Rule 424(b)(3)
File No. 333-93919
PROSPECTUS
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.
Per Share Total Amount
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
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.
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.
May 12, 2000
<PAGE>
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 4
Forward Looking Statements 6
Use of Proceeds 7
Management's Discussion and Analysis of Financial Condition
and Results of Operation 7
Business 8
Management 22
Certain Transactions 25
Market Information 26
Principal Shareholders 26
Selling Shareholder 27
Description of Securities 28
Dividend Policy 30
Plan of Distribution 30
Shares Eligible For Future Sale 32
Legal Matters 32
Experts 32
Change of Accountants 32
Financial Statements 33
<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;
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:
For the Years
Ended December 31,
1999 1998
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
For the Year Ended
Consolidated Balance Sheet Data: 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)
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 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.
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.
Number of shares and percentage Date of availability for resale
of total outstanding into the public market
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.
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 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 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.
Minimum Maximum
Offering Offering
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
(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
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:
Dividend Amount Date Payable
$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
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:
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 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 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
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.
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 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 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.
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 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
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.
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.
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 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 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.
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.
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.
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.
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 2000, with an
option for three 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.
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.
Name Age Position Director Since
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
Set forth below is similar information for our two wholly owned
subsidiaries
PayStar Communications, Inc.
Name Age Position Director Since
William D. Yotty 54 Director & CEO 1998
Jeff McKay 39 President --
Harry Martin 59 Secretary, Treasurer & CFO --
Clifford Goehring 70 Director 1998
U.S. Cash Exchange, Inc.
Name Age Position Director Since
William D. Yotty 54 Director 1999
Jeff McKay 39 Director, President & CEO 1996
Thomas Howell 38 Director 1999
Harry T. Martin 59 Secretary & Treasurer --
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 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
Other Annual
Name and Principal Positions Year Salary Bonus Compensation
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-
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:
Number of
Securities Percent of
Underlying Total Exercise Expiration
Name Options Options Price Date
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
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.
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 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.
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.
Quarter High Low
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
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.
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
William D. Yotty 2,675,000(1) 39.71%
1110 West Kettleman Ln.
Suite 48
Lodi, CA 95240
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)
1110 West Kettleman Ln.
Suite 48
Lodi, CA 95240
Executive officers and
directors as a group
(5 persons) 4,212,500 60.41%
*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.
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
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
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, 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:
William D. Yotty Director & CEO
Jeff McKay President
Brian R. McClure Director
Harry T. Martin Secretary, Treasurer & CFO
Clifford Goehring Director
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. 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 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.
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.
<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
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
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
Dec 31, Dec 31,
1999 1998
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
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
Capital in
Common Stock Excess of Accumulated
Shares Amount Par Value Deficit
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)
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
Dec 31, Dec 31,
1999 1998
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
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
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Recognition of Income - continued
Cash usually receives about 57% of the services charges each month and is
reported as income as received.
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.
Dec 1999
Cost 277,583
Accumulated Depreciation 57,667
Net 219,916
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;
Tax from net loss carryforwards $ 636,237
Less valuation reserve 636,237
Net tax benefit -
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share amounts are computed based on the weighted
average number of shares actually outstanding. Diluted net income (loss) per
share amounts are computed using the weighted average number of common shares
and common equivalent shares outstanding as if shares had been issued on the
exercise of the preferred share rights unless the exercise becomes
antidilutive and then only the basic per share amounts are shown in the
report.
Principals of Consolidation
The consolidated financial statements shown in this report excludes the
historical operating information of the parent before October 12, 1998 and
includes the historical financial statements of the subsidiaries.
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.
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
Year Amount
1 $ 306,400
2 321,700
3 329,380
4 344,700
5 360,020
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.
Revenues Cost of Sales Gross
and Services Profit
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
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
Page
Prospectus Summary 3
Risk Factors 4
Forward Looking Statements 6
Use of Proceeds 7
Management's Discussion and Analysis of Financial Condition and
Results of Operation 7
Business 8
Management 22
Certain Transactions 25
Market Information 26
Principal Shareholders 26
Selling Shareholder 27
Description of Securities 28
Dividend Policy 30
Plan of Distribution 30
Shares Eligible For Future Sale 32
Legal Matters 32
Experts 32
Change of Accountants 32
Financial Statements 33
Until August 10, 2000, 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.
