<PAGE>
As filed with the Securities and Exchange Commission on February 24, 2000
SEC Registration No. 333-93919
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM SB-2/A-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
PAYSTAR COMMUNICATIONS CORPORATION
(Name of small business issuer in its charter)
NEVADA 481 86-0885565
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Number) Identification No.)
incorporation or
organization)
1110 WEST KETTLEMAN LANE, SUITE 48, LODI, CA 95240
Telephone (209) 339-0484
(Address and Telephone Number of Principal Executive Offices)
1110 WEST KETTLEMAN LANE, SUITE 48, LODI, CA 95240
(Address of Principal Place of Business)
JEFF MCKAY, PRESIDENT, PAYSTAR COMMUNICATIONS CORPORATION
1110 WEST KETTLEMAN LANE, SUITE 48, LODI, CA 95240; (209) 339-0484
(Name, Address and Telephone number of agent for service)
Copies to:
Ronald N. Vance, Esq.
57 West 200 South, Suite 310
Salt Lake City, UT 84101
(801) 359-9300
(801) 359-9310 - FAX
<PAGE>
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [ ]
________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered Per Unit(1) Price(1) Fee
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series A Preferred 5,500,000 $ 2.00 $ 11,000,000 $ 3,058
Stock, $.001
par value
Common Stock, 15,000 $ 2.50(2) $ 37,500 $ 11
$.001 par ----
value
TOTAL $ 3,069
=======
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457 under the Securities Act of 1933.
(2) Estimated solely for purpose of calculating the registration fee
pursuant to Rule 457. This amount is based upon the average of the bid and
asked prices ($2.50) of the common stock of the Registrant as of December 20,
1999.
-2-
<PAGE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
-3-
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, DATED FEBRUARY 24, 2000
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
PAYSTAR COMMUNICATIONS CORPORATION
5,500,000 Shares of Preferred Stock
$2.00 Per Share
We are offering for sale shares of our series A convertible
cumulative $2.00 preferred stock. This offering of our preferred shares is
not underwritten. Our officers and directors will offer and sell the
preferred shares without remuneration to them. The minimum number of
preferred shares a person must purchase is 1,000. An indeterminate number of
the shares may be sold through broker/dealers who are members of the National
Association of Securities Dealers, Inc., and who will be paid a 10%
commission on sales they make. The offering will end not later than one
hundred eighty days following the date of this prospectus.
We are escrowing proceeds from sales of the shares at Community Bank
of San Joaquin, Stockton, California, until the sale of the minimum number of
preferred shares is achieved. If the minimum of $3,000,000 in proceeds is not
received within ninety days from the date of this prospectus, which period
may be extended for an additional thirty days, at our option, all escrowed
funds will be promptly returned to subscribers without interest or deduction.
<TABLE>
<CAPTION>
Per Share Total Amount
--------- ------------
<S> <C> <C>
The Offering: Minimum: 1,500,000 shares $2.00 $3,000,000
Maximum: 5,500,000 shares $2.00 $11,000,000
Less Selling Commissions
Minimum $0.20 $300,000
Maximum $0.20 $1,100,000
Proceeds to us
Minimum $1.80 $2,700,000
Maximum $1.80 $9,900,000
</TABLE>
Concurrently with this offering, we are registering for resale
15,000 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.
-4-
<PAGE>
THIS OFFERING IS HIGHLY SPECULATIVE AND INVOLVES SPECIAL RISKS
CONCERNING THE COMPANY AND ITS BUSINESS. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
________, 2000
-5-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary
Risk Factors
Forward Looking Statements
Use of Proceeds
Dilution
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Business
Management
Certain Transactions
Market Information
Principal Shareholders
Selling Shareholder
Description of Securities
Dividend Policy
Plan of Distribution
Shares Eligible For Future Sale
Legal Matters Experts
Financial Statements
</TABLE>
-6-
<PAGE>
PROSPECTUS SUMMARY
OUR COMPANY
We service and operate pay telephones for various owners, including
ourselves. We also operate and manage scrip ATM machines which permit
customers to use their debit cards to purchase merchandise or food at retail
outlets and receive cash back.
Our principal executive offices are located at 1110 West Kettleman
Lane, Suite 48, Lodi, California 95240, and our telephone number at these
offices is (209) 339-0484
<TABLE>
THE OFFERING
<S> <C>
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
</TABLE>
We intend to use the net offering proceeds to:
- Repay existing debt;
-7-
<PAGE>
- Acquire more pay telephones; and
- Provide working capital.
The following summary financial information has been derived from
our financial statements which appear later in this prospectus and should be
read in conjunction with those financial statements and related notes:
<TABLE>
<CAPTION>
(Unaudited)
For the Nine
Months Ended For the Years
September 30 Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Consolidated Statement of
Operations Data:
Total revenues $ 3,346,225 $ 1,156,149 $ 252,332
Gross profit 647,624 371,953 252,332
Net loss (434,951) (175,495) (126,597)
Loss per share (0.11) (0.05) (0.12)
Shares used in per
share computations 3,821,200 3,539,500 1,081,200
Consolidated Balance Sheet Data:
Cash $ 756,347 $ 17,171
Current assets 952,794 22,254
Total assets 1,552,230 146,354
Working capital (506,391) (39,965)
Total stockholders' equity (deficit) (54,869) 84,135
</TABLE>
RISK FACTORS
IF WE ARE UNABLE TO GENERATE SUFFICIENT REVENUES IN THE FUTURE, WE MAY NOT BE
ABLE TO DECLARE THE DIVIDENDS REQUIRED BY THE TERMS OF THE PREFERRED STOCK.
IF WE ARE UNABLE TO DO SO, THE PREFERRED SHAREHOLDERS MAY VOTE THEIR SHARES
TO ELECT A MAJORITY OF THE DIRECTORS AND CHANGE CONTROL OF THE COMPANY.
At September 30, 1999, we had a net loss of ($434,951) for the nine
months then ended, and net losses of ($175,495) and ($126,597) for 1998 and
1997. Our liabilities exceeded our assets by $54,869 at September 30, 1999,
but our assets exceeded our liabilities by $84,135 at December 31, 1998.
Generally, dividends may be paid from the excess of our
-8-
<PAGE>
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.
-9-
<PAGE>
OUR ABILITY TO EXPAND OUR PAY TELEPHONE BUSINESS IS DEPENDENT UPON FINDING
NEW TELEPHONES OR ROUTES. THERE IS NO ASSURANCE THAT WE WILL BE ABLE TO
IDENTIFY AND ACQUIRE BUSINESSES ON A BASIS WHICH WILL SATISFY OUR MINIMUM
RATES OF RETURN AND OTHER CRITERIA FOR ACQUISITION.
We intend to expand our business by contracting to install payphones
or acquiring assets from payphone service providers in geographic areas where
we are presently operating, as well as in new areas. There can be no
assurance that the Company will be able to locate favorable new sites for
internal growth, access developing technologies at satisfactory costs to
provide those service enhancements demanded by consumers and customers in its
existing and future businesses, or hire qualified new employees to meet the
requirements of our expanding business. There can be no assurance that our
business strategy will prove to be successful or that expansion of our
business will not have a material adverse effect on the operations and
financial condition of the Company. While we are negotiating with certain pay
telephone route owners, we have not been able to finalize any such
acquisitions
5,300,000, OR 80%, OF OUR TOTAL OUTSTANDING SHARES ARE RESTRICTED FROM
IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE. THIS
COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN
IF OUR BUSINESS IS DOING WELL.
The preferred shares being offered are convertible into common
shares. We have outstanding 6,636,000 common shares. This includes 15,000
restricted shares which are being registered for resale into the public
market. The remaining 5,300,000, or 80%, of our total outstanding shares, as
well as the shares being registered for resale, will become available for
resale in the public market as shown in the chart below.
As restrictions on resale end, the market price could drop
significantly if the holders of these restricted shares sell them or are
perceived by the market as intending to sell them.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
NUMBER OF SHARES AND PERCENTAGE OF TOTAL DATE OF AVAILABILITY FOR RESALE INTO THE
OUTSTANDING PUBLIC MARKET
- ------------------------------------------------------------------------------------------------
<S> <C>
15,000/0.2% Immediately available, so long as the
registration statement remains effective.
- ------------------------------------------------------------------------------------------------
5,300,000/80% Between 90 and 365 days after the date of this
prospectus due to the requirements of the
federal securities laws.
- ------------------------------------------------------------------------------------------------
</TABLE>
THERE IS NO TRADING MARKET FOR THE PREFERRED SHARES, AND A LIMITED TRADING
FOR THE COMMON SHARES, WHICH MAY MAKE THIS INVESTMENT AN ILLIQUID ONE.
Currently there is no market for the preferred shares and we do not
anticipate that a market will develop in the future. Our common stock is
quoted on the OTC Bulletin Board, but limited
-10-
<PAGE>
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,
-11-
<PAGE>
except for the repayment of debt which will be paid in full. Actual receipts
and expenditures may vary from these estimates. Pending use of the funds, the
Company will invest the net proceeds in investment-grade, short-term,
interest bearing securities.
<TABLE>
<CAPTION>
Minimum Maximum
Offering Offering
-------- --------
<S> <C> <C>
Gross Proceeds $ 3,000,000 $ 11,000,000
Selling commissions (300,000) (1,100,000)
Other offering expenses (65,000) (65,000)
----------- ------------
NET OFFERING PROCEEDS $ 2,635,000 $ 9,835,000
=========== ============
Use of Net Proceeds
Debt Repayment(1) $ 800,000 $ 1,200,000
Accounts Payable 300,000 400,000
Pay Telephone Acquisitions 1,100,000 7,900,000
Working Capital 435,000 335,000
----------- ------------
TOTAL $ 2,635,000 $ 9,835,000
=========== ============
- ------------
</TABLE>
(1) These funds were loaned to us by Intermountain Marketing
Associates, LLC, a Utah limited partnership managed by Mr. Thomas Howell, the
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, $1,332,750 were loaned to PayStar
Communications, Inc. for working capital and $152,950 were loaned to U.S.
Cash Exchange to acquire ATM equipment.
We estimate that the net minimum proceeds from this offering will
meet our cash needs for at least the next twelve months.
From the minimum proceeds allocated for accounts payable, we intend
to repay $20,000 to Mr. Yotty, an officer, director, and principal
shareholder, for advances made by him.
If we are able to acquire significant pay telephone routes with part
of the funds from this offering, we may allocate more funds to working
capital to support these acquisitions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
-12-
<PAGE>
RESULTS OF OPERATIONS
We were basically dormant until October 1998. At that time we
reorganized and acquired PayStar Communications, Inc. We realized a 1998 net
loss of $116,212 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 September 30, 1999 net loss of
$287,068 on sales of $3,346,225. 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
September 30, 1999, was a negative $243,444, 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 September
30, 1999, was $756,347 compared to $17,171 as of December 31, 1998.
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.
-13-
<PAGE>
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
-14-
<PAGE>
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. 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 2,500 privately owned pay telephones located
throughout California and in northwestern Nevada. Of these, we own forty-seven.
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.
-15-
<PAGE>
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.
-16-
<PAGE>
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
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. 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.
The other pay telephones managed by us are done so pursuant to
contracts containing terms similar to the foregoing. However, the management
fees received by us are equal to 70% of the net revenues of each pay
telephone, with a guaranteed monthly payment of $65 to the pay telephone
owner. Also, 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. 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.
-17-
<PAGE>
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
-18-
<PAGE>
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.
-19-
<PAGE>
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
-20-
<PAGE>
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
-21-
<PAGE>
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.
-22-
<PAGE>
OUR ATM SCRIP BUSINESS
GENERAL
U.S. Cash Exchange, Inc. was originally founded in 1984 by Jeff McKay
as a sole proprietorship in Modesto, California. Approximately eight years ago
he launched the scrip machine business. 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 December 1, 1999, we owned and
operated approximately 1,143 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.
-23-
<PAGE>
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 minimum 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
-24-
<PAGE>
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
-25-
<PAGE>
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
-26-
<PAGE>
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.
-27-
<PAGE>
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:
-28-
<PAGE>
- 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.
OUR EMPLOYEES
In our pay telephone business we employed approximately twenty-six
people on a full-time basis at December 1, 1999. Of these employees, seven
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 nine people on a full-time basis
at December 1, 1999. Of these employees, two are administrative, two are
clerical, three are in operations, and two 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.
-29-
<PAGE>
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.
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
William D. Yotty 53 Director & CEO 1998
Jeff McKay 38 President --
Jim Chambas 45 Director & Secretary 1998
Harry Martin 59 Treasurer & CFO --
Clifford Goehring 70 Director 1998
</TABLE>
Set forth below is similar information for our two wholly owned
subsidiaries
PAYSTAR COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
William D. Yotty 53 Director & CEO 1998
Jeff McKay 38 President --
Jim Chambas 45 Director & Secretary 1998
Harry Martin 59 Treasurer & CFO --
Clifford Goehring 70 Director 1998
</TABLE>
U.S. CASH EXCHANGE, INC.
<TABLE>
<CAPTION>
Name Age Position Director Since
---- --- -------- --------------
<S> <C> <C> <C>
William D. Yotty 53 Director 1999
Jeff McKay 38 Director, President & CEO 1996
-30-
<PAGE>
Thomas Howell 38 Director & Secretary 1999
</TABLE>
Set forth below is certain information concerning the business
experience of our executive officers and directors:
WILLIAM D. YOTTY has been the president of Quantum Telequip, Inc., a
communications sales enterprise, since 1989. Since 1985 he has been
self-employed as a communications consultant. From 1997 to 1998 he was the
president of 21st Century Communications, a pay telephone company. Mr. Yotty is
also a director of NetVoice Communications Corporation.
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.
JIM CHAMBAS has been employed by Central Valley Communications since
1989. He has also been the president and CEO of Nationwide Hospitality, which
provides operator services, since 1997. He has been the president of CVC
Management Services, Inc., a pay telephone management company, since 1998. He
has also been a director of NetVoice Technologies Corporation since 1998. He has
also been the chairman and CEO of Worldwide Networks, Inc. since 1999.
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.
-31-
<PAGE>
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
Other Annual
Name and Principal Positions Year Salary Bonus Compensation
- ---------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
William D. Yotty, CEO 1999 -0- $203,416 -0-
1998 -0- -0- -0-
1997 -0- -0- -0-
Jeff McKay, President 1999 $17,107 $203,416 -0-
1998 -0- -0- -0-
1997 -0- -0- -0-
</TABLE>
U.S. Cash Exchange, Inc. was an "S" corporation at the time of the
distributions set forth above, which means that all profits and losses were
passed through to the owners of the company for tax purposes. The amounts
listed were cash distributions of profits to the named persons and were paid
during 1999.
Prior to December 31, 1999, no stock options had been made to any of
our executive officers. As of February 15, 2000, the following grants of stock
options had been made to the officers and directors named below:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL EXERCISE EXPIRATION
NAME OPTIONS OPTIONS PRICE DATE
- ---- ---------- ----------- -------- ----------
<S> <C> <C> <C> <C>
William D. Yotty 100,000 13.97% $1.00 1/3/03
Jim Chambas 100,000 13.97% $1.00 1/3/03
Clifford Goehring 100,000 13.97% $1.00 1/3/03
Jeff McKay 100,000 13.97% $1.00 1/3/03
Harry T. Martin 75,000 10.47% $1.00 1/3/03
</TABLE>
Mr. Yotty received 7,500 shares from our pay telephone subsidiary prior
to the reorganization with our company in which he exchanged these shares for
1,500,000 shares. He also received 1,000 shares from our ATM subsidiary prior to
the reorganization with our company in which he exchanged these shares for
1,075,000 shares. Since the acquisition of our ATM subsidiary, Mr. Yotty has not
been paid, and will not receive, any compensation by our subsidiary, U.S. Cash
Exchange, Inc., or the parent or its pay telephone subsidiary.
We have entered into a three year employment contract with Mr. McKay
for his full-time employment which commenced on October 1, 1999. The
agreement will be renewed automatically for one year terms unless written
notice of termination is given 90 days before the end of the initial or any
renewal term. Mr. McKay receives a base salary of $300,000, plus a bonus of
between 1%
-32-
<PAGE>
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
-33-
<PAGE>
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 February 15, 2000, we had outstanding 716,000 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 $67,040 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. Chambas,
an 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
-34-
<PAGE>
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, an officer and director of U.S. Cash Exchange, Inc., has loaned
$1,217,750 to PayStar Communications, Inc. during the year ending December 31,
1999. In February 2000 he loaned an additional $115,000 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 February 15,
2000, the aggregate principal amount of these notes which remained outstanding
was $1,485,700. 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 February 15, 2000,
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.
<TABLE>
<CAPTION>
Quarter High Low
------- ---- ---
<S> <C> <C> <C>
FISCAL YEAR ENDING
DECEMBER 31, 1999 Second $ 3.00 $0.125
Third $ 2.625 $0.375
</TABLE>
At December 21, 1999, we had granted 165,000 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 December 28, 1999, there were approximately 50 holders of record
of our shares as reported to us by our transfer agent.
-35-
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning the
shares common stock ownership as of December 28, 1999, of each person who is
known to us to be the beneficial owner of more than five percent of our common
stock; by each of our executive officers and directors; and by executive
officers and directors as a group. Such information was furnished to us by such
persons or was obtained from information provided by the transfer agent.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------- -------------------- ----------------
<S> <C> <C>
William D. Yotty 2,675,000(1) 39.71%
1110 West Kettleman Ln
Suite 48
Lodi, CA 95240
Jeff McKay 1,175,000(1) 17.44%
1110 West Kettleman Ln
Suite 48
Lodi, CA 95240
Harry Martin 31,300(1) *
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
Executive officers and
directors as a group (5 persons) 4,581,300 64.59%
</TABLE>
- ----------------
*Less than 1%.
(1) Includes 100,000 options granted to each such person.
(2) This amount includes 56,250 options granted to Mr. Martin which
are presently exercisable.
-36-
<PAGE>
SELLING SHAREHOLDERS
Up to 15,000 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
-37-
<PAGE>
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
-38-
<PAGE>
- 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 December 28, 1999, 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
-39-
<PAGE>
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
-40-
<PAGE>
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:
<TABLE>
<S> <C>
William D. Yotty Director & CEO
Jeff McKay President
Jim Chambas Director & Secretary
Harry T. Martin Treasurer & CFO
Clifford Goehring Director
</TABLE>
Each of these individuals has represented to us that he meets the requirements
of an exemption from registration as a broker-dealer as set forth in Rule 3a4-1
promulgated by the Securities and Exchange Commission.
All proceeds from subscriptions with respect to the first 1,500,000
preferred shares will be deposited promptly with Community Bank of San
Joaquin, as escrow agent for this offering pursuant to the terms of a funds
escrow agreement. All of the proceeds of this offering will be deposited in
the escrow account no later than noon of the business day next following
receipt. In the event that 1,500,000 preferred shares are not sold, on or
before ninety days from the date of this prospectus, all funds will be
refunded promptly to subscribers in full without deduction therefrom or
interest thereon. If the minimum proceeds are received before expiration of
the offering period, we will hold an initial closing for disbursement of
funds. Subsequent closings may be held upon receipt of additional
subscriptions. During the offering period or any extension thereof, no
subscriber will be entitled to a refund of any subscription. We reserve the
right to accept or reject any subscription, in whole or in part.
We anticipate making sales of the shares to residents of the states of
California, Michigan and Nevada, as well as other persons resident in other
states who have expressed an interest in our company, or persons we believe may
be interested in purchasing our shares. We may sell shares to such persons only
if they reside in a state in which we are permitted to sell the shares. We are
not obligated to sell any shares to any such persons.
PRICING THE PREFERRED STOCK
The offering price of our shares of preferred stock was determined
arbitrarily by us. In arriving at that price, our board of directors took
into account such factors as the current market price of our common shares,
our lack of significant history and operations, our assets, plan of
operation, and anticipated costs of our continued development and operation.
However, the offering price of the shares should not be understood as an
indication of the value of the shares offered or an assurance that you will
be able to resell these shares for an amount equal to or more than the
offering
-41-
<PAGE>
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.
-42-
<PAGE>
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, 1998, included
in this prospectus have been examined by Schvaneveldt & Company, Certified
Public Accountant. The financial statements examined by the Certified Public
Accountant have been included in reliance upon their audit report.
The financial statements of U.S. Cash Exchange, Inc. for the year ended
June 30, 1999, included in this prospectus have been examined by Andersen
Andersen & Strong, Certified Public Accountants. The financial statements
examined by the Certified Public Accountants have been included in reliance upon
their audit report.
FINANCIAL STATEMENTS
We have attached to this prospectus copies of our audited financial
statements as of December 31, 1998, consisting of a consolidated balance sheet
at December 31, 1998, and the related statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1998 and 1997. We have
also included unaudited financial statements for September 30, 1999, consisting
of a balance sheet as of September 30, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the nine months ended
September 30, 1999.
-43-
<PAGE>
Schvaneveldt and Company
Certified Public Accountant
275 E. South Temple, Suite 300
Salt Lake City, Utah 84111
(801) 521-2392
Independent Auditors Report
Board of Directors
PayStar Communications Corporation
I have audited the accompanying balance sheet of PayStar Communications
Corporation, as of December 31, 1998, and the related statement of
operations, stockholders' equity, and cash flows for the period June 10, 1998
(Inception) to December 31, 1998. This financial statement is the
responsibility of the Company's management. My responsibility is to express
an opinion on this financial statement based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatements. 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 the
significant estimates made by management, as well as evaluating the overall
financial statements presentation. I believe that my audit provides a
reasonable basis for my opinion.
In my opinion, the aforementioned financial statement present fairly, in all
material respects, the financial position of PayStar Communications
Corporation, as of December 31, 1998, and the results of its operations and
its cash flows for the period June 10, 1998 (Inception) to December 31, 1998,
in conformity with generally accepted accounting principles.
/s/ Schvaneveldt Company
Salt Lake City, Utah
April 19, 1999
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
================================================================================
<TABLE>
<CAPTION>
(UNAUDITED)
SEPT 30, DEC 31,
1999 1998
----------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 756,347 $ 17,171
Accounts receivable - Note 2 102,147
Inventory - Note 2 94,300 22,800
Prepaid Expenses - 1,000
----------- ---------
Total Current Assets 952,794 40,971
----------- ---------
PROPERTY AND EQUIPMENT - net of accumulated depreciation 244,687 -
----------- ---------
OTHER ASSETS
Securities - available for sale - Note 3 100,000 100,000
Accounts receivable - related parties 129,923 -
Advance deposits 18,725 300
Deferred interest on notes payable - Note 5 106,101 -
Loan Receivable - 5,083
----------- ---------
$ 1,552,230 $ 146,354
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Contracts payable - current portion - Note 4
$ 306,695 $ -
Notes payable - Note 5
889,101 -
Accounts payable 263,389 62,219
----------- ---------
Total Current Liabilities 1,459,185 62,219
----------- ---------
OTHER LIABILITIES
Contracts payable - long term - Note 4 127,627 -
Accounts payable - related parties 20,287 -
----------- ---------
STOCKHOLDERS' EQUITY
Common stock
100,000,000 shares authorized, at $0.001 par value;
6,521,200 shares issued and outstanding on September 30;
3,581,200 shares on December 31 6,521 3,581
Capital in excess of par value 814,996 260,419
Accumulated deficit (876,386) (179,865)
----------- ---------
Total Stockholders' Equity (54,869) 84,135
----------- ---------
$ 1,552,230 $ 146,354
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND THE YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
(UNAUDITED) (NOTE 7)
SEPT 30, DEC 31, DEC 31,
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
REVENUES $ 3,346,225 $ 1,156,149 $ 252,332
COST OF SALES AND SERVICES 2,698,601 784,196
----------- ----------- ----------
Gross Profit 647,624 371,953 252,332
----------- ----------- ----------
EXPENSES
Administrative 816,617 508,994 279,321
Sales 179,393 35,123 99,608
Depreciation 37,970 3,331 -
Interest 48,595 - -
----------- ----------- ----------
1,082,575 547,448 378,929
----------- ----------- ----------
NET LOSS $ (434,951) $ (175,495) $ (126,597)
=========== =========== ==========
NET LOSS PER COMMON SHARE
Basic $ (0.11) $ (0.05) $ (0.12)
----------- ----------- ----------
AVERAGE OUTSTANDING SHARES
Basic 3,821,200 3,539,500 1,081,200
----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD JANUARY 1, 1998 TO SEPTEMBER 30, 1999
================================================================================
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN
------------ EXCESS OF ACCUMULATED
SHARES AMOUNT PAR VALUE DEFICIT
--------- ------ -------- ---------
<S> <C> <C> <C> <C>
BALANCE JANUARY 1, 1998 1,081,200 1,081 27,284 -
Issuance of common stock for all stock
of PayStar Communications Inc. -
October 12, 1998 - Note 6 2,000,000 2,000 (16,365) -
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 - Note 7 - - - (175,495)
--------- ------ -------- ---------
BALANCE DECEMBER 31, 1998 3,581,200 3,581 260,419 (175,495)
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 (265,940)
Note 7
Net operating loss for the nine months
ended September 30, 1999 - - - (434,951)
--------- ------ -------- ---------
BALANCE SEPTEMBER 30, 1999 6,521,200 $6,521 $814,996 $(876,386)
========= ====== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
AND THE YEARS ENDED DECEMBER 31, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
UNAUDITED
SEPT 30, DEC 31, DEC 31,
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss (434,951) $(175,495) $(126,597)
Adjustments to reconcile net loss to
net cash provided by operating
activities
Depreciation 37,970 3,331 -
Changes in inventory (94,300) - -
Changes in accounts receivable (226,987) (5,083) -
Changes in accounts payable 474,824 68,518 120,957
Issuance of common capital stock and capital
contributions - expenses - 150,000 5,640
---------- --------- ---------
Net Increase (Decrease) in Cash From Operations (243,444) 41,271 -
---------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES
Deposits (17,425) (1,300) -
Purchase of office equipment (285,988) (22,800) -
---------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from loans 1,046,033 - -
Proceeds from issuance of common stock 240,000 - -
---------- --------- ---------
Net Increase in Cash 739,176 17,171 -
Cash at Beginning of Period 17,171 - -
---------- --------- ---------
Cash at End of Period $ 756,347 $ 17,171 $ -
========== ========= =========
NON CASH OPERATING AND INVESTING ACTIVITIES
Issuance of 300,000 shares common capital stock for services $ 150,000
=========
Issuance of 200,000 shares common capital stock for investment 100,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. ORGANIZATION
The Company was incorporated under the laws of the state of Nevada on June
16, 1977 with 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". from "Soterco, Inc." On October 12,
1998 the name was changed to PayStar Communications Corporation as part of
the acquisition of PayStar Communications Inc. Note 6
On October 1, 1999 the Company acquired all of outstanding stock of U.S.
Cash Exchange, Inc.
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.
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 2200 pay telephones
for their owners. The income is recognized when the cash is collected and
deposited. The company pays the owners a minimum monthly rental fee of $65
for each telephone as provided by a yearly renewable contractual agreement.
U. S. Cash Exchange - subsidiary
US Cash has developed and marketed an ATM scrip machine, as a substitute for
an ATM cash-dispensing machine, which has been installed in various
commercial locations. The scrip machine functions in a similar manner as the
ATM cash machine except that after approval the user receives a scrip showing
the amount the user has requested, as preset by the machine, and that amount
plus a transaction fee is charged against the users bank account. The scrip
can then be used to purchase merchandise in the store.
The transactions are processed through a clearing house and the service
charge is then paid to the participating entities. US Cash usually receives
about 57% of the services charges each month and is reported as income as
received.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
RECOGNITION OF INCOME - continued
US Cash purchases the script 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. For the nine months
ended September 30, 1999 sales of script machines amounted to $1,805,660 with
cost of sales of $1,328,793. The lease commitments are shown in note 9. The
sale and leaseback is considered to be an operating lease by US Cash with no
excess profits being recognized.
PROVISION FOR DOUBTFUL ACCOUNTS RECEIVABLE
A provisions for doubtful accounts receivable is provided at the time it is
determined there is doubt as to the collection of accounts receivable. On
September 30, 1999 all accounts receivable are considered to collectable
within four months.
INVENTORY
Inventory consists of script machines installed in commercial locations ready
for sale. The costs of the installations in commercial locations are averaged
over all installations for the year and used to cost the ending inventory.
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 seven years
<TABLE>
<CAPTION>
SEPT 1999 DEC 1998
--------- --------
<S> <C> <C>
Cost 285,988 26,131
Accumulated Depreciation 41,301 3,331
--------- --------
Net 244,687 22,800
========= ========
</TABLE>
INCOME TAXES
On September 30, 1999, the Company had a net operating loss available for
carry forward of $386,651. 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 components of the net deferred tax benefit on September 30, 1999 follows
<TABLE>
<S> <C>
Tax from net loss carryforwards $ 131,461
Less valuation reserve 131,461
---------
Net tax benefit -
=========
</TABLE>
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share amounts are computed based on the weighted average
number of shares actually outstanding in accordance with FASB No. 128.
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. 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 audited financial
statements of U.S. Cash Exchange Inc. at June 30, 1999 have been restated to
December 31and the unaudited financial statements for the three months ended
September 30, 1999 have been added. All intercompany transactions have been
eliminated
FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments, including the assets and
liabilities shown in the balance sheet, are carried at their cost, and are
considered by management to be their estimated fair values.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentration of credit risk 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 as 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.
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.
<PAGE>
PAYSTAR COMMUNICATIONS CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
================================================================================
4. CONTRACTS PAYABLE
Contracts payable consist of amounts due for script cash machines installed
in commercial locations, coin counting machines and office equipment. The
installment payments due, with interest, are shown under current and long
term liabilities.
5. NOTES PAYABLE
The Company has outstanding loans, to related parties, of $ 889,101 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., except for the acquisition outlined in note 7. 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 2.5% of the total shares outstanding at the end of the prior
fiscal year. No options had been granted at the balance sheet date.
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, as outlined in note 2,
over the next five years as follows
<TABLE>
<CAPTION>
YEAR AMOUNT
<S> <C>
1 $ 296,400
2 308,700
3 321,108
4 333,450
5 345,750
</TABLE>
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
accounts receivable and accounts payable.
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.
10. SUBSEQUENT EVENTS
During October 1999 the Company issued 115,000 common shares for services at
$.80 per share. During January 2000 the Company granted options to purchase
165,000 common shares at $1.00 before January 3, 2003 under the Employee
Stock Option Plan. The value of the stock on the grant date was considered to
be $1.50 per share.
<PAGE>
[OUTSIDE BACK COVER]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary
Risk Factors
Forward Looking Statements
Use of Proceeds
Dilution
Management's Discussion and Analysis of Financial Condition and Results of
Operation
Business
Management
Certain Transactions
Market Information
Principal Shareholders
Selling Shareholders
Description of Securities
Dividend Policy
Plan of Distribution
Shares Eligible For Future Sale
Legal Matters
Experts
Financial Statements
</TABLE>
Until _____, 2000, (ninety days after the date of this prospectus) all
dealers that effect transactions in these securities may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 1. Indemnification of Directors and Officers
Nevada law expressly authorizes a Nevada corporation to indemnify its
directors, officers, employees, and agents against liabilities arising out of
such persons' conduct as directors, officers, employees, or agents if they acted
in good faith, in a manner they reasonably believed to be in or not opposed to
the best interests of the company, and, in the case of criminal proceedings, if
they had no reasonable cause to believe their conduct was unlawful. Generally,
indemnification for such persons is mandatory if such person was successful, on
the merits or otherwise, in the defense of any such proceeding, or in the
defense of any claim, issue, or matter in the proceeding. In addition, as
provided in the articles of incorporation, bylaws, or an agreement, the
corporation may pay for or reimburse the reasonable expenses incurred by such a
person who is a party to a proceeding in advance of final disposition if such
person furnishes to the corporation an undertaking to repay such expenses if it
is ultimately determined that he did not meet the requirements. In order to
provide indemnification, unless ordered by a court, the corporation must
determine that the person meets the requirements for indemnification. Such
determination must be made by a majority of disinterested directors; by
independent legal counsel; or by a majority of the shareholders.
Article VI of the bylaws of the Company provides that the corporation
shall indemnify its directors, officers, agents and other persons to the full
extent permitted by the laws of the State of Nevada.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable.
Item 2. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection
with the offering described in the registration statement:
<TABLE>
<S> <C>
Registration Fee $ 3,069
Blue Sky Fees 10,000
Accounting Fees and Expenses 7,000
Legal Fees and Expenses 20,000
Printing and Engraving 10,000
Transfer Agent Fees 2,500
Miscellaneous 12,431
------
Total Expenses $65,000
=======
</TABLE>
<PAGE>
Item 3. Undertakings
(a) The Company hereby undertakes that it will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement;
and (iii) include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) For the purpose of determining liability under the Securities Act
of 1933, treat each post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at that time shall be
the initial BONA FIDE offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(d) The Company will:
(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in the form of a prospectus filed by
the Company under Rule 424(b) (1) or (4) or 497(h) under the Act as part of this
registration statement as of the time the Commission declared it effective.
(2) For any liability under the 1933 Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement for
the securities offered in the registration statement, and that the offering of
the securities at that time as the initial bona fide offering of those
securities.
<PAGE>
Item 4. Unregistered Securities Issued or Sold Within Three Years
In October 1998 the Company issued 2,000,000 shares of Common Stock
of the Company to the three shareholders of PayStar Communications, Inc. The
shares were issued in a reverse acquisition transaction between the Company
and PayStar, in which such shareholders exchanged all of their shares for the
shares of the Company. Such securities were issued without registration under
the Act by reason of the exemption from registration afforded by the
provisions of Section 4(2) thereof, as transactions by an issuer not
involving any public offering. Each of the shareholders of PayStar delivered
appropriate investment representations to the Company with respect to such
transaction and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. No underwriting discounts or
commissions were paid in connection with such issuance.
In December 1998 the Company issued 150,000 shares each to Baldwin
Investments Limited and Starling Securities Limited, foreign entities, for
professional consulting fees in connection with the reorganization between the
Company and the pay telephone subsidiary. These shares were issued pursuant to
Regulation S promulgated by the Securities and Exchange Commission. No
underwriting discounts or commissions were paid in connection with such
issuance.
Also in December 1998 the Company issued 200,000 shares to Mezzanine
Capital Ltd. for 50,000 shares of such entity. Such securities were issued
without registration under the Act by reason of the exemption from registration
afforded by the provisions of Section 4(2) thereof, as transactions by an issuer
not involving any public offering. Such entity delivered appropriate investment
representations to the Company with respect to such transaction and consented to
the imposition of restrictive legends upon the certificates evidencing such
securities. No underwriting discounts or commissions were paid in connection
with such issuance.
In April 1999 the Company issued 240,000 shares of Common Stock of
the Company for an aggregate of $240,000 to approximately eight persons
without registration in a limited public offering pursuant to Rule 504
promulgated by the Securities and Exchange Commission under the Securities
Act of 1933 and Section 3(b) thereunder. No underwriting discounts or
commissions were paid in connection with such issuances.
In October 1999 the Company issued 2,700,000 shares of Common Stock
of the Company to the three shareholders of U.S. Cash Exchange, Inc. The
shares were issued in a reverse acquisition transaction between the Company
and U.S. Cash, in which such shareholders exchanged all of their shares for
the shares of the Company. Such securities were issued without registration
under the Act by reason of the exemption from registration afforded by the
provisions of Section 4(2) thereof, as transactions by an issuer not
involving any public offering. Each of the shareholders of PayStar delivered
appropriate investment representations to the Company with respect to such
transaction and consented to the imposition of restrictive legends upon the
certificates evidencing such securities. No underwriting discounts or
commissions were paid in connection with such issuance.
In December 1999 the Company issued 15,000 shares to Ronald N. Vance,
P.C. in connection with legal services provided by him. Such shares were issued
without registration under the Act by
<PAGE>
reason of the exemption from registration afforded by the provisions of
Section 4(2) thereof as transactions by an issuer not involving any public
offering. Mr. Vance delivered appropriate investment representations to the
Company with respect to such issuances and consented to the imposition of
restrictive legends upon the certificates evidencing such securities. No
underwriting discounts or commissions were paid in connection with such
issuance.
Also in December 1999 the Company issued 50,000 shares, and options to
purchase 100,000 shares under the Company's stock option plan, to Jerry
Genschorck and 25,000 shares, and options to purchase 25,000 shares under the
Company's stock option plan, to Harry T. Martin, employees of the Company, in
connection with their employment agreements. The Company also granted options to
purchase 40,000 shares to Jay Whitmore, an employee of the Company, in
connection with his employment agreement. Such shares were issued without
registration under the Act by reason of the exemption from registration afforded
by the provisions of Rule 701 promulgated by the Securities and Exchange
Commission. No underwriting discounts or commissions were paid in connection
with such issuances.
Also in December 1999 the Company issued 25,000 shares to Richard
Kelly, a former employee of the Company, in connection with his original
employment agreement. Such shares were issued without registration under the Act
by reason of the exemption from registration afforded by the provisions of Rule
701 promulgated by the Securities and Exchange Commission. No underwriting
discounts or commissions were paid in connection with such issuance.
From May through December 1999, U.S. Cash Exchange, Inc. and PayStar
Communications, Inc. issued a series of nine-month promissory notes to
Intermountain Marketing Associates, LLC, a limited liability company managed by
Thomas Howell, a director of U.S. Cash Exchange, Inc. and one of the
shareholders of the Company. Such shares were issued without registration under
the Act by reason of the exemption from registration afforded by the provisions
of Section 4(2) thereof as transactions by an issuer not involving any public
offering. Each of the notes bears a restrictive legend pursuant to Rule 144. No
underwriting discounts or commissions were paid in connection with such
issuance.
In January 2000 the Company granted options to purchase 551,000 shares
pursuant to the Company's stock option plan. The options were granted to twelve
persons who were directors and/or employees of the Company without registration
under the Act by reason of the exemption from registration afforded by the
provisions of Rule 701 promulgated by the Securities and Exchange Commission. No
underwriting discounts or commissions were paid in connection with such
issuances.
Item 5. Exhibits
The exhibits set forth in the following index of exhibits are filed as a part
of this registration statement.
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit Location
----------- ---------------------- --------
<S> <C> <C>
1.1 Funds Escrow Agreement (To be filed with next amendment) --
1.2 Form of Subscription Agreement *
2.1 Reorganization Agreement with PayStar Communications, Inc., as
amended *
2.2 Reorganization Agreement with U.S. Cash Exchange, Inc. *
3.1 Articles of Incorporation, as amended *
3.2 By-Laws of the Company currently in effect *
4.1 Form of certificate evidencing shares of Common Stock *
4.2 Form of Certificate evidencing Preferred Stock *
5.1 Opinion re Legality
10.1 1998 Employee Stock Option Plan
10.2 Form of Stock Grant with Schedule of Grantees
10.3 Employment Agreement with Jeff McKay
10.4 Pay Telephone Services Agreement with Quantum Network
Services, Inc. *
10.5 Form of Promissory Note to Intermountain Marketing Associates,
LLC, together with schedule of notes *
10.6 Form of Pay Telephone Services Agreement
21.1 List of Subsidiaries *
23.1 Consent of Schvaneveldt & Company
23.3 Consent of Ronald N. Vance (contained in Exhibit 5.1 above.) --
</TABLE>
- ---------------------
*Filed as an exhibit with the original filing of the registration
statement of the Company on Form SB-2 on December 30, 1999 (SEC File No.
333-93919).
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this amended
registration statement to be signed on its behalf by the undersigned in the
city of Lodi, State of California, on the 17th day of February 2000.
PayStar Communications Corporation
By: /s/ Jeff McKay, President
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
<TABLE>
<S> <C>
Date: February 17, 2000 /s/ William D. Yotty, Director and CEO
<PAGE>
Date: February 17, 2000 /s/ Harry Martin, Chief Financial
Officer and Principal Accounting
Officer
Date: February 17, 2000 /s/ James Chambas, Director
Date: February 17, 2000 /s/ Clifford Goehring, Director
</TABLE>
<PAGE>
EXHIBIT 5.1
RONALD N. VANCE, P.C.
Attorney at Law
57 West 200 South
Suite 310
Salt Lake City, Utah 84101
September 16, 1999
William D. Yotty, President
PayStar Communications Corporation
1110 West Kettleman Lane, Suite 48
Lodi, CA 95240
Re: Registration Statement on Form SB-2
Dear Mr. Yotty:
You have requested my opinion as to whether or not the securities to be
issued by PayStar Communications Corporation (the "Company") in the
above-referenced registration statement will be legally issued and, when
issued, will be fully paid and non-assessable shares of the Company. In
connection with this engagement I have examined the form of the registration
statement to be filed by the Company; the Articles of Incorporation of the
Company; the By-laws of the Company currently in effect; and the minutes of
the Company relating to the registration statement and the issuance of the
shares of preferred stock by the Company.
Based upon the above-referenced examination, I am of the opinion that
pursuant to the corporate laws of the State of Nevada, the shares of
preferred stock to be issued by the Company and to be registered pursuant to
said registration statement will be legally issued and, when issued, will be
fully paid and non-assessable. I am also of the opinion that the shares of
common stock to be issued upon the conversion, if any, of the preferred stock
will be legally issued and, when issued, will be fully paid and
non-assessable.
I hereby consent to being named in the registration statement as having
rendered the foregoing opinion and as having represented the Company in
connection with the registration statement.
Sincerely,
/s/ Ronald N. Vance
<PAGE>
EXHIBIT 10.1
SUN SOURCE, INC.
1998 EMPLOYEE STOCK OPTION PLAN
ARTICLE I
PURPOSE
The purpose of the Sun Source, Inc. ("Sun Source" or the "Company") 1998
Employee Stock Option Plan (hereinafter referred to as the "Plan") is,
through the opportunity for greater stock ownership, to provide officers,
consultants, directors and other key employees (all such persons hereinafter
referred to as "Key Persons") of Sun Source and its subsidiaries with an
additional annual incentive to continue and increase their efforts with
respect to Sun Source and to develop a personal and active interest in the
broader growth and greater financial success of Sun Source. The Plan may
grant such Key Persons "Incentive" and "Non-qualified" options for the
acquisition of common shares (the "Shares" or "Option Shares") of Sun Source.
Options granted under the Plan may be either options which are intended
to be incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or any successor
provision("Incentive Options") or options that do not qualify as incentive
stock options under the Code ("Non-qualified Options"). The Company may
provide for the exercise of options in installments or otherwise and for such
periods from the date of grant as it may in its discretion determine;
provided, however, that any incentive stock option granted under the Plan
shall be exercisable for a period of not more than ten years from the date of
grant.
In the event common shares of the Company are registered pursuant to the
Securities Act 1933, as amended (the "Act"), Shares under the Plan may be
unrestricted ("unrestricted shares"), alternatively, Shares under the Plan
maybe subject to restrictions imposed for common shares that have not been
registered under the Act, ("restricted shares"). Grants under the Plan may be
subject to such other terms and conditions, not inconsistent with the Plan,
as may be determined by Sun Source.
ARTICLE II
RESERVATION OF SHARES
a) The total number of Shares of the Company which may be issued under
this Plan shall be 3,000,000. The Shares to be optioned under the Plan may be
unissued shares or treasury shares. Shares subject to an option which remain
unpurchased at the expiration, termination or cancellation of an option shall
again be available for use under the Plan.
b) No Shares shall be issued until all of the terms and conditions
pursuant to the option granting such Shares have been satisfied. A holder of
an option shall have none of the rights of a shareholder of the Company until
the Shares are issued to such person.
<PAGE>
ARTICLE III
ADMINISTRATION
a) The Plan shall be administered by the Board of Directors of the
Company (the "Board") or a committee of directors of the Company (the
"Committee") which shall be appointed by the Board and which shall consist of
two or more disinterested directors. In the event two or more disinterested
directors are not available to be elected to the Committee, the Board shall
act in place of the Committee. Vacancies in the Committee shall be filled by
the Board.
b) The Board or, to the extent authorized by the Board, the Committee
shall, to the extent not inconsistent with the Plan, have the power to select
Key Persons to whom options shall be granted; determine the number of
restricted or unrestricted Shares to be granted; determine the other terms
and conditions, if any, to which any grant of Shares or options shall be
subject and to amend, modify or waive any terms or conditions of any such
grant (provided, however, that no such amendment or modification shall impair
any outstanding right of any participant without the consent of such
participant, except to the extent permitted under the terms and conditions of
such grant as then in effect); and authorize any action of or make any
determination by the Company and prescribe such provisions and
interpretations in connection with the Plan as the Board or the Committee
shall deem necessary or advisable for carrying out the purposes of the Plan.
Each member of the Board or Committee, and, to the extent provided by the
Board or the Committee, any other person to whom duties or powers shall be
delegated in connection with the Plan, shall incur no liability with respect
to any action taken or omitted to be taken in connection with the Plan and
shall be fully protected in relying in good faith upon the advice of counsel,
to the fullest extent permitted under applicable law.
ARTICLE IV
ELIGIBILITY
An option may be granted to any officer or other Key Person, provided
that any person to whom an option is granted shall be a Key Person to the
Company at the time an option is granted. An Incentive Stock Option shall be
granted only to an employee of the Company.
ARTICLE V
PRICE
a) The option exercise price per Share with respect to each option
shall be based on the fair market value of such stock on the date an option
to purchase the same is granted. In making such determination, the Board or
Committee may rely on market quotations, if available, and upon independent
appraisals of the stock or such other information deemed appropriate by the
Board or Committee.
b) Any Incentive Option granted under the Plan must provide for an
exercise price of not less than 100% of the fair market value of the
underlying shares on the date of such grant; provided, however, that the
exercise price of any Incentive Option granted to an eligible employee owning
more than 10% of the outstanding Common Stock of the Company must not be less
than 110% of such fair market value as determined on the date of the grant.
<PAGE>
ARTICLE VI
CHANGES IN PRESENT STOCK
In the event the common shares of the Company are changed into a different
number of securities by reason of stock dividends, split-ups, recapitalizations,
mergers, consolidations, combinations or exchanges of shares and the like, the
optionee of any option granted under the Plan shall receive, upon exercise of
his option, the new number of securities recorded by the Company on account of
any such change.
ARTICLE VII
EXERCISE OF OPTIONS
An optionee shall exercise an option by delivery of a signed, written
notice to the Company, specifying the number of Shares to be acquired, the date
the acquisition is to be consummated, together with payment of the full purchase
price for the Shares. The Company may accept payment from a broker on behalf of
the optionee and may, upon receipt of signed, written instructions from the
optionee, deliver the Shares directly to the broker. The date of receipt by the
Company of the final item required under this paragraph shall be the date of
exercise of the option.
ARTICLE VIII
OPTION PROVISIONS
Each option granted under the Plan shall be in such form as the Board or
Committee may from time to time approve. All options under the Plan are
intended to be granted as "incentive" or "non-qualified" stock options. All
options granted under the Plan shall be subject to the following terms and
conditions unless otherwise varied by the Board or Committee:
a) DOLLAR LIMITATIONS. Each Incentive Option grant shall constitute a
"qualified" stock option eligible for favorable tax treatment under Section
422 of the Code, provided that no more than $100,000 of such options (based
upon the fair market value of the underlying shares as of the date of grant)
can first become exercisable for any employee in any calendar year. To the
extent any option grant exceeds the $100,000 limitation, it shall constitute
a non-qualified stock option. Each stock option agreement shall specify as to
whether it is an incentive and/or a non-qualified stock option. For purposes
of this paragraph, options granted under all plans of the Company and
affiliated companies which are qualified under Section 422 of the Internal
Revenue Code shall be included.
b) PAYMENT. The full purchase price of the Shares acquired upon the
exercise of any option shall be paid in cash, by certified or cashier's
check, by common stock of the Company, or by cancellation of indebtedness of
the Company.
c) EXERCISE PERIOD. The period for exercising an option shall commence
not earlier than one (1) week from the date of grant and shall end no more
than ten years from the date of grant, provided however, an Incentive Option
granted to an eligible employee owning more than 10% of the Common Stock,
shall end no more than five years after the date of the grant. Outstanding
options shall become immediately exercisable in full in the event that the
Company is acquired by merger,
<PAGE>
purchase of all or substantially all of the Company's assets, or purchase of
a majority of the outstanding stock by a single party or group acting in
concert.
d) RIGHTS OF OPTIONEE BEFORE EXERCISE. The holder of an option shall
not have the right of a stockholder with respect to the Shares covered by his
or her option until such Shares have been issued to him or her upon exercise
of an option.
e) NO RIGHT TO CONTINUED EMPLOYMENT. Nothing herein shall be construed
to confer upon any optionee any right to continue in the employ of the
Company or to interfere in any way with the right of the Company as an
employer to terminate his or her employment at any time, nor to derogate from
the terms of any written employment agreement between the Company and the
optionee.
f) NON-TRANSFERABILITY OF OPTION No option shall be transferable by
the optionee otherwise than by will or by the laws of decent and
distribution, and each option shall be exercisable during the optionee's
lifetime only by the optionee.
g) DATE OF GRANT. The date on which the Board or Committee approves
the granting of an option shall be considered the date on which such option
is granted.
ARTICLE IX
RESTRICTIONS ON TRANSFER
During any period in which the offering of the Shares under the Plan is not
registered under federal and state securities laws, the optionee shall agree in
the Stock Option Agreements that they are acquiring the Shares under the Plan
for investment purposes, and not for resale, and that the Shares cannot be
resold or otherwise transferred except pursuant to registration or unless, in
the opinion of counsel for the Company, registration is not required.
Any restrictions upon Shares acquired upon exercise of an option pursuant
to the Plan and the Stock Option Agreement shall be binding upon the optionee
and his or her heirs, executors, and administrators. Any stock certificate
issued under the Plan which is subject to restrictions shall be endorsed so as
to refer to the restrictions on transfer imposed by the Plan and by applicable
securities laws.
ARTICLE X
RELATIONSHIP TO OTHER PLANS
Nothing in this Plan shall prevent the Company or any subsidiary from
adopting or continuing other or additional compensation arrangements,
including without limitation plans providing for the granting of
restricted or unrestricted stock options and cash or common stock performance
bonuses. Grants under the Plan may form a part of or otherwise be related to
such other or additional compensation arrangements.
<PAGE>
ARTICLE XI
AMENDMENT AND DISCONTINUANCE
The Board shall have the right at any time and from time to time to
amend, modify, or discontinue the Plan, except that (a) no such amendment,
modification, or discontinuance shall revoke or alter the terms of any valid
option previously granted in accordance with the Plan, without the consent of
the holder of the option, and (b) no action of the Board may, without
approval by the affirmative vote of a majority of the vote of the
stockholders cast at a meeting at which a quorum is present, (i) increase the
maximum number of shares subject to the Plan, or (ii) materially increase the
benefits accruing to participants under the Plan or materially modify the
requirements for eligibility under the Plan.
ARTICLE XII
GOVERNMENT REGULATION
The Plan and the grant of options thereunder shall be subject to all
applicable governmental rules and regulations; and, any other provisions of this
Plan to the contrary notwithstanding, the Board may in its discretion and
without any shareholder action, make such changes in the Plan as may be
required, in its opinion, to conform the Plan to such rules and regulations.
ARTICLE XIII
EFFECTIVE DATE OF PLAN
The Plan shall become effective on such date as the Board shall determine,
but subject to the approval by the affirmative vote of the holders of a majority
of the shares of the Company. The Plan will terminate ten years from its
effective date unless sooner terminated by the Board.
CERTIFICATE OF ADOPTION
The undersigned, duly elected and acting Secretary of Sun Source, Inc.,
hereby certifies that the Board of Directors and a majority of the shareholders
of the Company adopted the foregoing Plan on November 3, 1998.
/s/ James H. Chambas, Secretary
<PAGE>
EXHIBIT 10.2
FORM OF
SUN SOURCE, INC.
STOCK OPTION AGREEMENT
FOR GOOD AND VALUABLE CONSIDERATION, Sun Source, Inc., a Nevada
corporation, hereby irrevocably grants to the Key Person named below a stock
option (the "Option") to purchase any part or all of the specified number of
shares of its Common Stock upon the terms and subject to the conditions set
forth in the Sun Source, Inc. 1998 Employee Stock Option Plan at the
specified purchase price per share without commission or other charge.
Social Security Number: ________________________
Number of Shares covered by Option __________ (___________)
(the "Option Shares"):
Purchase Price Per Option Share: __________ ($__________)
__________ ($__________)
[ ] Incentive Option [ ] Non-qualified Option
Minimum Number of Option Shares Per Partial
Exercise (unless Optionee exercises all of the
Option then exercisable): One hundred (100)
The period for exercising this option shall commence on __________________
and end on ___________________. (Commence not earlier than one (1) week from
the date of grant and shall end no more than ten years from the date of
grant, provided however, an Incentive Option granted to an eligible employee
owning more than 10% of the Common Stock, shall end no more than five years
after the date of the grant. Outstanding options shall become immediately
exercisable in full in the event that the Company is acquired by merger,
purchase of all or substantially all of the Company's assets, or purchase of
a majority of the outstanding stock by a single party or group acting in
concert.)
Date of this Agreement: __________________
SUN SOURCE, INC.
By:
----------------------------- ------------------------------------
Key Person's Signature
Its
------------------------
Residence Address:
------------------------------------
------------------------------------
<PAGE>
SCHEDULE OF GRANTEES
1. Harry T. Martin
Number of options granted: 25,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: Quarterly beginning October 15, 1999
Expiration date: October 15, 2002
2. Jay Whitmore
Number of options granted: 40,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: Quarterly beginning October 1, 1999
Expiration date: October 1, 2002
3. Jerry Genschorek
Number of options granted: 100,000
Purchase price per share: 50,000 at $1.00
50,000 at $2.00
Type of option: Non-qualified
Vesting date: October 1, 1999 for 50,000
October 1, 2000 for 50,000
Expiration date: October 1, 2002
4. William D. Yotty
Number of options granted: 100,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: None
Expiration date: January 3, 2003
5. Jim Chambas
Number of options granted: 100,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: None
Expiration date: January 3, 2003
6. Clifford Goehring
Number of options granted: 100,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: None
Expiration date: January 3, 2003
<PAGE>
7. Jeff McKay
Number of options granted: 100,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: None
Expiration date: January 3, 2003
8. Harry T. Martin
Number of options granted: 50,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: None
Expiration date: January 3, 2003
9. Philip Heatwole
Number of options granted: 50,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: None
Expiration date: January 3, 2003
10. Jim Willis
Number of options granted: 11,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: None
Expiration date: January 3, 2003
11. Barbara Thomas
Number of options granted: 10,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: 1/8th each quarter beginning 3/1/00
Expiration date: January 3, 2003
12. Kevin Stevens
Number of options granted: 10,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: 1/8th each quarter beginning 3/1/00
Expiration date: January 3, 2003
13. Christine Shuffield
Number of options granted: 10,000
Purchase price per share: $1.00
<PAGE>
Type of option: Non-qualified
Vesting date: 1/8th each quarter beginning 3/1/00
Expiration date: January 3, 2003
14. Rosa Trevizo
Number of options granted: 5,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: 1/8th each quarter beginning 3/1/00
Expiration date: January 3, 2003
15. Carlys Hubbard
Number of options granted: 5,000
Purchase price per share: $1.00
Type of option: Non-qualified
Vesting date: 1/8th each quarter beginning 3/1/00
Expiration date: January 3, 2003
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
first day of October 1999, by and between PayStar Communications Corporation, a
Nevada corporation, ("Employer"), and Jeff McKay ("Employee").
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties agree as follows:
1. Employment: Employer hereby employs Employee, and Employee hereby
accepts employment with Employer, on the terms and conditions set forth herein.
2. Duties:
(a) Employee shall advise and counsel the Board of Directors of Employer
on all matters pertaining to the business, affairs, and activities of Employer,
handle such affairs of Employer, Employer subsidiary(ies), affiliate(s), or
parent as the Board of Directors of Employer shall determine from time to time,
and act in such offices or capacities as the Board shall request,
(b) So long as he shall be elected to such offices, Employee shall
continue to occupy the positions of and perform all the acts and duties of
President. Employer's Board of Directors may extend or modify Employee's duties
and titles from time to time.
(c) Employee shall be required to devote his entire time, ability and
attention to the business of Employer.
3. Term: Subject to the provisions for termination as herein provided, the
term of employment of Employee shall be three (3) years, beginning October 1,
1999, and ending September 30, 2002. Thereafter, this Agreement shall
automatically be renewed for a renewal term of one (1) year after the expiration
of the initial three year term, and for successive one-year renewal terms
thereafter, unless either party gives the other written notice ("Notice") to
terminate the Agreement at the expiration of the initial three year term or of
the first renewal term or of any such successive renewal term. The Notice must
be given at least ninety (90) days prior to the expiration of any such term;
and, provided further, that in any event the automatic renewal clause in this
Agreement shall not be effective to renew this Agreement in excess of three (3)
terms of one (1) year each.
4. Compensation:
(a) Base Salary. The compensation to be paid Employee by Employer for
all services rendered to Employer during the term of this Agreement, including
services as an officer, director, or member of any committee of Employer, or of
a parent or subsidiary of Employer, shall be determined by the Board of
Directors of Employer, but in no event shall such annual
<PAGE>
salary be less than three hundred thousand dollars ($300,000.00) ("Base
Salary"), payable in bi-monthly installments in arrears, on the 15th and the
last day of the month after the effective date hereof. The Base Salary shall be
reduced by income tax and other applicable withholdings, and may be payable by
Employer, or by a parent or subsidiary of Employer, at the Employer's
discretion.
(b) Bonus. In addition to his Base Salary the Employee shall be paid a
bonus in each fiscal year that he is employed by the Employer pursuant to the
terms of this Agreement in an amount not less to one percent (1%) of the net
income of Employer, and not more that four percent (4%) of the net income for
that fiscal year.
5. Vacation: Employee shall be entitled each year to a vacation of not less
than three (3) weeks, during which time his compensation shall be paid in full.
For vacation purposes, a year shall be deemed to run from July 1 to June 30.
6. Working Facilities: Employee shall be furnished with a private office,
stenographic and other necessary secretarial assistance, and such other
facilities, amenities and services as are presently or may be hereinafter
furnished to senior management officers of Employee and as are appropriate for
Employee's position and adequate for the performance of his duties.
7. Other Benefits
(a) Employee shall be entitled to participate on a basis consistent with
other executive employees of Employer in pension, profit-sharing, stock option,
deferred compensation, savings, hospitalization, medical, disability, and life
insurance programs in accordance with such plans as Employer or its corporate
parent may now have in effect or may adopt from time to time in the future.
(b) Employer shall provide a monthly automobile allowance not to exceed
$800.00, either in the form of a direct automobile payment or a salary increase
to Employee.
(c) Employee shall also receive such other additional compensation,
rights and other benefits as the Board of Directors of Employer shall from time
to time, in its absolute and sole discretion, grant to him. (d) The benefits and
perquisites provided from time to time to the Employee may not be unilaterally
reduced or diminished by the Employer.
8. Expenses: Employee is authorized to incur on behalf of Employer expenses
in connection with the performance of his duties hereunder or in promoting or
furthering the business of Employer, including dues for social clubs, expenses
for entertainment, travel, lodging and similar items, in accordance with the
standards and policies that the Board of Directors of Employer may establish
from time to time. All such expenses are to be paid, insofar as possible, by use
of credit cards in Employer's name furnished to Employee. Any such charges that
cannot be charged an a credit card may be paid for directly by Employee, who
shall be reimbursed by Employer upon the submission to Employer's Treasurer of
an itemized account of such expenditures.
9. Location: The office at which Employee will be employed is located in
Modesto,
<PAGE>
California. Employer will not be required to relocate outside of the Stanislaus
County, California, area without his voluntary consent. The withholding of such
consent shall not be grounds for any action taken against Employee.
10. Confidentiality: Except as required in the ordinary course of
Employer's Business, Employee shall hold in confidence and not disclose to any
person or entity without the express prior written authorization of Employer,
either during the term of this Agreement or any time thereafter, the names or
addresses of any of Employer's customers; Employer's past or prospective
dealings with its customers; the parties, dates, or terms if any of Employer's
contracts; any information, trade secrets, systems, processes or business
methods, or any other secret or confidential matter relating to the customers or
the business affairs of Employer or any companies affiliated with Employer.
Employee acknowledges that in the course of performing his duties he may have
access to confidential information, the ownership and confidential status of
which are highly important to Employer and he agrees to comply with all known
policies and procedures of Employer for the protection of said confidential
information. The term "confidential information" as used in this Agreement means
(1) proprietary information of Employer including, but not limited to, formulas,
procedure, processes, materials, client lists and vendor lists (2) information
marked or designated by Employer as confidential (3) information whether or not
in written form which is known by the Employee to be treated by Employer as
confidential and (4) information provided to employee by third parties which
Employer is obligated to keep confidential. Employee agrees as follows:
(a) That he will not copy, transmit, reproduce, summarize, quote or make
any commercial or other use whatsoever of Employer's confidential information
except as may be necessary in the performance of his duties for Employer.
(b) Employee agrees to exercise the highest degree of care in
safeguarding Employer's confidential information against loss, theft or other
inadvertent disclosure and agree generally to take all steps necessary to ensure
the maintenance of confidentiality.
(c) Upon termination of his employment, or as otherwise requested by
Employer, will deliver promptly to Employer all of Employer's confidential
information in whatever form that may be in their possession or under their
control.
(d) Employee agrees not to disclose Employer's confidential information
directly or indirectly under any circumstances or by any means to any third
person without the express written consent of Employer.
11. Non-Competition: While employed and for a period of one yew after the
termination of employment, Employee shall not, without the prior written consent
of Employer, compete with Employer, its subsidiaries, successors, or assigns,
either directly or indirectly, as an owner, member, partner, employee, officer,
director or agent of any sole proprietorship, association, partnership or
corporation. For the purposes of this Paragraph, the terms "compete" and
"competition" and "competitor" shall refer to: ATM script and pre-paid products.
<PAGE>
Should any term or condition of these covenants against competition be
found to be unreasonable or excessive by any court of competent jurisdiction,
the parties agree to accept as binding in lieu thereof any lesser restrictions
which said court may deem reasonable.
Both Employer and the Employee recognize that no adequate remedy at law
exists in which to enforce the terms and conditions of this Agreement.
Therefore, in the event the Employee breaches the confidential or covenant
not-to-compete provisions of this Agreement, then Employer shall be entitled to
injunctive relief prohibiting the continued breaches of the Agreement by the
Employee.
12. Right to Employer Materials: Employee agrees that all documents are
intangible media relating to Employer's Business, including, but not limited to
the following; advertising literature, drawings, blueprints, notes, memorandum,
specification, devices, mechanical pads, formula, lists, materials, books,
files, reports, correspondence, records and other documents ("Employer
Materials") relating to the Business of Employer, shall remain the property of
Employer. Employer Materials constitute trade secrets of Employer and shall not
be disclosed to any other party except as expressly authorized by Employer. Upon
termination of employment, for any reason, all Employer Materials shall be
returned immediately to Employer, and Employee shall not make or retain any
copies thereof. Employee acknowledges and agrees that any knowledge, information
and materials in Employee's possession relating to the Business which Employee
possessed prior to the transfer of the Business to Employer, shall also be
deemed to constitute part of Employer Materials for purposes of this Section.
13. Inventions and Patents: Employee agrees that he will promptly and from
time to time fully inform and disclose to Employer all inventions, designs,
improvements, and discoveries which he now has or may hereafter have during the
term of this Agreement which pertain to or relate to the Business of Employer or
to any experimental work carried on by Employer, whether conceived by the
Employee alone or with others and whether or not conceived during regular
working hours. All such inventions, designs, improvement and discoveries shall
be the exclusive property of Employer. Employee shall assist Employer to obtain
patents on all such inventions, designs, improvements, and discoveries deemed
patentable by Employer and shall execute all documents and do all things
necessary to obtain letters patent, vest Employer with full and exclusive title
thereto, and protect the same against infringement by others. This provision
shall apply with equal force and effect to any items that may be subject to
copyright or trademark protection. This provision does not apply to an invention
for which no equipment, supplies, facility or trade secret information of the
Employer was used and which was developed entirely on the Employee's own time,
and (a) which does not relate, at the time the invention is conceived or reduced
to practice, to (1) the Business of Employer, or (2) actual or demonstrably
related anticipated research or development of Employer; or (b) which does not
result from any work performed by the Employee for the Employer. The provisions
set forth in the preceding sentence shall not, however, in any way authorize
Employee to engage in any such activities set forth therein in contravention of
the provisions of his duties and obligations hereunder.
<PAGE>
14. Termination.
(a) The employment of Employee may be terminated at any time by:
(i) Mutual written agreement; or
(ii) The death of Employer; or
(iii) Action of the Board of Directors of Employer if Employee is
in material and willful default in the performance of his obligations,
services, or duties hereunder, or has materially and willfully breached any
provision of this Agreement or the Stockholders Agreement, or has committed
any act of dishonesty, fraud, misrepresentation, or other act of moral
turpitude that would prevent the effective performance of Employee's duties; or
(iv) Action of Employee if Employer is in default in the
performance of its Obligations or duties hereunder, or has breached any
provision of this Agreement or the Stockholders Agreement; or has committed
any act of dishonesty, fraud, misrepresentation, or other act of moral
turpitude that would prevent the effective performance of Employee's duties; or
(v) Either party in the event Employee shall not be elected to the
office of President of Employer. In the event Employer terminates the employment
pursuant to this provision, Employer shall continue to pay Employee for the
remainder of the term of the Agreement the compensation specified in paragraph 4
of this Agreement, except and to the extent that Employee is being paid more
than the minimum amount set forth in paragraph 4, then Employee shall be
entitled to the remaining payments at the increased rate; however, the other
benefits to which Employee is entitled pursuant to paragraph 7 of this Agreement
shall not continue for the remainder of the term of this Agreement; or
(vi) A determination by the Board of Directors that the Employee
has become so physically or mentally disabled as to be incapable of
satisfactorily performing his duties under this Agreement for a period of
ninety (90) consecutive days.
(b) Thirty (30) days' written notice to the other party shall be given
prior to termination by either party followed by a reasonable time within which
to cure as to termination under subparagraphs 14(a)(i), (iii), (iv), (v) or
(vi).
(c) Termination under subparagraphs 14(a)(iii) or (iv) shall not be in
limitation of any other right or remedy which the terminating party may have
under this Agreement or otherwise, however, if this Agreement is terminated
pursuant to paragraph 14(a)(iii) hereof, the Employee shall not be required to
mitigate damages otherwise obtainable from the Employer as a result thereof and
any income received by the Employee after such termination shall not reduce the
amount of damages otherwise obtainable from the Employer hereunder.
(d) All obligations of Employer hereunder shall terminate upon the death
of Employee except:
(i) Employer shall pay to the spouse of Employee the compensation as
set forth in subparagraph 4 for the remaining initial or renewal term of this
Agreement. If Employee does not have a surviving spouse at that time, Employer
agrees to pay Employee's designee or estate said sums;
(ii) To the extent that Employee by reason of his death becomes
entitled to benefits under any group life insurance policy provided by Employer
hereunder.
15. Successors and Assigns. The rights and obligations of Employer under
this
<PAGE>
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of Employer, and the rights and obligations of Employee under this
Agreement shall inure and be binding upon his heirs, executors and
administrators.
16. Definitions: For purposes of this Agreement unless the context
indicates otherwise, the term Employer shall be deemed to also include any
corporation which is in control of, controlled by or under common control with
Employer, whether or not Employee is directly employed by such other corporation
or corporations.
17. Notices: Any notice to be given to Employer under the terms of this
Agreement shall be addressed to the Chairman of Employer's Board of Directors,
and any notice to be given to Employee shall be addressed to him at his home
address last shown on the records of Employer, or at such other address as
either party may hereafter designate in writing to the other. Any such notice
(except notice of a change of address) shall have been deemed duly given when
enclosed in a properly sealed envelope or wrapper addressed as aforesaid,
registered or certified, and deposited (postage and registry or certification
fee prepaid) in a post office or branch post office regularly maintained by the
United States Government. Notice of a change of address shall be deemed given
only when received.
18. Waiver: Either party's failure to enforce any provision or provisions
of this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, or prevent that party thereafter from enforcing each
and every other provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a waiver of either party's right
to assert all other legal remedies available to it under the circumstances.
19. Governing Law and Binding Effect: This Agreement shall be interpreted
and construed in accordance with the laws of the State of California and shall
inure to the benefit of and be binding upon the parties hereto and their heirs,
personal representatives, successors and assigns.
20. Captions and Paragraph Headings: Captions and paragraph headings used
herein are for convenience only, are not a part of this Agreement, and shall not
be used in construing it.
21. Severability: The invalidity or unenforceability of any provision
hereof or any part of any provision hereof shall in no way affect the validity
or enforceability of any other provision or part hereof, and this Agreement
shall be interpreted, construed and enforced as though the invalid or
unenforceable provision were not contained herein.
22. Counterparts: This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which taken together shall
constitute one and the same instrument.
23. Entire Agreement: This Agreement supersedes all prior agreements and
understanding between the parties and may not be modified or terminated orally.
No modification, termination, or attempted waiver shall be valid unless in
writing and signed by the
<PAGE>
party against whom the same is sought to be enforced.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date and year first set forth above.
EMPLOYER PayStar Communications Corporation
A Nevada Corporation
By: /s/ William D. Yotty, Chairman
By: /s/ Jim Chambas, Secretary
EMPLOYEE /s/ Jeff McKay
<PAGE>
EXHIBIT 10.6
PAY TELEPHONE SERVICES AGREEMENT
THIS AGREEMENT, made this ____ day of _________________, ______, by and
between the undersigned designated parties
____________________________________________________ (hereafter referred to as
"Owner") and Paystar Communications, Inc., a Nevada Corporation (hereafter
referred to as "Company").
WITNESSETH:
WHEREAS, Owner owns and operates the private pay telephone(s)
(collectively, the "Telephone(s)") at the locations set forth in Exhibit A
attached hereto; and
WHEREAS, the Owner desires to utilize the services of Company in connection
with the operation of the Telephone(s) and Company desires to render such
services, upon the terms and conditions hereinafter set forth: and
NOW, THEREFORE, in consideration of the foregoing recitals, all of which
are incorporated herein by reference, and of the mutual covenants herein
contained, the Owner and Company agree as follows:
SECTION I
DEFINITIONS
1.1 Definitions. As used herein, the following terms shall have the
respective meanings indicated below:
(a) Capital Improvements: any alteration or addition to, or rebuilding
or renovation of, the Telephone(s) the cost of which is not charged to repairs,
maintenance or other operating expenses.
(b) Gross Revenues: all receipts of a Telephone from all sources,
except the proceeds from the sale of such Telephone.
(c) Legal Requirements: all laws, statutes ordinances, orders, rules,
regulations, permits, licenses, authorizations, directions and requirements of
all governments and governmental authorities, which now or hereafter, may be
applicable to the Telephone(s), or any Telephone and the operation thereof.
(d) Operating Vendors: Vendors of all services required in the
operation of the Telephone(s), including all lessors, local and long distance
carriers, operator service providers and other carriers.
(e) Net Revenues: Gross Revenues, less the payment of all vendor
invoices
<PAGE>
relating to telephone usage, including, but not limited to, all fees and taxes
due and owing to local and long distance telephone carriers, site owners, and
operator service providers, the cost of ordinary and necessary new or
serviceable parts not covered by the manufacture's warranty required to repair
the Telephone, and the cost of all ordinary and necessary service calls to
repair the Telephone at a rate of $20 each occurrence.
(f) Sites: The physical location upon which each Telephone is in
operation.
SECTION II
TERM
2.1 Term. The term of the Agreement shall be one (1) year and commence on
the date hereof and end at midnight on the first (1st) anniversary of the date
hereof. Unless terminated by ninety (90) days written notice prior to the
anniversary date. This Agreement shall extend annually 1 year at a time.
2.2 Termination. Anything contained in this Agreement to the contrary
notwithstanding, Owner, at its sole discretion, shall have the right to
terminate this Agreement, without default by Company, as herinafter defined in
Section 9.2, after sixty (60) days written notice of termination to Company at
which time this Agreement shall be defined null and void.
2.3 Acquisition. Owner will be solely responsible for the acquisition or
lease of each of the Telephone(s), including the purchase of Capital
Improvements required for the Telephone(s), and the acquisition or lease of the
Sites.
SECTION III
OPERATION OF THE TELEPHONES
3.1 Company's Duties and Responsibilities. During the Operating Period,
Company, on behalf and at the sole expense of Owner, in accordance with the
standards set forth in Section 3.2 is hereby authorized to and shall perform the
services indicated in Exhibit B, and with respect to the services described in
Sections L1-L4, as expressly authorized by Owner.
3.2 Owner's Release Option. Provided that the Agreement shall remain in
effect through the fifth anniversary of the date of the Agreement (the
"Termination Date"), and ninety (90) days notice given to Company with first
right of refusal, then Owner shall have the option to require the Company to
Purchase from Owner any Telephone(s) upon the following terms and conditions
(the "Option"):
a. Sales Price. The value of any Telephone, the "Sales Price", shall
be six thousand dollars ($6,000.00) or fair market value (which
ever is higher). Payment of the Sales Price shall be made within
thirty (30) days of the Termination Date.
<PAGE>
b. Conveyance of the Telephone(s). Concurrently upon receipt of the
cash proceeds described in Section a above, Owner shall deliver
to Company, at the address provided in Section XI of the
Agreement or at such other address as Company may designate in
writing, title to the Telephone(s) at current locations, with all
taxes, direct or indirect, attributable to the transfer of the
Telephone(s) paid and shall take such other steps as may be
necessary to convey the Telephone(s) to Company free and clear of
all liens, claims and encumbrances, as contemplated in the
Agreement. The date of such conveyance shall be deemed the
"Closing Date".
3.3 Company's Release Purchase Option. During the term of the Agreement and
after the initial period of twelve (12) months, the Company may, by giving 90
days notice to the Owner, elect to purchase from Owner the Telephone(s) and site
agreement(s) (to include all owned telephones) for the sum of six thousand five
hundred dollars ($6500.00) each. The Owner may, by giving 90 days notice with
first right of refusal to the Company and after said Company's refusal, retain
the right to sell the Telephone(s) and site agreement(s) to a third party.
3.4 Standard of Services. Company agrees that its services hereunder shall
be performed by competent personnel. All obligations of Company hereunder shall
be subject to and contingent upon (a) the provision by Owner of sufficient funds
(if not otherwise available from the operations of the Telephone(s)) to permit
Company to comply with, and (b) the commission by Owner of no act which prevents
Company from complying with such obligations. At the request of either, Company
and Owner shall meet to discuss any aspect of the operation of the Telephone(s)
or any operating problem which warrants a modification of any operating policy
or procedure. Owner acknowledges and agrees that Company is not a guarantor of
the financial success of the Telephone(s).
3.5 Funding. From time to time throughout the term hereof as and when
requested by Company upon at least fifteen (15) days prior written notice, Owner
shall provide working capital by way of cash or through bank credit, such
working capital to be in amounts sufficient to constitute normal working capital
for Company to perform the services described in Sections L1-L3 of Exhibit B, to
the extent such services are authorized by Owner. Company shall in no event be
required to advance any of its own funds for the operation of the Telephone(s).
Not applicable if Level four (4) services are selected.
SECTION IV
REMUNERATION AND REIMBURSEMENT OF COMPANY
4.1 Monthly Fee. During the Operating Period, Owner shall pay to Company
with respect to each Telephone a monthly fee (the "Monthly Fee") as set forth in
Exhibit B attached hereto.
4.2 Payment of Telephone Revenue and Monthly Fees. All Telephone(s)
revenues collected by the Company shall be mailed by the 10th day of the second
month based upon the Gross Revenues of the relevant Telephone.
4.3 At any time during the term of the agreement, Owner may request that
Company pay
<PAGE>
to Owner all Telephone revenues collected by Company by the last day of each
quarter or semi-annual period instead of on the 10th day of the second month as
set forth within 4.2 above. Such request shall be in writing.
SECTION V
COMPANY TO ACT SOLELY AS AGENT FOR OWNER
5.1 In the performance of its duties hereunder, Company shall act solely as
agent of Owner. Nothing herein shall constitute or be construed to be or create
a partnership or joint venture between Owner and Company, nor shall the
execution and delivery of this Agreement by Company constitute the offer or sale
to Owner of an investment contract or other security. As to debts and
liabilities of Owner, Company shall not be liable for any such debts or
liabilities by reason of its maintenance, supervision, direction or operation of
the Telephone(s) for Owner. Company may so inform third parties with whom it
deals on behalf of Owner and may take any other reasonable steps to carry out
the intent of this Section. Owner agrees that it shall provide sufficient funds
to enable Company to promptly pay or discharge all obligations and debts of the
Telephone(s). Owner further agrees to indemnify, defend and hold Company and its
officers, employees, shareholders and affiliates harmless from any and all
liabilities, debts, claims or expenses (including reasonable attorney's fees and
other expenses in connection with the defense of same) of the Telephone(s)
incurred in accordance herewith.
SECTION VI
BOOKS AND RECORDS AND REPORTS
6.1 Books and Records. Company shall keep complete and accurate books of
account and other records on an accrual basis reflecting the results of
operation of the Telephone(s). Books of account and all other records relating
to or reflecting the operation of the Telephone(s) shall be available to Owner
and its representatives at the office of Company at all reasonable times for
examination, audit, inspection and copying. Such books and records shall not be
removed from the office of Company (other than temporarily for examination or
use by accountants employed to examine such books and records or prepare
financial statements or reports with respect to the Telephone(s)) without
Owner's prior written approval.
6.2 Reports. Within forty-five (45) days after the end of each month,
Company shall prepare and furnish to Owner financial statements for each
Telephone for such month and, the Operating Year. Such statements shall include
a report of income or loss for the month, a balance sheet as of the end of the
month and an inventory report. The statements for the Operating Year shall be
prepared by Company and may be reviewed by an accounting firm retained by Owner,
which firm may also review the Monthly Fees for such year.
SECTION VII
INSURANCE AND LOSSES
7.1 Owner acknowledges and agrees that it shall be solely responsible for
obtaining and keeping in force with respect to the Telephone(s), in amounts
determined by Owner: (a) fire and
<PAGE>
extended coverage and business interruption insurance; (b) liability and excess
liability insurance for loss, damage or injury to property or persons which
might arise out of the operation of the Telephone(s); (c) any workmen's
compensation and employer liability coverage as required by statute; and (d) any
other coverage desired by Owner. Not applicable if Level four (4) services are
selected.
SECTION VIII
INDEMNIFICATION
8.1 Owner and Company agree to protect, indemnify and hold each other
harmless from and against any and all losses, costs, expenses, claims, demands,
judgments, orders, decrees, damages or liabilities (including without
limitation, costs of litigation and reasonable attorneys' fees) arising out of
any tortuous conduct on the part of the indemnifying party or related in any way
to the failure or refusal of the indemnifying party to comply timely and fully
with each of its obligations, promises and covenants set forth herein.
SECTION IX
DEFAULT
9.1 Default by Owner. Owner shall be in default hereunder if any one or
more of the following shall occur or exist: (a) Owner shall fail to provide
funds, after request by Company pursuant to Section 3.4, sufficient to permit
timely payment of any amount due to Company hereunder and such failure shall
continue for seven (7) days after written notice thereof has been given to Owner
by Company; or (b) Owner shall neglect or fail to perform any of its duties or
obligations hereunder or shall neglect or fail to comply with any of the
provisions hereof (other than as referred to in subsection (a) of this Section
9.1) and shall fail to remedy the same within fourteen (14) days after Company
shall have given Owner written notice specifying such neglect or failure or if
such failure cannot reasonably be cured within said fourteen (14) days and Owner
shall not have commenced to cure such failure within such period and shall not
thereafter with reasonable diligence and good faith cure such failure.
9.2 Default by Company. Company shall be in default hereunder if Company
shall neglect or fail to perform any of its duties or obligations hereunder or
shall neglect or fail to comply with any of the provisions hereof and shall fail
to remedy the same within thirty (30) days after Owner shall have given Company
written notice specifying such neglect or failure or if such failure cannot
reasonably be cured within said thirty (30) days and Company shall not have
commenced to cure such failure within such period and shall not thereafter with
reasonable diligence and good faith cure such failure.
9.3 Remedies Upon Default. Upon the occurrence of any default under Section
9.1 or Section 9.2, the non-defaulting party may, in addition to and without
prejudice to any other right or remedy available to it at law or in equity,
terminate this Agreement by written notice of termination given to the
defaulting party.
SECTION X
<PAGE>
ASSIGNMENT
10.1 Either Company or Owner may voluntarily, by operation of law or
otherwise, assign any of its rights or delegate any of its duties hereunder.
SECTION XI
NOTICES
11.1 All notices, statements, consents, approvals, requests and demands
shall be in writing, duly executed by an authorized officer or agent, and shall
be delivered personally or sent by certified or registered United States mail,
postage prepaid, return receipt requested, addressed to Owner as set forth in
the signature page of this Agreement and to Company as follows:
If to Company: Jeff D. McKay, President
PAYSTAR COMMUNICATIONS, INC.
1110 W. Kettleman Ln. #46
Lodi, CA 95240
If to Owner:
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
Any notice, statement, consent, approval, request, demand or other
communication, if delivered personally, shall be deemed to be given upon
delivery to the entities specified above; and, if sent by mail, shall be deemed
to have been given three (3) days after being deposited in the United States
mail, postage prepaid, properly addressed as provided above. Either party may
change either or both the address and person to which notices thereafter shall
be sent by giving notice to the other party in the manner provided above.
SECTION XII
MISCELLANEOUS
12.1 Copies of Notices. Owner and Company shall each promptly furnish the
other with copies of all notices received concerning a Telephone, and especially
notices relating to any claimed failure to perform obligations with respect to a
Telephone, including, without limitation, notices from governmental authorities
and from third parties asserting rights to recover damages for personal injury
or property damage, breach of contract or any other claim.
12.2 Headings. The headings to the articles and sections of this Agreement
are inserted for convenience of reference only and shall in no way affect the
interpretation of this Agreement.
12.3 Entire Agreement. This Agreement constitutes the entire agreement and
understanding between the parties concerning the subject matter hereof and
supersedes all prior and contemporaneous negotiations, correspondence, memoranda
and agreements, whether oral or written.
<PAGE>
12.4 Amendment. Except as specifically provided otherwise herein, this
Agreement may be amended, modified, altered or waived, in whole or in part, only
by a written instrument signed by the party to be bound by such amendment,
modification, alteration or waiver.
12.5 Waivers. The waiver of any of the terms and conditions of this
Agreement on any occasion shall not be deemed a waiver of such terms and
conditions on any future occasion.
12.6 Severability. If any term or provision of this Agreement or the
application of that term or provision to any person or circumstance is illegal,
invalid or unenforceable to any extent, then the remainder of the Agreement and
the application of that term or provision to persons or circumstances other than
those as to which it is held illegal, invalid or unenforceable, shall not be
affected thereby. It is also the intention of the parties to this Agreement that
in lieu of each term or provision of this Agreement that is illegal, invalid or
unenforceable, there be added as a part of this Agreement a term or provision as
similar in terms to such illegal, invalid or unenforceable term or provision as
may be possible and be legal, valid and enforceable.
12.7 Binding Effect. This Agreement shall bind and inure to the benefit of
Owner and Company and their respective successors and assigns.
12.8 Applicable Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California. If any suit or action
(including any appeal) is brought to enforce or interpret any one or more of the
terms and provisions of this Agreement, the prevailing party shall be entitled
to reasonable attorney fees and all costs of such action from the other party.
12.9 Impossibility of Performance. Neither Owner nor Company shall be
liable for loss or damage or deemed to be in breach of this Agreement if its
failure to perform its obligations results from: (1) the unavailability of
suitable Operating Vendors; (2) compliance with Legal Requirements; (3) acts of
God; (4) acts of omissions of the other party; (5) fires, strikes, embargoes,
war, or riot; or (6) any other similar event or cause beyond the control of the
non-performing party. Any delay resulting from any of said causes shall extend
performance accordingly or excuse performance, in whole or in part, as may be
reasonable, but with respect only to the relevant Telephone, except that said
causes shall not excuse payments of amounts owed at the time of such occurrence.
12.10 Personal Emergency. The Company will exercise the Owner's Release
Option (3.2) upon notice from Owner of a valid and documented personal
emergency. This request by Owner must be accompanied by a letter from a doctor
of a life threatening event or by an attorney or other qualified representative
of the Owner in the event of an emergency legal situation requiring the exercise
of 3.2.a of this Agreement. This request may not be unduly withheld by the
Company.
IN WITNESS WHEREOF, the Owner has duly executed this Agreement as of the
_______day of __________________, 19___.
<PAGE>
OWNER: (COMPLETE ONE)
Business Entity Individual
- ------------------------------- -------------------------------
(Print Name) (Print Name)
- ------------------------------- -------------------------------
(Signature) (Signature)
- ------------------------------- -------------------------------
(Title) (Telephone)
- ------------------------------- -------------------------------
(Address) (SSN#)
- -------------------------------
(City, State, Zip)
COMPANY ACCEPTANCE
- -------------------------------
(Telephone)
Jeff D. McKay, President
PAYSTAR COMMUNICATION, INC.
- ------------------------------- 1110 W. Kettleman Ln. #46
(SSN/FIEN NO.) Lodi, CA 95240
---------------------------------
(Signature)
---------------------------------
(Date)
<PAGE>
Exhibit A
(Page___of___)
Telephone Equipment Business No.________
(Attach Extra copies for each Business to be purchased hereunder)
Site Address:
----------------------------------
(Location Name)
----------------------------------
(Address)
----------------------------------
(City, State, Zip)
Telephone Serial No.:
-------------------------------
Enclosure Type:
------------------------------------
Other Equipment:
------------------------------------
Geographic Location: General Location:
__________AL ___________Indoor
__________CA ___________Outdoor
__________NV ___________Either
__________IL
__________GA
__________MI
__________OH
__________TX
__________WA
__________Other
__________No Preference
Existing Long Distance Company OSP Services
____________Telco Communications ___________Opticom
____________US Long Distance ___________ILD Teleservices
____________ILD Teleservices ___________Other
____________Other
<PAGE>
EXHIBIT B
PAY TELEPHONE SERVICES AGREEMENT
SELECT ONE
Service Levels and Fees
During the term of this Agreement, Owner shall pay to Company with respect to
each Telephone a monthly fee ("Monthly Fee*") based on the following level of
services provided by Company. Owners signature in the space provided indicates
Owners understanding and acceptance of the terms of the Service selected.
Level 1 Collect all monthly revenue generated by the
Telephone(s), and forward same to Owner in accordance
with Owner's written direction to Company, less the
Monthly Fee.
Monthly Service Fee $25.00 Signature
------------------------
Level 2 Level 1 Service PLUS at Owner's expense, pay
commissions and fees to operating Vendors.
Monthly Service Fee $35.00 Signature
------------------------
Level 3 Level 1 & 2 Services PLUS in consultation with
Owner, provide for the repair of the Telephone(s) and
maintain the Telephone(s) in a neat and clean
condition and in compliance with all Legal
Requirements, and with Owner's prior written
approval, make Capital Improvements, as necessary.
Monthly Service Fee $50.00 Signature
------------------------
Level 4 Shall perform all of the services indicated
within the above sections Level 1-3, PLUS a guarantee
against losses incurred by theft, vandalism, or
destruction. In the event Owner shall elect to
exercise the Release Purchase Option pursuant to
Section 3.2 of the Agreement and Exhibit A attached
thereto, then the Monthly Service Fee shall be 70% of
Net Revenues for each Telephone as set forth in
Exhibit A of the Agreement. In the event Gross
Revenues are equal to or less than the option Amount
for each month, then Owner shall be entitled to 100%
of such net Revenues, or $65.00 for each Telephone,
which ever is greater.
Signature
------------------------
*Such fees may be adjusted by Company with 90 days notice
(Level 4 (L4) Services will remain in effect for contract duration).
<PAGE>
EXHIBIT 23.1
Schvaneveldt and Company
Certified Public Accountant
275 E. South Temple, Suite 300
Salt Lake City, UT 84111
(801) 521-2392
Darrell T. Schvaneveldt, C.P.A.
Consent of Darrell T. Schvaneveldt
Independent Auditor
I consent to the use of our report dated April 19, 1999, on the financial
statements of PayStar Communications Corporation, dated December 31, 1998,
included in the Form SB-2 herein and to the reference made to me.
/s/ Darrell Schvaneveldt
Salt Lake City, Utah
February 23, 2000
