X]
State the number of shares outstanding of each of the Issuer's classes of
common equity as of the latest practicable date: At June 8, 2000, there were
6,636,200 shares of the Registrant's Common Stock outstanding.
<PAGE>PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
Mar 31, 2000 Dec 31, 1999
ASSETS
CURRENT ASSETS
Cash $ 34,937 $ 203,152
Accounts receivable - Note 2 278,876 61,314
Inventory - Note 2 995,140 667,972
Total Current Assets 1,308,953 932,438
PROPERTY AND EQUIPMENT - net of accumulated
depreciation 336,938 219,916
OTHER ASSETS
Securities - available for sale - Note 3 100,000 100,000
Advance deposits 14,547 12,458
Deferred interest on notes payable -
related parties - Note 5 91,322 121,765
$1,851,760 $ 1,386,577
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Contracts payable - Note 4 $ 656,643 $ 346,934
Notes payable - related parties - Note 5 1,908,700 1,370,650
Accounts payable - related party -- 20,000
Accounts payable 536,558 556,390
Accrued interest payable - related parties
- Note 5 102,441 50,373
Total Current Liabilities 3,204,342 2,344,347
STOCKHOLDERS' EQUITY
Preferred stock
10,000,000 shares authorized at $0.001 par
value; none outstanding -- --
Common stock
100,000,000 shares authorized, at $0.001
par value;
6,636,200 shares issued and outstanding 6,636 6,636
Capital in excess of par value 906,881 906,881
Accumulated deficit (2,266,099) (1,871,287)
Total Stockholders' Deficiency (1,352,582) (957,770)
$1,851,760 $1,386,577
The accompanying notes are an integral part of these financial statements
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2000 and 1999
Mar 31, Mar 31,
2000 1999
REVENUES $1,985,856 $ 488,035
COST OF SALES AND SERVICES 1,341,406 464,417
Gross Profit 644,450 23,618
EXPENSES
Administrative 612,916 145,278
Sales 256,314 11,301
Depreciation 21,414 7,624
Interest 148,618 9,451
1,039,262 173,654
NET LOSS $ (394,812) $ (150,036)
NET LOSS PER COMMON SHARE
Basic $(.059) $(.042)
AVERAGE OUTSTANDING SHARES
Basic 6,636,200 3,581,200
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
Mar 31, Mar 31,
2000 1999
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss $(394,812) $(150,036)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation 21,414 7,624
Changes in inventory (327,168) -
Changes in accounts receivable (217,562) (5,083)
Changes in deferred interest expenses 30,443 -
Changes in accounts payable 321,945 161,228
Net Increase (Decrease) in Cash From
Operations (565,740) 13,733
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits (2,089) (1,300)
Purchase of equipment (138,436) (9,031)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from loans - related parties 538,050 -
Net Change in Cash (168,215) 3,402
Cash at Beginning of Period 203,152 -
Cash at End of Period $ 34,937 $ 3,402
NON CASH OPERATING AND INVESTING ACTIVITIES
Issuance of 300,000 shares common capital
stock for services - 1998 $150,000
Issuance of 200,000 shares common capital
stock for investment - 1998 100,000
Issuance of 115,000 shares common capital
stock for services -1999 92,000
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
The Company was incorporated under the laws of the state of Nevada on
June 16, 1977, with the name "Soterco, Inc," with authorized common stock of
100,000 shares with a par value of $.25 and on September 11, 1997, the
authorized common stock was increased from 100,000 shares to 100,000,000
shares with a par value of $0.001 in connection with a name change to "Sun
Source, Inc." On October 12, 1998, the name was changed to PayStar
Communications Corporation as part of the acquisition of PayStar
Communications Inc. Effective December 21, 1999, the articles of
incorporation were amended to authorize 10,000,000 shares of preferred stock
at $0.001 par value.
On August 22, 1997, The Company completed a forward stock split of one
share of its outstanding stock for six shares and on November 30, 1998, a
forward stock split of one share of outstanding stock for two shares. This
report has been prepared showing after stock split shares from inception.
On October 1, 1999, the Company acquired all of outstanding stock of U.S
Cash Exchange, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Methods
The Company recognizes income and expenses based on the accrual method of
accounting.
Dividend Policy
The Company has not yet adopted a policy regarding payment of dividends.
Recognition of Income
PayStar Communications Inc. - subsidiary
PayStar is in the business of servicing and maintaining 2,803 pay
telephones for their owners, of which, 1,046 belong to related parties. The
income is recognized when the cash is collected and deposited. The company
pays the owners a minimum monthly rental fee of $65 for each telephone, as
provided by a yearly renewable contractual agreement.
U. S. Cash Exchange - subsidiary
U. S. Cash has developed and marketed an ATM scrip machine, as a
substitute for an ATM cash-dispensing machine, which has been installed in
various commercial locations. The scrip machine functions in a similar manner
as the ATM cash machine except that, after approval, the user receives a
scrip showing the amount the user has requested, as preset by the machine, and
that amount plus a transaction fee is charged against the user's bank
account. The scrip can then be used to purchase merchandise in the store.
The transactions are processed through a clearing house and the service charge
is then paid to the participating entities. U. S. Cash usually receives about
57% of the services charges each month and is reported as income as received.
Recognition of Income
U. S. Cash purchases the scrip machines and accessories and, after a
contractual agreement has been completed with a merchant, installs them in the
commercial locations. The completed location is then sold to an investor who
then leases the location back to U. S. Cash. The sale by U. S. Cash is
recorded when the purchase price is received from the investor. The sale and
leasebacks are considered to be operating leases by U. S. Cash, with no
excess profits being recognized. The lease commitments are shown in note 9.
Provision for doubtful accounts receivable
A provisions for doubtful accounts receivable is provided at the time it
is determined there is doubt as to the collection of accounts receivable. On
March 31, 2000, all accounts receivable are considered to be currently
collectable.
Inventory
Inventory is carried at cost and consists of scrip machines installed
in operating commercial locations ready for sale, and the component parts for
the machines ready to assemble for installation. The costs of the
installations in commercial locations are averaged over all installations for
the year and used to cost the ending inventory of installed locations ready
for sale. Certain of the component parts, held in the warehouse, have been
valued below cost because of required updating or for non-use in current
installations.
Warranties on Sales of Installed Locations
No provision for warranties for defective equipment is recognized on
the installations because the Company has a policy of replacing the
defective equipment and returning it the equipment manufacture who provides
servicing at no charge to the Company.
Property and Equipment
The equipment consists of machines used in processing coins, accessories,
and office equipment. Depreciation is provided using the straight line method
over three, five, and seven years.
March 2000 Dec 1999
Cost 413,797 277,583
Accumulated Depreciation 76,859 57,667
Net 336,938 219,916
Income Taxes
On March 31, 2000, the Company had a net operating loss available for
carry forward of $2,266,099. The tax benefit from the loss carry forward
has been fully offset by a valuation reserve because the use of the future tax
benefit is doubtful since the Company has not been able to establish a
reliable projection of future net income.
The loss carryforward will expire starting in the years 2018 through 2021.
The deferred tax benefit on March 31, 2000, follows:
Tax from net loss carryforwards $ 679,800
Less valuation reserve 679,800
Net tax benefit -
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share amounts are computed based on the
weighted average number of shares actually outstanding. Diluted net income
(loss) per share amounts are computed using the weighted average number of
common shares and common equivalent shares outstanding as if shares had been
issued on the exercise of the preferred share rights unless the exercise
becomes antidilutive and then only the basic per share amounts are shown in
the report.
Principals of Consolidation
The consolidated financial statements shown in this report excludes the
historical operating information of the parent before October 12, 1998, and
includes the historical financial statements of the subsidiaries.
All intercompany transactions have been eliminated.
Financial Instruments
The carrying amounts of financial instruments, including the assets and
liabilities shown in the balance sheet, are carried at their cost, and are
considered by management to be their estimated fair values.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and account
receivables. Cash balances are maintained in accounts that are not
federally insured for amounts over $100,000 but are otherwise in financial
institutions of high credit quality. Accounts receivable are unsecured and
are derived from revenues earned; however management considers all accounts
receivable to be currently collectable.
Estimates and Assumptions
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of the assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the estimates
that were assumed in preparing these financial statements.
Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130. The adoption of this standard had no impact on the total stockholder's
equity on December 31, 1999.
Accounting for Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123 but has elected to continue to measure compensation cost under APB 25.
The adoption of FASB No. 123 has no impact on the Company's financial
statements.
Other Recent Accounting Pronouncements
The Company does not expect that the adoption of other recent accounting
pronouncements to have any material impact on its financial statements.
3. SECURITIES - AVAILABLE FOR SALE
The company owns 50,000 shares of Mezzanine Capital and is shown at cost
which is considered to be its current fair market value.
4. CONTRACTS PAYABLE
Contracts payable consist of amounts due for scrip cash machines
installed in commercial locations, ready for sale, coin counting machines, and
office equipment. The installment payments due, with interest, are shown
under current liabilities.
5. NOTES PAYABLE
The Company has outstanding loans, to related parties, of $1,908,700 due
within nine months with various due dates, plus 13.5% interest. The loans can
be renewed for an additional nine months with the payment of current interest
due.
A premium was added to the cash received which will be payable at
maturity and is shown in the financial statements as an asset under deferred
interest on notes payable. The deferred amount is being amortized to expense
over eighteen months.
6. ACQUISITION OF ALL OUTSTANDING STOCK OF PAYSTAR COMMUNICATIONS, INC.
On October 12, 1998 the Company (parent) completed the acquisition of
all of the outstanding stock of PayStar Communications, Inc. (subsidiary), a
California corporation, by a stock for stock exchange in which the
stockholders of PayStar Communications, Inc. received 65% of the outstanding
stock of the company. Following the acquisition the name of the parent, "Sun
Source Inc.", was changed to "PayStar Communications Corporation." For
reporting purposes, the acquisition was treated as an acquisition of the
Company by PayStar Communications, Inc. (reverse acquisition) and a
recapitalization of PayStar Communications, Inc. The historical financial
statements prior to October 12, 1998, are those of PayStar Communications,
Inc. Good will was not recognized from the acquisition.
7. ACQUISITION OF ALL OUTSTANDING STOCK OF U. S. CASH EXCHANGE, INC.
On October 1, 1999, the Company ( the parent) completed the acquisition
of all the outstanding stock of U. S. Cash Exchange, Inc. (the subsidiary)
through a stock for stock exchange in which the stockholders of U. S. Cash
received 2,700,000 common shares of the parent, representing 41% of the
parent, in exchange for all of their shares in U. S. Cash. Prior to the
exchange a common stockholder and officer owned 39% of the outstanding stock
of the parent and 40% of U. S. Cash Exchange, Inc.
Due to the common stockholders and officers in each corporation, the
historical financial statements of each company have been combined.
U. S. Cash Exchange Inc. was organized in the State of California on June
24, 1996, for the purpose of conducting the business outlined in note 2.
8. EMPLOYEE STOCK OPTION PLAN
On November 3, 1998, the Company adopted an employee Stock Option Plan
which provides a plan for employees, officers, directors, and consultants to
purchase up to 3,000,000 shares of the Company.
During December 1999 165,000 options to purchase 165,000 common shares
were granted, with 100,000 at an option price of $1.00 per share and 65,000 at
an option price of $2.00 per share. Of these options, 66,500 vested on the
issue date and 98,500 will vest during 2000 with expiration dates during
October 2002.
During the three months ended March 31, 2000, 1,016,000 options to
purchase 1,016,000 common shares were granted, with 200,000 at an option price
of $2.00 per share and 816,000 at an option price of $1.00. Of the total
options, 40,000 will vest at 1/8th each quarter for a two year period
starting March 1, 2000.
On the date the options were granted the fair value of the Company's
common stock was considered by management to be $1.00 per share and therefore
no value was assigned to the options.
9. CONTINUING LIABILITIES
The Company has office and warehouse leases with the following terms:
Office - 3000 square feet - annual lease $30,600 - lease expires May 31,
2001
Warehouse - 4000 square feet - annual lease $13,200 - lease expires April
30, 2000
The Company is obligated to pay lease payments on the ATM Script
machines, as outlined in note 2, over the next five years as follows:
Year Amount
1 $306,400
2 321,700
3 329,380
4 344,700
5 360,020
10. RELATED PARTY TRANSACTIONS
Related parties have acquired 67% of the common stock issued by the
Company. Various related party transactions are shown in the balance sheet
under the liability section.
The Company has paid related parties $565,734 in commissions and wages
during 1999.
The Company has also completed an employment agreement with an officer
providing for a yearly salary of $300,000 beginning in 2000.
The Company conducts an on going business with a related party which
consists of maintaining and servicing 1,046 pay telephones. For the year
ended December 31, 1999, the maintenance income received amounted to $246,320
and the rental payments made were $213,914.
11. GOING CONCERN
The Company will need additional working capital to be successful in its
activity and to service its current debt for the coming year and therefore
continuation of the Company as a going concern is dependent upon obtaining the
additional working capital necessary to accomplish its objective. Management
has developed a strategy, which it believes will accomplish this objective and
is presently engaged in seeking and has obtained various sources of additional
working capital including additional loans from officers, equity funding
through a private placement, long term financing, and increased revenues from
sales which will enable the Company to operate for the coming year. The
accompanying financial statements do not include any adjustments to the
recorded assets or liabilities that might be necessary should the Company fail
in any of above objectives.
12. CONSOLIDATED STATEMENT OF SIGNIFICANT COMPONENTS OF INCOME
Included in the following is a summarized statement showing significant
components of income and cost of sales and services for the three months ended
March 31, 2000:
Cost of Sales Gross
Revenues and Services Profit
Telephone Servicing $1,185,389 $930,441 $254,948
Scrip Machine Sales 800,467 410,965 389,502
and Other
$1,985,856 $1,341,406 $644,450
<PAGE>
ANDERSEN ANDERSEN & STRONG, L.C.
Certified Public Accountants and Business Consultants
941 East 3300 South, Suite 202
Salt Lake City, Utah 84106
Telephone 801 486-0096
Fax 801 486-0098
REPORT ON REVIEW BY INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
PayStar Communications Corporation and Subsidiaries
We have reviewed the condensed consolidated balance sheets of PayStar
Communications Corporation and Subsidiaries as of March 31, 2000, and the
related condensed consolidated statement of operations and the statement of
cash flows for the three-months ended March 31, 2000 and 1999. These
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
/s/ Andersen Andersen and Strong
Salt Lake City, Utah
June 5, 2000
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes.
OVERVIEW
Our business is divided into two distinct segments: Pay telephones and
cashless ATM scrip services. Our pay telephone business is managed through
our wholly owned subsidiary, PayStar Communications, Inc., and our cashless
ATM scrip business is managed through our other wholly owned subsidiary, U. S.
Cash Exchange, Inc.
Payphones
We operate and manage over 3,000 privately owned pay telephones located
throughout California and in northwestern Nevada. Of these, we own
sixty-four. The pay telephones are situated in a wide variety of retail,
commercial, and business environments, including many Fortune 500 companies.
The pay telephones generate revenue from both coin and non-coin calls. The
typical location of the pay telephones include liquor and convenience stores,
gas stations, retail strip centers, restaurants, and fast food facilities.
Cashless ATM Scrip
We are currently an independent owner and operator of automatic cashless
scrip machines which provide individuals the mechanism to use their bank debit
card to obtain on-the-spot scrip to purchase items and to obtain cash for use
in various retail stores using funds from their bank savings or checking
accounts for a fee. At March 31, 2000, we owned and operated approximately
1,600 scrip machines located throughout the United States. Generally, the
cashless scrip machines are located in convenience and liquor stores, fast
food and other restaurants, gas stations, video and entertainment facilities,
and other high traffic merchant locations. The cashless scrip machines are
provided to the merchants at no cost, and the merchants receive a percentage
of the fee paid by the customer to use the machine. We receive the balance of
the processing fee.
The company owns about 50% of the machines with the balance rented back
after being sold out of inventory. The machines we rent were originally
purchased by us and then re-sold to a broker, who locates investors interested
in financing the machines. The broker sells the machines to the investor who
in turn rents the machines back to us. Our company pays the monthly rental
fee out of the profits generated each month by the machines, and keeps the
balance left over.
REVENUE FROM OPERATIONS
The payphone subsidiary generates revenue from:
Coin calls
Non-coin calls
Long distance
Management fees
Coin calls. The pay telephones generate coin revenues from interstate
and intrastate long distance calls and local calls. We estimate that most of
the gross coin revenues are derived from local calls. In all of the
territories in which we operate, we charge the same rates for local coin calls
as the local exchange carriers charge. They typically charge $0.35 for a
local coin call in all of the territories in which the pay telephones are
located.
Non-coin calls. We have entered in to contractual agreements with
operator service companies such as AT&T to provide non-coin call capabilities
on all of our pay telephones. These calls include 800 number access, operator
assisted calling, person-to-person calling, foreign language assistance, and
collect calling. PayStar Communications receives a commission off of each
call made.
Long distance. During the first quarter of 2000 we added a long distance
division to our telecommunications core of products. This division purchases
long distance services at a wholesale price and retails the product at a
marked up price.
Management fee. We offer our customers four management service options.
The first three levels of management services are at fixed monthly fees, which
range from $25.00 to $50.00. The fourth level fee is 70% of the net revenue,
with the pay telephone owner being entitled to the balance of the net revenues
or a fixed amount, whichever is greater.
The cashless ATM scrip machine subsidiary generates revenue from:
Sale of ATM machines
ATM service fees
Sale of ATM machines. Machines are sold by brokers who locate
investors. Generally, these machines come out of our inventory. We realize a
profit from the sale of these ATM machines.
ATM service fees. A fee is charged the customer each time they use the
machine. The merchant receives a percentage of the fee and we receive the
balance.
COST STRUCTURE
Our costs and expenses include:
Payphone cost of goods
ATM cost of goods
General and administrative
Interest and depreciation
Payphone cost of goods. The cost of goods associated with our payphone
business includes:
Commissions to payphone owners
Commissions to site owners
Maintenance and repairs
Telephone bills
We expect these costs to level off during the second quarter. We
recently entered into a contract with a firm to maintain and service all of
our Southern California telephones. Based on this contract we have closed our
Los Angeles operations office. We feel that this relationship will reduce our
costs and increase our efficiency in the Southern California area.
ATM cost of goods. The cost of sales associated with our ATM business
includes the following:
Commissions to ATM owners
Equipment
Warehouse operations
These costs should remain relatively stable. We are continually
searching for areas to improve our equipment costs.
General and administrative. These expenses consist of the salaries of
our employees and associated benefits, the cost of travel, rent, utilities,
office supplies and professional services. A large portion of our general and
administrative expenses is allocated to operations and customer support.
Customer support expenses include the costs associated with customer service
and technical support, and consist primarily of the salaries and employment
costs of the employees responsible for these efforts. We expect operations
and customer support expenses to increase over time to take care of new and
existing customers. We expect general and administrative costs to increase to
sustain our growth, particularly as we establish a larger organization. Over
time, we expect these relatively fixed general and administrative expenses to
decrease as a percentage of revenue, primarily as a consequence of increased
revenues.
Interest and depreciation. This expense includes the cost incurred for
commissions (recognized over the life of the notes) on the issuance of the
short-term notes and interest on the notes. The notes have a term of
nine-months with an interest rate of 13.35%. During the three months ended
March 31, 2000, we had net interest expense in the aggregate amount of
$111,286.
Depreciation primarily relates to our payphone equipment, and office
furniture and equipment. We depreciate our equipment over an estimated life
of three, five and seven years using the straight-line method. We expect
depreciation to increase as we grow to support new and acquired customers, but
to decrease as a percentage of revenue.
RESULTS OF OPERATIONS
In comparing the quarter ending March 31, 2000, to March 31, 1999, our
revenue increased over 400%. PayStar Communications, Inc., realized a 254%
increase and U.S. Cash Exchange improved their revenue base by over 1000%.
Currently, sixty (60) percent of our revenues come from our PayStar payphone
subsidiary and the remaining forty (40) percent is derived from U. S. Cash
Exchange.
Revenue for PayStar Communications increased from $466,000 to $1,185,000
for the three months ended March 31, 1999 and 2000, respectively. Forty-five
(45) percent of the revenue was derived from coin activity, thirty-two (32)
percent from management fees and commissions, twelve (12) percent from long
distance and eleven (11) percent from non-coin sources.
The sales increase for U.S. Cash Exchange was from $20,000 in the quarter
ending March 31, 1999, to $801,000 in the quarter ending March 31, 2000.
Eighty-one (81) percent of the revenue was generated by ATM sales and the
balance from ATM service fees.
While we expect this trend to continue, it will not escalate at the above
rate. We will continue to expand our efforts, as money, if any, from our SB 2
filing becomes available. The majority of the growth will come through
acquisitions of companies and routes.
The costs of sales and services were reduced as a percentage of sales
from ninety-five (95) percent in the quarter ending March 31, 1999, to
sixty-eight (68) percent in the quarter ending March 31, 2000. The major
reason for this lower percentage is our greater efficiency in the area of
maintenance and repairs.
General and administrative costs increased from $156,579 to $869,230 for
the three months ended March 31, 1999 and 2000, respectively. As we continue
to build our customer base and execute our business plan, we expect these
expenses to increase. The primary reason for this increase relates to the
hiring of additional personnel. These costs are expected to increase as a
percentage of revenue for a period until all necessary personnel and systems
are in place to handle future revenue and support future products.
Thereafter, we anticipate that general and administrative costs will increase
as a proportion of revenue.
Depreciation costs increased from $7,624 to $21,414 for the three months
ended March 31, 1999 and 2000, respectively. Depreciation costs consist
primarily of depreciation of office furniture and equipment, and payphone
equipment. It can be expected that depreciation will continue to increase as
we continue to expand our subsidiaries.
Interest expense increased from $9,451 to $148,618 for the three months
ended March 31, 1999 and 2000, respectively. This increase is the result of
the increase in the issuance of short-term notes and the cost of financing our
equipment.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had $34,937 in cash. Our operating activities
generated a negative cash flow of $565,740 for the three months ended March
31, 2000, compared to a positive cash flow $13,733 for the three months ended
March 31, 2000. Cash used from investing activities of $140,525 for the three
months ended March 31, 2000, compared to $10,031 for the three months ended
March 31, 1999, was primarily expended for the purchase of office and
telephone equipment. Our financing activities generated cash of $538,050 as
of March 31, 2000. The principal reason for the cash generated was from the
sale of notes.
Our future capital requirements will depend on numerous factors,
including:
Acquisition of profitable payphone routes
Increased sales of ATM machines
Greater efficiency of operations
We expect to fund our operations through profits from the above factors
as well as from future private and public financing.
FORWARD-LOOKING STATEMENTS
The foregoing includes statements that may constitute forward-looking
statements. The company would like to caution readers regarding certain
forward-looking statements in this document. Statements that are based on
management's projections, estimates and assumptions are forward-looking
statements. The words "believe," "expect," "anticipate," "intend," and
similar expressions generally identify forward-looking statements. While the
company believes in the veracity of all statements made herein,
forward-looking statements are necessarily based upon a number of estimates
and assumptions that, while considered reasonable by the company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies and known and unknown risks. Many of the
uncertainties and contingencies can affect events and the company's actual
results and could cause its actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
company. Some of the factors that could cause actual results or future events
to differ materially include the company's inability to find suitable
acquisition candidates or financing on terms commercially reasonable to the
company; inability to find suitable facilities or personnel to open or
maintain new branch locations; interruptions or cancellation of existing
sources of supply; the pricing of and demand for distributed products; the
presence of competitors with greater financial resources; economic and market
factors; and other factors.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 7, 1999, the Pennsylvania Securities Commission issued a
cease and desist order against PayStar Communications, Inc., and Mr. William
D. Yotty, our chief executive officer, chairman and principal shareholder, and
against Interactive Technologies, Inc., a payphone telephone marketing
company, Tony O. LaVine, its president, and Joseph A. Watters, a selling agent
for that company (Docket No. 9907-05). The order was issued without a
hearing. The order alleges that the parties are in the business of offering
and selling pay telephones and management services which constitute the offer
and sale of a security without proper registration under the state securities
act, or an applicable exemption from registration. The order requires the
parties to cease and desist from offering the programs in the State of
Pennsylvania. Both we and Interactive Technologies disagree with the
conclusions of the state agency. We do not believe that the method of selling
the pay telephones by Interactive Technologies and the servicing of pay
telephones by us constitutes the offer and sale of a security. PayStar,
through its legal counsel, has requested the Pennsylvania Securities
Commission to withdraw the Summary Order to cease and desist under the terms
of a mutually acceptable settlement agreement. Counsel is awaiting formal
consent order from the Office of the Commission for approval and execution by
PayStar.
On December 23, 1999, a complaint was filed by World Cash Providers, Inc.
against U.S. Cash Exchange, Jeff McKay, our president and a principal
shareholder, Russell Downey, and Lynk Systems, Inc. The complaint was filed
in the Fresno County Superior Court, Case No. 643683-6. The complaint
contains eleven causes of action, including misappropriation of trade secrets;
statutory and common law unfair competition; intentional interference with
contractual relations; intentional interference with prospective economic
advantage; negligent interference with prospective economic advantage; breach
of contract; conversion; declaratory relief; unjust enrichment; and trade
libel.
The basic claim of the case is that the plaintiff's former employee,
Russell Downey, purportedly accepted employment with U.S. Cash Exchange in
breach of his sales agent agreement with World Cash Providers. Further, it is
alleged that the defendants used the customer relationships of Mr. Downey to
contact actual customers of World Cash Providers with the alleged intent to
damage and harm its relationship with its customers.
Counsel for U.S. Cash Exchange has advised the company that there appears
to be no basis in fact for any of the claims made against U.S. Cash Exchange,
Mr. McKay and Mr. Lynk in the lawsuit. Therefore, the defendants intend to
vigorously defend the matter.
ITEM 2. CHANGES IN SECURITIES
(c) During the three months ended March 31, 2000, 1,016,000 options
to purchase 1,016,000 common shares were granted. Of these options, 200,000
had an option price of $2.00 per share and 816,000 had an option price of
$1.00. On the date the options were granted, the fair value of the Company's
common stock was considered by management to be $1.00 per share and therefore
no value was assigned to the options.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K: We did not file any Form 8-K reports during
the quarter ended March 31, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
PayStar Communications Corporation
Date: June 9, 2000 By /s/ Jeff McKay, President
Date: June 9, 2000 By /s/ Harry Martin, Chief Financial
Officer and Principal Accounting Officer
