<PAGE>
As filed with the Securities and Exchange Commission on May 11, 2000
SEC Registration No. 333-93919
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM SB-2/A-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
PAYSTAR COMMUNICATIONS CORPORATION
(Name of small business issuer in its charter)
NEVADA 481 86-0885565
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Number) Identification No.)
incorporation or
organization)
1110 WEST KETTLEMAN LANE, SUITE 48, LODI, CA 95240
Telephone (209) 339-0484
(Address and Telephone Number of Principal Executive Offices)
1110 WEST KETTLEMAN LANE, SUITE 48, LODI, CA 95240
(Address of Principal Place of Business)
JEFF MCKAY, PRESIDENT, PAYSTAR COMMUNICATIONS CORPORATION
1110 WEST KETTLEMAN LANE, SUITE 48, LODI, CA 95240; (209) 339-0484
(Name, Address and Telephone number of agent for service)
Copies to:
Ronald N. Vance, Esq.
57 West 200 South, Suite 310
Salt Lake City, UT 84101
(801) 359-9300
(801) 359-9310 - FAX
<PAGE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / / __________
If 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. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered Per Unit(1) Price(1) Fee
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A Preferred 5,500,000 $2.00 $11,000,000 $3,058
Stock, $.001
par value
Common Stock, 15,000 $2.50(2) $37,500 $11
$.001 par ---
value
TOTAL $3,069
------
------
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457 under the Securities Act of 1933.
(2) Estimated solely for purpose of calculating the registration fee
pursuant to Rule 457. This amount is based upon the average of the bid and asked
prices ($2.50) of the common stock of the Registrant as of December 20, 1999.
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<PAGE>
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.
-3-
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED MAY 11, 2000
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PAYSTAR COMMUNICATIONS CORPORATION
5,500,000 Shares of 11% Preferred Stock
$2.00 Per Share
We are offering for sale shares of our series A convertible cumulative
$2.00 preferred stock. This offering of our preferred shares is not
underwritten. Our officers and directors will offer and sell the preferred
shares without remuneration to them. The minimum number of preferred shares a
person must purchase is 1,000. An indeterminate number of the shares may be sold
through broker/dealers who are members of the National Association of Securities
Dealers, Inc., and who will be paid a 10% commission on sales they make. The
offering will end not later than one hundred eighty days following the date of
this prospectus.
We are escrowing proceeds from sales of the shares at Community Bank of
San Joaquin, Stockton, California, until the sale of the minimum number of
preferred shares is achieved. If the minimum of $3,000,000 in proceeds is not
received within ninety days from the date of this prospectus, which period may
be extended for an additional thirty days, at our option, all escrowed funds
will be promptly returned to subscribers without interest or deduction.
<TABLE>
<CAPTION>
Per Share Total Amount
--------- ------------
<S> <C> <C>
The Offering: Minimum: 1,500,000 shares $2.00 $3,000,000
Maximum: 5,500,000 shares $2.00 $11,000,000
Less Selling Commissions
Minimum $0.20 $300,000
Maximum $0.20 $1,100,000
Proceeds to us
Minimum $1.80 $2,700,000
Maximum $1.80 $9,900,000
</TABLE>
Concurrently with this offering, we are registering for resale
15,000 common shares to be offered by a selling security holder. We will not
receive any of the proceeds from the sale of the shares by this person.
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<PAGE>
THIS OFFERING IS HIGHLY SPECULATIVE AND INVOLVES SPECIAL RISKS
CONCERNING THE COMPANY AND ITS BUSINESS. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
________, 2000
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary
Risk Factors
Forward Looking Statements
Use of Proceeds
Dilution
Management's Discussion and Analysis of Financial Condition and Results of
Operation
Business
Management
Certain Transactions
Market Information
Principal Shareholders
Selling Shareholder
Description of Securities
Dividend Policy
Plan of Distribution
Shares Eligible For Future Sale
Legal Matters
Experts
Change of Accountants
Financial Statements
</TABLE>
-6-
<PAGE>
PROSPECTUS SUMMARY
OUR COMPANY
We service and operate pay telephones for various owners, including
ourselves. We also operate and manage scrip ATM machines which permit customers
to use their debit cards to purchase merchandise or food at retail outlets and
receive cash back.
Our principal executive offices are located at 1110 West Kettleman
Lane, Suite 48, Lodi, California 95240, and our telephone number at these
offices is (209) 339-0484
THE OFFERING
Securities offered: Series A preferred stock. The shares have a face
value of $2.00 per share and carry a cumulative
dividend rate beginning at 11% and decreasing to
10%. They have no voting rights, except if we fail
to pay a quarterly dividend.
Conversion Rate: They are convertible beginning at one share of
common stock for each two shares of preferred stock,
decreasing to one share of common stock for each
four shares of preferred stock.
Redemption Provisions: We can redeem the preferred shares beginning January
1, 2001, beginning at $2.20 per share and decreasing
to $1.80 per share.
Total public price
Maximum Offering $11,000,000
Minimum Offering $3,000,000
Selling Commissions
Maximum Offering $1,100,000
Minimum Offering $300,000
Estimated offering expenses $65,000
Net proceeds
Maximum Offering $9,835,000
Minimum Offering $2,635,000
We intend to use the net offering proceeds to:
- Repay existing debt;
-7-
<PAGE>
- Acquire more pay telephones; and
- Provide working capital.
The following summary financial information has been derived from our
financial statements which appear later in this prospectus and should be read in
conjunction with those financial statements and related notes:
<TABLE>
<CAPTION>
For the Years
Ended December 31,
1999 1998
---- ----
<S> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues $4,313,728 $1,156,149
Gross profit 1,759,366 371,953
Net loss (1,428,726) (175,495)
Loss per share (0.31) (0.16)
Shares used in per
share computations 4,496,200 1,081,200
Consolidated Balance Sheet Data:
For the Year Ended
December 31, 1999
-----------------
Cash $203,152
Current assets 932,438
Total assets 1,386,577
Working capital (1,411,909)
Total stockholders' equity (deficit) (957,770)
</TABLE>
RISK FACTORS
- If we are unable to generate sufficient revenues in the future, we
may not be able to declare the dividends required by the terms of the
preferred stock. If we are unable to do so, the preferred shareholders
may vote their shares to elect a majority of the directors and change
control of the company.
We had net losses of ($1,428,726) and ($175,495) for 1999 and 1998.
Our liabilities exceeded our assets by $957,770 at December 31, 1999. Generally,
dividends may be paid from the excess of our assets less our liabilities. If we
do not meet this requirement, we will not be able to pay the quarterly dividends
required by the terms of this series of preferred stock. In such an event, the
preferred shareholders will have the right to elect a majority of the directors,
who may in turn appoint new officers. They may also vote to sell the assets,
change the business, or issue shares of either common or preferred stock. There
is no assurance that we will be profitable in
-8-
<PAGE>
the future or generate sufficient revenues to avoid default of the provisions
of the series A preferred stock.
- Our competition with other pay telephone companies may require us
to offer higher commissions to site owners, which in turn could reduce
our profitability.
The pay telephone business is highly competitive. We have no patents or
exclusive rights to operate our business. The markets in which we operate are
fragmented, but include certain large, well-capitalized providers of
telecommunications services. Our principal competition in the pay telephone
business comes from local exchange carriers operated by the regional Bell
operating companies, GTE Corporation, a number of independent providers of pay
telephone services, major operator service providers and interexchange carriers.
In addition to offering pay telephone service, local exchange carriers are the
exclusive line service providers in certain geographical regions. We also
compete with many other non-local exchange carrier telecommunication companies,
which offer services similar to those of ours. Increased competition from these
sources could cause us to offer higher commissions to new location owners. Such
higher commissions could have a material adverse effect on us by impeding our
ability to grow and by increasing our operating expenses as a percentage of
revenue. Wireless and cellular communications provide an alternative to
payphones and may, therefore, be a factor in slowing the rate of growth of the
payphone industry.
- We are dependent upon continued service by outside providers. The
interruption of these services could materially affect our ability to
generate business.
Our long-distance operations require that our switching equipment and
the equipment of our long-distance service providers be operational 24 hours per
day, 365 days per year. As is the case with other telecommunications companies,
our long-distance operations may experience temporary service interruptions or
equipment failures, which may result from causes beyond our control.
- Our pay telephone contracts with owners are subject to termination
without cause. The loss of these contracts, or the failure to pay on a
timely basis could materially affect our ability to continue or expand
our business.
Each of the pay telephones we manage signs an agreement with us to
manage their pay telephones. The owner may terminate this agreement should we
fail to properly maintain the pay telephones in good working order as per the
agreement. There is a risk that we could at some time in the future not perform
satisfactory service and lose the management contract. There also is the
possibility that we may be unable to collect its management fees in a timely
manner, which could have an adverse financial impact on us. Currently, one of
our vendors, Quantum Communications, is three months delinquent in payment of
management fees to us.
-9-
<PAGE>
- Our ability to expand our pay telephone business is dependent upon
finding new telephones or routes. There is no assurance that we will be
able to identify and acquire businesses on a basis which will satisfy
our minimum rates of return and other criteria for acquisition.
We intend to expand our business by contracting to install payphones or
acquiring assets from payphone service providers in geographic areas where we
are presently operating, as well as in new areas. There can be no assurance that
the Company will be able to locate favorable new sites for internal growth,
access developing technologies at satisfactory costs to provide those service
enhancements demanded by consumers and customers in its existing and future
businesses, or hire qualified new employees to meet the requirements of our
expanding business. There can be no assurance that our business strategy will
prove to be successful or that expansion of our business will not have a
material adverse effect on the operations and financial condition of the
Company. While we are negotiating with certain pay telephone route owners, we
have not been able to finalize any such acquisitions
- 5,300,000, or 80%, of our total outstanding shares are restricted
from immediate resale but may be sold into the market in the near
future. This could cause the market price of our common stock to drop
significantly, even if our business is doing well.
The preferred shares being offered are convertible into common shares.
We have outstanding 6,636,200 common shares. This includes 15,000 restricted
shares which are being registered for resale into the public market. The
remaining 5,300,000, or 80%, of our total outstanding shares, as well as the
shares being registered for resale, will become available for resale in the
public market as shown in the chart below.
As restrictions on resale end, the market price could drop
significantly if the holders of these restricted shares sell them or are
perceived by the market as intending to sell them.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
NUMBER OF SHARES AND PERCENTAGE OF TOTAL DATE OF AVAILABILITY FOR RESALE INTO THE
OUTSTANDING PUBLIC MARKET
- ----------------------------------------------------------------------------------------------
<S> <C>
15,000/0.2% Immediately available, so long as the
registration statement remains effective.
- ----------------------------------------------------------------------------------------------
5,300,000/80% Between 90 and 365 days after the date of this
prospectus due to the requirements of the
federal securities laws.
- ----------------------------------------------------------------------------------------------
</TABLE>
- - There is no trading market for the preferred shares, and a limited
trading for the common shares, which may make this investment an
illiquid one.
Currently there is no market for the preferred shares and we do not
anticipate that a market will develop in the future. Our common stock is quoted
on the OTC Bulletin Board, but
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<PAGE>
limited trading of our stock occurs. There is no assurance that any market
for the preferred shares will develop in the future, or that a more active
market for the common shares will be established.
FORWARD LOOKING STATEMENTS
This prospectus contains statements that plan for or anticipate the
future. Forward-looking statements include statements about the future of the
pay telephone or scrip ATM businesses, statements about our future business
plans and strategies, and most other statements that are not historical in
nature. In this prospectus forward-looking statements are generally identified
by the words "anticipate," "plan," "believe," "expect," "estimate," and the
like. Although we believe that any forward-looking statements we make in this
prospectus are reasonable, because forward-looking statements involve future
risks and uncertainties, there are factors that could cause actual results to
differ materially from those expressed or implied. For example, a few of the
uncertainties that could affect the accuracy of forward-looking statements,
besides the specific factors identified in the Risk Factors section of this
prospectus, include the following:
- Obsolescence of our current technology;
- Uncertainty of the markets for our products or services;
- Our ability to anticipate and respond to changes and new
technology;
- Our ability to make the investments necessary to acquire new
technology or to introduce new services that would satisfy an
expanded range of customer needs;
- Our access to long-distance providers at competitive rates;
- Changes in existing laws and regulations or the adoption of
new laws or regulations;
In light of the significant uncertainties inherent in the
forward-looking statements made in this prospectus, particularly in view of our
early stage of operations, the inclusion of this information should not be
regarded as a representation by us or any other person that our objectives and
plans will be achieved.
The Private Securities Litigation Reform Act of 1995, which provides a
"safe harbor" for similar statements by existing public companies, does not
apply to our offerings.
USE OF PROCEEDS
The following table sets forth the use of proceeds, alternatively under
the minimum and maximum offering, and management's present estimate of the
allocation and prioritization of net
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<PAGE>
proceeds expected to be received from this offering. If funds in excess of
the minimum amount, but less than the maximum, are received, the funds will
be allocated pro rata among the items in the table, except for the repayment
of debt which will be paid in full. Actual receipts and expenditures may vary
from these estimates. Pending use of the funds, the Company will invest the
net proceeds in investment-grade, short-term, interest bearing securities.
<TABLE>
<CAPTION>
Minimum Maximum
Offering Offering
-------- --------
<S> <C> <C>
Gross Proceeds $3,000,000 $11,000,000
Selling commissions (300,000) (1,100,000)
Other offering expenses (65,000) (65,000)
-------- --------
NET OFFERING PROCEEDS $2,635,000 $9,835,000
========== ==========
Use of Net Proceeds
Debt Repayment(1) $800,000 $2,100,000
Accounts Payable 300,000 400,000
Pay Telephone Acquisitions 1,100,000 7,000,000
Working Capital 435,000 335,000
------- -------
TOTAL $2,635,000 $9,835,000
========== ==========
</TABLE>
(1) These funds were loaned to us by Intermountain Marketing
Associates, LLC, a Utah limited partnership managed by Mr. Thomas Howell, a
director of our ATM subsidiary, and one of our shareholders. The loans were
evidenced by a series of nine-month notes, the first of which was issued on May
13, 1999, and bearing interest at 13.35% per annum due at the maturity date. The
loans are non-recourse, but are secured by the revenues from the various
telecommunications and income opportunities and certain equipment. Of the total
amount of these loans, $1,947,000 were loaned to PayStar Communications, Inc.
for working capital and $152,950 were loaned to U.S. Cash Exchange to acquire
ATM equipment.
We estimate that the net minimum proceeds from this offering will meet
our cash needs for at least the next twelve months.
From the minimum proceeds allocated for accounts payable, we intend to
repay $20,000 to Mr. Yotty, an officer, director, and principal shareholder, for
advances made by him.
If we are able to acquire significant pay telephone routes with part of
the funds from this offering, we may allocate more funds to working capital to
support these acquisitions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
-12-
<PAGE>
RESULTS OF OPERATIONS
We were basically dormant until October 1998. At that time we
reorganized and acquired PayStar Communications, Inc. We realized a 1998 net
loss of $175,495 on sales of $1,156,149. The net loss can be attributed to the
company being in its developmental stage, therefore, incurring one time start-up
costs.
On October 1, 1999, we acquired U.S. Cash Exchange, Inc. With the
addition of U.S. Cash Exchange, Inc. we had a December 31, 1999 net loss of
$1,428,726 on sales of $4,313,728. These numbers reflect the consolidation of
PayStar Communications, Inc. and U.S. Cash Exchange, Inc. While the numbers
reflect an upward trend in revenue, we are still experiencing developmental
costs.
We currently conduct the majority of our business within the state of
California. The expansion plan for both payphones and ATMs include having a
presence in states throughout the United States. We utilize an elaborate model
when we review a future acquisition, thus insuring that additional business will
add profit to our bottom line. The proceeds from this offering will be utilized
to fund these profitable acquisitions.
Liquidity and Capital Resources
Since our inception we have financed our operations through a series
of nine-month notes and from a private stock offering. Most of our equipment has
been financed through capital leases. Our cash flow from operations as of
December 31, 1999, was a negative $1,006,078, compared to December 31, 1998, of
a positive $41,271. However, because of our issuance of common stock and our
ability to borrow funds through notes, our cash balance as of December 31, 1999,
was $203,152 compared to $17,171 as of December 31, 1998.
The maximum dollar amount of preferred dividends to be payable if
the maximum amount of securities is sold and the dates by which such payments
would be due is set forth below:
<TABLE>
<CAPTION>
DIVIDEND AMOUNT DATE PAYABLE
--------------- ------------
<S> <C>
$1,210,000 December 31, 2001
$1,210,000 December 31, 2002
$1,155,000 December 31, 2003
$1,100,000 December 31, 2004, and each year thereafter
</TABLE>
The dividends will be paid out of working capital. If sufficient
monies are not available from working capital, then we will attempt to finance
the payment through outside funding. Our capacity to fund operations and to pay
preferred stock dividends will depend on several factors, namely:
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<PAGE>
- 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.
BUSINESS
HISTORY AND ORGANIZATION
Our company, PayStar Communications Corporation, was originally
incorporated under the name of "Soterco, Inc." on June 16, 1977. We changed our
name to "Sun Source, Inc." on September 11, 1997, and again to "PayStar
Communications Corporation" on November 10, 1998.
From the date of incorporation until October of 1979, we did not engage
in any business activities. In October of 1979 the Board of Directors was
presented with an opportunity to develop a mineral property in Inyo County,
California, on a joint venture basis with a mining company. In December 1979 we
were informed that the test drills in the Inyo mine site had not proved out and
that the mine, known as the Suitcase Mine, could not be commercially operated.
The project was thereafter abandoned and we became inactive until 1997.
In December of 1997 we acquired, in a stock for stock exchange, all of
the issued and outstanding stock of a closely held Utah corporation known as Sun
Source, Inc. The Utah Company became a wholly owned subsidiary and was engaged
in the business of operating a tanning salon in Salt Lake City, Utah. The
business was subsequently terminated and the subsidiary was sold. We again
became dormant in approximately July 1998.
On October 12, 1998, we entered into a reorganization agreement with
PayStar Communications, Inc., a closely held Nevada corporation, and the
shareholders of this entity. The closely held company was incorporated in the
State of Nevada on June 10, 1998, for the purpose of managing coin and credit
card operated pay telephones. The agreement provided that on the closing date
the shareholders of the closely-held company would exchange all of their shares
for 2,000,000 shares of our company, such that the closely-held company would
become a wholly owned subsidiary and the shareholders of the subsidiary would
own approximately 65% of the outstanding stock. The closing of the
reorganization agreement was held on October 30, 1998.
On August 22, 1997, we forward split our outstanding shares at the rate
of six-for-one, which means that each share of stock outstanding immediately
prior to the forward split was increased to six shares after the split. On
November 16, 1998, we forward split our outstanding stock again at the rate of
two-for-one, which means that each share of stock outstanding immediately prior
to the forward split was increased to two shares after the split. All references
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<PAGE>
to outstanding shares in this prospectus reflect these forward stock splits,
unless otherwise designated.
In April 1999, we completed a limited offering of our stock pursuant to
Rule 504 in which we issued 240,000 shares and received gross proceeds of
$240,000. At such time, Rule 504, which is part of Regulation D promulgated by
the Securities and Exchange Commission for offerings of securities to a limited
number of persons or for a limited amount of proceeds, permitted the offer and
sale of free-trading securities which would not be subject to any limitations or
restrictions on resale.
On September 30, 1999, we entered into a reorganization agreement
with U.S. Cash Exchange, Inc., a closely held California corporation, and the
shareholders of this entity. The closely held company was incorporated in the
State of California on June 24, 1996, for the purpose of commencing the business
of marketing and managing scrip-type ATM machines. From its inception until its
acquisition by us, U.S. Cash Exchange had been engaged in the marketing and
management of scrip-type ATM machines. The agreement provided that on the
closing date the shareholders of the closely-held company would exchange all of
their shares for 2,700,000 shares of our company, such that the closely-held
company would become a wholly owned subsidiary and the shareholders of the
subsidiary would own approximately 41% of the outstanding stock. The closing of
the reorganization agreement was held on October 1, 1999.
Our business is divided into two distinct segments: Pay telephone
services and ATM scrip services. Our pay telephone business is managed through
our wholly owned subsidiary, PayStar Communications, Inc., and our ATM scrip
business is managed through our other wholly owned subsidiary, U.S. Cash
Exchange, Inc.
OUR PAY TELEPHONE BUSINESS
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 includes liquor and convenience stores, gas
stations, retail strip centers, restaurants, and fast food facilities.
INDUSTRY BACKGROUND
In 1984, a ruling by the U.S. District Court for the District of
Columbia in the well-documented Bell System antitrust divestiture case, UNITED
STATES V. AMERICAN TELEPHONE & TELEGRAPH COMPANY, created various business
opportunities in the telecommunications industry. In 1985, the FCC and most of
the state public service commissions followed this initiative by authorizing the
connection of competitive or privately owned public pay telephones to the public
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<PAGE>
switched network. Prior to that time, the Bell System and other monopoly local
exchange carriers owned all public telephones in the United States.
Prior to 1987, coin calls were the sole source of revenue for
independent public pay telephone companies. Long distance calling card and
collect calls from these pay telephones were handled exclusively by AT&T. All
revenue, except the coins deposited in public pay telephones, went to AT&T
rather than to the owner of the public pay telephone. Beginning in 1987, a
competitive operator service system developed which allowed operator services
providers to offer independent public pay telephone companies commissions for
directing operator assisted or calling card calls to them.
ACQUISITION OF PAY TELEPHONES
As part of our business strategy we intend to seek and acquire suitable
existing pay telephone routes. We have established certain criteria used in
seeking and evaluating potential acquisition candidates. These criteria include:
- The volume of coin revenues;
- operator services revenues;
- dial around compensation;
- commissions paid to the site owners;
- years remaining with the merchant agreements;
- the amount of the phone bills; and
- the brand of pay phones.
Acquisitions may take several forms, including cash purchases, or a
combination of cash and stock. In some instances we may purchase the company
owning and operating the pay telephones, and in other cases we may purchase only
the pay telephone equipment and site contracts. We are currently negotiating
with several potential acquisition candidates, but we have not entered into any
definitive agreements for purchase.
We have entered into a letter of intent to purchase a pay telephone
route in Oklahoma City, Oklahoma, consisting of 100 pay telephones. The purchase
price will be approximately $335,000. We anticipate paying $100,000 and the
balance of the purchase price in shares of our common stock.
MANAGEMENT ARRANGEMENTS
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<PAGE>
We offer our customers four management service options. The first
three levels of management services are at fixed monthly fees, with level one
being the least expensive and level 3 the most expensive. Set forth below are
the services provided under each level:
- Level 1 includes the monthly distribution of coin box
collections and an accounting statement. The monthly service
fee is $25.00.
- Level 2 includes Level 1 services plus equipment cleaning as
required during each coin box collection. The monthly service
fee is $35.00.
- Level 3 includes Levels 1 and 2 services, plus payment of coin
commissions due site owners, and invoices due venders, such as
local/long distances telephone companies, and so forth. Also,
this level includes one service call to effect repairs or, at
the direction of the owner, to make equipment improvements.
The monthly service fee is $50.00.
- Level 4 includes Levels 1, 2, and 3 services plus a sale
release option which provides that commencing with the fifth
anniversary date of each agreement, the owner has the option
to require us to purchase the pay telephone for $6,000 or the
fair market value, whichever is higher. The monthly fee due is
70% of the net revenues. The pay telephone owner is entitled
to the balance of the net revenues or a fixed amount,
whichever is greater.
Under the management contracts, and depending upon which level of
service selected by the telephone owner, we are responsible for collection of
the coins and other revenue from the telephones; disbursing from the gross
revenues the costs of the telephones, such as site owner commissions, local and
long distance costs, operator service providers and other carriers; providing
for the repair of the telephones, including parts and labor; maintaining the
telephones in a neat and clean condition; and, with the prior consent of the
telephone owner, performing capital improvements to the telephones to alter,
rebuild, or renovate the telephones. Under the Level 4 services, all funds
collected by us, less all of the costs associated with the telephones and our
monthly fees, are disbursed to the telephone owner. We are required to maintain
accurate books and records pertaining to the telephones and to provide monthly
and annual reports to the owners concerning the revenues generated by each pay
telephone. The management contracts are for an initial period of one year and
are automatically renewed, unless terminated prior to any renewal date. Each
telephone owner has the right to terminate the management agreement at any time
upon written notice to us. We and the owners have each agreed to indemnify the
other for actions arising out of tortuous conduct or any breach of the
agreement. The telephone owner is required to maintain fire and business
interruption insurance, liability insurance for the operation of the telephones,
and any workers' compensation insurance required by law. The agreement is freely
assignable by either party.
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Of the pay telephones that we manage, 903 are owned by Quantum
Network Services, Inc., a California corporation controlled by William D. Yotty,
an officer, director, and principal shareholder of ours. We perform these
services pursuant to a one-year, renewable management agreement with Quantum
dated May 1, 1999. Quantum has selected Level 2 services for all of the pay
telephones managed by us, but pays $32.00 per month pursuant to the management
contract.
All of the other pay telephones managed by us are done so under
Level 4 management services. In addition, all of our management contracts,
except the one with Quantum, contain a provision which provides that after the
first year of the agreement, we may purchase the telephone for $6,500 or the
fair market value, whichever is greater.
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. Because busy and non-connect
calls are part of the billing system, but generate no revenues, we cannot
provide exact figures and therefore can only estimate such amount. In all of the
territories in which we operate, we charges 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. For
the year ended December 31, 1998 the total coin revenues were approximately 90%
of the total revenues generated by the telephones.
NON-COIN CALLS
We have entered into 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 receives a commission off of each call made. For the year ended December
31, 1998, the pay telephones generated approximately 10% of the revenues from
non-coin telephone calls.
SITE SELECTION
As part of our management arrangement, we are also involved in the
selection of the sites for the pay telephones. The pay telephones are generally
located where there is a demonstrated high demand for public pay telephone
service based upon high foot traffic or a reason for a patron to use the pay
telephone, such as at a truck stop, school, prison, fast food chain, drug store,
or movie theater. Each location is evaluated for suitability based upon strict
criteria that only allows profit-generating locations to be acquired. If
available from the local exchange carrier, the performance history of each
potential location is obtained by the site owner and is evaluated by us. If such
performance history is not available, locations are generally selected based
upon the experience of our employees in evaluating payphone locations. If a pay
telephone fails to perform
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as anticipated within from three to six months, it is generally removed and
placed in a new location.
We generally focus our efforts to secure accounts with small local
businesses, but we also negotiate with larger national accounts when possible.
As discussed above, we also actively seek and purchase groups of pay telephones.
We utilize outside independent locating contractors in securing new locations.
As of December 1, 1999, we had two principal outside contracting companies.
Outside locating contractors are compensated on a flat-fee, per-location basis
The pay telephones are installed pursuant to agreements with the
property owners. Each of the agreements has a specified term, generally for five
to ten years. Each agreement provides for a revenue sharing arrangement with the
particular property owner, which is generally a percentage of either the gross
or net coin and non-coin revenue generated from the use of the pay telephones.
The percentage of revenue paid to the property owner is generally fixed for the
period of the agreement.
We are obligated to service, clean, and maintain the pay telephone
equipment installed pursuant to the site agreements. The site owners have no
ownership interest in the pay telephone equipment. Generally the owner is
obligated to maintain insurance on the pay telephone equipment to cover
potential liability from persons or property arising from the operation of the
equipment.
SERVICE AND MAINTENANCE
We maintain a staff of telephone technicians in each area in which the
pay telephones are located. We impose a high standard of service and maintenance
in order to assure the pay telephones are operating properly and generating
revenue. The software system used with the pay telephones enables us via modem
to diagnose the vital functions of the telephones and to count the coins in the
pay telephones on a daily basis. Such software programs are obtained from the
manufacturers of the pay telephones by means of a license granted to us. In
addition, we own a software system that enables us to compute the commissions
due to each property owner based upon the actual collections.
The pay telephones are polled on a daily basis for potential
operational problems and for coin counts. This routine allows us to respond
quickly to any suspected troubles and to collect the coins on a scheduled basis.
Generally, we are able to determine possible troubles before the telephone users
report the problems to us. As a result of our computer system, the telephones
are usually repaired within 24 hours. This system also enables us to reduce the
number of visits required at each pay telephone to maintain its operation and to
collect the coins.
Based upon the results of the polling of each of the telephones each
night, we can determine which of the telephones requires collection or service.
Our service technicians are authorized to remove the coin boxes from the pay
telephones. Upon removing the sealed coin box from the pay
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telephone, the technician is unaware of the number of coins in the coin box,
while management, through use of the pay telephone software system, has an
accurate count of the coins. Once the coin boxes are returned to the office,
the office manager opens them and the coins are counted. The amount in each
coin box is recorded and compared with the information provided by the
software system. We reconcile variances at each telephone on a regular basis.
Vandalism of the pay telephone equipment has had a negligible effect
upon the operations or profitability of the pay telephones. We estimate that
approximately .05% of the pay telephone equipment is vandalized on a weekly
basis. Such vandalism usually consists of damage to the handsets. If vandalism
at a particular location persists, we usually will relocate the pay telephones
to a more secure location at the same site or remove the telephone to a new
site.
The loss of long distance revenues because of the unauthorized use of
our long distance service by so-called "hackers" has been substantially
eliminated. If a hacker in fact charges an unauthorized long distance telephone
call to one of the our pay telephones, we can notify the long distance carrier
and receive credit for such call. We estimate that our current arrangements with
our long distance carrier prevents virtually 100%of such unauthorized calls from
being placed; we also estimate that we are able to identify almost all of the
remaining unauthorized long distance calls by hackers and receive credit back
from the long distance carrier.
COMPETITION
The markets in which we operate are fragmented, but very competitive
due principally to the number of providers of telecommunications services
operating in the markets in which our pay telephones are located.
Our principal competitor in each market is the local exchange carrier.
We estimate that approximately 82% of all pay telephones in these markets are
owned and operated by the local access carriers. In addition, we estimate that
there are approximately one hundred independent providers in most populated
state geographic market areas. We believe that the principal competitive factors
in the public pay telephone industry are related to the ability to locate pay
telephones in desirable locations. The competitive factors involved in obtaining
such locations include the payment of signing bonuses or incentives to property
owners, the rate of commission paid to the property owners, and the level of
service provided to the them.
We believe there are two principal factors that determine whether a
company can successfully compete in this industry, namely the cost of locating a
pay telephone and the service provided to the location owner. Because of the
many years of experience of our management in this industry, we believe we can
negotiate profitable contracts for the site locations. We also believe that the
level of service that we provide to our location owners and our pay telephone
customers equals or exceeds that provided by our competition. In part, our
superior service is a result of the use of equipment that equals or exceeds that
used by our competition, thus allowing us to respond quickly to any problems
with the pay telephone.
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In particular, we believe we can compete directly with the local
exchange carriers. We can generally offer site owners more revenue and better
services than they currently receive from the local exchange carrier.
To a limited degree we also compete with cellular telephone companies.
However, in many cases, those who cannot afford the cost of obtaining cellular
telephone service use pay telephones.
EQUIPMENT
Our pay telephone equipment and the pay telephones managed by us use
the latest technology. Protel manufactured approximately 78% of these pay
telephones currently operated by us, and Elcotel manufactured approximately 22%.
Most of the pay telephones were purchased less than two years ago and are
updated on a regular basis with new electronics from the manufacturers
approximately every six months to a year. In addition to the pay telephones, we
purchase the pay telephone booth equipment from a number of different vendors
based upon the best price available.
Our pay telephones use microprocessors that provide voice synthesized
calling instructions and the capability to detect and count coins deposited
during each call. These intelligent telephones also provide information to the
caller at certain intervals regarding the time remaining on each call and the
need for an additional deposit.
REGULATION
In January 1996, Congress passed the Telecom Act, a comprehensive
telecommunications bill that, in part, dealt with several concerns of the
independent pay telephone industry. Congress stated that its intent was to
create a "pro-competitive, de-regulatory national policy framework designed to
accelerate rapidly private sector deployment of advanced telecommunications and
information technologies and services to all Americans by opening all
telecommunications markets to competition". The Telecom Act, among other things,
requires local telephone companies to eliminate subsidies of their pay telephone
services and to treat their own and independent payphones in a nondiscriminatory
manner.
Of particular importance to our company, the Telecom Act addressed the
inherently unfair disadvantage independent pay telephone companies have in
competing with regulated monopolies, the compensation of independent pay
telephone companies for calls made from their equipment that previously offered
no compensation, and the issue of price regulation of local calls by the various
state Public Utility Commissions.
Under the Telecom Act, the Regional Bell Operating Company's (RBOCs)
must operate their payphone divisions with separate profit and loss statements.
The Company believes that this will likely result in the Company's RBOC
competitors being less aggressive in bidding for
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locations. It may result in the RBOCs removing many low volume pay telephones
that collectively compete with the Company's pay telephones.
With regard to Dial-Around Compensation, which is a compensation plan
to insure that all payphone service providers are fairly reimbursed for each and
every completed intrastate and interstate call using their payphones, pay
telephones are now required by the FCC to provide equal access to all
long-distance carriers. This is accomplished by access codes, which are the
calls to 800 numbers or 10XXX numbers, that the caller uses to reach the
long-distance carrier of his choice. Prior to November 1996, the Company
received just $6.00 per payphone per month from long-distance carriers for
providing this Dial-Around service. The Telecom Act recognized that it is a
burden to payphone companies to provide such access and that the compensation
paid to payphone companies for this access should be greater. Because the
infrastructure to track and compensate for these calls did not exist at that
time, the FCC's 1996 order raised the flat rate of compensation for Dial-Around
service to about $45.00 per payphone per month, based upon $0.35 per call times
the national average of 131 monthly Dial-Around calls placed per payphone. In
October 1997, the method of compensating payphone companies was scheduled to
switch to a per call charge of $0.35 to be tracked and paid by the long-distance
carriers.
The FCC's 1996 order implementing the increased Dial-Around
compensation was appealed, with the intent of decreasing the amount of the
matter to the FCC for reconsideration of the rate of Dial-Around
compensation. The Court found that the per call charge of $0.35 was
inappropriate because the FCC did not consider evidence of the differences in
the cost of coin calls and Dial-Around calls. The long distance carriers then
petitioned the Court to clarify the effect of the Court's July decision and
to a vacate the portion of the FCC's 1996 order setting the rate of
Dial-Around compensation pending the FCC's re-examination of the Dial-Around
rate. Further, in a letter to the FCC dated August 15, 1997, AT&T challenged
the FCC's authority to order the long-distance carriers to make any payments
during the pendency of the rate determination and stated its intention to
make Dial-Around payments voluntarily based on its imputed rate of $0.12 per
call, subject to retroactive adjustments, up or down, after the FCC's final
order on remand. The Court agreed with the long-distance carriers. In a
decision dated September 16, 1997, the Court vacated the portion of the FCC's
1996 order setting the rate of Dial-Around compensation pending a new FCC
order on remand. Accordingly, the long-distance carriers were not required to
make Dial-Around payments to payphone service providers until the FCC issued
a new order setting the Dial-Around rate. On October 9, 1997, the FCC issued
an order establishing the Dial-Around rate as of October 7, 1997 at $0.284
per call ($0.35 minus an off set of $0.066 for expenses unique to coin calls)
for the two years beginning October 7, 1997. The FCC indicated that it
planned to address Dial-Around compensation for the period from November 6,
1996, through October 6, 1997 in a subsequent order and tentatively concluded
that the $0.284 per call rate adopted on a going forward basis should also
govern compensation during the period from November 6, 1996 through October
6, 1997. This would be approximately $37 per payphone per month. Because the
Company could not be certain what the rate of Dial-Around compensation would
be for the period from November 7, 1996 through October 6, 1997, it has
determined the amount of its revenue from Dial-Around compensation for the
six months
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ended June 30, 1997 and going forward through October 6, 1997 based upon the
previous rate of $6.00 per payphone per month, and established an $85,000
liability for revenue accrued in excess of the previous rate during the
period from November 6, 1996 through December 31, 1996. Beginning October 7,
1997, the Company began recognizing revenue from Dial-Around compensation
based upon the Dial-Around rate of $0.284 per call multiplied by an estimated
number of dial-around calls per phone. On May 15, 1998 the Court again
remanded the dial-around rate back to the FCC for further justification of
the $0.35 starting point. On February 4, 1999 the FCC issued an order
reducing the dial around rate to $0.24 retroactive to October 7, 1997 and
going forward until at least January 31, 2002. The FCC indicated that it
planned to address Dial-Around compensation for the period from November 7,
1996 through October 6, 1997 in a subsequent order and tentatively concluded
that the $0.24 per call rate adopted on a going forward basis should also
govern compensation during the period from November 7, 1996 through October
6, 1997. However, there can be no assurance that Dial-Around compensation
will not be based on a rate that is less than $6.00 per payphone per month
for the period from November 7, 1996 through October 6, 1997 or that is less
than $0.24 per call for the period beginning October 7, 1997. The setting of
a rate of Dial-Around compensation that is to be paid to the Company that is
less than the Company's estimate of such rate could have an adverse effect on
the results of operations and financial condition of the Company, which could
be material.
The FCC also adopted rules pursuant to the Telecom Act which on October
7, 1997, repealed all rules regulating the cost of a local call placed at a
payphone and allowed the market to set the rate for local coin calls, unless the
state can demonstrate to the satisfaction of the FCC that there are market
failures within the state that would not allow market-based rates.
LITIGATION
On December 7, 1999, the Pennsylvania Securities Commission issued a
cease and desist order against us and William D. Yotty, our chief executive
officer, chairman, and principal shareholder, and against Interactive
Technologies, Inc., a pay 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 telephone 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.
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OUR ATM SCRIP BUSINESS
GENERAL
We are currently an independent owner and operator of automatic
scrip machines which provides 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 April 1, 2000, we owned and operated
approximately 1,600 scrip machines located throughout the United States.
Generally, the 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 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 our machines with the balance rented back
after being sold out of inventory. These machines we rent were originally
purchased by us and were then re-sold to a broker who located investors
interested in financing the machines. The broker sells these 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.
INDUSTRY OVERVIEW
In recent years the number and use of cash dispensing and debit
machines have increased dramatically. The Star System, Inc. debit network
reported April 5, 1999, that ATM/debit card use continues to escalate as
evidenced by the results of their consumer survey. The survey of more than 4,000
households in nine Western states revealed that consumers used their ATM/debit
cards, on average, 16.3 times per month in 1998 compared to 15.4 times per month
in 1997. More importantly for our industry, while ATM use increased just
slightly, growth was more rapid in the use of scrip at the point of sale which
jumped from an average of 6.6 times per month in 1997 to 7.4 times per month in
1998, a one year increase of 11%. The Star consumer survey conducted in 1994
revealed consumers were using ATM cards an average of 8.0 times per month. In
just four years, usage doubled.
This industry can be separated into three broad categories:
- Those companies marketing point of sale products;
- Those marketing ATM cash dispensing machines, including banks
and independent agents; and
- Those marketing scrip machines.
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Companies marketing point of sale products are characterized as
providing the merchant with a debit PINpad that allows customers to use their
ATM debit cards at the checkout register. Most merchants purchasing this system
buy a PINpad to use in conjunction with their credit card equipment. This PINpad
integrates with their equipment to provide debit card processing.
Generally, ATM cash dispensing machines are either sold to the merchant
or placed on the premises for free if the merchant meets certain qualifications
designed to assure the owner of the machine that a minimum amount of
transactions would occur at the location.
Currently those companies, like ours, that market scrip machines to
merchants, represent the smallest segment of the industry. Management estimates
that there are approximately 5,000 of this type of machine installed throughout
the United States, including those owned by us.
A number of large franchise companies are testing the use of debit or
cash dispensing machines in their franchise locations. We believe that the trend
toward the increased use of debit or cash dispensing machines will be a positive
factor in the growth of our business.
AGREEMENTS WITH BUSINESS OPERATORS
We provide our services and place our scrip machines at locations
pursuant to agreements with the owners of business premises. Such agreements
typically have initial terms of five years, with automatic renewal clauses for
two additional years, unless terminated by the client prior to the end of the
initial term. These agreements also provide that if there are fewer than a
minimum number of approved transactions per month, the business owner will pay a
certain amount for each transaction less than the minium number. There can be no
assurance that any of the agreements will be renewed after their initial terms.
These owners typically receive a fee based on a percentage of scrip dispensed
transactions.
SERVICES OFFERED
Our scrip machine can be described as a hybrid ATM machine and works
essentially like a cash-dispensing machine. At the machine, the customer
swipes his or her debit card through the machine, enters a PIN number that
acts as a security code for the customer, and selects the dollar amount of
scrip desired. The merchant can preset the amounts of the scrip at various
levels, for example, $5, $10, $20, and $40, depending upon the type of
business. Upon authorization of the transaction by either the bank who issued
the debt card or a designated agent, the scrip machine dispenses a paper
receipt, which the customer takes to the check out stand to receive
merchandise and any cash in excess of the purchase. The customer is guided
through the process by instructions and messages that appear on the LCD
display on the machine. This process allows the customer to make a purchase
without using cash and to receive cash back from the transaction. In most
instances, the customer is required to purchase an item at the location to
redeem the scrip. Total elapsed time to obtain the scrip from our machine is
usually under one-half minute
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per customer. Generally, the scrip machine is located somewhere other than at
the checkout counter to avoid delaying the checkout process for other
customers waiting in line.
Our scrip machines will accept all debit cards. There is a preset limit
on the amount of scrip available in each transaction. The bank, the merchant, or
both can set this limit. Each transaction charges the customer a terminal fee.
This fee is split between the processing company, the merchant, and us. All
transactions are posted through Lynk Systems, Inc. which in turn posts the
transaction to the merchant's bank within two business days. Lynk Systems, Inc.
monthly distributes the terminal fee to the merchants and us.
We believe this type of machine offers a number of advantages to the
merchant and the customer. For the merchant it has the potential to increase
foot traffic into his store because of the convenience for the customer in using
a debit machine rather than carrying cash. It also has the potential to increase
the amount spent by each customer who may want to purchase more items than he
has cash to do so. It also decreases losses from bad checks and is faster to
process than checks at the checkout counter. For the customer it is faster and
easier than writing a check, it is safer than carrying cash, it requires no
identification to use the scrip machine or at checkout, there is more security
using the scrip machine inside the store rather than an outside ATM machine, and
the surcharge is usually less than the cost of using an ATM machine.
We also offer a 24-hour telephone support system to provide assistance
to customers and to report problems of any machine at any location. Our office
staff handles customer and service calls during normal business hours. During
non-business hours calls are taken by our voice mail system which directs the
caller to an 800-number for after hours assistance. This 800 service is
available 24 hours every day from our current debit processor. We are highly
dependent upon the proper functioning of our telecommunications and equipment.
While we strive to provide reasonable backup provisions, there can be no
assurance that certain events caused by outside parties, such as telephone
companies, debit card processors and banks, which are beyond our reasonable
control, could not disrupt our business.
SERVICE AND MAINTENANCE
Our in-house service representative's handle most service calls from
the merchant. They will attempt to walk the merchant through corrective actions
to attempt to fix the problem. If this does not occur, a service representative
will be dispatched to the location if it is close to our company office. If it
is outside of this geographic location, we will sometimes call an outside
contractor to visit the location and fix the problem. These are contractors with
whom we may have a preexisting business relationship, but with whom we do not
have any existing contract. In other instances, we will simply ship a new scrip
machine to the merchant and have him return the broken one.
Our scrip machines permit us to check the activity of the machine, but
do not allow us to diagnose any malfunctions. If a machine with a history of
transactions posts no transactions for a
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particular period, we will contact the merchant to check the operation of the
machine. We monitor our machines each day to ensure they are operating as
efficiently as possible, thereby maximizing revenues.
DEBIT CARD PROCESSING
Our company has contracted with Lynk Systems, Inc. of Atlanta, Georgia,
to process our debit transactions through the various debit networks. The basic
debit transaction works similarly to a cash dispensing machine: a customer in
our merchant's place of business walks up to the terminal, swipes the debit card
through the unit, enters the PIN number and then enters the dollar amount. The
terminal dials up to the appropriate ATM network, ensures the transaction is
valid, and then sends back an approval (or a denial) code to the terminal. Then,
instead of receiving cash out of the machine, the machine prints up a coupon or
receipt which the customer then takes to the front counter and receives their
cash back, less any purchase they have made.
The merchant receives his money back from the ATM networks in one to
two days. We receive our surcharge fee that was placed on the transaction from
Lynk at the end of the month. This surcharge fee was debited from the
cardholder's account at the same time the transaction occurred. The merchant
also receives any commissions from the surcharge at the end of the month.
MARKETING
The key to the success of our business is the marketing of our debit
machines to retail merchants. We will continue to focus on several target
groups. These include the fast food and restaurant groups, liquor and
convenience stores, gas stations, video and entertainment facilities, bars and
entertainment facilities, grocery stores, and other similar high traffic
merchant locations. Our prospective merchant clients generally share the need
for additional non-cash forms of payment for merchandise. Typically, they will
have a high volume of cash transactions and a relatively high foot traffic
count. The decision-maker typically works at the business location. Many of
these merchants cannot afford to purchase a cash dispensing machine or do not
have sufficient foot traffic to qualify for placement of a cash dispensing
machine owned by someone else.
We currently market our machines using in-house sales people and
independent sales representatives. We employ three in-house sales people who act
as managers of our independent sales people. At December 1, 1999, we had 45
active independent sales representatives located throughout the United States.
We offer our sales representatives a flat commission per installation and a
percentage of the surcharge per debit transaction at that location so long as
they meet minimum volume criteria for locating new merchants to use our scrip
machines. We also offer our sales representatives cash bonuses if they submit a
minimum number of new locations in a particular month.
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We recruit and train our independent sales representatives. This is
done primarily in one of two ways. The first involves our company placing ads
in the classified help-wanted sections in the city we have targeted, seeking
qualified sales representatives. We arrange to have them come to a training
seminar we hold in their city and train them on how to market our product to
the particular business population we have identified and desire.
The second form of recruitment and training is by developing strategic
alliances with established sales groups who already have sales people out on the
street. We typically train the group's regional sales managers who subsequently
go out and train their sales representatives.
We have found that face-to-face selling is critical for successful
deployment of our scrip machines. We furnish our sales people with a list of
criteria for selecting potential merchant customers.
We plan to increase the number of independent selling agents to 141
over the next twelve months. To manage this increase we intend to hire two
additional regional managers within the next twelve months. Each manager will be
responsible for the recruitment and training of new sales representatives within
a specific geographic area.
During the next twelve months we intend to retain a graphic house to
produce color brochures to replace the existing black and white brochures we
currently offer. We also propose to develop a sales training video to aid the
independent sales representatives. Also, we expect to attend at least five
trade shows over the next twelve months. We also intend to conduct further
market research and to develop and conduct market surveys to improve our
products and service. In addition, we plan to increase our direct advertising
efforts by developing brochures for delivery door-to-door to businesses,
through creation of joint promotions with other businesses, by creating and
placing signs on the premises of current customers, an by inserting
advertisements in invoices or statements sent by various businesses. Finally,
we intend to increase our general advertising in industry publications,
industry directories, national business newspapers, and market specific
magazines.
We also intend to promote our business through the development of a
web site on the Internet. On the site we intend to offer program information,
basic data about our business, suggestions on how to use our product more
effectively, advice on how to contact us, and pictures of our product. We
have retained an outside web site development firm to work with staff to
create the web site. We hope to have it completed by the second quarter of
2000.
In addition to seeking individual locations to place our scrip
machines, we also contact and negotiate with large franchise companies. If we
are successful in our negotiations, we will contact our independent sales
representatives who will call on individual franchisees who would typically
not permit placement of our scrip machines until the corporate headquarters
had approved use of the machines in the businesses.
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We intend to offer value-added Benefits to our customers in the near
future. These additional services and benefits will include a pre-paid debit
card, a gift certificate program, a frequent user program, and pre-paid calling
cards.
EQUIPMENT
We do not manufacture our scrip machines. We purchase the machines from
a single manufacturer. We download our own software program into the machine for
use by the merchants. We then bolt the machine to a stand which the merchant can
affix to a counter or utilize our freestanding model. We do not have a written
contract with our supplier to guaranty a constant supply of the machines.
However, we believe there are a number of alternate suppliers from whom we could
purchase similar machines at approximately the same price and terms. If we were
to lose our existing supplier, we believe that before we exhausted our inventory
of machines, we could engage a new supplier.
Our existing machines come with a one-year manufacturer's warranty,
which is not voided by the assembly process we employ. We do not maintain any
product liability insurance and do not believe that such insurance is necessary
in our business.
COMPETITION
In general, we compete with numerous ATM companies, including most
banks, and many point of sale debit machine companies. Most of these companies
are significantly larger and better financed than are we. We believe the
greatest risk from these segments of the industry is from banks or other large
companies already involved in the industry adding scrip machines to their
inventory of products and offering these to the same merchants targeted by us.
In the geographic areas where we currently offer our products, we
compete with several companies offering cash dispensing or point of sale debit
machines. These competitors include World Cash Providers, POS Systems
Management, Inc., and Universal ATM.
We believe we can compete successfully with our direct competition
based upon our experience in this segment of the industry, what we believe is a
superior product, and the quality of service we provide our merchants and
customers. Also, we believe there is only one other company that places the
scrip machines in business locations at no cost to the merchant. We feel that
being ability to place the machine at no cost to the merchant is a significant
advantage in negotiating for location contracts.
GOVERNMENT REGULATION
There are currently five states that do not permit surcharging on debit
transactions. We do not attempt to place our machines in these states.
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<PAGE>
The recent imposition of limits on charging for debit transactions in
two California cities has no negative bearing on our industry. In fact, should
any regulations be imposed, they would most likely have a positive impact on our
company. There are several reasons for this:
- The recent legislation was imposed upon only ATM CASH
dispensing machines owned and operated by banks. We are not a
bank and as such would not fall under these regulations.
- The regulations imposed are for CASH dispensing machines, not
for Scrip machines using point-of-sale (POS) networks. We do
not use cash dispensing machine technology or networks. A
point-of-sale transaction is one that occurs at the cash
register or front counter, such as at a grocery store or gas
station.
- Most legislation impositions have concentrated on the
secondary or "hidden" fees that banks charge when their
customers use a competitor's ATM machine. Should legislation
be passed and held by the courts to be valid, then this would
be a positive factor for our industry because banks would then
simply increase the upfront fee they charge for ATM
transactions. This increase would serve to further demonstrate
how low our fees are compared to those charged by our
competitors.
LITIGATION
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 Systemes, 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 relationship 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.
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<PAGE>
OUR EMPLOYEES
In our pay telephone business we employed approximately twenty-eight
people on a full-time basis at April 1, 2000. Of these employees, nine are
administrative, ten are clerical, and nine are in operations. With funds from
this offering we intend to hire between seven and fifteen new employees to be
used primarily in customer services and operations. None of our employees is
subject to a collective bargaining agreement. We offer our employees coverage in
our company health plan, and vacation and sick leave.
In our scrip business we employed fifteen people on a full-time
basis at April 1, 2000. Of these employees, two are administrative, two are
clerical, six are in operations, and five are in sales. None of our employees is
subject to a collective bargaining agreement. We offer our employees coverage in
our company health plan, and vacation and sick leave.
OUR FACILITIES
Our pay telephone business is headquartered at 1110 West Kettleman
Lane, Suite 48, Lodi, California 95240. We lease approximately 7,000 square feet
of office space at this location. Our lease expires in March 2001, with an
option for two more one-year leases. Annual lease payments for the space are
$93,660. We maintain property and casualty insurance, renter's insurance, and
liability insurance on the space
Our scrip business is headquartered at 3001 Coffee Road, Suite 2,
Modesto, California 95355. We lease approximately 3,000 square feet of office
space at this location. Our lease expires May 31, 2001. Annual lease payments
for the space are $30,600. We also lease approximately 4,000 square feet of
production space at 1307 N. Seventh Street, Suite B, Modesto, California 95354.
Our lease on this space expires April 30, 2000. Our annual lease payments are
$13,200.
REPORTS TO OUR SECURITY HOLDERS
Our fiscal year ends on December 31st. We do not presently intend to
furnish our shareholders annual reports. However, we intend to become a
reporting company and file annual, quarterly, and current reports, and other
information with the SEC. You may read and copy any reports, statements or other
information we file at the SEC's public reference room at 450 Fifth Street,
N.W., Washington D.C. 20549. You can request copies of these documents, upon
payment of a duplicating fee, by writing to the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings are also available to the public on the SEC Internet site
at http\\www.sec.gov.
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<PAGE>
MANAGEMENT
GENERAL
The following table sets forth our current directors and executive
officers, their ages, and all offices and positions. Directors are elected for a
term of one year and until his successor is elected and qualified. Annual
meetings are to be scheduled by the Board of Directors. Officers are elected by
the Board of Directors and hold office until their successors are chosen and
qualified.
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
William D. Yotty 54 Director & CEO 1998
Jeff McKay 39 President --
Brian R. McClure 43 Director 2000
Harry Martin 59 Secretary, Treasurer & CFO --
Clifford Goehring 70 Director 1998
</TABLE>
Set forth below is similar information for our two wholly owned
subsidiaries
PAYSTAR COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
William D. Yotty 54 Director & CEO 1998
Jeff McKay 39 President --
Harry Martin 59 Secretary, Treasurer & CFO --
Clifford Goehring 70 Director 1998
</TABLE>
U.S. CASH EXCHANGE, INC.
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
William D. Yotty 54 Director 1999
Jeff McKay 39 Director, President & CEO 1996
Thomas Howell 38 Director 1999
Harry T. Martin 59 Secretary & Treasurer --
</TABLE>
Set forth below is certain information concerning the business
experience of our executive officers and directors:
WILLIAM D. YOTTY has been the president of Quantum Telequip, Inc., a
communications sales enterprise, since 1989. Since 1985 he has been
self-employed as a communications consultant. From 1997 to 1998 he was the
president of 21st Century Communications, a pay telephone company.
JEFF MCKAY was the owner from 1984 to 1986 of Pacific Communications, a
pay telephone company. Pacific Communications was dissolved in 1996. From 1996
to the present
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<PAGE>
he has been the president of U.S. Cash Exchange, our wholly owned subsidiary,
and from October 1, 1999 to the present, he has been the president of PayStar
Communications, Inc. and PayStar Communications Corporation.
BRIAN R. McCLURE has owned and been President of First Network
Communications, Inc. since 1992. He has also owned Dynamic Advantage, Inc. since
1999. Both companies are involved in the sales and marketing of communication
equipment. Mr. McClure's main impetus has been in the sales and marketing arena,
but he has 20 years experience in all phases of the telecommunications
industry.
HARRY MARTIN has been the chief financial officer of our parent company
and the pay telephone subsidiary since October 1999. From 1993 until 1995 he was
a vice president and the chief financial officer for Quality Transport, and from
1995 until October 1999 he was a partner in Sierra Financial, a financial
services company.
CLIFFORD GOEHRING has been the president of First Call Communications
since 1997. From 1990 to 1997 he was the vice-president of Quantum Network.
The Board of Directors has no nominating, auditing or compensation
committee. There are no arrangements or understandings between any of the
officers or directors and any other person(s) pursuant to which such officer or
director was selected as an officer or director. There are no family
relationships between any of our officers or directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the aggregate executive compensation
awarded to, earned by, or paid to the named executive officers for all services
rendered in all capacities to our company or any of its subsidiaries for the
years ended December 31, 1999, 1998, and 1997. All such compensation was paid by
our subsidiary, U.S. Cash Exchange, Inc., prior to our acquisition of the
subsidiary in October 1999.
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Other Annual
Name and Principal Positions Year Salary Bonus Compensation
- ---------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
William D. Yotty, CEO 1999 -0- $203,416 -0-
1998 -0- -0- -0-
1997 -0- -0- -0-
Jeff McKay, President 1999 $17,107 $203,416 -0-
1998 -0- -0- -0-
1997 -0- -0- -0-
</TABLE>
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<PAGE>
The amounts listed as bonuses were cash dividends to the named
persons who were shareholders at the time of such distributions which were paid
during 1999.
Prior to December 31, 1999, no stock options had been made to any of
our executive officers. As of April 18, 2000, the following grants of stock
options had been made to the officers and directors named below:
<TABLE>
<CAPTION>
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
---- ----------- ------- ----- ----
<S> <C> <C> <C> <C>
William D. Yotty 100,000 9.84% $1.00 1/3/03
Jim Chambas 100,000 9.84% $1.00 1/3/03
Clifford Goehring 100,000 9.84% $1.00 1/3/03
Jeff McKay 100,000 9.84% $1.00 1/3/03
Harry T. Martin 75,000 7.38% $1.00 1/3/03
Brian R. McClure 200,000 19.69% $2.00 4/1/03
</TABLE>
Mr. Yotty received 7,500 shares from our pay telephone subsidiary prior
to the reorganization with our company in which he exchanged these shares for
1,500,000 shares. He also received 1,000 shares from our ATM subsidiary prior to
the reorganization with our company in which he exchanged these shares for
1,075,000 shares. Since the acquisition of our ATM subsidiary, Mr. Yotty has not
been paid, and will not receive, any compensation by our subsidiary, U.S. Cash
Exchange, Inc., or the parent or its pay telephone subsidiary.
We have entered into a three year employment contract with Mr. McKay
for his full-time employment which commenced on October 1, 1999. The agreement
will be renewed automatically for one year terms unless written notice of
termination is given 90 days before the end of the initial or any renewal term.
Mr. McKay receives a base salary of $300,000, plus a bonus of between 1% and 4%
of the net income of the combined companies, as determined by the Board of
Directors. He receives a monthly car allowance of $800 and is entitled to
participate in any pension, profit-sharing, stock option, deferred compensation,
savings, hospitalization, medical, disability, and life insurance programs
offered by us. His agreement also contains confidentiality and non-competition
provisions which require him to maintain the confidentiality of non-public
information about the company and which prohibit him from competing with us in
the area of the ATM scrip business for a period of one year from the termination
of the agreement.
We employed Mr. Martin as chief financial officer commencing October
15, 1999, at a monthly salary of $5,000. We also issued 25,000 shares to Mr.
Martin as a signing bonus for accepting the position of chief financial officer
and granted options to him under our stock option plan to purchase up to 25,000
shares at any time before October 15, 2002 at $1.00 per share. These options
vest 25% per quarter during the first year of his employment. We have also
agreed to pay his health insurance premiums.
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<PAGE>
COMPENSATION OF DIRECTORS
Directors are permitted to receive fixed fees and other compensation
for their services as directors, as determined by the Board of Directors. The
Board of Directors has not adopted any policy in regard to the payment of fees
or other compensation to directors, and no fees or compensation have been paid
to, or accrued by, any of the present directors.
STOCK OPTION PLAN
On November 3, 1998, we adopted an employee stock option plan which we
amended effective January 3, 2000, pursuant to which we are authorized to grant
up to 3,000,000 options to our key employees, officers, directors, and
consultants. Awards under the plan will consist of both non-qualified options
and options intended to qualify as "Incentive Stock Options" under Section 422
of the Internal Revenue Code of 1986, as amended.
The plan is administered by the Board of Directors which will determine
the persons to whom awards will be granted, the number of awards to be granted
and the specific terms of each grant, including the vesting thereof, subject to
the provisions of the plan.
In connection with qualified stock options, the exercise price of each
option may not be less than 100% of the fair market value of the common stock on
the date of grant (or 110% of the fair market value in the case of a grantee
holding more than 10% of our outstanding stock). The aggregate fair market value
of shares for which qualified stock options are exercisable for the first time
by such employee (or 10% shareholder) during any calendar year may not exceed
$100,000. Non-qualified stock options granted under the plan may be granted at a
price determined by the Board of Directors, not to be less than the fair market
value of the common stock on the date of grant.
The plan also contains certain change in control provisions which could
cause options and other awards to become immediately exercisable. Payment of the
exercise price may be in cash, certified check, our common stock, or
cancellation of indebtedness.
At April 18, 2000, we had outstanding 1,016,000 options granted by
the Board of Directors under the plan.
CERTAIN TRANSACTIONS
William D. Yotty, a director, officer, and principal shareholder, is
also the controlling shareholder of Quantum Network Services, Inc. which owns
903 of the pay telephones managed by us. This agreement was not entered into by
means of arms length negotiations. The agreement was entered into on May 1,
1999, for a period of one year and is renewable for like periods. Under the
agreement we receive a flat monthly fee for each pay telephone we manage for
Quantum. In return, we are responsible for collection of the coins and other
revenue from the
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<PAGE>
telephones; disbursing from the gross revenues the costs of the telephones,
such as site owner commissions, local and long distance costs, operator
service providers and other carriers; providing for the repair of the
telephones, including parts and labor; maintaining the telephones in a neat
and clean condition; and, with the prior consent of Quantum, performing
capital improvements to the telephones to alter, rebuild, or renovate the
telephones. All funds collected by us, less all of the costs associated with
the telephones and our monthly fees, are disbursed to Quantum. Quantum has
the right to terminate the management agreement at any time upon 120 days'
written notice to us. We have each agreed to indemnify the other for actions
arising out of tortuous conduct or any breach of the agreement. Quantum is
required to maintain fire and business interruption insurance, liability
insurance for the operation of the telephones, and any workers' compensation
insurance required by law. The agreement is freely assignable by either
party. During the year ended December 31, 1998, we distributed $26,100 to
Quantum pursuant to the agreement. During the year ended December 31, 1999,
we distributed $213,914 to Quantum; however, we billed Quantum $246,320 for
our fees under the agreement. At December 31, 1999, all but $25,400 of this
amount had been paid by Quantum.
Mr. Yotty, Mr. McKay, and Mr. Howell were the sole shareholders of U.S.
Cash Exchange, Inc. prior to the reorganization transaction with us. In that
transaction Mr. Yotty and Mr. McKay each received 1,075,000 shares, and Mr.
Howell, through his company, MIH Associates, Inc., received 550,000 shares. The
book value of U.S. Cash Exchange immediately prior to this acquisition was
approximately ($38,580).
Mr. Yotty, a director, officer, and principal shareholder, Mr. Jim
Chambas, a former officer and director, and Mr. Goehring, a director, were the
sole shareholders of PayStar Communications, Inc. prior to the reorganization
with us. In that transaction Mr. Yotty received 1,500,000 shares, Mr. Chambas
received 400,000 shares, and Mr. Goehring received 100,000 shares. The book
value of PayStar Communications, Inc. immediately prior to this acquisition was
approximately $84,135.
Intermountain Marketing Associates, LLC, a limited partnership
managed by Mr. Howell, a director of U.S. Cash Exchange, Inc., has loaned
$1,217,750 to PayStar Communications, Inc. during the year ending December 31,
1999. In 2000 he loaned an additional $729,250 to PayStar Communications, Inc.
He has also loaned $152,950 to U.S. Cash Exchange during the year ended December
31, 1999. We have issued a series of nine-month promissory notes to such entity.
The interest rate on the notes with Intermountain Marketing Associates, LLC is
13.35% per annum. At April 18, 2000, the aggregate principal amount of these
notes which remained outstanding was $2,099,950. Mr. Howell is presently the
owner of Intermountain Marketing Associates, LLC.
Mr. Yotty advanced $20,000 to PayStar Communications, Inc. during
the year ended December 31, 1999, for working capital. These advances are not
evidenced by a promissory note and do not bear interest. At April 18, this
advance had not been repaid.
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<PAGE>
MARKET INFORMATION
Our shares have been quoted on the OTC Electronic Bulletin Board since
approximately May 10, 1999, with the trading symbol of "PYST." Based upon the
limited volume of trading, we do not believe that there exists an established
market for our stock. The table below sets forth for the periods indicated the
high and low bid quotations as reported by various private services on the
Internet. These quotations reflect inter-dealer prices, without retail mark-up,
mark-down, or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Quarter High Low
<S> <C> <C> <C>
FISCAL YEAR ENDED
DECEMBER 31, 1999 Second $3.00 $0.125
Third $2.625 $0.375
Fourth $3.75 $1.25
FISCAL YEAR ENDING
DECEMBER 31, 2000 First $8.00 $4.00
</TABLE>
As of April 18, 2000, we had granted 1,016,000 options to purchase
shares. There are no other outstanding warrants or rights to purchase our
shares. None of the shares is being, nor have any shares proposed to be,
publicly offered by us. However, we have granted registration rights to the
selling shareholder to register up 15,000 of the outstanding restricted
shares.
As of April 18, 2000, there were approximately 44 holders of record
of our shares as reported to us by our transfer agent.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning the
shares common stock ownership as of April 18, 2000, of each person who is known
to us to be the beneficial owner of more than five percent of our common stock;
by each of our executive officers and directors; and by executive officers and
directors as a group. Such information was furnished to us by such persons or
was obtained from information provided by the transfer agent.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------- -------------------- ----------------
<S> <C> <C>
William D. Yotty 2,675,000(1) 39.71%
1110 West Kettleman Ln.
Suite 48
Lodi, CA 95240
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Jeff McKay 1,175,000(1) 17.44%
1110 West Kettleman Ln.
Suite 48
Lodi, CA 95240
Harry Martin 37,500(2) *
1110 West Kettleman Ln.
Suite 48
Lodi, CA 95240
James Chambas 500,000(1) 7.42%
1110 West Kettleman Ln.
Suite 48
Lodi, CA 95240
Clifford Goehring 200,000(1) 2.97%
1110 West Kettleman Ln.
Suite 48
Lodi, CA 95240
Brian R. McClure 125,000(3) 1.88%
1110 West Kettleman Ln.
Suite 48
Lodi, CA 95240
Executive officers and
directors as a group (5 persons) 4,212,500 60.41%
- ------------
</TABLE>
*Less than 1%.
(1) Includes 100,000 options granted to each such person.
(2) This amount includes 12,500 options granted to Mr. Martin which
are presently exercisable.
(3) Includes 25,000 options granted to Mr. McClure which are
exercisable since April 1, 2000.
SELLING SHAREHOLDERS
Up to 15,000 common shares issued previously by us may be offered
for resale by Ronald N. Vance, P.C. We will not receive any of the proceeds
from the sale of these securities. Mr. Vance is acting as counsel for us in
this offering and the shares previously issued to him are for services
rendered in connection with this offering. Mr. Vance will not beneficially
own any of our securities if these shares are sold.
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<PAGE>
The sale of the shares by the selling security holder may be effected
from time to time in transactions (which may include block transactions by or
for the account of the selling security holders) in the over-the-counter market
or in negotiated transactions or otherwise. Sales may be made at fixed prices
which may be changed, at market prices, if any, prevailing at the time of sale,
or at negotiated prices.
The selling security holder may effect these transactions by selling
his shares directly to purchasers, through broker-dealers acting as agents for
him or to broker-dealers who may purchase the securities as principals and
thereafter sell the securities from time to time in the over-the-counter market,
if any, in negotiated transactions or otherwise. These broker-dealers, if any,
may receive compensation in the form of discounts, concessions or commissions
from the selling security holder or the purchasers for whom the broker dealers
may act as agents or to whom they may sell as principals or otherwise (which
compensation as to a particular broker-dealer may exceed customary commissions).
Under applicable rules and regulations under the Securities Exchange
Act, any person engaged in the distribution of the selling security holder's
shares may not simultaneously engage in market making activities with respect to
any of our securities for a period of at least two (and possibly nine) business
days prior to the start of any distribution.
The selling security holder and broker-dealers, if any, acting in
connection with these sales might be deemed to be underwriters within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of the securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
DESCRIPTION OF SECURITIES
PREFERRED STOCK
We are authorized to issue 10,000,000 shares of preferred stock, par
value $.001 per share. As of the date of this prospectus, no preferred shares
were outstanding. The board of directors has the authority to divide the
preferred stock into series, to establish and fix the distinguishing designation
of each series and the number of shares thereof and, within the limitations of
applicable law of the State of Nevada, to fix and determine the relative rights
and preferences of the shares of each series so established prior to the
issuance thereof. The board of directors has designated 5,500,000 of these
preferred shares as Series "A" Convertible $2.00 Preferred Stock. This series
has the following rights and preferences:
FACE VALUE
The face value of this series, or the value at which they can be sold,
is $2.00.
DIVIDENDS
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<PAGE>
We have agreed to pay dividends at the following rates:
- 11% through December 31, 2002;
- 10.5% from January 1, 2003 to December 31, 2003; and
- 10% from January 1, 2004.
CONVERSION RIGHTS
A holder of this series of preferred shares may convert the preferred
shares into shares of our common stock as follows:
- Through December 31, 2002, at the rate of one share of common
stock for each two shares of preferred stock surrendered for
conversion;
- From January 1, 2003, through December 31, 2003, at the rate
of one share of common stock for each three shares of
preferred stock surrendered for conversion; and
- Thereafter at the rate of one share of common stock for each
four shares of preferred stock surrendered for conversion.
Under certain circumstances, we may also force conversion of the
preferred shares into common stock based upon the trading value of our common
stock. We may require conversion at the following times and under the following
conditions:
- Through December 31, 2002, at the rate of one share of common
stock for each two shares of preferred stock, so long as the
closing price of our common stock is at least $6.00 per share
for twenty trading days within any period of thirty
consecutive trading days ending within ten calendar days;
- From January 1, 2003, through December 31, 2003, at the rate
of one share of common stock for each three shares of
preferred stock, so long as the closing price of our common
stock is at least $8.00 per share for twenty trading days
within any period of thirty consecutive trading days ending
within ten calendar days; and
- Thereafter at the rate of one share of common stock for each
four shares of preferred stock, so long as the closing price
of our common stock is at least $10.00 per share for twenty
trading days within any period of thirty consecutive trading
days ending within ten calendar days preceding the written
notice.
DEFAULT AND VOTING RIGHTS
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<PAGE>
The holders of the preferred shares have no voting rights, unless we
fail to pay any quarterly dividends. So long as such default persists, the
preferred stock holders will be able to vote as a separate class and to elect a
majority of the directors.
REDEMPTION
We have the option to redeem the preferred shares at the following
times and subject to the following conditions:
- From January 1, 2001, through December 31, 2002, at the rate
of $2.20 per share of preferred stock;
- From January 1, 2003, through December 31, 2003, at the rate
of $2.00 per share of preferred stock; and
- Thereafter at the rate of $1.80 per share of preferred stock.
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution, or winding up of our
affairs, whether voluntary or involuntary, the holders of the preferred stock
are entitled, before any distribution or payment is made to the holders of the
common shares or any other series of preferred shares, to be paid an amount
equal to $2.20 per share of preferred stock, plus all unpaid cumulative
dividends accrued to the date of liquidation.
COMMON STOCK
We are authorized to issue 100,000,000 shares of common stock, par
value $.001 per share. As of April 18, 2000, we had outstanding 6,636,200
shares. All common shares are equal to each other with respect to voting, and
dividend rights, and are equal to each other with respect to liquidations
rights. Special meetings of the shareholders may be called by the Chairman,
the Board of Directors, the President, the chief executive officer, or upon
the request of holders of at least one-tenth of the outstanding voting
shares. Holders of common shares are entitled to one vote at any meeting of
the shareholders for each common share they own as of the record date fixed
by the Board of Directors. At any meeting of shareholders, a majority of the
outstanding common shares entitled to vote, represented in person or by
proxy, constitutes a quorum. A vote of the majority of the common shares
represented at a meeting will govern, even if this is substantially less than
a majority of the common shares outstanding. Holders of shares are entitled
to receive such dividends as may be declared by the Board of Directors out of
funds legally available therefor, and upon liquidation are entitled to
participate pro rata in a distribution of assets available for such a
distribution to shareholders. There are no conversion, pre-emptive or other
subscription rights or privileges with respect to any share. Reference is
made to our Articles of Incorporation and Bylaws, as well as to the
applicable statutes of the State of Nevada,
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<PAGE>
for a more complete description of the rights and liabilities of holders of
shares. The shares do not have cumulative voting rights, which means that the
holders of more than fifty percent of the common shares voting for election
of directors may elect all the directors if they choose to do so. In such
event, the holders of the remaining shares aggregating less than fifty
percent will not be able to elect directors.
REGISTRATION RIGHTS OF OUTSTANDING SHARES
In December 1999 we issued 15,000 shares to Ronald N. Vance, P.C., our
counsel, as partial consideration for preparation of this registration
statement. We agreed to include these shares in this registration statement.
TRANSFER AGENT
The transfer agent for our common stock is Interwest Transfer Company,
Inc., 1981 East 4800 South, Suite 100, Salt Lake City, Utah 84117. We intend to
appoint Interwest as the transfer agent for our preferred stock, as well.
DIVIDEND POLICY
We have not declared or paid any cash dividends as yet on the common
stock. The Board of Directors intends to declare and pay dividends to the
holders of the preferred shares from funds legally available for such payments.
We have no plans to pay any dividends to the holders of our common stock.
PLAN OF DISTRIBUTION
This offering is being conducted by us, through our officers and
directors, on a 1,500,000 share minimum and 5,500,000 share maximum basis at an
offering price of $2.00 per preferred share. The stock may also be offered and
sold through participating brokers/dealers who are members of the NASD. We will
pay a maximum commission of 10% of the offering price for shares sold by these
broker/dealers. The minimum subscription is 1,000 shares. We will not pay a
commission to our officers or directors for sales made by them. We and
participating broker/dealers may further agree to indemnify each other against
certain liabilities, including liabilities arising under the Securities Act of
1933. No one, including us or any broker/dealer, has made any commitment to
purchase any or all of the shares offered hereby. Rather, the officers and
directors will use their best efforts to find purchasers for the shares until
one-hundred eighty days following the date of this prospectus.
The individuals who will be participating the distribution of the
shares are the following officers and directors:
-42-
<PAGE>
<TABLE>
<S> <C>
William D. Yotty Director & CEO
Jeff McKay President
Brian R. McClure Director
Harry T. Martin Secretary, Treasurer & CFO
Clifford Goehring Director
</TABLE>
Each of these individuals has represented to us that he meets the requirements
of an exemption from registration as a broker-dealer as set forth in Rule 3a4-1
promulgated by the Securities and Exchange Commission.
All proceeds from subscriptions with respect to the first 1,500,000
preferred shares will be deposited promptly with Community Bank of San Joaquin,
as escrow agent for this offering pursuant to the terms of a funds escrow
agreement. All of the proceeds of this offering will be deposited in the escrow
account no later than noon of the business day next following receipt. In the
event that 1,500,000 preferred shares are not sold, on or before ninety days
from the date of this prospectus, all funds will be refunded promptly to
subscribers in full without deduction therefrom or interest thereon. If the
minimum proceeds are received before expiration of the offering period, we will
hold an initial closing for disbursement of funds. Subsequent closings may be
held upon receipt of additional subscriptions. During the offering period or any
extension thereof, no subscriber will be entitled to a refund of any
subscription. We reserve the right to accept or reject any subscription, in
whole or in part.
We anticipate making sales of the shares to residents of the states of
California, Michigan and Nevada, as well as other persons resident in other
states who have expressed an interest in our company, or persons we believe may
be interested in purchasing our shares. We may sell shares to such persons only
if they reside in a state in which we are permitted to sell the shares. We are
not obligated to sell any shares to any such persons.
PRICING THE PREFERRED STOCK
The offering price of our shares of preferred stock was determined
arbitrarily by us. In arriving at that price, our board of directors took into
account such factors as the current market price of our common shares, our lack
of significant history and operations, our assets, plan of operation, and
anticipated costs of our continued development and operation. However, the
offering price of the shares should not be understood as an indication of the
value of the shares offered or an assurance that you will be able to resell
these shares for an amount equal to or more than the offering price. The
offering price of the shares bears no necessary relationship to the market
price, our assets, book value, lack of earnings, net worth or other recognized
criterion of value.
In as much as we have not retained an underwriter or broker/dealer to
assist in this offering, the offering price has not been arrived at through a
process of arms-length negotiation.
-43-
<PAGE>
Accordingly, new investors bear a disproportionate risk to that of existing
shareholders attendant to the fact that the offering price was arrived at
arbitrarily, rather than by arms-length bargaining.
DELIVERY OF PREFERRED STOCK CERTIFICATES
We intend to timely issue certificates for the shares after completion
of the offering and to forthwith mail such certificates directly to investors at
their addresses as set forth in their subscription agreements.
SHARES ELIGIBLE FOR FUTURE SALE
We have 6,636,200 outstanding common shares. Of those, the 15,000
shares being offered in this offering, will, subject to any applicable state law
restrictions on secondary trading, be freely tradeable without restriction under
the Securities Act, except that any shares purchased by "affiliates" (as that
term is defined in Rule 144 under the Securities Act) will be subject to the
resale limitations of Rule 144.
Of the remaining 6,621,200 shares 5,315,000 are "restricted" within the
meaning of Rule 144 under the Securities Act, and are not being registered for
resale. Of this number, 2,000,000 shares may be eligible for immediate sale in
the public market without restriction under Rule 144(k). The balance of
3,315,000 will be eligible for resale under Rule 144 between ninety and 365 days
after the date of this prospectus.
In general, under Rule 144, as currently in effect, any person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for at least one year, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of our
then outstanding shares, or (ii) the average weekly trading volume of our stock
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Commission. Sales pursuant to Rule 144 are also
subject to certain requirements relating to manner of sale, notice and
availability of current public information about us. A person who is not deemed
to have been an affiliate at any time during the 90 days immediately preceding
the sale and whose restricted shares have been fully-paid for two years since
the later of the date they were acquired from us, or the date they were acquired
from one of our affiliates, may sell these restricted shares under Rule 144(k)
without regard to the limitations and requirements described above. Restricted
shares may not be resold under Rule 144 until ninety days from the date of this
prospectus, regardless of when the one year holding period expires.
We cannot predict the effect, if any, that sales of shares under Rule
144 or the availability of shares for sale will have on the market price of our
common stock prevailing from time to time. We are unable to estimate the number
of shares that may be sold in the public market under Rule 144, because the
amount will depend on the trading volume in, and market price for, our stock and
other factors. Nevertheless, sales of substantial amounts of shares in the
public market, or the
-44-
<PAGE>
perception that sales of these shares could occur, could adversely affect the
market price of our common stock.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for
us by Ronald N. Vance, P.C., Attorney at Law, Salt Lake City, Utah. Mr. Vance is
the beneficial owner of 15,000 shares which were received as partial
consideration for representing us in the preparation of the registration
statement of which this prospectus is a part.
EXPERTS
Our financial statements for the year ended December 31, 1999,
included in this prospectus have been examined by Andersen Andersen & Strong,
L.C., Certified Public Accountants. The financial statements examined by the
Certified Public Accountants have been included in reliance upon their audit
report.
CHANGE OF ACCOUNTANTS
On March 8, 2000, we engaged Andersen Andersen & Strong, L.C.,
Certified Public Accountants, as our independent auditors for the year ended
December 31, 1999. The decision to retain Andersen Andersen & Strong, and not
to re-engage Schvaneveldt & Company, the former independent auditor, was made
by the Board of Directors on such date. The decision not to re-engage
Schvaneveldt & Company did not involve a dispute with us over accounting
policies or practices. The report of Schvaneveldt & Company on our financial
statements for the years ended December 31, 1998 and 1997, did not contain an
adverse opinion or disclaimer of opinion, nor was it modified as to
uncertainty, audit scope, or accounting principals. In connection with the
audit of our financial statements for these years ended December 31, 1998 and
1997, there were no disagreements with Schvaneveldt & Company for the annual
periods and for the period up to the date of dismissal on any matters of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to the satisfaction of
Schvaneveldt & Company, would have caused the firm to make reference to the
matter in its report.
Neither we, nor anyone on our behalf, has consulted Andersen
Andersen & Strong regarding the application of accounting principles to a
specific completed or contemplated transaction, or the type of audit opinion
that might be rendered on our financial statements, and neither written nor
oral advice was provided by Andersen Andersen & Strong that was an important
factor considered by us in reaching a decision as to any accounting,
auditing, or financial reporting issue.
-45-
<PAGE>
FINANCIAL STATEMENTS
We have included as part of this prospectus copies of our audited
financial statements as of December 31, 1999, consisting of a consolidated
balance sheet at December 31, 1999, and the related statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1999 and
1998.
-46-
<PAGE>
Andersen Andersen & Strong, L.C.
Certified Public Accountants and Business Consultants
Member SEC Practice Section of the AICPA
941 East 3300 South, Suite 202
Salt Lake City, Utah 84106
Telephone 801-486-0096
Fax 801-486-0098
Board of Directors
Paystar Communications Corporation and Subsidiaries
Lodi, California
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying balance sheet of Paystar Communications
Corporation and Subsidiaries at December 31, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the years ended December
31, 1999 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the over all financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Paystar Communications
Corporation and Subsidiaries at December 31, 1999 and the results of operations,
and cash flows for the years ended December 31, 1999 and 1998 , in conformity
with generally accepted accounting principles.
/s/ Andersen Andersen & Strong
Salt Lake City, Utah
March 17, 2000
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 203,152
Accounts receivable - Note 2 61,314
Inventory - Note 2 667,972
-----------
Total Current Assets 932,438
-----------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 219,916
-----------
OTHER ASSETS
Securities - available for sale - Note 3 100,000
Advance deposits 12,458
Deferred interest on notes payable - related parties - Note 5 121,765
-----------
$ 1,386,577
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - Note 4 $ 346,934
Notes payable - related parties - Note 5 1,370,650
Accounts payable - related parties 85,846
Accounts payable 490,544
Accrued interest payable - related parties - Note 5 50,373
-----------
Total Current Liabilities 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
Capital in excess of par value 906,881
Accumulated deficit (1,871,287)
-----------
Total Stockholders' Equity (957,770)
-----------
$ 1,386,577
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
DEC 31, DEC 31,
1999 1998
----- ----
<S> <C> <C>
REVENUES $ 4,313,728 $ 1,156,149
COST OF SALES AND SERVICES 2,554,362 784,196
------------ ------------
Gross Profit 1,759,366 371,953
------------ ------------
EXPENSES
Administrative 1,888,748 508,994
Sales 1,127,715 35,123
Depreciation 54,336 3,331
Interest 117,293 -
------------ ------------
3,188,092 547,448
------------ ------------
NET LOSS $ (1,428,726) $ (175,495)
============ ============
NET LOSS PER COMMON SHARE
Basic $ (0.31) $ (0.16)
------------ ------------
AVERAGE OUTSTANDING SHARES
Basic 4,496,200 1,081,200
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1998 TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
-------------------------- EXCESS OF ACCUMULATED
SHARES AMOUNT PAR VALUE DEFICIT
--------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
BALANCE JANUARY 1, 1998 1,081,200 $ 1,081 $ 10,919 $ (267,066)
Issuance of common stock for all stock
of PayStar Communications Inc. - 2,000,000 2,000 - -
October 12, 1998 - Note 6
Issuance of common stock for services
at $0.50 - December 1998 300,000 300 149,700 -
Issuance of common stock for 50,000 shares
Mezzanine Capital at $0.50 - December 1998 200,000 200 99,800 -
Net operating loss for the year ended
December 31,1998 - - - (175,495)
--------- ----------- ----------- ------------
BALANCE DECEMBER 31, 1998 3,581,200 3,581 260,419 (442,561)
Issuance of common stock for cash
at $ 1.00 - April 1999 240,000 240 239,760 -
Issuance of common stock for all stock of
U.S. Cash Exchange Inc. - October 1, 1999 2,700,000 2,700 314,817 -
Note 7
Issuance of common stock for services
at $.80 - December 27, 1999 115,000 115 91,885 -
Net operating loss for the year ended
December 31, 1999 - - - (1,428,726)
--------- ----------- ----------- ------------
BALANCE DECEMBER 31, 1999 6,636,200 $ 6,636 $ 906,881 $(1,871,287)
========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEC 31, DEC 31,
1999 1998
----- -----
<S> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss $(1,428,726) $ (175,495)
Adjustments to reconcile net loss to
net cash provided by operating
activities
Depreciation 54,336 3,331
Changes in inventory (667,972) -
Changes in accounts receivable (36,231) (5,083)
Changes in accounts payable 980,515 68,518
Issuance of common capital stock for expenses 92,000 150,000
----------- -----------
Net Increase (Decrease) in Cash From Operations (1,006,078) 41,271
----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Deposits (11,158) (1,300)
Purchase of equipment (254,783) (22,800)
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net proceeds from loans - related parties 1,188,000 -
Proceeds from issuance of common stock 270,000 -
----------- -----------
Net Increase in Cash 185,981 17,171
Cash at Beginning of Period 17,171 -
----------- -----------
Cash at End of Period $ 203,152 $ 17,171
=========== ===========
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
-----------
</TABLE>
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 2500 pay telephones
for their owners, of which, 903 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
US 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 users 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. US Cash usually receives about 57% of the
services charges each month and is reported as income as received.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
RECOGNITION OF INCOME - continued
US 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 US Cash. The sale by US Cash is recorded when the
purchase price is received from the investor. The sale and leasebacks are
considered to be operating leases by US 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
December 31, 1999 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.
<TABLE>
<CAPTION>
Dec 1999
--------
<S> <C>
Cost 277,583
Accumulated Depreciation 57,667
-------
Net 219,916
-------
</TABLE>
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
INCOME TAXES
On December 31, 1999, the Company had a net operating loss available for
carry forward of $1,871,287. 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 2118 through 2020.
The deferred tax benefit on December 31, 1999 follows;
<TABLE>
<S> <C>
Tax from net loss carryforwards $ 636,237
Less valuation reserve 636,237
-------
Net tax benefit -
-------
</TABLE>
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. PayStar
Communications Corporation, the parent, and its subsidiary PayStar
Communications Inc have a fiscal year of December 31 and the subsidiary U. S.
Cash Exchange, Inc. has a fiscal year of June 30. For purposes of these
consolidated financial statements the financial statements of U.S. Cash
Exchange Inc. have been restated to December 31, 1999 and 1998. 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.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk consists primarily of cash and account
receivables. Cash balances are maintained in accounts that are not federally
insured for amounts over $100,000 but are other wise 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, coin counting machines and office equipment. The
installment payments due, with interest, are shown under current liabilities.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. NOTES PAYABLE
The Company has outstanding loans, to related parties, of $ 1,370,650 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 COMMUNICATION 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
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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. 100,000 at an option price of $1.00 per share and 65,000 at an
option price of $2.00 per share. 66,500 of the options vested on the issue
date and 98,500 will vest during 2000 with expiration dates during October
2002. 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
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1 $ 306,400
2 321,700
3 329,380
4 344,700
5 360,020
</TABLE>
The Company was named in a legal action which has been settled for $12,000
and in return the Company will receive a payphone site with two payphones
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 903 pay telephones. For the year ended December
31, 1999 the maintenance income received amounted to $246,320 and the rental
payments made was $213,914.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 year ended December
31, 1999.
<TABLE>
<CAPTION>
Revenues Cost of Sales Gross
and Services Profit
-------- ------------ ------
<S> <C> <C> <C>
Telephone Servicing $1,578,224 $1,510,246 $ 67,978
Scrip Machine Sales 2,005,460 1,044,116 961,344
Commissions, Management Fees,
and Other 730,044 730,044
---------- ---------- ----------
$4,313,728 $2,554,362 $1,759,366
========== ========== ==========
</TABLE>
13. SUBSEQUENT EVENT (UNAUDITED)
The option price of stock grants in 2000 was $1.00 versus the market price of
$2.00. The amount of compensation that will be recorded in 2000 for this
difference will be $526,000.
<PAGE>
[OUTSIDE BACK COVER]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary
Risk Factors
Forward Looking Statements
Use of Proceeds
Dilution
Management's Discussion and Analysis of Financial Condition and Results of Operation
Business
Management
Certain Transactions
Market Information
Principal Shareholders
Selling Shareholders
Description of Securities
Dividend Policy
Plan of Distribution
Shares Eligible For Future Sale
Legal Matters
Experts
Change of Accountants
Financial Statements
</TABLE>
Until _____, 2000, (ninety days after the date of this prospectus)
all dealers that effect transactions in these securities may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 1. Indemnification of Directors and Officers
Nevada law expressly authorizes a Nevada corporation to indemnify
its directors, officers, employees, and agents against liabilities arising
out of such persons' conduct as directors, officers, employees, or agents if
they acted in good faith, in a manner they reasonably believed to be in or
not opposed to the best interests of the company, and, in the case of
criminal proceedings, if they had no reasonable cause to believe their
conduct was unlawful. Generally, indemnification for such persons is
mandatory if such person was successful, on the merits or otherwise, in the
defense of any such proceeding, or in the defense of any claim, issue, or
matter in the proceeding. In addition, as provided in the articles of
incorporation, bylaws, or an agreement, the corporation may pay for or
reimburse the reasonable expenses incurred by such a person who is a party to
a proceeding in advance of final disposition if such person furnishes to the
corporation an undertaking to repay such expenses if it is ultimately
determined that he did not meet the requirements. In order to provide
indemnification, unless ordered by a court, the corporation must determine
that the person meets the requirements for indemnification. Such
determination must be made by a majority of disinterested directors; by
independent legal counsel; or by a majority of the shareholders.
Article VI of the bylaws of the Company provides that the
corporation shall indemnify its directors, officers, agents and other persons
to the full extent permitted by the laws of the State of Nevada.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the Company pursuant to the foregoing provisions,
or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
Item 2. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection
with the offering described in the registration statement:
<TABLE>
<S> <C>
Registration Fee $ 3,069
Blue Sky Fees 10,000
Accounting Fees and Expenses 7,000
Legal Fees and Expenses 20,000
Printing and Engraving 10,000
Transfer Agent Fees 2,500
Miscellaneous 12,431
------
Total Expenses $65,000
=======
</TABLE>
<PAGE>
Item 3. Undertakings
(a) The Company 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 to (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and (iii) include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) For the purpose of 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 shall 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.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the small business issuer will, unless
in the opinion of its counsel the 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.
(d) The Company will:
(1) For determining any liability under the 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 the form
of a prospectus filed by the Company under Rule 424(b) (1) or (4) or 497(h)
under the Act as part of this registration statement as of the time the
Commission declared it effective.
(2) For any liability under the 1933 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 the
offering of the securities at that time as the initial bona fide offering of
those securities.
<PAGE>
Item 4. Unregistered Securities Issued or Sold Within Three Years
In October 1998 the Company issued 2,000,000 shares of Common Stock
of the Company to the three shareholders of PayStar Communications, Inc. The
shares were issued in a reverse acquisition transaction between the Company
and PayStar, in which such shareholders exchanged all of their shares for the
shares of the Company. Such securities were issued without registration under
the Act by reason of the exemption from registration afforded by the
provisions of Section 4(2) thereof, as transactions by an issuer not
involving any public offering. Each of the shareholders of PayStar delivered
appropriate investment representations to the Company with respect to such
transaction and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. No underwriting discounts or
commissions were paid in connection with such issuance.
In December 1998 the Company issued 150,000 shares each to Baldwin
Investments Limited and Starling Securities Limited, foreign entities, for
professional consulting fees in connection with the reorganization between
the Company and the pay telephone subsidiary. These shares were issued
pursuant to Regulation S promulgated by the Securities and Exchange
Commission. No underwriting discounts or commissions were paid in connection
with such issuance.
Also in December 1998 the Company issued 200,000 shares to Mezzanine
Capital Ltd. for 50,000 shares of such entity. Such securities were issued
without registration under the Act by reason of the exemption from
registration afforded by the provisions of Section 4(2) thereof, as
transactions by an issuer not involving any public offering. Such entity
delivered appropriate investment representations to the Company with respect
to such transaction and consented to the imposition of restrictive legends
upon the certificates evidencing such securities. No underwriting discounts
or commissions were paid in connection with such issuance.
In April 1999 the Company issued 240,000 shares of Common Stock of
the Company for an aggregate of $240,000 to approximately eight persons
without registration in a limited offering pursuant to Rule 504 promulgated
by the Securities and Exchange Commission under the Securities Act of 1933
and Section 3(b) thereunder. No underwriting discounts or commissions were
paid in connection with such issuances.
In October 1999 the Company issued 2,700,000 shares of Common Stock
of the Company to the three shareholders of U.S. Cash Exchange, Inc. The
shares were issued in a reverse acquisition transaction between the Company
and U.S. Cash, in which such shareholders exchanged all of their shares for
the shares of the Company. Such securities were issued without registration
under the Act by reason of the exemption from registration afforded by the
provisions of Section 4(2) thereof, as transactions by an issuer not
involving any public offering. Each of the shareholders of PayStar delivered
appropriate investment representations to the Company with respect to such
transaction and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. No underwriting discounts or
commissions were paid in connection with such issuance.
<PAGE>
In December 1999 the Company issued 15,000 shares to Ronald N.
Vance, P.C. in connection with legal services provided by him. Such shares
were issued without registration under the Act by reason of the exemption
from registration afforded by the provisions of Section 4(2) thereof as
transactions by an issuer not involving any public offering. Mr. Vance
delivered appropriate investment representations to the Company with respect
to such issuances and consented to the imposition of restrictive legends upon
the certificates evidencing such securities. No underwriting discounts or
commissions were paid in connection with such issuance.
Also in December 1999 the Company issued 50,000 shares, and options to
purchase 100,000 shares under the Company's stock option plan, to Jerry
Genschorck and 25,000 shares, and options to purchase 25,000 shares under the
Company's stock option plan, to Harry T. Martin, employees of the Company, in
connection with their employment agreements. The Company also granted options to
purchase 40,000 shares to Jay Whitmore, an employee of the Company, in
connection with his employment agreement. Such shares were issued without
registration under the Act by reason of the exemption from registration afforded
by the provisions of Rule 701 promulgated by the Securities and Exchange
Commission. No underwriting discounts or commissions were paid in connection
with such issuances.
Also in December 1999 the Company issued 25,000 shares to Richard
Kelly, a former employee of the Company, in connection with his original
employment agreement. Such shares were issued without registration under the Act
by reason of the exemption from registration afforded by the provisions of Rule
701 promulgated by the Securities and Exchange Commission. No underwriting
discounts or commissions were paid in connection with such issuance.
From May through December 1999, U.S. Cash Exchange, Inc. and PayStar
Communications, Inc. issued a series of nine-month promissory notes to
Intermountain Marketing Associates, LLC, a limited liability company managed by
Thomas Howell, a director of U.S. Cash Exchange, Inc. and one of the
shareholders of the Company. Such shares were issued without registration under
the Act by reason of the exemption from registration afforded by the provisions
of Section 4(2) thereof as transactions by an issuer not involving any public
offering. Each of the notes bears a restrictive legend pursuant to Rule 144. No
underwriting discounts or commissions were paid in connection with such
issuance.
In January 2000 the Company granted options to purchase 551,000 shares
pursuant to the Company's stock option plan. The options were granted to twelve
persons who were directors and/or employees of the Company without registration
under the Act by reason of the exemption from registration afforded by the
provisions of Rule 701 promulgated by the Securities and Exchange Commission. No
underwriting discounts or commissions were paid in connection with such
issuances.
Item 5. Exhibits
The exhibits set forth in the following index of exhibits are filed as
a part of this registration statement.
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Location
<S> <C> <C>
1.1 Funds Escrow Agreement ***
1.2 Form of Subscription Agreement *
2.1 Reorganization Agreement with PayStar
Communications, Inc., as amended *
2.2 Reorganization Agreement with U.S. Cash Exchange, Inc. *
3.1 Articles of Incorporation, as amended *
3.2 By-Laws of the Company currently in effect *
4.1 Form of certificate evidencing shares of Common Stock *
4.2 Form of Certificate evidencing Preferred Stock *
5.1 Opinion re Legality **
10.1 1998 Employee Stock Option Plan, as amended **
10.2 Form of Stock Grant with Schedule of Grantees **
10.3 Employment Agreement with Jeff McKay **
10.4 Pay Telephone Services Agreement with Quantum Network
Services, Inc. *
10.5 Form of Promissory Note to Intermountain Marketing Associates,
LLC, together with schedule of notes *
10.6 Form of Pay Telephone Services Agreement **
16.1 Letter re change of accountants
21.1 List of Subsidiaries *
23.1 Consent of Auditor
23.3 Consent of Ronald N. Vance (contained in Exhibit 5.1 above.) --
</TABLE>
- ------------------
*Filed as an exhibit with the original filing of the registration
statement of the Company on Form SB-2 on December 30, 1999 (SEC File No.
333-93919).
**Filed as an exhibit with the first amended filing of the
registration statement of the Company on Form SB-2 on February 24, 2000 (SEC
File No. 333-93919).
***Filed as an exhibit with the second amended filing of the
registration statement of the Company on Form SB-2 on May 3, 2000 (SEC File
No. 333-93919).
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 for filing on Form SB-2 and authorized this amended
registration statement to be signed on its behalf by the undersigned in the city
of Lodi, State of California, on the 11th day of May 2000.
PayStar Communications Corporation
By: /s/ Jeff McKay, President
<PAGE>
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Date: May 11, 2000 /s/ William D. Yotty, Director and CEO
Date: May 11, 2000 /s/ Harry Martin, Chief Financial Officer and
Principal Accounting Officer
Date: May 11, 2000 /s/ Brian R. McClure, Director
Date: May 11, 2000 /s/ Clifford Goehring, Director
<PAGE>
EXHIBIT 16.1
SCHVANEVELDT & COMPANY
Certified Public Accountants
275 East South Temple
Suite 300
Salt Lake City, Utah 84111
May 11, 2000
Board of Directors
PayStar Communications, Inc.
1110 West Kettleman Lane
Suite 48
Lodi, CA 95240
Gentlemen:
I acknowledge receipt of a copy of the disclosures set forth in the
second amendment to your registration statement on Form SB-2 (SEC Registration
No. 333-93919) under the heading "Change of Accountant," made in response to
Item 304 of Regulation S-B promulgated by the Securities and Exchange
Commission. This letter will confirm that I agree with the statements made by
you in this section.
There were no disagreements with the Company for the annual periods or for
the period up to the date of dismissal.
Sincerely,
/s/ Darrell T. Schvaneveldt
<PAGE>
EXHIBIT 23.1
ANDERSEN ANDERSEN & STRONG, L.C.
Certified Public Accountants
941 East 3300 South
Suite 202
Salt Lake City, Utah 84106
(801) 486-0096 Telephone
Independent Auditor Consent
We consent to the use of our report dated March 17, 2000, on the
financial statements of PayStar Communications Corporation and Subsidiaries at
December 31, 1999, included in the Form SB-2/A-3 herein and to the reference
made to us in the amended registration statement.
/s/ L. R. Andersen
Salt Lake City, Utah
May 11, 2000
