UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission File Number: 333-93919
PAYSTAR COMMUNICATIONS CORPORATION
(Exact name of Registrant as specified in charter)
NEVADA 86-0885565
State or other jurisdiction of I.R.S. Employer I.D. No.
incorporation or organization
1110 WEST KETTLEMAN LANE, SUITE 48, LODI, CA 95240
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (209) 339-0484
Check whether the Issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such fling requirements for the past 90 days. (1) Yes
[X] No [ ] (2) Yes [ ] No [X]
State the number of shares outstanding of each of the Issuer's classes of
common equity as of the latest practicable date: At November 11, 2000, there
were 6,636,200 shares of the Registrant's Common Stock outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
Sept 30, Dec 31,
ASSETS
CURRENT ASSETS
Cash $ 593,816 $ 203,152
Accounts receivable - Note 2 284,337 61,314
Inventory - Note 2 1,490,224 667,972
--------- -------
Total Current Assets 2,368,377 932,438
========= =======
PROPERTY AND EQUIPMENT - net of accumulated
depreciation 583,597 219,916
--------- -------
OTHER ASSETS
Securities - available for sale - Note 3 100,000 100,000
Advance deposits 33,558 12,458
Deferred interest on notes payable -
related parties - Note 5 47,456 121,765
--------- -------
181,014 234,223
--------- -------
$3,132,988 $1,386,577
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Contracts payable - Note 4 $ 647,782 $ 346,934
Notes payable - related parties -
Note 5 2,921,950 1,390,650
Accrued interest payable - related
parties - Note 5 243,912 50,373
Notes payable - other 425,000 -
Accrued interest on notes payable - other 29,221 -
Accounts payable 1,111,653 556,390
--------- -------
Total Current Liabilities 5,379,518 2,344,347
--------- -------
STOCKHOLDERS' EQUITY
Preferred stock
10,000,000 shares authorized at $0.001
par value; none outstanding -- --
Common stock
100,000,000 shares authorized, at $0.001
par value; 6,636,200 shares issued and
outstanding 6,636 6,636
Capital in excess of par value 906,881 906,881
Stock subscriptions received - Note 9 45,000 -
Accumulated deficit (3,205,047) (1,871,287)
--------- -------
Total Stockholders' Deficiency (2,246,530) (957,770)
--------- -------
$3,132,988 $1,386,577
========= =======
The accompanying notes are an integral part of these financial statements
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2000 and 1999
Three Months Nine Months
Sept 30, Sept 30, Sept 30, Sept 30,
2000 1999 2000 1999
REVENUES $2,536,630 $1,136,905 $6,341,856 $3,346,225
COST OF SALES AND SERVICES 1,665,519 781,620 4,525,701 2,698,601
--------- --------- --------- ---------
Gross Profit 871,111 355,285 1,816,155 647,624
--------- --------- --------- ---------
EXPENSES
Sales 151,824 117,453 555,039 179,393
Administrative 692,572 257,605 2,026,094 816,617
Depreciation 26,365 12,325 72,049 37,970
Interest 146,934 16,769 496,733 48,595
--------- --------- --------- ---------
1,017,595 404,152 3,149,915 1,082,575
--------- --------- --------- ---------
NET LOSS $(146,484) $(48,867) $(1,333,760) $ (434,951)
========= ========= ========= =========
NET LOSS PER COMMON SHARE
Basic $ (.02) $ (.01) $ (.20) $ (.12)
--------- --------- --------- ---------
AVERAGE OUTSTANDING SHARES
Basic 6,636,200 3,581,200 6,636,200 3,581,200
--------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Sept 30, 2000
Net Loss $ (1,333,760)
Adjustments to reconcile net loss to
net cash provided by operating
activities
Depreciation 72,049
Changes in Inventory (822,252)
Changes in Accounts Receivable (223,023)
Changes in deferred interest expenses 74,309
Changes in accounts and contracts payable 1,503,869
---------
Net Increase (Decrease) In Cash From Operations (728,808)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Deposits (21,100)
Purchase of equipment (435,728)
---------
(456,828)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from loans - related parties 1,531,300
Stock subscriptions received 45,000
---------
1,576,300
---------
Net change in cash 390,664
Cash at Beginning of Period 203,152
---------
Cash at the End of Period $ 593,816
=========
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
services - 1998 100,000
---------
Issuance of 115,000 shares common capital stock for
services - 1998 92,000
---------
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
The Company was incorporated under the laws of the state of Nevada on
June 16, 1977, with the name "Soterco, Inc," with authorized common stock of
100,000 shares with a par value of $.25 and on September 11, 1997, the
authorized common stock was increased from 100,000 shares to 100,000,000
shares with a par value of $0.001 in connection with a name change to "Sun
Source, Inc." On October 12, 1998, the name was changed to PayStar
Communications Corporation as part of the acquisition of PayStar
Communications Inc. Effective December 21, 1999, the articles of
incorporation were amended to authorize 10,000,000 shares of preferred stock
at $0.001 par value.
On August 22, 1997, The Company completed a forward stock split of one
share of its outstanding stock for six shares and on November 30, 1998, a
forward stock split of one share of outstanding stock for two shares. This
report has been prepared showing after stock split shares from inception.
On October 1, 1999, the Company acquired all of outstanding stock of
PayStar Financial Services, Inc., formerly known as U.S. Cash Exchange, Inc.
These financial statements have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. However, in the opinion of management, all
adjustments (which include only normal recurring accruals) necessary to
present fairly the financial position and results of operations for the
periods presented have been made. The results for interim periods are not
necessarily indicative of trends or of results to be expected for the full
year. These financial statements should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 1999,
included in the Company's registration statement on Form SB-2 (SEC file no.
333-93919).
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 3,250 pay
telephones for their owners, of which, 1,359 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, except that no monthly
rental fees are paid to related parties.
PayStar Financial Services, Inc. - subsidiary
PayStar Financial Services, Inc. has developed and marketed an ATM scrip
machine, as a substitute for an ATM cash-dispensing machine, which has been
installed in various commercial locations. The scrip machine functions in a
similar manner as the ATM cash machine except that, after approval, the user
receives a scrip showing the amount the user has requested, as preset by the
machine, and that amount plus a transaction fee is charged against the user's
bank account. The scrip can then be used to purchase merchandise in the
store. The transactions are processed through a clearing house and the
service charge is then paid to the participating entities.
Recognition of Income
PayStar Financial usually receives about 57% of the services charges
each month and is reported as income as received. PayStar Financial 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 PayStar Financial. The sale by PayStar Financial is recorded when the
purchase price is received from the investor. The sale and leasebacks are
considered to be operating leases by PayStar Financial, with no excess
profits being recognized. The lease commitments are shown in note 10.
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
September 30, 2000, all accounts receivable are considered to be currently
collectable.
Inventory
Inventory is carried at cost and consists of scrip machines installed
in operating commercial locations ready for sale, and the component parts for
the machines ready to assemble for installation. The costs of the
installations in commercial locations are averaged over all installations for
the year and used to cost the ending inventory of installed locations ready
for sale. Certain of the component parts, held in the warehouse, have been
valued below cost because of required updating or for non-use in current
installations.
Warranties on Sales of Installed Locations
No provision for warranties for defective equipment is recognized on the
installations because the Company has a policy of replacing the defective
equipment and returning it to 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.
Sept 2000 Dec 1999
Cost 704,691 268,961
Accumulated Depreciation 121,094 49,045
Net 583,597 219,916
Income Taxes
On September 30, 2000, the Company had a net operating loss available for
carry forward of $3,233,412. 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 2008 through 2021.
The deferred tax benefit on September 30, 2000 follows:
Tax from net loss carryforwards $ 961,514
Less valuation reserve 961,514
Net tax benefit -
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share amounts are computed based on the
weighted average number of shares actually outstanding. Diluted net income
(loss) per share amounts are computed using the weighted average number of
common shares.
Principals of Consolidation
The consolidated financial statements shown in this report excludes the
historical operating information of the parent before October 12, 1998, and
includes the historical financial statements of the subsidiaries.
All intercompany transactions have been eliminated.
Financial Instruments
The carrying amounts of financial instruments, including the assets and
liabilities shown in the balance sheet, are carried at their cost, and are
considered by management to be their estimated fair values.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and account
receivables. Cash balances are maintained in accounts that are not
federally insured for amounts over $100,000 but are otherwise in financial
institutions of high credit quality. Accounts receivable are unsecured and
are derived from revenues earned; however management considers all accounts
receivable to be currently collectable.
Estimates and Assumptions
Management uses estimates and assumptions in preparing financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of the assets and
liabilities, the disclosure of contingent assets and liabilities, and the
reported revenues and expenses. Actual results could vary from the estimates
that were assumed in preparing these financial statements.
Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130. The adoption of this standard had no impact on the total stockholder's
equity.
Accounting for Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123 but has elected to continue to measure compensation cost under APB 25.
The adoption of FASB No. 123 has no impact on the Company's financial
statements.
Other Recent Accounting Pronouncements
The Company does not expect that the adoption of other recent accounting
pronouncements to have any material impact on its financial statements.
3.SECURITIES - AVAILABLE FOR SALE
The company owns 50,000 shares of Mezzanine Capital and is shown at cost
which is considered to be its current fair market value.
4.CONTRACTS PAYABLE
Contracts payable consist of amounts due for scrip cash machines
installed in commercial locations, ready for sale, coin counting machines, and
office equipment.
5. NOTES PAYABLE
The Company has outstanding loans to related parties of $2,921,950 due
within nine months with various due dates, plus 13.35% interest. The loans
can be renewed for an additional nine months with the payment of current
interest due. A premium was added to the proceeds received on the notes which
will be payable at maturity and is shown in the financial statements as an
asset under deferred interest on notes payable. The deferred amount is being
amortized to expense over eighteen months.
6.ACQUISITION OF ALL OUTSTANDING STOCK OF PAYSTAR COMMUNICATIONS, INC.
On October 12, 1998, the Company (parent) completed the acquisition of
all of the outstanding stock of PayStar Communications, Inc. (subsidiary), a
Nevada 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 PAYSTAR FINANCIAL SERVICES, INC.
On October 1, 1999, the Company ( the parent) completed the acquisition
of all the outstanding stock of PayStar Financial Services, Inc. (the
subsidiary) through a stock for stock exchange in which the stockholders of
PayStar Financial Services received 2,700,000 common shares of the parent,
representing 41% of the parent, in exchange for all of their shares in PayStar
Financial. Prior to the exchange a common stockholder and officer owned 39%
of the outstanding stock of the parent and 40% of PayStar Financial.
Due to the common stockholders and officers in each corporation, the
historical financial statements of each company have been combined.
PayStar Financial Services, Inc. was organized in the State of California
on June 24, 1996, with the name "U.S. Cash Exchange, Inc." for the purpose of
conducting the business outlined in note 2.
8. EMPLOYEE STOCK OPTION PLAN
On November 3, 1998, the Company adopted an employee Stock Option Plan
which provides a plan for employees, officers, directors, and consultants to
purchase up to 3,000,000 shares of the Company.
During December 1999 25,000 options to purchase 25,000 common shares were
granted, with an option price of $1.00 per share. Of these options, all will
vest during 2000 with expiration dates during October 2002.
During the nine months ended September 30, 2000, 1,151,000 options to
purchase 1,151,000 common shares were granted, with 260,000 at an option price
of $2.00 per share and 891,000 at an option price of $1.00. Of the total
options, 200,000 will vest at 25% each quarter for a one year period starting
March 1, 2000; 40,000 will vest at 12.5% each quarter for a two year period
starting January 3, 2000; and 60,000 will vest at 25% each quarter for a one
year period starting July 17, 2000.
On the date the options were granted the fair value of the Company's
common stock was considered by management to be $1.00 per share and therefore
no value was assigned to the options.
9.STOCK SUBSCRIPTIONS RECEIVED
The Company has commenced a private placement sale of 2,500,000 units
each of which consists of one share of common stock and one two-year Class A
Warrant to purchase another share of common stock at an exercise price of
$2.00 per share. The warrants will not be exercisable until one year from the
date of purchase. The placement closes on January 31, 2001, and has no
minimum sales requirement. The terms of the sale provide for a commission of
10% to be paid to outside selling agents. At September 30, 2000, the Company
had received $45,000 for the purchase of 22,500 common shares. The securities
offered will not be, and have not been, registered under the Securities Act
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. This information should
not be construed in any manner as a general or specific offer to sell
securities or as a solicitation of an offer to buy the securities.
10. CONTINUING LIABILITIES
The Company has office and warehouse leases with the following terms:
Office - 3,000 square feet - annual lease $30,600 - lease expires May 31,
2001
Warehouse - 4,000 square feet - annual lease $13,200 - lease expires
April 30, 2001
The Company is obligated to pay lease payments on the ATM Script
machines, as outlined in note 2, over the next five years as follows:
Year Amount
1 $306,400
2 321,700
3 329,380
4 344,700
5 360,020
10. RELATED PARTY TRANSACTIONS
Related parties have acquired 67% of the common stock issued by the
Company. Various related party transactions are shown in the balance sheet
under the liability section.
During October 1999 the Company completed a three year employment
agreement with an officer providing for a yearly salary of $300,000.
The Company conducts an on going business with a related party which
consists of maintaining and servicing 1,359 pay telephones. For the nine
months ended September 30, 2000, the maintenance income received amounted to
$362,352.
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 nine months ended
September 30, 2000:
Cost of Sales Gross
Revenues and Services Profit
Telephone Servicing $3,801,528 $3,017,600 $ 783,928
Scrip Machine Sales 2,540,266 1,508,100 1,032,166
and Other
$6,341,794 $4,525,700 $1,816,094
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes.
OVERVIEW
Our business is divided into two distinct segments: Pay telephones and
cashless ATM scrip services. Our pay telephone business is managed through
our wholly owned subsidiary, PayStar Communications, Inc., and our cashless
ATM scrip business is managed through our other wholly owned subsidiary,
PayStar Financial Services, Inc. (formerly U. S. Cash Exchange, Inc.).
We recently formed a Prepaid Services division, which will be
incorporated in the fourth quarter, 2000.
Payphones
We operate and manage over 3,000 privately owned pay telephones located
throughout California, Nevada, Texas, Louisiana and Florida. Of these, we own
one hundred and seventy. The pay telephones are situated in a wide variety of
retail, commercial, and business environments, including many Fortune 500
companies. The pay telephones generate revenue from both coin and non-coin
calls. The typical location of the pay telephones include liquor and
convenience stores, gas stations, retail strip centers, restaurants, and fast
food facilities.
Cashless ATM Scrip
We are currently an independent owner and operator of automatic cashless
scrip machines which provide individuals the mechanism to use their bank debit
card to obtain on-the-spot scrip to purchase items and to obtain cash for use
in various retail stores using funds from their bank savings or checking
accounts for a fee. At September 30, 2000, we owned and operated
approximately 2,500 scrip machines located throughout the United States.
Generally, the cashless scrip machines are located in convenience and liquor
stores, fast food and other restaurants, gas stations, video and entertainment
facilities, and other high traffic merchant locations. The cashless scrip
machines are provided to the merchants at no cost, and the merchants receive a
percentage of the fee paid by the customer to use the machine. We receive the
balance of the processing fee.
The company owns about 50% of the machines with the balance rented back
after being sold out of inventory. The machines we rent were originally
purchased by us and then re-sold to a broker, who locates investors interested
in financing the machines. The broker sells the machines to the investor who
in turn rents the machines back to us. Our company pays the monthly rental
fee out of the profits generated each month by the machines, and keeps the
balance left over.
Prepaid Services
This division features the sale of prepaid services through our existing
merchant base and new customers. The Prepaid Services Division offers
multiple venues of distribution including prepaid calling cards, prepaid home
dial tone and prepaid Internet services. These services are in high demand,
and point-of-sale activation (POSA) is emerging as the new trend driving the
prepaid market. We provide the retailer with a system that doesn't compete
for counter space and can seamlessly meet the merchant's needs. On-the-spot
activation benefits the merchant by eliminating the need to carry an inventory
and the concern about the potential of that inventory from theft.
REVENUE FROM OPERATIONS
The payphone subsidiary generates revenue from:
- Coin calls
- Non-coin calls
- Long distance
- Management fees
Coin calls. The pay telephones generate coin revenues from interstate
and intrastate long distance calls and local calls. We estimate that most of
the gross coin revenues are derived from local calls. In all of the
territories in which we operate, we charge the same rates for local coin calls
as the local exchange carriers charge. They typically charge $0.35 for a
local coin call in all of the territories in which the pay telephones are
located.
Non-coin calls. We have entered in to contractual agreements with
operator service companies such as AT&T to provide non-coin call capabilities
on all of our pay telephones. These calls include 800 number access, operator
assisted calling, person-to-person calling, foreign language assistance, and
collect calling. PayStar Communications receives a commission off of each
call made.
Long distance. During the first quarter of 2000 we added a long distance
division to our telecommunications core of products. This division purchases
long distance services at a wholesale price and retails the product at a
marked up price.
Management fee. We offer our customers four management service options.
The first three levels of management services are at fixed monthly fees, which
range from $25.00 to $50.00. The fourth level fee is 70% of the net revenue,
with the pay telephone owner being entitled to the balance of the net revenues
or a fixed amount, whichever is greater.
The cashless ATM scrip machine subsidiary generates revenue from:
- Sale of ATM machines
- ATM service fees
Sale of ATM machines. Machines are sold by brokers who locate
investors. Generally, these machines come out of our inventory. We realize a
profit from the sale of these ATM machines.
ATM service fees. A fee is charged the customer each time they use the
machine. The merchant receives a percentage of the fee and we receive the
balance.
COST STRUCTURE
Our costs and expenses include:
- Payphone cost of goods
- ATM cost of goods
- General and administrative
- Interest and depreciation
Payphone cost of goods. The cost of goods associated with our payphone
business includes:
- Commissions to payphone owners
- Commissions to site owners
- Maintenance and repairs
- Telephone bills
We expect these costs to level off during the forth quarter. We entered
into a contract with a firm to maintain and service all of our Southern
California telephones in April, 2000. Based on this contract we have closed
our Los Angeles operations office. We feel that this relationship will reduce
our costs and increase our efficiency in the Southern California area.
ATM cost of goods. The cost of sales associated with our ATM business
includes the following:
- Commissions to ATM owners
- Equipment
- Warehouse operations
These costs should remain relatively stable. We are continually
searching for areas to improve our equipment costs.
General and administrative. These expenses consist of the salaries of
our employees and associated benefits, the cost of travel, rent, utilities,
office supplies and professional services. A large portion of our general and
administrative expenses is allocated to operations and customer support.
Customer support expenses include the costs associated with customer service
and technical support, and consist primarily of the salaries and employment
costs of the employees responsible for these efforts. We expect operations
and customer support expenses to increase over time to take care of new and
existing customers. We expect general and administrative costs to increase to
sustain our growth, particularly as we establish a larger organization. Over
time, we expect these relatively fixed general and administrative expenses to
decrease as a percentage of revenue, primarily as a consequence of increased
revenues.
Interest and depreciation. This expense includes the cost incurred for
commissions (recognized over the life of the notes) on the issuance of the
short-term notes and interest on the notes. The notes have a term of
nine-months with an interest rate of 13.35%. During the three months ended
September 30, 2000, we had net interest expense in the aggregate amount of
$146,934.
Depreciation primarily relates to our payphone equipment, and office
furniture and equipment. We depreciate our equipment over an estimated life
of three, five and seven years using the straight-line method. We expect
depreciation to increase as we grow to support new and acquired customers, but
to decrease as a percentage of revenue.
RESULTS OF OPERATIONS
In comparing the quarter ending September 30, 2000, to September 30,
1999, our revenue increased over 223%. PayStar Communications, Inc., realized
a 293% increase and PayStar Financial Services revenue decreased by 11%.
Currently, sixty (60) percent of our revenues come from our PayStar payphone
subsidiary and the remaining forty (40) percent is derived from PayStar
Financial Services.
Revenue for PayStar Communications increased from $519,000 to $1,523,000
for the three months ended September 30, 1999 and 2000, respectively. Sixty
(60) percent of the revenue was derived from coin activity, eight (8) percent
from management fees and commissions, five (5) percent from long distance and
twenty-seven (27) percent from non-coin sources.
The sales decrease for PayStar Financial Services was from $1,141,000 in
the quarter ending September 30, 1999, to $1,014,000 in the quarter ending
September 30, 2000. Seventy-six (76) percent of the revenue was generated by
ATM sales and the balance from ATM service fees.
The majority of our growth will come through acquisitions of companies
and routes.
The costs of sales and services decreased as a percentage of sales from
seventy-one (71) percent in the quarter ending September 30, 1999, to
sixty-six (66) percent in the quarter ending September 30, 2000. The major
reason for this lower percentage relates to the spreading of certain fixed
costs over a larger revenue base.
General and administrative costs increased from $375,057 to $844,396 for
the three months ended September 30, 1999 and 2000, respectively. As we
continue to build our customer base and execute our business plan, we expect
these expenses to increase. The primary reason for this increase relates to
the hiring of additional personnel. These costs are expected to increase as a
percentage of revenue for a period until all necessary personnel and systems
are in place to handle future revenue and support future products.
Thereafter, we anticipate that general and administrative costs will increase
as a proportion of revenue.
Depreciation costs increased from $12,325 to $26,365 for the three months
ended September 30, 1999 and 2000, respectively. Depreciation costs consist
primarily of depreciation of office furniture and equipment, and payphone
equipment. It can be expected that depreciation will continue to increase as
we continue to expand our subsidiaries.
Interest expense increased from $16,769 to $146,934 for the three months
ended September 30, 1999 and 2000, respectively. This increase is the result
of the increase in the issuance of short-term notes and the cost of financing
our equipment.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had $593,816 in cash. Our operating
activities generated a negative cash flow of $728,808 for the nine months
ended September 30, 2000. Cash used from investing activities of $456,828 for
the nine months ended September 30, 2000, was primarily expended for the
purchase of office and telephone equipment. Our financing activities
generated cash of $1,576,300 as of September 30, 2000. The principal reason
for the cash generated was from the sale of notes.
Our future capital requirements will depend on numerous factors,
including:
- Acquisition of profitable payphone routes
- Increased sales of ATM machines
- Entry into the Prepaid Services arena
- Greater efficiency of operations
We expect to fund our operations through profits from the above factors
as well as from future private and public financing.
FORWARD-LOOKING STATEMENTS
The foregoing includes statements that may constitute forward-looking
statements. The company would like to caution readers regarding certain
forward-looking statements in this document. Statements that are based on
management's projections, estimates and assumptions are forward-looking
statements. The words "believe," "expect," "anticipate," "intend," and
similar expressions generally identify forward-looking statements. While the
company believes in the veracity of all statements made herein,
forward-looking statements are necessarily based upon a number of estimates
and assumptions that, while considered reasonable by the company, are
inherently subject to significant business, economic and competitive
uncertainties and contingencies and known and unknown risks. Many of the
uncertainties and contingencies can affect events and the company's actual
results and could cause its actual results to differ materially from those
expressed in any forward-looking statements made by, or on behalf of, the
company. Some of the factors that could cause actual results or future events
to differ materially include the company's inability to find suitable
acquisition candidates or financing on terms commercially reasonable to the
company; inability to find suitable facilities or personnel to open or
maintain new branch locations; interruptions or cancellation of existing
sources of supply; the pricing of and demand for distributed products; the
presence of competitors with greater financial resources; economic and market
factors; and other factors.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
From August 28, 2000, until September 11, 2000, the Company sold 22,500
units to three investors for an aggregate of $45,000. Each unit consists of
one share of common stock and one two-year Class A Warrant to purchase another
share of common stock at an exercise price of $2.00 per share. The warrants
will expire three years from the date of issuance but will not be exercisable
until one year from the date of purchase. The warrants are exercisable by (i)
the surrender of the warrant certificate, with the purchase form at the end
hereof properly executed, at the principal executive office of the Company, or
such other office or agency of the Company as it may designate by notice in
writing to the holder of the warrant at the address of the holder appearing on
the books of the Company; (ii) payment to the Company of the exercise price
then in effect for the number of shares specified in the purchase form
together with applicable stock transfer taxes, if any; and (iii) delivery to
the Company, if the Company so requires, of a duly executed agreement signed
by the holder to the effect that such person agrees to be bound by all
provisions set forth in the warrant certificate. Such securities were issued
without registration under the Securities Act by reason of the exemption from
registration afforded by the provisions of Section 4(2) thereof, and Rule 506
thereunder, as transactions by an issuer not involving any public offering. A
Form D evidencing such exemption was filed with the Securities and Exchange
Commission on September 14, 2000. Each of the purchasers 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. The Company believed that these
investors were sophisticated or accredited at the time of receipt of the units
and were furnished with the kind of information normally provided in a
prospectus. No form of general solicitation was used in connection with such
issuances. The Company paid selling commissions of $2,000 to outside selling
agents in connection with these unregistered sales.
On July 1, 2000, the Company granted options to Brian R. McClure, a
director and acting CEO of the company, to purchase up to 100,000 shares of
Common Stock. The options are exercisable immediately at $2.00 per share.
The options expire July 1, 2003. The options were granted under the Company's
1998 Employee Stock Option Plan. The options may be exercised by delivery of
a signed, written notice to the Company, specifying the number of shares to be
acquired, the date the acquisition is to be consummated, together with payment
of the full purchase price for the shares. The Company may accept payment from
a broker on behalf of the optionee and may, upon receipt of signed, written
instructions from the optionee, deliver the Shares directly to the broker.
The full purchase price of the shares acquired upon the exercise of any option
shall be paid in cash, by certified or cashier's check, by common stock of the
Company, or by cancellation of indebtedness of the Company. Such securities
were issued without registration under the Securities 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. The Company
believed that Mr. McClure was sophisticated or accredited at the time of
receipt of the options and was furnished access to the kind of information
normally provided in a prospectus. No form of general solicitation was used in
connection with such issuances. No underwriting discounts or commissions were
paid in connection with such issuance.
On July 17, 2000, the Company granted options to Joe Garcia, a
vice-president of PayStar Communications, Inc., a wholly owned subsidiary of
the Company, to purchase up to 60,000 shares of Common Stock. The options are
exercisable immediately at $2.00 per share. The options expire July 17,
2002. The options were granted under the Company's 1998 Employee Stock Option
Plan. The options may be exercised by delivery of a signed, written notice to
the Company, specifying the number of shares to be acquired, the date the
acquisition is to be consummated, together with payment of the full purchase
price for the shares. The Company may accept payment from a broker on behalf
of the optionee and may, upon receipt of signed, written instructions from the
optionee, deliver the Shares directly to the broker. The full purchase price
of the shares acquired upon the exercise of any option shall be paid in cash,
by certified or cashier's check, by common stock of the Company, or by
cancellation of indebtedness of the Company. Such securities were issued
without registration under the Securities 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. The Company
believed that Mr. Garcia was sophisticated at the time of receipt of the
options and was furnished access to the kind of information normally provided
in a prospectus. No form of general solicitation was used in connection with
such issuances. No underwriting discounts or commissions were paid in
connection with such issuance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits. The exhibits set forth in the following index of exhibits
are filed as a part of this report.
Exhibit No. Description of Exhibit Location
4.3 Form of Certificate evidencing Class A Warrants Attached
(b) Reports on Form 8-K: We did not file any Form 8-K reports during
the quarter ended September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
PayStar Communications Corporation
Date: November 9, 2000 By /s/ Jeff McKay, President
Date: November 9, 2000 By /s/ Harry Martin, Chief Financial Officer and
Principal Accounting Officer
<PAGE>
EXHIBIT 4.3
COMMON STOCK PURCHASE WARRANT
CLASS A
PAYSTAR COMMUNICATIONS CORPORATION
(A NEVADA CORPORATION)
Dated: ____________, 2000
CERTIFICATE NUMBER: A-_______ _______ WARRANTS
THESE WARRANTS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE TRANSFERRED OR
SOLD IN THE ABSENCE OF AN EFFECTIVE REGISTRATION OR OTHER COMPLIANCE UNDER THE
ACT OR THE LAWS OF THE APPLICABLE STATE OR A "NO ACTION" OR INTERPRETIVE
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE ISSUER, AND ITS COUNSEL, TO THE EFFECT THAT THE
SALE OR TRANSFER IS EXEMPT FROM REGISTRATION UNDER THE ACT AND SUCH STATE
STATUTES.
THIS CERTIFIES THAT _________________________ (hereinafter called the
"Holder") will in the future during the period hereinafter specified, upon
fulfillment of the conditions and subject to the terms hereinafter set forth,
be entitled to purchase from PayStar Communications Corporation, a Nevada
corporation (the "Company"), _______________ shares (the "Shares") of the
Company's common stock, par value $.001 per share ("Common Stock"), at an
exercise price of $2.00 per Share (the "Exercise Price"), on the basis of one
share for each warrant (the "Warrant") indicated on the face hereof. At its
sole option, the Company may reduce the Exercise Price.
1. Commencing one year following the date of the original issuance of
the warrants represented by this Warrant Certificate, and ending on the date
two years from the date of such original issuance, unless extended by the
Company in its sole discretion ("Expiration Date"), the Holder shall have the
right to purchase the Shares hereunder at the Exercise Price. After the
Expiration Date, the Holder shall have no right to purchase any Shares
hereunder and this Warrant shall expire thereon effective at 5:00 p.m.,
Pacific Time. At its sole option, the Company may extend the Expiration Date.
2. The rights represented by this Warrant may be exercised at any
time within the period above specified, in whole or in part, by (i) the
surrender of this Warrant (with the purchase form at the end hereof properly
executed) at the principal executive office of the Company (or such other
office or agency of the Company as it may designate by notice in writing to
the Holder at the address of the Holder appearing on the books of the
Company); (ii) payment to the Company of the Exercise Price then in effect for
the number of Shares specified in the above-mentioned purchase form together
with applicable stock transfer taxes, if any; and (iii) delivery to the
Company, if the Company so requires, of a duly executed agreement signed by
the Holder to the effect that such person agrees to be bound by all provisions
hereof. This Warrant shall be deemed to have been exercised, in whole or in
part to the extent specified, immediately prior to the close of business on
the date this Warrant is surrendered and payment is made in accordance with
the foregoing provisions of this Paragraph 2, and the person or persons in
whose name or names the certificates for Shares shall be issuable upon such
exercise shall become the holder or holders of record of such Shares at that
time and date. The certificates for the Shares so purchased shall be
delivered to the Holder within a reasonable time after the rights represented
by this Warrant shall have been exercised.
3. This Warrant may not be exercised or sold, transferred, assigned,
or otherwise disposed of at any time by the Holder unless the transaction is
registered under the Securities Act of 1933, as amended (the "Act") or, in the
opinion of the Company (which may in its discretion require the Holder to
furnish it with an opinion of counsel in form and substance satisfactory to
it), such exercise, sale, transfer, assignment, or other disposition does not
require registration under the Act and a valid exemption is available under
applicable federal and state securities laws. Any permitted transfer or
assignment shall be effected by the Holder (i) completing and executing the
form of assignment at the end hereof and (ii) surrendering this Warrant with
such duly completed and executed assignment form for cancellation, accompanied
by funds sufficient to pay any transfer tax, at the principal executive office
of the Company, accompanied by a written representation from each such
assignee addressed to the Company stating that such assignee agrees to be
bound by the terms of this Warrant; whereupon the Company shall issue, in the
name or names specified by the Holder (including the Holder) a new Warrant or
Warrants of like tenor with appropriate legends restricting transfer under the
Act and representing in the aggregate rights to purchase the same number of
Shares as are purchasable hereunder.
4. The Company covenants and agrees that all Shares purchased
hereunder will, upon issuance, be duly and validly issued, fully paid, and
non-assessable and no personal liability will attach to the Holder thereof.
The Company further covenants and agrees that during the period within which
this Warrant may be exercised, the Company will at all times have authorized
and reserved a sufficient number of shares of Common Stock to provide for the
exercise of this Warrant.
5. This Warrant shall not entitle the Holder to any voting rights or
other rights as a stockholder of the Company, either at law or in equity, and
the rights of the Holder are limited to those expressed in this Warrant and
are not enforceable against the Company except to the extent set forth herein.
6. In the event that the Company shall at any time subdivide or
combine into a greater or lesser number the number of outstanding shares of
Common Stock, the number of Shares purchasable upon exercise of the Warrant
shall be proportionately increased and the Exercise Price proportionally
decreased in the case of subdivision or, in the case of combination, the
number of Shares purchasable upon the exercise of the Warrant shall be
proportionately decreased and the Exercise Price proportionately increased.
Irrespective of any adjustments in the Exercise Price or the number of Shares
purchasable upon exercise of the Warrant, the Warrant theretofore or
thereafter issued may continue to express the same price and number and kind
of Shares as are stated in the Warrant initially issued.
7. The Warrants are redeemable by the Company at any time prior to
the Expiration Date on not less than thirty (30) days prior written notice, at
a redemption price of $.01 per Warrant, provided that prior to the redemption
the closing price of the Common Stock issuable upon exercise of a Warrant
shall equal or exceed $4.00 per share for twenty (20) business days within any
period of thirty (30) consecutive business days ending within ten (10) days
preceding the written notice. If the Company shall elect to redeem Warrants,
notice of redemption shall be given to the holders of all outstanding Warrants
to whom the redemption shall apply by mailing by first-class mail a notice of
such redemption, not less than thirty (30) nor more than sixty (60) days prior
to the date fixed for redemption, to their last addresses as they shall appear
upon the registry books, but failure to give such notice by mailing to the
holder of any Warrants, or any defect therein, shall not affect the legality
or validity of the proceedings for the redemption of any other Warrants. The
notice of redemption to each holder of Warrants shall specify the date fixed
for redemption and the redemption price at which Warrants are to be redeemed,
and shall state that payment of the redemption price of the Warrants will be
made at the office of the Company upon presentation and surrender of such
Warrants, and shall also state that the right to exercise the Warrants so
redeemed will terminate (stating the date of such termination) and shall state
the then current Exercise Price. If the giving of notice of redemption shall
have been completed as above provided, the right to exercise the Warrants
shall terminate at the close of business on the business day proceeding the
date fixed for redemption, and the holder of each Warrant shall thereafter be
entitled upon surrender of his Warrants only to receive the redemption price
thereof, without interest.
8. This Warrant Certificate does not constitute an offer to sell, nor
does it confer any right to purchase, securities of the Company until such
time as the conditions precedent to its exercisability have been fulfilled.
IN WITNESS WHEREOF, PayStar Communications Corporation has caused this
Warrant to be signed by its duly authorized officer.
PayStar Communications Corporation
By
Its
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of Warrant)
The undersigned, the Holder of the foregoing Warrant, hereby irrevocably
elects to exercise the purchase rights represented by such Warrant for, and to
purchase thereunder, Shares of the Common Stock of PayStar Communications
Corporation, and herewith makes payment of $__________ therefore, and requests
that the share certificates be issued in the name(s) of, and delivered
to_______________________________________________________________ whose
address(es) is (are)____________________________________________________.
Dated:
(Signature)
Name (Print or Type)
Address:
TRANSFER FORM
(To be signed only upon transfer of the Warrant)
For value received, the undersigned hereby assigns and transfers unto
_____________________________________________ the right to purchase shares of
the Common Stock of PayStar Communications Corporation, Inc. represented by
the foregoing Warrant to the extent of________ Shares, and appoints
___________________________, attorney to transfer such rights on the books of
_____________________________________________, with full power of substitution
in the premises.
Dated:
(Signature)
Name (Print or Type)
Address:
