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As Filed with the Securities and Exchange Commission on December 18, 2000
Registration No. 333-93149
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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UNITED STATES TELECOMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
Florida 4813 59-3470483
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
Suite 118
5251 110th Avenue North
Clearwater, FL 33760
(727) 572-7832
(Address, Including Zip Code, and Telephone Number, including Area Code, of
Registrant's Principal Executive Offices)
Richard Pollara
President
United States Telecommunications, Inc.
Suite 118
5251 110th Avenue North
Clearwater, FL 33760
(727) 572-7832
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
----------------
COPIES TO:
Walter E. Jospin, Esq.
Paul, Hastings, Janofsky & Walker LLP
600 Peachtree Street, N.E., Suite 2400
Atlanta, Georgia 30308
(404) 815-2400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective 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. [ ]
----------------
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 this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
[Logo]
UNITED STATES TELECOMMUNICATIONS, INC.
OFFER TO EXCHANGE
SHARES OF COMMON STOCK AND CLASS A PREFERRED STOCK
FOR
UNSECURED INSTALLMENT NOTES
OR
CLASS B CONVERTIBLE PREFERRED STOCK
The exchange offer will expire at 5:00 P.M.,
Tampa, Florida time, on , 2001, unless extended.
EXCHANGE OFFER
We will exchange
- up to $31,471,548 aggregate principal amount of registered
unsecured installment notes; or
- 125,307,600 shares of our registered Class B convertible
preferred stock
for shares of our common stock and Class A preferred stock. You are entitled to
participate in this exchange offer only if you
- received shares of our common stock and Class A preferred
stock in exchange for units of ownership interests in our
predecessor companies; or
- purchased shares of our common stock from us in a private
placement of our stock during the period from February 1999
to December 1999 for a purchase price of $3.00 per share.
Either rejection or acceptance of this exchange offer is speculative and
involves a high degree of risk. See "Risk Factors" beginning on page 10 of
this prospectus for a discussion of certain factors that you should consider in
connection with this exchange offer and an investment in the notes.
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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 this prospectus. Any representation to the contrary is
a criminal offense.
The date of this prospectus is , .
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY.......................................................................................... 2
RISK FACTORS................................................................................................ 9
THE EXCHANGE OFFER.......................................................................................... 16
FEDERAL INCOME TAX CONSEQUENCES............................................................................. 21
PRO FORMA CAPITALIZATION.................................................................................... 24
SELECTED FINANCIAL DATA..................................................................................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 28
BUSINESS.................................................................................................... 43
MANAGEMENT.................................................................................................. 58
COMPENSATION OF EXECUTIVE OFFICERS.......................................................................... 59
CERTAIN TRANSACTIONS........................................................................................ 60
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................................. 61
DESCRIPTION OF INDENTURE AND NOTES.......................................................................... 63
DESCRIPTION OF CAPITAL STOCK................................................................................ 68
EXPERTS..................................................................................................... 69
LEGAL MATTERS............................................................................................... 70
WHERE YOU CAN FIND ADDITIONAL INFORMATION................................................................... 70
APPENDIX A.................................................................................................. A-1
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-i-
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It does not contain all of the information that you should consider before
acting on our exchange offer. We encourage you to read the entire prospectus
carefully, including the section entitled "Risk Factors" and the financial
statements and notes to those financial statements.
THE COMPANY
We provide residential local telephone service to people with bad credit.
Typically, our customers have been disconnected by their local telephone service
provider because of nonpayment. Most local telephone service providers require
disconnected customers to pay a security deposit in addition to their past due
balance before the provider will reconnect their service. We focus on those
consumers who have been disconnected by their local telephone service provider
and cannot afford to reconnect service with the provider. We offer these
consumers local telephone service for a fixed monthly price without requiring a
security deposit.
We have obtained licenses from public utility commissions in 26 states to
operate as a competitive local telephone service provider of local telephone
service within those states. In this capacity, we are able to purchase
telephone service from local telephone service providers, such as Verizon
Communications, Sprint, US West, Bell South and Southwestern Bell, at wholesale
rates and then resell the local telephone service to our customers. As of
December 4, 2000, we had 14,948 customers. Our principal executive offices are
located at Suite 118, 5251 110th Avenue North, Clearwater, Florida 33760.
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THE EXCHANGE OFFER
On May 12, 1999, we entered into a consent agreement with the State of
Florida, Department of Banking and Finance. In this consent agreement, we
admitted that units of ownership interests in Tel Com Plus East, LLC, Tel Com
Plus West, LLC and Tel Com Plus Jacksonville, LLC, our predecessor companies,
were offered and sold in Florida in violation of Florida law. We agreed to
complete an offer of rescission with respect to shares of our common stock and
Class A preferred stock that were issued in exchange for these units. However,
because we do not have sufficient funds with which to effect a rescission offer,
we are offering to exchange our unsecured installment notes or our Class B
preferred stock for shares of our common stock and/or Class A preferred stock.
We are also making this exchange offer to holders of our common stock who
purchased shares of our common stock during the period from February 1999 to
December 1999 for a purchase price of $3.00 per share. The purchasers of these
shares were existing shareholders who were accredited investors. This offering
may not have complied with the registration requirements of federal and
applicable state securities laws. Therefore, we are offering to exchange these
shares of common stock for shares of our Class B preferred stock or our notes.
Holders who elect to exchange their securities for shares of Class B
preferred stock will be issued that number of shares of Class B preferred stock
which will equal 80% of our issued and outstanding capital stock. We have
structured the exchange offer in this manner so that holders, eligible to
participate in this exchange offer, may receive a more equitable stake in our
capital stock.
THIS EXCHANGE OFFER IS NOT A VALID RESCISSION OFFER UNDER APPLICABLE
FEDERAL AND STATE SECURITIES LAWS. THEREFORE, IT DOES NOT SATISFY THE
REQUIREMENTS OF THE CONSENT AGREEMENT WITH THE STATE OF FLORIDA. THIS EXCHANGE
OFFER ALSO DOES NOT LIMIT THE RIGHTS THAT OUR SHAREHOLDERS HAVE UNDER FEDERAL
AND STATE SECURITIES LAWS AS A RESULT OF THE OFFERS AND SALES OF THEIR SHARES
IN VIOLATION OF THESE LAWS.
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FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences of participating in the exchange
offer will depend on your particular circumstances and on the exchange option
you select. Because of the unusual nature of this transaction, the way that the
exchange offer will be characterized for federal income tax purposes is not
certain.
We have received an opinion of counsel with respect to the tax
consequences of the exchange offer. In the opinion of counsel, an exchange by
you of common stock and Class A preferred stock for our notes will be a taxable
event, resulting in a taxable gain or loss to the extent that the face amount of
the note received by you is greater or less than your aggregate tax basis in the
surrendered shares. In addition, you will be required to report interest on the
note as ordinary income at the time interest accrues rather than at the time
such interest is paid. If you exchange shares of common stock and Class A
preferred stock for Class B preferred stock, no taxable event will occur.
FINANCIAL CONDITION
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Pender Newkirk & Company, our independent public accountants, have audited
our financial statements for the years ended December 31, 1999 and 1998 and from
the period from inception (November 19, 1997) to December 31, 1997. During these
audits they noted that we have incurred substantial operating losses during each
period and, in addition, we had negative working capital at December 31, 1999 of
approximately $6,667,000. Further, we have not filed all required federal, state
and municipal excise tax returns nor have we remitted the related payments of
these taxes. Also, we could face civil or criminal penalties in California, as
well as the loss of our California Public Utilities Commission license, because
our application to the California Public Utilities Commission to operate as a
reseller in the State of California was accompanied by false financial
information regarding our cash balance. These conditions, combined with the
exchange offer, have raised substantial doubt about our ability to continue our
operations. Accordingly, Pender Newkirk & Company has added an explanatory
paragraph in their opinion regarding their doubt about our ability to continue
our business operations.
RISK FACTORS
Either rejection or acceptance of this exchange offer is speculative and
involves a high degree of risk. Retaining an equity investment in us is suitable
only for persons of substantial financial means who are able to bear the risk of
loss of their entire investment. Our debt obligations will significantly
increase if eligible holders elect to exchange their stock for our notes. This
increase in our liabilities will have a significant detrimental impact on our
financial condition and results of operations because of the increase in our
obligations to make periodic principal and interest payments on the notes,
among other factors. Additionally, there will be a substantial risk of
nonpayment of principal and interest on any notes issued in this exchange
offer. Recipients of this exchange offer should carefully consider all
information set forth in this prospectus, including the information set forth
in "risk factors" beginning on page 10, prior to acting on our offer.
LEGAL ACTION
On September 27, 2000, we filed a complaint in the Thirteenth Judicial
Circuit of Hillsborough County, Florida against defendants Joseph Cillo, Richard
Inzer, Joseph Thacker, Prime Equities Group, Inc., GIRI Holdings, Ltd., Raymond
Beam and Captive Administrators, Inc. In this complaint, we allege that the
defendants devised and implemented a fraudulent scheme to enrich themselves and
their associates by using boiler room tactics and illegally selling, at grossly
inflated prices, securities of our predecessor companies. We further allege that
the defendants defrauded us and our shareholders out of millions of dollars and
millions of shares. As a result of this scheme, we believe that our shareholders
paid an aggregate purchase price of approximately $31,000,000 for our
stock, of which we received only approximately $6,450,000. We allege that
the remaining $24,500,000 paid by investors was retained by the defendants and
other unlicensed brokers and facilitators also involved in the fraudulent
scheme.
By filing this complaint, we are seeking the return from defendants of all
proceeds and shares they acquired as a result of their fraudulent scheme, as
well as damages to compensate us for the liabilities we have and will incur as
a direct result of defendants' wrongful and illegal acts.
BUSINESS STRATEGY
Our mission is to become a leading reseller of local telephone services to
consumers with bad credit. To achieve this goal, we have developed and have
begun implementing, a business strategy to position us as a leader in the
reseller segment of the telecommunication services industry. Our business
strategy has the following main objectives:
- Expand our market area;
- Increase product availability for our customers;
- Automate and upgrade our
operational systems; and
- Advertise on a national basis.
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SUMMARY FINANCIAL DATA
The following table summarizes our statements of operations for the period
from our inception (November 19, 1997) to December 31, 1997, for the years ended
December 31, 1998 and 1999 and for the nine months ended September 30, 1999 and
2000, and also summarizes our balance sheet data as of September 30, 2000. See
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the historical financial statements
and the notes thereto, appearing elsewhere in this prospectus.
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SUMMARY FINANCIAL INFORMATION
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<CAPTION>
Nine Months Ended Years Ended Period From
September 30, December 31, Inception
--------------------------------------------------------------------- (November 19,
1997) to
2000 1999 December 31,
(unaudited) (unaudited) 1999 1998 1997
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<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Sales ............................. $ 13,359,062 $ 15,042,829 $ 19,738,566 $ 5,066,448 $ --
------------ ------------ ------------ ------------
Cost of sales ..................... 4,467,211 5,579,939 7,514,529 2,317,945 --
------------ ------------ ------------ ------------ -----
Gross profit ...................... 8,891,851 9,462,890 12,224,037 2,748,503 --
------------ ------------ ------------ ------------ -----
Operating loss .................... (2,761,780) (7,003,170) (8,980,079) (34,792,470) (250)
------------ ------------ ------------ ------------ -----
Net loss .......................... $ (3,017,439) $ (5,940,969) $ (8,083,293) $(34,862,830) $(250)
============ ============ ============ ============ =====
Per share data:
Basic and diluted loss per share .. $ (0.26) $ (0.66) $ (0.84) $ (5.68) $ --
============ ============ ============ ============ =====
Weighted average number of common
shares used in basic and diluted loss
per share calculations .............. (11,499,214) (10,236,796) 10,560,947 6,140,532 --
============ ============ ============ ============ =====
Consolidated Statement of Cash Flow
Data:
Net cash provided (used) by operating
activities .......................... $ 156,479 $ (1,887,848) $ (2,152,261) $ (1,393,336) $ --
------------ ------------ ------------ ------------ -----
Net cash provided (used) by investing
activities .......................... $ (73,995) $ (279,559) $ (304,657) $ (180,572) $ --
------------ ------------ ------------ ------------ -----
Net cash provided (used) by financing
activities .......................... $ (138,595) $ 1,539,551 $ 1,885,175 $ 2,201,762 $ --
------------ ------------ ------------ ------------ -----
Depreciation and amortization .......... $ 681,458 665,605 869,174 $ 215,811 $ --
------------ ------------ ------------ ------------ -----
Capital expenditures ................... $ 73,995 $ 279,557 304,657 $ 180,572 $ --
------------ ------------ ------------ ------------ -----
Other data:
EBITDA (1) ............................. $ (2,080,342) $ (4,609,992) $ (6,383,832) $(34,576,659) $(250)
------------ ------------ ------------ ------------ -----
Deficiency of earnings available to
To cover fixed charges (1) .......... $ (3,017,439) $ (5,940,969) $ (8,083,793) $(34,862,830) $(250)
------------ ------------ ------------ ------------ -----
</TABLE>
(1) "EBITDA" represents earnings (loss) before net interest expense, income
taxes, depreciation, amortization, and other non-cash charges,
including fixed asset write-offs. EBITDA should not be used as an
alternative to operating loss or net cash provided by (used for)
operating activities, investing activities or financing activities,
each as measured under generally accepted accounting principles. In
addition, EBITDA may not be comparable to other similarly titled
information from other companies. However, our management believes that
EBITDA is an additional meaningful measure of performance and
liquidity. With respect to the captions entitled "Deficiency of
earnings available to cover fixed charges," earnings consist of income
(loss) before provision for income taxes plus fixed charges. Fixed
charges consist of interest charges and amortization of debt expense.
The "EBITDA" and "Deficiency of earnings available to cover fixed
charges" data is unaudited.
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<TABLE>
<CAPTION>
Balance Sheet Data September 30,
------------------ 2000
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Working capital deficit .............................................. $ 6,501,556
------------
Total assets ......................................................... $ 4,874,070
------------
Unit rescission obligation ........................................... $ 29,243,144
------------
Rescission accrued interest .......................................... $ 7,372,703
------------
Total stockholders' deficit .......................................... $(39,251,482)
------------
</TABLE>
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RISK FACTORS
You should carefully consider the following risks factors and other
information in this prospectus before acting on this exchange offer.
Lack Of Information on Which To Make an Investment Decision
During the period from our inception until April 2000, we and our
predecessor companies did not properly document our corporate actions, including
shareholder and board of director meetings. In addition, we did not put in place
proper internal corporate control procedures. Our inadequate and incomplete
accounting records and stock records reflect our failure to put in place and
maintain internal control procedures. As a result of this failure, you may not
receive full and adequate information about us in this prospectus that will
enable you to make an informed investment decision in connection with this
exchange offer. For example, persons acting with actual or apparent authority on
our behalf, but without our knowledge, may have done one or more of the
following acts:
- Issued shares that were not properly authorized. These stock issuances
could result in you owning a lesser ownership percentage interest in us.
- Entered into contracts with persons or entities that require
extensive use of our resources, including our time and money.
- Taken corporate funds for unauthorized or improper purposes.
- Distributed false or misleading information about us to you or other
potential investors that may subject us to additional liabilities under
federal and state securities laws.
Because present management is unaware of the actions that may have been
taken on our behalf, this list is not exclusive.
LIMITED OPERATING HISTORY
We have a limited operating history from which you can evaluate our business
and prospects. Since our incorporation in November 1997, we have incurred
operating losses and we cannot assure you that we will be profitable in the
future. You must evaluate our business prospects in light of the uncertainties
encountered by companies in the early stages of development. Some of the
uncertainties we face include uncertainties about our ability to:
- increase the efficiency and function of our services;
- respond effectively to the increasingly competitive environment;
- respond effectively to our customers; and
- develop appropriate strategic alliances with our agents.
SURVIVAL OF MATERIAL LIABILITIES
We may be subject to claims asserted by holders of our common shares and
Class A preferred shares who purchased these shares in transactions that we
believe did not satisfy the requirements of federal and state securities laws.
We believe that we and our
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predecessor companies offered and sold securities in violation of these laws. In
addition, securities in our predecessor companies were exchanged as of September
30, 1998 for shares of our common stock and Class A preferred stock in an
exchange transaction that was not registered with the Securities and Exchange
Commission or any applicable state securities commission. We are making this
exchange offer to you as a holder of our common stock and Class A preferred
stock issued in the exchange transaction as of September 30, 1998 or as a holder
of our common stock issued in a purported private placement of our common stock
during the period from February 1999 to December 1999 for a purchase price of
$3.00 per share. HOWEVER, THIS EXCHANGE OFFER WILL NOT CUT OFF ANY RIGHTS THAT
YOU OR OTHER INVESTORS HAVE AGAINST US FOR VIOLATING THESE FEDERAL AND
STATE SECURITIES LAWS.
If any claims are brought against us for violating federal and state
securities laws and such claims prevail, it is likely that holders of our notes
and stock will lose their entire investment. We estimate that our maximum
exposure to such liabilities is in excess of $31,000,000.
ACTION BY THE STATE OF FLORIDA DEPARTMENT OF BANKING AND FINANCE
We entered into a consent agreement with the State of Florida, Department of
Banking and Finance on May 12, 1999. In this consent agreement, we admitted that
sales of securities of our predecessor companies violated Florida law. We
further agreed to complete on or before November 30, 1999 an offer of rescission
with respect to these securities in accordance with Florida law. We were unable
to do so. On December 7, 1999, the Department notified us that we were in
violation of this consent agreement and that it intended to commence litigation
against us in order to enforce the provisions of the consent agreement. As of
the date of this prospectus, the Department has not commenced litigation against
us; however, the Department has informed us that it is retaining all options in
connection with our failure to perform under this consent agreement. The
Department's options include an action to enforce the consent agreement, a
motion to seek receivership and other remedies.
Because of our financial condition, we are unable to pay in cash the
purchase price paid by the holders of our common stock and Class A preferred
stock who are entitled to rescind their purchases. Therefore, we are offering to
exchange our notes or shares of our Class B preferred stock for shares of our
common stock and Class A preferred stock. Because this exchange offer does not
constitute a valid rescission offer, it does not satisfy the requirements of the
consent agreement and will not have the effect of barring any claims against us
by the Department in connection with our failure to perform under the consent
agreement.
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SECURITIES AND EXCHANGE COMMISSION LITIGATION RISKS
On May 12, 1999, the SEC brought a lawsuit against Tel Com East and Tel Com
West, two of our predecessor companies, in the United States federal district
court in Tampa, Florida. The SEC has advised us that we will be named as a
defendant in this action as the successor to these companies. This complaint
alleges that Tel Com East and Tel Com West committed fraud and failed to
register their respective units of ownership interests when they each offered
and sold them. As a result of these allegations, the SEC seeks permanent
injunctive relief against the named defendants, return of all proceeds of the
offerings and civil penalties. Our potential monetary exposure in this lawsuit
is in excess of $31 million.
We have entered into settlement negotiations with the SEC. However, we
cannot assure you that we will be able to enter into an acceptable settlement
agreement with the SEC, if at all. Our ability to continue our business
operations will be significantly impaired if we are unsuccessful in settling or
defending this lawsuit. If our business operations are significantly impaired or
cease entirely, holders of our notes and stock will most likely lose their
entire investment in our securities.
RISKS ASSOCIATED WITH EXCHANGE OFFER
A shareholder entitled to participate in this exchange offer has the
following three options:
- Exchange his shares of common stock and Class A preferred stock for our
notes;
- Exchange his shares of common stock and Class A preferred stock for
shares of our Class B preferred stock; or
- Reject this exchange offer and retain his shares of common stock and
Class A preferred stock.
A shareholder must elect one of the above three options. There are
substantial risks involved in electing any of the above options.
RISK OF OUR NOTES
If every recipient of this exchange offer tenders his or her shares of
common stock and Class A preferred stock for our notes, then our aggregate
liability under the notes will be approximately $31,000,000 plus interest. The
term of the notes will vary from five (5) to fifteen (15) years, depending on
the aggregate principal amount of notes issued.
At present, our sole source of funds for payment of the principal and
interest on the notes will be our operating revenues to the extent that they
exceed our operating expenses. For the nine months ended September 30, 2000, our
operating revenues were $13,359,062, and we had an operating loss of $2,761,780.
It is possible that our operating revenues may never significantly exceed our
operating expenses, or that we will never achieve profitability on a quarterly
or
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annual basis. If we continue to incur losses, we will not be able to pay the
principal and interest on the notes from the cash flow from our operating
activities. Further, we may not be able to raise funds with which to make
payments to our noteholders. We may not be able to pay all or a portion of the
interest and principal on the notes, regardless of the aggregate principal
amount of notes issued in this exchange offer. In addition, the notes are
general unsecured obligations and the holders will have no collateral to
foreclose against if we fail to make payments of principal and interest on the
notes.
Under the terms of the indenture covering the notes, you may also be unable
to enforce your rights as a noteholder unless holders of at least 25% of the
notes agree to such action.
It is unlikely that there will ever be a public or other market for our
notes. Therefore, investors may be required to hold our notes indefinitely.
RISK OF EQUITY SECURITIES
If a shareholder elects to either
- exchange his shares of common stock and Class A preferred stock for
shares of our Class B preferred stock or
- reject this exchange offer and retain his shares of common stock and
Class A preferred stock,
he will hold shares for which there is currently no public or other market.
Further, we do not anticipate that a public or other market will develop in the
near future, if at all. Consequently, shareholders may be required to hold our
equity securities indefinitely.
RISK OF REJECTING THE EXCHANGE OFFER
If you retain your shares of common stock and Class A preferred stock, your
ownership interest will be significantly reduced if any shareholder exchanges
his shares for shares of Class B preferred stock. Presently shareholders
eligible to participate in this exchange offer own approximately 35% of our
capital stock. Upon completion of the exchange offer, shareholders who exchange
their shares for Class B preferred stock will own 80% of our capital stock. The
remaining 20% will be owned by our common shareholders and Class A preferred
shareholders.
If we liquidate or dissolve, for reasons other than the sale of all or
substantially all of our assets, and there are assets to be distributed to
shareholders, holders of Class B preferred stock will receive up to $0.10 per
share from the proceeds of such liquidation or dissolution. This payment will be
made before any distribution to the holders of Class A preferred stock or common
stock. After payment of this full preferential amount to the holders of Class B
preferred stock, and assuming that additional cash or other assets are available
for distribution to shareholders, holders of Class A preferred stock will then
be entitled to receive up to $0.10 per share from the proceeds of such
liquidation or dissolution. Upon payment of the full preferential amount to the
holders of the Class A preferred stock and Class B preferred stock, holders of
our common stock will receive the remainder of the proceeds, if any, from such
liquidation or dissolution. Therefore, if we liquidate or dissolve and there are
assets to be distributed to shareholders, holders of Class B preferred stock
will receive up to $12,307,600 before any distribution is made to holders of
Class A preferred stock or common stock.
FAILURE TO IMPLEMENT BUSINESS STRATEGY
Failure to implement our business strategy could adversely affect our
operations, our financial position and our results of operations and possibly
our ability to generate sufficient cash to pay the principal and interest due
under the notes. Our ability to execute our business strategy depends on our
ability to:
- manage our indebtedness and raise sufficient capital to pursue our
business plan;
- expand our market share;
- identify and target new markets for our services;
- increase our product availability;
- advertise in an effective yet cost efficient manner;
- retain our key employees; and
- manage growth successfully.
LACK OF PROFITABILITY
We may not achieve profitability in the near term, if at all. During the nine
months ended September 30, 2000, we incurred an operating loss of $2,761,780.
Since our inception, we have incurred operating losses for each fiscal year. We
cannot assure you that our revenues will increase to the level necessary to
cover our expenses. In addition, our expenses will increase substantially if a
significant number of our shareholders entitled to participate in this exchange
offer elect to receive our notes in exchange for their stock. We believe our
sole source of funds for the payment of the notes will be our operating
revenues. Based on our historical performance, it is unlikely that our
operating revenues will be sufficient to fully satisfy our expenses, including
required payments on the notes.
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TAX LIABILITIES
We are delinquent in our filings of federal excise and state and municipal
sales tax returns and we have not remitted all taxes collected. We estimate a
liability of approximately $4.9 million for unremitted taxes, including
penalties and interest, as of September 30, 2000. This estimate is based on
collected revenues and the applicable tax rates, including an estimate for
penalties and interest. We are currently negotiating with various tax agencies
to settle these liabilities, but we cannot predict whether these negotiations
will be successful for us. If these negotiations are unsuccessful, the payment
obligations of these tax liabilities will have a significant and detrimental
impact on our results of operations and will impair our ability to implement
our business strategies and to pay the notes, because cash that we would
otherwise use for such purposes will be used to pay these tax obligations.
ACCOUNTANT'S CONCERN ABOUT OUR ABILITY TO CONTINUE AS AN OPERATIONAL BUSINESS
Pender Newkirk & Company, our independent public accountants, have audited
our financial statements for the years ended December 31, 1999 and 1998 and the
period from inception (November 19, 1997) to December 31, 1997. During these
audits, they noted that we incurred a net loss of approximately $8,083,000 for
the year ended December 31, 1999. In addition, we had negative working capital
of approximately $6,667,000 and our liabilities exceeded our assets by
approximately $36,800,000 at December 31, 1999. Additionally, we are in
violation of a consent agreement with the State of Florida, Department of
Banking and Finance, which requires us to make an offer of rescission with
respect to securities sold in violation of Florida securities laws. Further, we
have not filed all required state and municipal sales and excise tax returns,
nor have we remitted the related payments of these taxes, estimated to be
approximately $3.7 million, including penalties and interest, at December 31,
1999. We also could face civil or criminal penalties in California, as well as
the loss of our California Public Utilities Commission license, because we
included false information in our 1998 application for a certificate of
necessity and convenience to provide local telephone service in California.
These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. Pender Newkirk & Company has
added an explanatory paragraph to their opinion describing this concern. If we
are unable to continue to operate our business, holders of our debt and stock
will lose their entire investment in our securities.
LIQUIDITY AND FINANCING REQUIREMENTS
In order to pursue our business strategy and growth plans and to satisfy
our liabilities, including our tax liabilities and any notes issued under this
exchange offer, we will require significant amounts of capital. Currently, we
do not have any financing arrangements. We cannot assure you that financing
will be available on terms acceptable to us, if at all. In addition, because we
plan to finance the repayment of the notes with our operating revenues, our
liquidity and financial condition may be adversely affected by this exchange
offer if our aggregate liability under the notes exceeds our cash on hand. Our
inability to raise capital and meet our financing requirements would have a
significant and detrimental impact on our ability to pay the principal and
interest on the notes, to continue our business operations and to increase the
value of our stock.
POSSIBLE ACTIONS BY CALIFORNIA PUBLIC UTILITIES COMMISSION
We may be subject to criminal or civil penalties, as well as the loss of
our public utility license issued by the State of California for including
false information in our 1998 application for a certificate of necessity and
convenience to provide local telephone service in California. We recently
discovered that a letter sent to the California Public Utilities Commission in
1998 in support of our application contained false financial information,
purportedly from the president of a Colorado bank. In this letter, the Colorado
bank represented that we had a balance of over $3 million in our account at
such bank, when we actually only had a balance of approximately $300,000. We
believe that a person, who is not presently one of our officers or directors,
caused the letter containing this false information to be fraudulently created
and forged, or caused to be forged, the signature of the bank's president.
If we lose our license to operate as a reseller of local telephone service
in the State of California, our results of operations will be significantly
impaired because we generate a significant portion of our revenues from
customers in California. In addition, if we become subject to civil or criminal
penalties, such penalties may have a material adverse effect on our ability to
continue operations.
RISK OF NONPAYMENT FROM CUSTOMERS
Because most of our customers have bad credit, we run a significant risk of
nonpayment. We disconnect service provided to nonpaying customers as soon as we
are legally permitted to do so under the applicable state laws and regulations.
Each state has enacted notice requirements that a local telephone service
provider must comply with prior to disconnecting a customer's telephone service.
These notice requirements vary from state to state and range from approximately
30 to 60 days' notice. In states that are more consumer oriented, such as
Massachusetts, we face a significant risk that we may be forced by state law to
continue to provide telephone service to a nonpaying customer for an extended
period of time. As a result, our financial position and results of operations
may be significantly and detrimentally affected. We cannot assure you that
additional states will not increase the required notice period for the
disconnection of nonpaying customers and therefore make conducting business in
these states cost prohibitive.
COMPETITION
We operate in a very competitive business environment. Competition may
affect our ability to increase our customer base and generate revenues. The
barriers to entry in our business are relatively low in that the initial capital
investment required to enter our business is minimal. Therefore, there are a
large number of small, local businesses who resell local telephone service to
consumers with bad credit. These types of small businesses typically focus on a
single city or relatively compact area. Although the geographic range of these
types of competitors is limited, many of these companies are fiercely
competitive with us in their fees for services and some of these companies have
greater financial resources than we do. In addition, we face increasing
competition from local telephone service providers, such as Southwestern Bell,
who have begun offering local telephone service to their own customers who have
been disconnected for nonpayment. These local telephone service providers have
far more resources than we do, and will generally have lower marketing and
operational costs, thus allowing them to price their local telephone services at
rates, when offered to disconnected customers, that are lower than the rates we
charge our customers. If we lose customers to our competitors, we will be unable
to improve our financial condition and thus, we may be unable to pay the
principal and interest on our notes or create any value for our stock.
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<PAGE> 17
ABILITY TO RETAIN KEY PERSONNEL
Our success is largely dependent upon our ability to retain our key
personnel including our President, Richard Pollara, Vice President/General
Manager, Bill Van Aken, Marketing Director/Secretary, Julie Graton, Banking
Administrator, Robin Caldwell and MIS Director, Bruce Walker. The loss of the
service of one or more of our key personnel could have a significant and
detrimental effect on our business. Except for Ms. Caldwell, we have not entered
into employment agreements or non-compete agreements with any of our key
personnel. Such employees may terminate their employment with us at any time. If
one or more of our key employees resign to join a competitor or to form a
competing company, the loss of such personnel and any resulting loss of existing
or potential customers to any such competitor could have a material adverse
effect on our business, financial condition and results of operations. If we
lose any such personnel, we cannot assure you that we would be able to prevent
the unauthorized disclosure or use of our technical knowledge, practices or
procedures by such personnel.
REGULATORY RISKS
We and our competitors are subject to state and federal statutes and rules
regulating the telecommunications industry. These regulations vary from state to
state and consist of items such as:
- approval procedures for resale agreements;
- certification or licensing procedures and requirements;
- tariff requirements;
- reporting requirements; and
- requirements in connection with customer billing, suspension and
disconnection.
We believe we are in substantial compliance with all of these laws and
regulations and that these laws and regulations have not had any significant and
detrimental effect on our ability to operate our business. Changes in existing
laws or regulations, or in their interpretation, or the adoption of any
additional laws or regulations, could have such an adverse effect on our
business.
As a reseller of residential local telephone service to persons with bad
credit, we, together with most other resellers, generally do not provide
long-distance services. Although most states have regulations requiring
resellers to provide access to long distance, operator or information services,
these states typically waive these regulations and thus permit resellers to
limit their exposure to the nonpayment risks of our customers. However, the
public utility commissioners in Ohio and Minnesota have been unwilling to waive
these regulations concerning long-distance and operator or information services.
Therefore, we are effectively prohibited from conducting business in those
states. There can be no assurance that other state public utility commissioners
will continue to waive these regulations and thus permit us to conduct business
in their state.
A substantial portion of the market for our services are consumers who have
been disconnected by their local telephone service provider for nonpayment of
long-distance service. Several states are examining the billing policies that
permit these providers to disconnect their local telephone service to customers
who have not paid for long-distance services. A change in this policy may have
an adverse impact on our earnings and our ability to attract customers.
FORWARD LOOKING STATEMENTS
You should not rely on our forward-looking statements. Certain of the
statements made in this prospectus, including matters discussed under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations," as well as oral statements made by us or our officers, directors
or employees, may constitute forward-looking statements. These forward-looking
statements are based on management's beliefs, current expectations, estimates
and projections about the telecommunications industry, the
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<PAGE> 18
economy and about us and telecommunications providers in general. The words
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors that may cause our actual
results, performance or achievements to differ materially from our historical
results or from any results expressed or implied by such forward-looking
statements. Such factors include those items listed in "Risk Factors" and the
following
- lack of sustained growth in the economy;
- increased competition within the telecommunications industry;
- changes in the regulatory environment;
- the impact of the exchange offer on our financial condition; and
- our ability to obtain the necessary capital to satisfy our liabilities
and operate and grow our business.
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<PAGE> 19
THE EXCHANGE OFFER
BACKGROUND AND REASONS FOR THE EXCHANGE OFFER
We are the legal successor to Tel Com East, Tel Com West, and Tel Com
Jacksonville, each a limited liability company previously engaged in the
business of reselling residential local telephone service to consumers with bad
credit. As of September 30, 1998, Tel Com East, Tel Com West and Tel Com
Jacksonville transferred their respective assets and liabilities to us. Prior to
this business combination, we believe that units of ownership interests in Tel
Com East, Tel Com West and Tel Com Jacksonville were offered and sold in
violation of the securities laws of the State of Florida, other applicable state
securities laws and federal securities laws by various intermediaries and
independent sales organizations. We do not believe that any member of our
current management was a participant in these sales.
In connection with the September 30, 1998 business combination, holders of
units in each of Tel Com East, Tel Com West and Tel Com Jacksonville received
shares of our common stock and Class A preferred stock. This transaction was not
registered with the Securities and Exchange Commission or any state securities
commission. We have been advised that the exchange of units for our stock may
have violated federal and applicable state securities laws.
From February 1999 until December 1999, we offered shares of our common
stock to investors at a purchase price of $3.00 per share. At the time of this
offering, former counsel advised us that this offering was exempt from the
registration requirements of the securities laws. During this offering, we sold
446,970 shares of our common stock for an aggregate purchase price of $1,340,909
to accredited persons who were already shareholders. Current counsel has now
advised us that this offering may not have been exempt from the registration
requirements of the securities laws. Therefore, we are offering to exchange our
notes or shares of Class B preferred stock for those previously issued shares of
our common stock.
As successor to Tel Com East, Tel Com West and Tel Com Jacksonville, we
entered into a consent agreement with the State of Florida, Department of
Banking and Finance, on May 12, 1999. In this consent agreement, we admitted
that the sale of units of ownership interests in our predecessor companies
violated Florida securities laws. We agreed to complete an offer of rescission
with respect to the securities of Tel Com East, Tel Com West and Tel Com
Jacksonville sold in violation of Florida securities law. We also agreed to
complete the rescission offer by November 30, 1999, which we failed to do. On
December 7, 1999, the Department notified us that we were in violation of the
consent agreement and that it intended to bring an action against us to enforce
the provisions of the consent agreement. As of the date of this prospectus, the
Department has not brought an action against us to enforce compliance with the
consent agreement. However, the Department has informed us that it is retaining
all options in connection with this default, including bringing an action to
enforce the consent agreement, a motion to seek receivership and other remedies.
Because we do not have sufficient funds with which to effect rescission
offers for all of our questionable securities offerings, we are offering to
exchange the outstanding shares of our common stock or Class A preferred stock
for either our notes or shares of our Class B preferred stock. THIS EXCHANGE
OFFER IS NOT A VALID RESCISSION OFFER UNDER FEDERAL AND APPLICABLE STATE
SECURITIES LAWS AND THEREFORE DOES NOT SATISFY THE CONSENT AGREEMENT OR CUT OFF
ANY RIGHTS THAT HOLDERS OF OUR SECURITIES MAY HAVE UNDER THESE SECURITIES LAWS.
The holders who are entitled to participate in this exchange offer are:
- persons who purchased for cash units of ownership interests in one or
more of the predecessor companies and subsequently received shares of our common
stock and Class A preferred stock in exchange for their units, and
- persons who purchased shares of our common stock during the period from
February 1999 to December 1999 in an offering that may not have complied with
the registration requirements of the securities laws.
Holders of shares of our common stock or Class A preferred stock who were
or are executive officers, who did not pay cash for his or her units in Tel Com
East, Tel Com West or Tel Com Jacksonville or who, to the best of our knowledge,
participated in the unlawful sale of one or more of our predecessor companies'
securities are not eligible to participate in this exchange offer.
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<PAGE> 20
LEGAL ACTION
On September 27, 2000, we filed a lawsuit in the Thirteenth Judicial
Circuit of Hillsborough County, Florida against Joseph Cillo, Richard Inzer,
Joseph Thacker, Prime Equities Group, Inc., GIRI Holdings, Ltd., Raymond Beam
and Captive Administrators, Inc. A description of this lawsuit is contained
under the heading "Business - Legal Proceedings".
TERMS OF THE EXCHANGE OFFER
We are offering to exchange our stock held by eligible holders for our
notes or shares of our Class B preferred stock. If you are entitled to
participate in this exchange offer, you have three (3) options:
1. Exchange your shares of common stock and Class A preferred stock for our
notes. You will receive an aggregate principal amount of notes equal to
the purchase price you paid for shares of our common stock and Class A
preferred stock (or units of ownership interests in our predecessor
companies). The notes will be issued in denominations of $1,000.
2. Exchange your shares of common stock and Class A preferred stock for
shares of our Class B preferred stock. As a group, the holders of our
common stock and Class A preferred stock who exchange their shares for
shares of our Class B preferred stock will be issued that number of
shares of Class B preferred stock that will equal 80% of our issued and
outstanding capital stock. You will receive your proportionate share of
Class B preferred stock based upon the price you paid for your shares of
common and Class A preferred stock compared to the total purchase price
paid by all eligible shareholders who exchange for Class B preferred
stock.
3. Reject this exchange offer and retain your shares of common stock and
Class A preferred stock. If you do not elect to exchange your shares for
our notes or Class B preferred stock by the expiration date of this
exchange offer, you will be deemed to have rejected this exchange offer.
If you retain your shares of common stock and Class A preferred stock,
your ownership percentage will be significantly reduced if any eligible
holder exchanges his or her shares of our stock for shares of our Class
B preferred stock.
You must choose only one of the above three (3) options. You may not
exchange a portion of your stock for our notes and a portion for the Class
B preferred stock.
Unsecured Installment Notes
We will exchange up to $31,471,548 aggregate principal amount of registered
unsecured installment notes for shares of our common stock and Class A preferred
stock. Interest will accrue on the notes at ____%, and will compound annually.
Payments of principal and interest on the notes are scheduled to be made in
annual equal installments commencing on ______ __ ,2003 and will continue
thereafter on each ____ ___. The notes will be issued in increments of $1,000.
The term of the notes will vary between five (5) and fifteen (15) years
depending on the aggregate principal amount of notes issued, as shown in the
following chart:
<TABLE>
<CAPTION>
AGGREGATE AMOUNT OF NOTES ISSUED COMMENCEMENT OF ANNUAL INSTALLMENT LAST DATE OF ANNUAL INSTALLMENT
-------------------------------- ---------------------------------- -------------------------------
<S> <C> <C>
$1,000,000 or less , 2003 , 2005
$1,000,001 - $5,000,000 , 2003 , 2008
$5,000,001 - $10,000,000 , 2003 , 2010
$10,000,001 - $20,000,000 , 2003 , 2012
$20,000,001 - $30,000,000 , 2003 , 2015
</TABLE>
See "Description of Indenture and Notes."
Class B Convertible Preferred Stock
The shares of Class B preferred stock will be issued in exchange for shares
of our common stock and Class A preferred stock. For every $1.00 you paid for
shares of our common stock or Class A preferred stock (or units of ownership
interests in our predecessor companies), you will receive a certain number of
shares of our Class B preferred stock. This number of shares of Class B
preferred stock will equal 125,307,600 divided by the aggregate purchase price
paid for shares of our common stock and Class A preferred stock (or units of
ownership interests in our predecessor companies) by holders who elect to
exchange their stock for shares of our Class B preferred stock. For example, if
holders of our common stock and Class A preferred stock who paid an aggregate
purchase price of $1,000,000 for such shares exchanged these shares for shares
of
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<PAGE> 21
our Class B preferred stock, then each exchanging holder would receive 125.3076
shares of Class B preferred stock for every $1.00 he or she paid for shares of
our common stock and Class A preferred stock.
The chart set forth below illustrates that the number of shares of Class B
preferred stock issued will remain constant, but the effective price per share
will change depending on the aggregate purchase price paid by those holders who
elect to exchange their shares of common stock and Class A preferred stock for
shares of our Class B preferred stock.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE PRICE PAID FOR SHARES TOTAL NUMBER OF SHARES OF
OF COMMON STOCK AND CLASS B PREFERRED STOCK EFFECTIVE PRICE PER SHARE OF
CLASS A PREFERRED STOCK ISSUED TO EXCHANGE HOLDERS CLASS B PREFERRED STOCK
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 1,000,000 125,307,600 $125.31
-----------------------------------------------------------------------------------------------------------------------------------
$ 5,000,000 125,307,600 $ 25.06
-----------------------------------------------------------------------------------------------------------------------------------
$ 10,000,000 125,307,600 $ 12.53
-----------------------------------------------------------------------------------------------------------------------------------
$ 15,000,000 125,307,600 $ 8.35
-----------------------------------------------------------------------------------------------------------------------------------
$ 20,000,000 125,307,600 $ 6.27
-----------------------------------------------------------------------------------------------------------------------------------
$ 25,000,000 125,307,600 $ 5.01
-----------------------------------------------------------------------------------------------------------------------------------
$ 30,000,000 125,307,600 $ 4.18
</TABLE>
The rights, preferences and privileges of the Class B preferred stock are
summarized below:
Voting Rights: The holders of the Class B preferred stock
have the same voting power as the
holders of the common stock and will vote
with the common stock as one class.
Dividends: The holders of the Class B preferred stock
are entitled to receive dividends ratably at
a per annum rate of 8% of the liquidation
value of the shares, if declared by our board
of directors, before and in preference to the
payment of any dividend on the common stock
or Class A preferred stock. The liquidation
value is $0.10 per share. This dividend
preference will not be cumulative.
Liquidation Rights: If we liquidate, dissolve or wind up, the
holders of the Class B preferred stock will
be paid up to $0.10 per share of any assets
available for distribution. This amount, if
any, will be paid out of our assets before
holders of common stock or Class A preferred
stock are paid. If the assets and funds to be
paid to the Class B preferred stock are not
sufficient to pay to the holders of the Class
B preferred stock their full preferential
amounts, then such assets and funds will be
distributed ratably among Class B holders
only. The liquidation value of the Class B
preferred stock will be appropriately
adjusted if we effect a stock split, stock
combination, stock dividend or other
distribution, merger, share exchange or other
fundamental corporate change.
Optional Conversion: Each share of Class B preferred stock may be
converted at the option of the holder into
shares of common stock based on the then
applicable conversion rate. The initial
conversion rate is one share of common stock
for each share of Class B preferred stock.
The number of shares of common stock into
which shares of Class B preferred stock may
be converted will be appropriately adjusted
in the event if we effect a stock split,
stock combination, stock dividend or other
distribution, merger, share exchange or other
fundamental corporate change.
Mandatory Conversion: Each share of Class B preferred stock will be
automatically converted into shares of common
stock based on the then applicable conversion
rate immediately upon (1) the closing of a
public offering of our common stock in an
effective registration statement under the
Securities Act in which the gross cash
proceeds that we receive are at least
$10,000,000, (2) any transaction or series of
transactions (including any reorganization,
merger or consolidation) that results in the
transfer of 50% or more
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<PAGE> 22
of our outstanding voting securities or (3)
the sale of all or substantially all of our
assets.
The chart below compares the important terms and conditions of our common
stock, Class A preferred stock, Class B preferred stock and notes.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK CLASS A PREFERRED STOCK CLASS B PREFERRED STOCK NOTES
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Voting Rights One vote per share; One vote per share; vote with One vote per share; vote No voting rights
vote with preferred common stock as one class with common stock as one
stock as one class class
-----------------------------------------------------------------------------------------------------------------------------------
Dividend Right to receive Right to receive dividends Right to receive dividends Receives interest at the
Rights/Rate of dividends only if and at a rate of 8% per annum of at a rate of 8% per annum rate of ___% per annum;
Return in the amount declared the liquidation value of the liquidation value compounded annually;
by our board; junior to (initially $0.10 per share) (initially, $0.10 per first interest payment on
dividend rights of only if declared by our board; share) only if declared by _______, 2003
preferred stock; senior to dividend rights of our board; senior to
noncumulative common stock; junior to dividend rights of Class A
dividend rights of Class B preferred stock and common
preferred stock; noncumulative stock; noncumulative
-----------------------------------------------------------------------------------------------------------------------------------
Liquidation Rights Entitled to receive Entitled to receive up to Entitled to receive up to Entitled to receive
ratably any proceeds $0.10 per share before any $0.10 per share before any principal plus accrued
after payment of all payment is made with payment is made with interest prior to
our liabilities and respect to the common stock respect to holders of payments on common stock
payment of all but after payment of all of common stock or Class A and preferred stock, but
preference amounts to our liabilities and payment preferred stock, but after equally with other holders
holders of preferred of preference amounts to payment of all of our of unsecured debt and
stock the Class B preferred stock liabilities liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Redemption Rights None None None Principal plus all
accrued interest is due
on stated maturity date
which varies from ______,
2005 to _______,2015.
-----------------------------------------------------------------------------------------------------------------------------------
Conversion Rights None Optional conversion at any Optional conversion at any None
time into shares of common time into shares of common
stock at the applicable stock at the applicable
conversion rate (initially conversion rate (initially
one share of Class A one share of Class B
preferred stock into one preferred stock into one
share of common stock). share of common stock).
Mandatory conversion upon Mandatory conversion upon
the closing of an initial the closing of an initial
public offering with gross public offering with gross
cash proceeds of cash proceeds of $10,000,000,
$10,000,000, a transaction a transaction or series of
or series of transactions transactions which results
which results in the in the transfer of 50% or
transfer of 50% or more of more of our outstanding
our outstanding securities, securities, or the sale of
or the sale of all or all or substantially all of
substantially all of our our assets.
assets.
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 23
HOW TO ACCEPT THIS EXCHANGE OFFER
We will exchange all shares of our common stock and Class A preferred stock
that are validly tendered to us.
If you wish to accept this exchange offer and tender your shares of common
stock and Class A preferred stock, you must do the following before the
expiration of this exchange offer:
- Complete the letter of transmittal in accordance with the instructions
contained in this prospectus; and
- Mail or otherwise deliver the letter of transmittal, together with the
certificates representing shares of our common stock and Class A
preferred stock, to us.
YOU ARE NOT REQUIRED TO ACCEPT THIS EXCHANGE OFFER.
Acceptance of the exchange offer is optional. You are urged to consider this
prospectus carefully before reaching a decision.
If you decide to exchange your shares of our common stock or Class A
preferred stock, you should complete and sign the appropriate sections of the
letter of transmittal included with this prospectus (see Appendix A) and return
it (along with your stock certificate(s) representing shares to be tendered in
acceptance of the exchange offer and other required documents) to _____________
as soon as practicable. We must receive all letters of transmittal on or before
the expiration date of this exchange offer, which is ____________, 2001. If you
wish to accept the offer, we encourage you to promptly return the letter of
transmittal and accompanying documents by certified mail or overnight courier.
You may withdraw your tender of shares of our common stock and Class A preferred
stock at any time prior to the expiration of the exchange offer.
If you do not complete and return a letter of transmittal prior to the
expiration of the exchange offer, you will be deemed to have rejected the
exchange offer and will continue to hold your shares of common stock and Class A
preferred stock.
QUESTIONS ABOUT THE EXCHANGE OFFER
Persons entitled to participate in the exchange offer may call our
representatives to ask questions at _________ between 9:00 a.m. and
6:00 p.m., Eastern Time.
USE OF OUR STOCK TENDERED BY RECIPIENTS OF THE EXCHANGE OFFER
The shares of common stock and Class A preferred stock tendered to us in
this exchange offer, if any, will resume the status of authorized but unissued
shares.
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<PAGE> 24
FEDERAL INCOME TAX CONSEQUENCES
The following describes the principal United States federal income tax
consequences to our shareholders who participate in the exchange offer.
These tax consequences will depend on your particular circumstances and on the
exchange option you select. Those shareholders who do not participate in the
exchange offer will not incur any United States federal income tax liability as
a result of not participating in the exchange.
The following discussion sets forth the opinion of Paul, Hastings, Janofsky
& Walker LLP, our special counsel, regarding the federal income tax consequences
to holders of our stock who decide to participate in the exchange offer. This
discussion and counsel's opinion are based upon the Internal Revenue Code,
regulations of the United States Treasury Department, and court and
administrative rulings and decisions in effect on the date of this prospectus.
These authorities may change, possibly retroactively, and any change could
affect the continuing validity of counsel's opinion and of this discussion.
Opinions of counsel are not binding upon the Internal Revenue Service or the
courts. We have not requested, and will not request, an advance ruling from the
IRS of the tax consequences of the exchange offer. This discussion does not
address the state, local or foreign tax consequences of participating in the
exchange offer.
You are urged to consult your tax advisor as to the particular consequences
of the exchange offer and the acquisition, ownership and disposition of the
Class B preferred stock or our notes.
EXCHANGE OF STOCK FOR NOTES
The exchange of common stock and Class A preferred stock for our notes will
be treated as a taxable sale or exchange and you will have a taxable gain or
loss to the extent that the face amount of the note is greater or less than your
aggregate tax basis in the surrendered shares. Your aggregate tax basis will
equal the sum of:
- your cost for the common stock, if any, purchased by you directly
from us in 1999, and,
- your cost for your ownership interests in our predecessor companies,
reduced by any tax losses previously allocated to you.
If you were allocated tax losses during the period in which you owned
units in our predecessor companies, you are likely to have a taxable gain from
the exchange in an amount equal to such prior losses. However, because you are
receiving an installment note in payment for your stock, you should be able to
defer any taxation of this gain until you receive principal payments on your
note. Any such gain will be long-term capital gain. The maximum federal income
tax rate imposed on long-term capital gains realized by an individual from the
sale of stock is 20%.
TREATMENT OF THE NOTES
Original Issue Discount
The notes will be issued with original issue discount, which will require
you to include in income, as ordinary income, interest on the notes when this
interest accrues rather than when this interest is paid.
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<PAGE> 25
Sale or Exchange of the Notes
Unless you transfer our note in a tax-free exchange permitted by the
Internal Revenue Code, the sale or exchange of our note will be a taxable event
for United States federal income tax purposes and you will have a taxable gain
or loss equal to the difference between
- the amount of cash plus the fair market value of any property received
upon such sale or exchange and
- your adjusted tax basis in the note.
Your adjusted tax basis in a note will equal the face amount of such note,
increased by the amount of original issue discount that you have already
included in your income with respect to your note and decreased by the amount of
any principal or interest payments that you received on your note. Gain or loss
from a taxable sale or exchange of the note should be capital gain or loss, and
will be long-term capital gain or loss if you have held your note for more than
one year at the time of the sale or exchange. The maximum federal income tax
rate imposed on long-term capital gains resulting from the sale of a note by an
individual is 20%.
EXCHANGE OF STOCK FOR CLASS B PREFERRED STOCK
If you exchange your common stock and Class A preferred stock for Class B
preferred stock, this exchange should be treated for federal income tax purposes
as a tax-free exchange. Consequently, you should not recognize any gain or loss
as a result of the exchange. In addition, your aggregate tax basis in the Class
B preferred stock will be equal to your aggregate tax basis in the common stock
and Class A preferred stock that you exchanged for the Class B preferred stock.
However, because of the unusual nature of this transaction, it is not clear
whether the holding period of all the Class B preferred stock that you receive
will be based on the holding period of your common stock and Class A preferred
stock that you exchanged. Consequently, if you sell any Class B preferred stock
within one year after the date of the exchange, a portion of any gain recognized
from such sale may be treated as short-term capital gain. Short term capital
gain is taxed at the same rates as ordinary income.
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<PAGE> 26
TREATMENT OF THE CLASS B PREFERRED STOCK
Distributions on Class B Preferred Stock.
Any cash distribution on the Class B preferred stock will be treated as a
dividend, taxable as ordinary income to the holder, but only to the extent of
our current or accumulated earnings and profits. If any cash distribution
exceeds our current and accumulated earnings and profits, the excess first will
be treated as a return of capital that will reduce your tax basis in the Class
B preferred stock. Any remaining amount after your basis has been reduced to
zero will be taxable as capital gain (either long-term or short-term depending
upon your holding period in the Class B preferred stock).
Sale or Exchange of the Class B Preferred Stock.
Unless you transfer our Class B preferred stock in a tax-free exchange
permitted by the Internal Revenue Code, a sale or exchange (other than a
purchase by us) of Class B preferred stock will be a taxable event. You will
have capital gain or loss equal to the difference between the amount of cash
and the fair market value of property that you receive and your adjusted tax
basis in those shares. Gain or loss will be long-term capital gain or loss if
you held the Class B preferred stock for more than one year. The maximum
federal income tax rate imposed on long-term capital gains realized by an
individual from the sale of stock is 20%.
23
<PAGE> 27
PRO FORMA CAPITALIZATION
The table shows our pro forma capitalization as of September 30, 2000. Our
capitalization is presented on a pro forma basis assuming that our Second
Amended and Restated Articles of Incorporation were in effect as of September
30, 2000. You should read this information together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and notes to those statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
At SEPTEMBER 30,
2000
----------------
<S> <C>
Current obligations
Unit rescission obligation(1) ..................................... $ 107,502
Rescission accrued interest ...................................... 70,740
Note payable related party(2)..................................... 150,000
------------
Total current obligations ............................................ $ 328,242
Long-term obligations(1)
Unit rescission obligation ........................................ $ 29,135,642
------------
Unit rescission obligation accrued interest ....................... 7,301,963
------------
Total Long-term obligations .......................................... $ 36,437,605
------------
Stockholders' Equity:
Preferred Stock, $0.10 par value, 200,000,000 shares authorized
Class A Preferred Stock, $0.10 par value per share, $ 1,572,951
40,000,000 shares authorized, 23,516,000 shares issued
and outstanding Class B Preferred Stock, $0.10 par value
per share, 130,000,000 shares authorized, no shares issued and
outstanding(3)
Common Stock, no par value, 300,000,000 shares
authorized, 12,945,149 shares issued and outstanding(4) ........ --
Additional Paid-In Capital ........................................ 5,166,379
Accumulated Deficit ............................................... $(45,963,812)
------------
Total Stockholders' Deficit .......................................... $(39,224,482)
============
Total Capitalization ................................................. $ (2,458,635)
============
</TABLE>
(1) These rescission obligations relate to our rescission obligation under the
consent agreement with the State of Florida to our shareholders who were
former unitholders of Tel Com East, Tel Com West or Tel Com Jacksonville.
Under this consent agreement, we agreed to offer to rescind purchases of our
stock (or units of ownership interests in our predecessor companies). Prior
to the consent agreement, Tel Com Jacksonville made a rescission offer in
early to mid-1998 to all the unitholders of Tel Com Jacksonville. The
rescission offer was accepted by 80 unitholders resulting in an aggregate
rescission obligation in the principal amount of $995,000. The Tel Com
Jacksonville rescission obligation bears interest at 8% per annum. As of
September 30, 2000, as successor to Tel Com Jacksonville, we have paid
$887,498 in principal to the former unitholders who elected to have their
shares repurchased, and we owe an additional $107,502 in principal amount to
these former unitholders.
(2) This note payable dated September 28, 2000 was issued to Joseph Thacker, one
of our shareholders. We are disputing the validity and enforceability of
this note in our lawsuit filed against Joseph Cillo, et. al. in state
court in Hillsborough County, Florida.
(3) This assumes that our Second Amended and Restated Articles of Incorporation,
which designates 130,000,000 shares of Class B preferred stock, were filed
and were in effect as of September 30, 2000.
(4) This assumes that our Second Amended and Restated Articles of Incorporation,
which increased the authorized number of shares of common stock from
100,000,000 to 300,000,000, were filed and were in effect as of September
30, 2000.
24
<PAGE> 28
SELECTED FINANCIAL DATA
The following historical selected financial data for the years ended
December 31, 1999 and 1998 and for the period from inception (November 19, 1997)
to December 31, 1997 and our predecessor selected financial data for the period
ended September 30, 1998 and for the period from inception (Tel Com Jacksonville
- February 6, 1997, Tel Com East - April 25, 1997, Tel Com West - July 28, 1997)
to December 31, 1997 are derived from our financial statements which have been
audited by Pender Newkirk & Company, our independent public accountants, and are
included elsewhere in this prospectus. The following selected financial data for
the nine months ended September 30, 2000 and 1999 are derived from unaudited
financial statements included elsewhere in this prospectus. In the opinion of
our management, the unaudited financial data include all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the data for
such period. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes
appearing elsewhere in this prospectus.
Historical
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(NOVEMBER 19,
NINE MONTHS ENDED YEARS ENDED 1997) TO
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
--------------------------------------------------------------------------------
2000 1999
(unaudited) (unaudited) 1999 1998 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales ......................................... $ 13,359,062 $ 15,042,829 $ 19,738,566 $ 5,066,448 $ --
Cost of sales ................................. 4,467,211 5,579,939 7,514,529 2,317,945 --
------------ ------------ ------------ ------------ ------------
GROSS PROFIT ............................... 8,891,851 9,462,890 12,224,037 2,748,503 --
Advertising expenses .......................... 814,458 1,144,516 1,383,815 430,703 --
Depreciation and amortization expense ......... 681,438 665,605 869,174 215,811 --
Provision for doubtful accounts receivable .... 3,545,941 6,241,074 7,709,478 1,953,860
General and administrative expenses ........... 4,532,297 6,193,416 8,283,538 2,517,470 (250)
Impairment loss ............................... -- 31,674,670 --
Loss on promoter receivable write off ......... 2,079,497 2,221,449 2,958,111 748,459 --
------------ ------------ ------------ ------------ ------------
OPERATING (LOSS) ........................... (2,761,780) (7,003,170) (8,980,079) (34,792,470) (250)
Interest expense .............................. (255,659) (196,046) (361,461) (70,360) --
------------ ------------ ------------ ------------ ------------
NET LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ........................... (3,017,439) (7,199,216) (9,341,540) (34,862,830) (250)
Income tax benefit .......................... -- 469,326 469,326 -- --
------------ ------------ ------------ ------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEM ............ (3,017,439) (6,729,890) (8,872,214) (34,862,830) (250)
EXTRAORDINARY ITEM
Extraordinary item, net of income tax of
</TABLE>
25
<PAGE> 29
<TABLE>
<S> <C> <C> <C> <C> <C>
$469,326 ..................................... -- 788,921 788,921 -- --
------------ ------------ ------------ ------------ ------------
NET LOSS ..................................... $ (3,017,439) $ (5,940,969) (8,083,293) $(34,862,830) $ (250)
============ ============ ============ ============ ============
Per share data:
Basic and diluted loss per share before
Extraordinary item............................... $ (0.26) $ (0.66) $ (0.84) $ (5.68) $ --
============ ============ ============ ============ ============
Basic and diluted loss per share .............. $ (0.26) $ (0.58) $ (0.77) $ (5.68) $ --
============ ============ ============ ============ ============
Weighted average number of common shares used in
BASIC and diluted loss per share calculations ... 11,499,214 10,236,796 10,560,947 6,140,532 $ --
============ ============ ============ ============ ============
Consolidated Statement of Cash Flow Data:
Net cash provided (used) by Operating
Activities ..................................... $ 156,479 $ (1,887,848) $ (2,152,261) $ (1,393,336) $ --
============ ============ ============ ============ ============
Net cash used by Investing
Activities ..................................... $ (73,995) $ (279,557) $ (304,657) $ (180,572) $ --
============ ============ ============ ============ ============
Net cash provided (used) by Financing
Activities ..................................... $ (138,595) $ 1,539,551 $ 1,885,175 $ 2,201,762 $ --
============ ============ ============ ============ ============
Depreciation and amortization ................... $ 681,438 $ 665,605 $ 869,174 $ 215,811 $ --
============ ============ ============ ============ ============
Capital expenditures ............................ $ 73,995 $ 279,557 $ 304,657 $ 476,898 $ --
============ ============ ============ ============ ============
Other data:
EBITDA(1) ....................................... $ (2,080,342) $ (4,609,992) $ (6,383,332) $(34,576,659) $ (250)
============ ============ ============ ============ ============
Deficiency of earnings available to
cover fixed charges(1) ........................ $ (3,017,439) $ (5,940,969) $ (8,083,293) $(34,862,830) $ (250)
============ ============ ============ ============ ============
</TABLE>
(1) In the following tables and in this document, "EBITDA" represents earnings
(loss) before net interest expense, income taxes, depreciation, amortization,
and other non-cash charges, including fixed asset write-offs. EBITDA should not
be used as an alternative to operating loss or net cash provided by (used for)
operating activities, investing activities or financing activities, each as
measured under generally accepted accounting principles. In addition, EBITDA may
not be comparable to other similarly titled information from other companies.
However, our management believes that EBITDA is an additional meaningful measure
of performance and liquidity. With respect to the captions entitled "Deficiency
of earnings available to cover fixed charges," earnings consist of income (loss)
before provision for income taxes plus fixed charges. Fixed charges consist of
interest charges and amortization of debt expense. The "EBITDA" and "Deficiency
of earnings available to cover fixed charges" data is unaudited.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
BALANCE SHEET DATA: 2000 1999 1999 1998 1997
------------ ------------ ------------ ------------ --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Working capital deficit ....................... $ 6,501,556 $ 5,799,504 $ 6,666,567 $ 3,919,675 $ (250)
Total assets .................................. 4,874,070 5,543,990 5,455,750 6,628,989 --
Unit rescission obligation .................... 29,243,144 29,590,668 29,541,194 29,912,642 --
</TABLE>
26
<PAGE> 30
<TABLE>
<S> <C> <C> <C> <C> <C>
Rescission obligation interest ................ 7,372,703 4,556,594 5,293,207 2,335,095 --
------------ ------------ ------------ ------------
Total Stockholders' equity (deficit) .......... $(39,251,482) $(35,017,872) $(36,804,332) (30,911,448) $(250)
------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(TEL COM JACKSONVILLE -- 2/28/97,
TEL COM EAST -- 4/25/97,
NINE MONTHS ENDED TEL COM WEST -- 7/28/97)
PREDECESSOR SEPTEMBER 30, 1998 TO DECEMBER 31, 1997
------------------ --------------------------------
<S> <C> <C>
Sales.............................................. $ 11,075,464 $ 3,558,018
Cost of sales...................................... 3,436,453 2,098,000
------------ ------------
GROSS PROFIT................................... 7,639,011 1,460,018
Advertising expenses............................... 1,662,704 1,455,009
Depreciation and amortization expense.............. 77,402 73,546
Provision for doubtful accounts receivable......... 3,292,145 280,916
General and administrative expenses................ 4,952,102 3,570,850
Impairment loss.................................... 126,721 200,356
Loss on promoter receivable write off.............. 18,840,882 6,453,979
------------ ------------
OPERATING (LOSS)............................... (21,312,945) (10,574,638)
Interest expense................................... (114,326) (57,047)
------------ ------------
NET LOSS $(21,427,271) $(10,631,685)
============ ============
Consolidated Statement of Cash Flow Data:
Net cash used by Operating Activities.............. $ (1,462,342) $ (1,682,148)
============ ============
Net cash used by Investing Activities.............. $ (243,638) $ (315,762)
============ ============
Net cash provided by Financing Activities.......... $ 1,930,374 $ 2,069,844
============ ============
Depreciation and amortization...................... $ 77,402 $ 73,546
============ ============
Capital expenditures............................... $ 243,638 $ 265,762
============ ============
Other data:
EBITDA(1).......................................... $(21,235,543) $(10,501,092)
============ ============
Deficiency of earnings available to cover fixed
charges(1)........................................ $(21,427,271) $(10,631,685)
============ ============
</TABLE>
(1) In the following tables and in this document, "EBITDA" represents earnings
(loss) before net interest expense, income taxes, depreciation, amortization,
and other non-cash charges, including fixed asset write-offs. EBITDA should not
be used as an alternative to operating loss or net cash provided by (used for)
operating activities, investing activities or financing activities, each as
measured under generally accepted accounting principles. In addition, EBITDA
may not be comparable to other similarly titled information from other
companies. However, our management believes that EBITDA is an additional
meaningful measure of performance and liquidity. With respect to the captions
entitled "Deficiency of earnings available to cover fixed charges, "earnings
consist of income (loss) before provision for income taxes plus fixed charges.
Fixed charges consist of interest charges and amortization of debt expense. The
"EBITDA" and "Deficiency of earnings available to cover fixed charges" data is
unaudited.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Working capital deficit............................ 2,934,658 2,159,704
Total assets....................................... 2,839,933 960,516
Unit rescission obligation......................... 30,032,642 6,900,774
Rescission obligation interest..................... 1,586,636 366,183
Total Stockholders' equity (deficit)............... (32,280,899) (8,828,104)
</TABLE>
27
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and
results of operations together with the financial statements and the notes to
financial statements included elsewhere in this prospectus.
BACKGROUND AND OVERVIEW
We were incorporated in the State of Florida on November 19, 1997. In
February 1998, we began limited operations. From February 1998 to September
1998, we obtained licenses from five state public utility commissions to resell
local telephone service. During this time, we also entered into several
agreements with local telephone service providers to purchase local telephone
service from them which we would, in turn, sell to our customers. As of
September 30, 1998, we purchased the assets and assumed the liabilities of Tel
Com East, Tel Com West and Tel Com Jacksonville to obtain a greater degree of
operational efficiency by combining the administrative, management, marketing
and finance functions of the various companies. Before this acquisition, our
operations were limited and our total revenue from such operations was
approximately $300,000.
28
<PAGE> 32
We provide local telephone service to people with bad credit.
Typically, our customers have been disconnected by their local telephone service
provider because of non-payment. Most providers require customers who have been
disconnected to pay a security deposit in addition to their past due balance
before the provider will reconnect their service. We focus on those consumers
who cannot afford to reconnect service with their local telephone service
provider. We offer these consumers local telephone service for a fixed monthly
price without requiring a security deposit. We do, however, charge a connection
fee for new service to our customers.
Source of revenue and revenue recognition policy
We generate revenues by activating and providing local telephone service for
our customers. Revenue generated from activating local telephone service ranges
from $89.95 to $109.95 per customer. The activation fee is charged for the
initial set-up and installation of a customer's line. We recognize activation
revenue when the telephone services are applied for and payment is received. Any
excess of the activation revenue over the direct costs related to the activation
is amortized over the period the customer uses our services. However, since
inception, we have not amortized any excess, because our direct cost of
activation does not materially exceed our activation revenue. Revenue generated
from providing local telephone service ranges from $49.95 to $79.95 per customer
per month and is recognized monthly at the time when services are provided and
the customer is billed. Depending on the date of the monthly bill, we may record
revenue that is billed but not yet earned. In such cases, we record this revenue
as deferred revenue.
Source of Costs of Revenue
Our costs of revenue result from the purchase of wholesale local telephone
service from various local telephone service providers. We pay for this
telephone service in arrears. Our purchase of this telephone service is governed
by resale agreements entered into with each local telephone service provider
operating in the areas in which we desire to operate. In addition, the purchase
and resale of the telephone service is subject to tariff agreements set by each
state.
RESULTS OF OPERATIONS
As of September 30, 1998, we purchased the assets and assumed the
liabilities of Tel Com East, Tel Com West and Tel Com Jacksonville. The
following table contains, for the periods indicated, results of operations data
as a percentage of revenues. Our results of operations are reported as a single
business segment.
<TABLE>
<CAPTION>
NINE MONTHS ENDED PERIODS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ---------------------------
2000 1999 1999 1998 1997
------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Sales ...................................... 100.0% 100.0% 100.0% 100.0% --
Cost of sales .............................. (33.4) (37.1) (38.1) (45.8) --
------ ----- ------ -----
GROSS PROFIT ............................... 66.6 62.9 61.9 54.2 --
Advertising expenses ....................... (6.1) (7.6) (7.0) (8.4) --
Depreciation and amortization expense ...... (5.1) (4.4) (4.4) (4.3) --
Provision for doubtful accounts
Receivables .............................. (26.5) (41.5) (39.1) (38.6) --
</TABLE>
29
<PAGE> 33
<TABLE>
<S> <C> <C> <C> <C> <C>
General and administrative expenses ........ (33.1) (41.2) (41.9) (49.6) --
Impairment loss ............................ -- -- -- (625.2) --
Loss on promoter receivable write off ...... (16.5) (14.8) (15.0) (14.8) --
------- ------- ------- -------
OPERATING (LOSS) ........................... (20.7) (46.6) (45.5) (686.7) --
Interest expense .......................... (1.9) (1.3) (1.8) (1.4) --
Net loss before income taxes and
extraordinary items ...................... (22.6) (47.9) (47.3) (688.1) --
Income tax benefit ........................ -- 3.2 2.3 -- --
Net loss before extraordinary items ....... (22.6) (44.7) (45.0) (688.1) --
Extraordinary items ....................... -- 5.2 4.0 -- --
NET LOSS .................................. (22.6)% (39.5)% (41.0)% (688.1)% --
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
Revenues
Our revenue decreased 11% from approximately $15,043,000 for the nine months
ended September 30, 1999 to approximately $13,359,000 for the nine months ended
September 30, 2000; however, our average monthly revenue per customer (based on
the average number of customers for the nine month periods ended September 30,
2000 and 1999) increased from $73 to $94. The decrease in our total revenues is
mainly due to a reduction of approximately 22% in the number of our subscribers.
The number of our subscribers decreased sharply because of our increased focus
on timely disconnecting non-paying customers.
The increase in our revenue per customer is due to our entering states with
higher permissible billing rates. The improvement in our profit margin and
reduction in our doubtful accounts is primarily the result of our efforts to
improve our collections by closely monitoring delinquent customer accounts. If a
customer fails to pay, we first suspend service and then, after the applicable
period of time has passed as required by state regulations, we permanently
disconnect service. We have improved our monitoring of delinquent customer
accounts by investing in software and adding additional monitoring procedures,
which have resulted in enabling us to disconnect problem accounts more
efficiently. This has allowed us to achieve a higher collection rate and to
greatly reduce the amount of our doubtful accounts. We believe the system we
have implemented to monitor our problem accounts will result in higher
collection rates in the future and thus, higher revenues per customer.
30
<PAGE> 34
Cost of Revenues
Our cost of revenues decreased 20% from approximately $5,580,000 for the
nine months ended September 30, 1999 to approximately $4,467,000 for the nine
months ended September 30, 2000. The decrease is directly related to reductions
in the number of our subscribers. The decrease in costs also resulted from the
correction of flaws in our billing system, which had, during the first and
second quarter of 1999, allowed some customers to receive services without a
bill being generated. In June 1999, we also corrected our system's inability to
decipher the local telephone service providers' encrypted bills. These
corrections enabled us to audit discrepancies. We believe all services
provided are billed and the increase in our revenue per customer indicates that
billing problems have been addressed.
Additionally, we have and will continue to indirectly benefit from the
merger of SBC Communications Inc. and Ameritech Corporation. The FCC has
mandated that SBC/Ameritech extend a promotional resale discount of 32% to all
eligible resellers of local telephone service, which commenced in November 1999
and will continue for two year period. We currently purchase local telephone
service from SBC/Ameritech at a discount which ranges between 6% and 21% of the
standard retail rates. Based on current telephone service providers billings, we
believe this discount program may result in an annual decrease in costs of
revenues of over $900,000.
Our cost of revenue also decreased as a result of the implementation of an
electronic data interface with SBC/Ameritech. This interface allows us to
communicate directly and electronically with SBC/Ameritech, which greatly
accelerates order processing, suspensions, and disconnections. Additionally, the
electronic data interface lowers processing fees that Ameritech charges, which
can be as high as $19.00 per manual order.
Advertising
Our advertising cost decreased $331,000 from approximately $1,145,000 for
the nine months ended September 30, 1999 to approximately $814,000 for the nine
months ended September 30, 2000. Because less money was available to be spent on
advertising due to our efforts to satisfy our outstanding obligations to local
telephone service providers and to pay non-recurring professional fees, we have
decreased our advertising budget. For the nine months ended September 30, 2000,
we allocated our reduced advertising budget to less expensive markets where, we
believed, our advertising would have the greatest impact in increasing the
number of activations. Our decrease in advertising costs for the nine months
ended September 30, 2000 includes approximately $150,000 in advertising credits
returned to us by an advertising agency.
Depreciation and Amortization
Our depreciation and amortization expense is the result of capital
expenditures, capitalized license and software cost amortization and
amortization of goodwill and the customer base acquired from Tel Com
Jacksonville, Tel Com East and Tel Com West. We had depreciation and
amortization expense of approximately $681,000 during the nine months ended
September 30, 2000 compared to approximately $666,000 for the same period in
1999. The increase of $15,000 is the result of capital additions, such as
computer equipment and software, during the nine month periods ended September
30, 2000 and 1999.
Provision for Doubtful Accounts Receivable
Our provision for doubtful accounts receivable cost decreased $2,695,000 from
approximately $6,241,000 for the nine months ended September 30, 1999 to
approximately $3,546,000 for the nine months ended September 30, 2000. During
the fourth quarter of 1999 and the first quarter of 2000 we invested in
additional software and developed existing software that allows us to keep in
constant contact with delinquent accounts, thereby, increasing our collection
percentage. This monitoring has resulted in a more timely disconnection of
problem accounts, thus decreasing the provision for doubtful accounts. For the
nine months ended September 30, 2000, our uncollectible billings were 27% of our
total billings as compared to approximately 41% for the nine months ended
September 30, 1999. We generally reserve 15% of our accounts receivable that
are due in 59 days or less and reserve 100% of our accounts receivables that are
past due by more than 60 days.
31
<PAGE> 35
General and Administrative Expenses
Our general and administrative expenses decreased $1,781,000 from
approximately $6,193,000 for the nine months ended September 30, 1999 to
approximately $4,532,000 for the nine months ended September 30, 2000. The
change in general and administrative expenses primarily resulted from the
following:
- a decrease of $921,000 in wages due to a decrease in the work force and
reductions in managements' salaries;
- a decrease of $336,000 in management fees and a decrease of $59,000 in
consulting fees due to the termination of a management contract with
Captive Administrators, Inc. in late 1999;
- a decrease of $174,000 in agent commissions;
- a decrease of $58,000 in office supplies due a smaller work force and
closer monitoring;
- a decrease of $58,000 in postage resulting from fewer mailings due to a
smaller subscriber base and increased usage of the computer and phone
to contact our customers; and
- a decrease of $79,000 in travel expenses due to less travel to agent
locations as a result of increased automation.
These decreases were offset by
- an increase of $136,000 in legal fees due to the filing of a complaint
against Joseph Cillo, et. al. and the filing of this prospectus;
- an increase of $37,000 in license expenses due to the filing of
delinquent filings in 2000 that were not filed in 1999;
- an increase of $34,000 in consulting fees to I-Nex Consulting Group for
its regulatory compliance consulting services;
- an increase of $36,000 in tax penalties on unpaid taxes (See
"Managements' Discussion and Analysis -- Liabilities");
- an increase of $37,000 in director fees not offered in 1999 and;
- an increase of $17,000 in SEC filing costs and financial printing
expenses not incurred in 1999.
Loss on Promoter Receivable Write Off
The loss on promoter receivable decreased by approximately $142,000 from
September 30, 1999 to September 30, 2000 due to a decrease in the interest
accrued on our rescission obligation to the former unitholders of Tel Com
Jacksonville. In early to mid-1998, Tel Com Jacksonville offered to repurchase
units of Tel Com Jacksonville held by persons or entities who had purchased such
units during 1997. This rescission offer was accepted by approximately 80 of the
holders, resulting in a rescission obligation in the principal amount of
approximately $995,000, which amount, plus interest, is being paid over time.
This principal amount represented the full amount paid by these holders of Tel
Com Jacksonville ownership units to the Tel Com Jacksonville promoter, D&B
Holdings. Tel Com Jacksonville received only $377,301 of the $995,000 paid by
the holders to the promoter. The remaining $617,699 was recorded as a promoter
receivable, all of which was written off in 1997. Interest accrues on the
rescission obligation at rate of 8% per annum and this interest is offset by a
promoter receivable and is immediately written off as uncollectible. We assumed
this liability when we purchased the assets of Tel Com Jacksonville. As the
principal amount of the rescission obligation decreases due to continued
payments, the promoter receivable amount for interest on this rescission
obligation also decreases.
The promoter receivable write off also includes our interest obligations to
holders of our securities to whom we are obligated to make a rescission offer
under a consent agreement we entered into with the State of Florida, Department
of Banking and Finance on May 12, 1999. Under this agreement, we, as successor
to Tel Com East, Tel Com West and Tel Com Jacksonville, agreed that securities
of our predecessor companies had been sold in violation of Florida securities
laws and we agreed to make an offer of rescission to holders of our stock who
received our stock in exchange for their units of ownership interests in our
predecessor companies. The estimated and recorded maximum rescission obligation
is $30,131,639, which includes $995,000 we have already offered to former
holders of units in Tel Com Jacksonville. The $30,131,639 amount represents the
gross proceeds paid by persons who purchased units in Tel Com East, Tel Com West
or Tel Com Jacksonville. Of this $30,131,639, Tel
32
<PAGE> 36
Com East, Tel Com West and Tel Com Jacksonville only received approximately
$6,451,000. The remaining $23,680,000 was allegedly received by various
independent sales organizations and intermediaries who sold units of our
predecessor companies. This amount was recorded as a promoter receivable, all of
which was written off. Simple interest accrues on this rescission obligation at
a rate of 10% per annum (except for the rescission obligation to Tel Com
Jacksonville holders which accrues interest at 8% per annum) and this interest
is offset by a promoter receivable, all of which was written off at the time the
sales occurred between January 1, 1997 through September 30, 1998. We have not
paid any amounts to any holder who is entitled to rescind his or her purchase
under the consent agreement. Therefore, the interest that is recorded as a
promoter receivable and immediately written off has remained constant. We
assumed this rescission offer liability when we purchased the assets of Tel Com
East, Tel Com West and Tel Com Jacksonville in 1998.
Interest Expense
For the nine months ended September 30, 2000, interest expense increased
$60,000 from approximately $196,000 for the nine months ended September 30, 1999
compared to approximately $256,000 for the nine months ended September 30, 2000.
The increase resulted from an increase of approximately $112,000 in interest
accrued on unpaid taxes, offset by the reduction of interest from the
forgiveness of two notes payable to Richard Pollara. During January 2000, Mr.
Pollara forgave and cancelled two promissory notes issued by us in the
aggregate amount of approximately $460,000.
Net Loss
Our net loss for the nine months ended September 30, 2000 was approximately
$3,017,000 as compared to a net loss of approximately $5,941,000 for the nine
months ended September 30, 1999. The $2,924,000 improvement in net loss
primarily was due to improvements in monitoring our customer base so
disconnection of non-paying customers were timely, reduced writeoffs of customer
billings, improvements in our general and administrative expenses through cost
saving efforts, and improvements in auditing the bills we received from
local telephone service providers.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
We began limited operations in February 1998 and had minimal revenues and
expenses until we acquired the assets and liabilities of Tel Com East, Tel Com
West and Tel Com Jacksonville as of September 30, 1998. This acquisition
resulted in significant increases in most of our accounts for the year ended
December 31, 1999 as compared to December 31, 1998 because we had a full year of
operations in 1999 as compared to only three months of significant operations in
1998.
Revenues
Our revenues increased 290% from approximately $5,066,000 for the year ended
December 31, 1998 to approximately $19,739,000 for the year ended December 31,
1999. The $14,672,000 increase was attributable to a partial year of operations
in 1998 as compared to a full year of operations in 1999.
Cost of Revenues
Our cost of revenues increased 224% from approximately $2,318,000 for the
year ended December 31, 1998 to approximately $7,515,000 for the year ended
December 31, 1999. The increase of $5,197,000 in costs was primarily due to a
partial year of operations in 1998 as compared to a full year of operations in
1999. In addition, our costs of revenues during the first half of 1999 were
inflated because of a flaw in our billing system that allowed customers to
receive services without a bill being generated. Further, we were unable to
decipher the local telephone service providers' encrypted bills in order to
audit discrepancies. These problems were addressed in the second half of 1999
and first quarter of 2000 by our efforts to closely monitor our billing system
to ensure that our services were being billed. Additionally, our development and
implementation of software that reads the encrypted data provided by the local
telephone service providers now permits us to audit any bill discrepancies.
Advertising
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<PAGE> 37
Our advertising cost increased $953,000 from approximately $431,000 for the
year ended December 31, 1998 to approximately $1,384,000 for the year ended
December 31, 1999. This increase is primarily due to a full year of operations
in 1999 as compared to a partial year of operations in 1998. This increase was
offset by a decrease in our advertising expenses during the third and fourth
quarter of 1999 because we had less funds to spend on advertising. Based on our
belief that our advertising budget could be managed more cost efficiently, we
shifted our promotional efforts to less expensive markets.
Depreciation and Amortization
Our depreciation and amortization expense is the result of capital
expenditures, capitalized license and software cost amortization and
amortization of goodwill and the customer base acquired from Tel Com East, Tel
Com West and Tel Com Jacksonville. We had depreciation and amortization expense
of approximately $869,000 during the year ended December 31, 1999 compared to
approximately $216,000 for the year ended December 31, 1998. The increase of
approximately $653,000 is due to three months of expense in 1998 as compared to
12 months in 1999. During 1999, we made several capital expenditures which
resulted in approximately $35,000 of additional depreciation in 1999.
Provision for Doubtful Accounts Receivable
Our provision for doubtful accounts receivable cost increased approximately
$5,756,000 from approximately $1,954,000 for the year ended December 31, 1998 to
approximately $7,709,000 for the year ended December 31, 1999. The percentage of
our uncollectible billings for the years ended December 31, 1998 and 1999 was
39% of our total billings. This rate is a high percentage of the billings due to
the high credit risk of our customers. In addition, during 1998 and the first
half of 1999, these rates were higher than expected due to flaws in our billing
system's ability to track and closely monitor delinquent accounts. The increase
in the provision of doubtful accounts receivable costs were offset by the
implementation of a plan to more closely monitor delinquent accounts and the
development and implementation of software to audit discrepancies with the bills
generated by local telephone service providers.
General and Administrative Expenses
Our general and administrative expenses increased approximately $5,766,000
from approximately $2,517,000 for year ended December 31, 1998 to approximately
$8,284,000 for the year ended December 31, 1999. The increased general and
administrative expenses were attributable to a full year of expenses in 1999 as
compared to only three months in 1998. the largest increases are as follows:
- an increase in wages of $2,920,000 due to an increase in our workforce;
- an increase of $562,000 in commissions paid to our paying agents;
- an increase of $536,000 in in-house phone costs relating to an increase
of volume in calls by potential customers and customer service calls by
existing customers;
- an increase in legal costs of $431,000 during 1999 as a result of our
retention of attorneys for licensing and securities laws;
- an increase of $343,000 in accounting fees related to audits required
by the State of Florida's consent agreement;
- an increase Of $242,000 in consulting and
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<PAGE> 38
outside services utilized to obtain licenses and to comply with state
utility filing requirements;
- an increase of $270,000 in penalties related to unpaid taxes;
- an increase of $147,000 for postage fees for the mailing of our monthly
subscriber bills; and
- an increase of $134,000 in office and equipment rent;
Impairment Loss
Our impairment loss was $0 for the year ended December 31, 1999 as compared
to approximately $31,675,000 for the year ended December 31, 1998. This
impairment loss was due to the write off of impaired goodwill and customer base
that we acquired as a result of our purchase of the assets of Tel Com East, Tel
Com West and Tel Com Jacksonville. We issued our stock to the unitholders of
Tel Com East, Tel Com West and Tel Com Jacksonville, valued at approximately
$3,802,000, to acquire assets of approximately $3,446,000 and assume net
liabilities of approximately $31,674,000. This resulted in a total purchase
price of approximately $35,476,000. Intangible assets were valued at
$35,476,000. Seventy-five percent (75%) of the value of the intangible assets
was allocated to goodwill in the amount of approximately $26,607,000 and 25% of
the value of the intangible assets was allocated to customer base in the amount
of approximately $8,869,000. The fair market value of the entities acquired was
approximately $3,802,000 based on an appraisal performed by certified
appraisers. Based on the value of this appraisal, the value of the goodwill
and customer base was deemed to be impaired. Therefore, the value attributed to
these intangible assets was written down by approximately $31,675,000 to the
fair market value of our acquisition. This resulted in the recognition of
approximately $31,675,000 in 1998 as an impairment loss.
At the time we purchased the assets and assumed the liabilities of Tel Com
East, Tel Com West and Tel Com Jacksonville, the Tel Com entities had
liabilities of approximately $4,534,000. Subsequent to the date of the purchase,
the liabilities of these entities were increased to approximately $35,121,000
because of the consent agreement we, as successor to Tel Com East, Tel Com West
and Tel Com Jacksonville, entered into with the State of Florida, Department of
Banking and Finance on May 12, 1999. Under this agreement, we agreed that units
of our predecessor companies, which were exchanged for our stock, had been sold
in violation of Florida securities laws and thus, we agreed to make an offer of
rescission to certain of our shareholders. Because of our agreement to make this
rescission offer, we are bound by applicable accounting rules and regulations to
record the rescission obligation plus accrued interest as a liability as of the
date the shares of our stock were sold. Therefore, the liabilities of the Tel
Com entities as of the date we purchased their assets and assumed their
liabilities were deemed to include the rescission obligation and related accrued
interest.
Loss on Promoter Receivable Write Off
The loss on promoter receivable increased by approximately $2,210,000 from
$748,000 as of December 31, 1998 to $2,958,000 as of December 31, 1999 as a
result three months of activity in 1998 compared to 12 months of activity in
1999. This increase was offset by a decrease in interest accrued on the $995,000
rescission obligation to former unitholders of Tel Com Jacksonville as a result
of payments of $120,000 in 1998 and $371,000 in 1999 on this obligation. The
rescission obligation to former unitholders of Tel Com Jacksonville was $406,000
at December 31, 1999.
Interest Expense
For the year ended December 31, 1999, interest expense increased $291,000 to
approximately $361,000 for the year ended December 31, 1999 as compared to
approximately $70,000 for the year ended December 31, 1998. This increase
resulted from a increase in interest expense on unpaid taxes of $169,000, an
increase of $30,000 from two obligations to Richard Pollara, an increase of
$11,000 from a note payable to Joseph Thacker and an increase of $4,000 from our
line of credit. These increases are the result of a full year of interest
expense in 1999 compared to only three months in 1998.
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<PAGE> 39
Income Tax Benefit and Extraordinary Item
In August 1999, we entered into a settlement agreement with Easy Phone, Inc.
Under this agreement, we agreed that we owed Easy Phone $1,315,742 for accrued
local telephone service provider obligations and Easy Phone agreed to release
us from this obligation in exchange for our transfer of 1,900,000 shares of
Easy Phone's common stock to Easy Phone. Prior to this settlement agreement, we
did not own any shares of Easy Phone; however, our president, Mr. Pollara, and
three other shareholders owned an aggregate of 1,900,000 shares of Easy Phone.
Mr. Pollara and the three shareholders agreed to sell these shares of Easy
Phone to us for an aggregate purchase price of $57,495. We, in turn,
transferred these shares to Easy Phone in exchange for a release from our local
telephone service provider obligations to Easy Phone. We had assumed these
obligations owed to Easy Phone as part of the acquisition of the predecessor
companies each of which had operated under the Easy Phone operating licenses.
This resulted in an extraordinary gain calculated as follows:
<TABLE>
<S> <C>
Release of accrued carrier costs $ 1,315,742
Cost of transferred Easy Phone
stock (57,495)
-----------
1,258,247
Income tax 469,326
-----------
Net extraordinary gain $ 788,921
===========
</TABLE>
Net Loss
Our net loss for the year ended December 31, 1999 was approximately
$8,083,000, as compared to a net loss of approximately $34,863,000 for the year
ended December 31, 1998. The $26,780,000 improvement in our net loss was
primarily due to a one-time gain in 1999 of $1,258,247 related to the settlement
of the local telephone service provider obligation with Easy Phone and by a non-
operating impairment loss in 1998 of $31,675,000.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
We began limited operations in February 1998 and began full operations
after we acquired the assets and liabilities of Tel Com East, Tel Com West and
Tel Com Jacksonville as of September 30, 1998. During 1997, we did not have any
operations and we only incurred expenses related to our organization.
Revenues
Our revenues for the year ended December 31, 1998 were approximately
$5,066,000. For the first nine months of 1998, our revenues were only
approximately $395,000. As part of the acquisition of Tel Com East, Tel Com West
and Tel Com Jacksonville, we acquired 9,686 customers. By December 31, 1998, we
had expanded this customer base to 24,718. The increase in subscribers was
attributable to the expansion of our operations and the increase of our
advertising activities in Florida and California and to the entrance into new
states in late 1998, such as Arizona, Massachusetts, and New Jersey.
Cost of Revenues
Our cost of revenues was $2,317,945 for the year ended December 31, 1998.
These costs are the direct costs to purchase local telephone service from the
major local telephone service providers such as Bell South and GTE. These costs
are directly related to our subscribers base.
Advertising
Our advertising costs were approximately $431,000 for the year ended
December 31, 1998. Our advertising activities consisted primarily of television
commercials. During 1998 we focused on markets in California and Florida.
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<PAGE> 40
Depreciation and Amortization
Our depreciation and amortization expense is the result of capital
expenditures, capitalized license and software cost amortization and
amortization of goodwill and the customer base acquired from our predecessor
companies. We had depreciation and amortization expenses of approximately
$216,000 for the year ended December 31, 1998.
Provision for Doubtful Accounts Receivable
Our provision for doubtful accounts receivable was approximately $1,954,000
for the year ended December 31, 1998 which represents approximately 39% of our
total billings.
General and Administrative Expenses
Our general and administrative expenses amounted to $2,517,470 during 1998.
The following are the material balances that make up the $2,517,000:
- Wages of $1,052,000 with a workforce of 152 persons as of December 31,
1998;
- Consulting and outside services of $405,000 which we utilized to obtain
licenses and to comply with federal and state regulatory requirements;
- Penalties of $183,000 related to unpaid taxes;
- Arbitration settlement with MCI for $152,000 for our non-payment of
disputed phone services provided by MCI;
- In-house phone costs of $133,000 to handle potential subscriber calls,
and customer service for existing customers;
- Commission costs of $102,000 paid to our payment agents;
- Legal fees of $87,000 mainly related to obtaining operating licenses in
new states;
- Travel and meals of $70,000 to reimburse employees for their expenses
incurred while recruiting new agents;
- Postage of $60,000 for the mailing of our monthly subscriber bills; and
- The largest remaining balances are related to outside accounting fees of
$38,000, insurance of $9,000, office supplies of $47,000, office and
equipment rent of $53,000, and utilities of $6,000.
Impairment Loss
Our impairment loss was $31,675,000 in 1998, and was due to the write off of
impaired goodwill and customer base that was purchased from Tel Com East, Tel
Com West and Tel Com Jacksonville as of September 30, 1998.
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<PAGE> 41
Loss on Promoter Receivable Write Off
The loss on promoter receivable was approximately $748,000 during 1998.
Interest Expense
For the year ended December 31, 1998, interest expenses were approximately
$70,000. This amount was comprised of $4,000 arising from the note payable to
Joseph Thacker, $10,000 from the two obligations owed to Richard Pollara and
$56,000 related to interest on unpaid taxes.
Net Loss
Our net loss for the year ended December 31, 1998 was approximately
$34,863,000 and was largely impacted by non-operating charges of an impairment
loss of $31,675,000 and a promoter receivable write off of $748,000.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have satisfied our cash requirements primarily from
our revenues from operations and from the sale of our common stock and sales of
units of ownership interests in Tel Com East, Tel Com Jacksonville and Tel Com
West. We have raised approximately $2,340,000 through the sale of our common
stock and approximately $6,451,000 through the sale of units of Tel Com East,
Tel Com Jacksonville and Tel Com West. Additionally, we have periodically drawn
upon a $50,000 bank line of credit and have also received periodic advances
from Richard Pollara, our president, to fund our growth and working capital
requirements. We have recorded a loan of $150,000 from a shareholder, the
validity of which is disputed. The bank line of credit was closed in February
2000.
We had negative cash and cash equivalents totaling approximately $246,000
and a negative working capital of approximately $6,501,556 at September 30, 2000
compared to cash and cash equivalents of approximately $56,000 and negative
working capital of approximately $6,667,000 at December 31, 1999. Our cash and
cash equivalents were approximately $628,000 and our negative working capital
was approximately $3,920,000 at December 31, 1998.
We believe that our funds from operations will be sufficient to satisfy our
cash requirements for at least the next twelve months, unless participants who
invested a significant amount of funds in our stock exchange their stock for
our notes and our operating income is insufficient to satisfy our operating
expenses and our obligations under the notes. We cannot determine this amount
at this time. In addition, our funds from operations will not be sufficient to
satisfy our cash requirements if we are required to pay a large portion of our
unremitted taxes, together with penalties and interest, within the next 12
months. Our capital requirements will depend on numerous factors, such as the
number of our shareholders who elect to exchange their shares for our notes,
the amount we are required to pay for unremitted taxes, penalties and interest,
and the amount we recover, if any, from our lawsuit against Joseph Cillo, et
al. in Hillsborough County, Florida.
We may need to raise additional capital to fund the payment of principal
and interest on the notes and to fund the payment of our unremitted taxes,
together with penalties and interest. If additional funds are raised through
the issuance of stock, the percentage ownership of our shareholders will be
reduced and our shareholders may experience dilution. There can be no assurance
that additional financing will be available or on terms favorable to us. If
adequate funds are not available or are not available on acceptable terms, our
ability to pay the principal and interest on the notes, fund the expansion of
our markets and take advantage of unanticipated opportunities or otherwise
respond to competitive pressures could be significantly limited. Our business
may be harmed by such limitations.
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<PAGE> 42
We have the following material commitments and contingent liabilities:
- Our recession obligation to our shareholders under the Florida consent
agreement. We have recorded the maximum rescission liability of $30,131,000,
which amount is based upon the aggregate purchase price paid for our stock
(or units of ownership interests in our predecessor companies). This
rescission liability amount includes our rescission obligation to the former
unitholders of Tel Com Jacksonville. Eighty former unitholders of Tel Com
Jacksonville accepted our rescission offer made in 1998, resulting in a
rescission obligation of $995,000. We have continued to make monthly
payments on this obligation and the balance was approximately $108,000 at
September 30, 2000.
- Our contingent liability to our shareholders who purchased common stock from
February 1999 through December 31, 1999. Under this exchange offer, we are
offering to exchange these shares of our common stock for our notes or Class
B preferred stock because the issuance of these shares may not have complied
with federal and applicable state securities laws. We estimate our
contingent liability to repurchase their shares to be approximately
$1,341,000.
- Our contingent liability to Easy Phone, Inc. related to sales taxes, excise
taxes and related interest and penalties. In August 1999, we reached a
settlement agreement with Easy Phone, Inc. whereby Easy Phone, Inc. agreed
to pay fees owed to a local telephone service provider and we agreed to
indemnify Easy Phone from any tax liabilities. The tax liabilities of Easy
Phone, Inc. have been assumed by us as part of the business combination
between us and our predecessor companies. Prior to the business combination,
Tel Com East, Tel Com West and Tel Com Jacksonville had operated under Easy
Phone, Inc.'s operating licenses, resulting in a tax liability under Easy
Phone's name. The indemnified tax liability and accrued interest and
penalties is approximately $1,717,000 at September 30, 2000. If this
contingent liability materializes, we plan to finance this liability from
operations.
- Our liability to MCI Telecommunications Corp under, a settlement agreement
and release between us and MCI with regard to nonpayment of phone service.
We have reserved $152,000 in respect of this obligation and we plan to fund
this obligation from operations. This amount was to be paid in full by
September 15, 2000. As of September 30, 2000, we have made one payment of
$25,000 and the remaining balance of $127,000 is in default.
- Our liability to Pacific Bell in the amount of $239,000. During February
2000, we filed a complaint with the California Public Utilities Commission
against Pacific Bell for failure to block our customers from making certain
toll calls and using certain usage sensitive calling features, such as
directory assistance. We have estimated that the failure to block these
items cost us approximately $239,000. It is not yet possible to evaluate the
likelihood of a favorable outcome.
As described in Note B, "Going Concern Uncertainty" to the accompanying
financial statements, there is substantial doubt as to our ability to continue
as a going concern. We have incurred substantial operating losses since
inception and, in addition, we had negative working capital at December 31, 1999
of approximately $6,667,000. These conditions combined with the exchange offer
have raised substantial doubt about our ability to continue as a going concern.
Management's plan regarding these matters is discussed in Note B to the
accompanying financial statements and elsewhere in this prospectus.
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<PAGE> 43
CHANGES IN FINANCIAL POSITION
Net cash provided by operating activities was approximately $156,000 for the
nine months ended September 30, 2000. Net cash used by operating activities was
approximately $1,888,000 for the nine months ended September 30, 1999,
$2,152,000 for the year ended December 31, 1999, $1,393,000 for the year ended
December 31, 1998, and $0 for the period ended December 31, 1997. The increase
in net cash provided by operating activities for the nine month period ended
September 30, 2000, as compared to net cash used for the nine month period ended
September 30, 1999, was due to reductions in net losses that were a result of
decreased general and administrative expenses. These reductions were offset by
our effort to satisfy past due telephone service provider obligations, which
used net cash of approximately $731,000 during the period. The decrease of
approximately $759,000 in net cash used by operating activities for the year
ended December 31, 1999, as compared to the year ended December 31, 1998, was
primarily due to a smaller net loss for the year ended December 31, 1999 as
compared to December 31, 1998. The increase of $1,393,000 in net cash used by
operating activities for the year ended December 31, 1998 as compared to the
period ended December 31, 1997 resulted from a partial year of operations and
expansion during 1998 and no operations in 1997.
Net cash used by investing activities was approximately $74,000 for the nine
months ended September 30, 2000 as compared to approximately $280,000 for the
nine months ended September 30, 1999. This decrease in net cash used by
investing activities was primarily due to a decrease in purchases of software,
property and equipment. Net cash used by investing activities was approximately
$305,000 for the year ended December 31, 1999 as compared to approximately
$181,000 for the year ended December 31, 1998. This increase in net cash used by
investing activities for the year ended December 31, 1999 as compared to the
year ended December 31, 1998 was primarily the result of a one-time increase in
net cash provided by investing activities in 1998 as a result of cash received
from the acquisition of Tel Com East, Tel Com West and Tel Com Jacksonville. In
fact, during 1998, we purchased approximately $257,000 more in software than we
did in 1999. We did not have any net cash used by investing activities for the
period ended December 31, 1997.
Net cash used by financing activities was approximately $139,000 for the
nine months ended September 30, 2000. Net cash provided by financing activities
was approximately $1,540,000 for the nine months ended September 30, 1999. This
decrease in net cash provided by financing activities for the nine months ended
September 30, 2000 as compared to September 30, 1999 primarily resulted from the
absence of any proceeds being received from the issuance of capital stock for
cash during the nine months ended September 30, 2000 as compared to proceeds of
approximately $1,835,000 from the issuance of our common stock for cash during
the nine months ended September 30, 1999. Net cash provided by financing
activities was approximately $1,885,000 for the year ended December 31, 1999 as
compared to approximately $2,201,000 for the year ended December 31, 1998. This
decrease of $317,000 in net cash provided by financing activities for the year
ended December 31, 1999 as compared to the year ended December 31, 1998 was
primarily due to our assumption of promissory notes issued to our predecessor
companies during 1998 in the amount of approximately $606,000 which impacted the
net cash provided by financing activities for the year ended December 31, 1998.
We also received $150,000 from the sale of 400,000 shares of our common stock in
December 1998. During 1998, we received cash on behalf of our predecessor
companies of approximately $1,407,000. We did not have any cash provided nor did
we use any cash during 1997 for financing activities.
ASSETS
The asset portion of the balance sheet provides liquidity primarily through
cash and cash equivalents and the collection of accounts receivables. Our
current assets increased approximately $89,000 for the nine months ended
September 30, 2000, as compared to the nine month period ended September 30,
2000. For the year ended December 31, 1999, our current assets
decreased approximately $680,000. Our current assets as of December 31, 1998
were $1,777,023.
The material changes to current assets are the results of changes in the
cash and accounts receivable balances. For the nine months ended September 30,
2000, the notes receivable balance increased approximately $134,000 because of a
promissory note issued to us by one of our advertising agencies for services
paid for during 2000 but never performed. In addition, there was an increase of
approximately $49,000 in prepaid expenses and other assets for the nine months
ended September 30, 2000 which is the result of prepaid legal fees and prepaid
insurance for directors and officers. This increase in current assets for the
nine month period ended September 30, 2000 was offset by a decrease in cash of
approximately $56,000, a decrease in the accounts receivable balance, net of the
allowance for doubtful accounts, of approximately $24,000 and a decrease in
agent receivables of approximately $14,000. This decrease in cash is due to our
increased efforts to decrease our obligations to local telephone service
providers and to decrease our past due tax obligations. The decrease in accounts
receivable, net of allowance for doubtful accounts, is primarily due to a
decrease in the number of subscribers, partially offset by improvements in
collections. The decrease in agent receivables is a result of the shift from our
customers using our paying agents to using other payment methods such as Western
Union. The decrease in current assets from December 1998 to December 1999 was
due to decreases in cash used to pay obligations and a decrease of approximately
$128,000 in accounts receivable due to a reduction in the subscriber base.
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<PAGE> 44
We purchased equipment and made leasehold improvements totaling
approximately $16,000 for the nine months ended September 30, 2000, $196,000 for
the year ended December 31, 1999 and $111,000 for the year ended December 31,
1998. In addition we purchased and developed a customer tracking and billing
software of approximately $58,000 for the nine months ended September 30, 2000,
$109,000 for the year ended December 31, 1999 and $366,000 for the year ended
December 31, 1998. The decreases in our spending are due to large capital
outlays during 1998 to develop and purchase the required assets and develop the
customer tracking and billing software to improve operations. Since 1998, our
expenditures were to maintain these assets and minor upgrades.
Based on our current business strategy, we do not anticipate any further
substantial capital expenditure for purchases of equipment and software.
Liabilities
The liability portion of the balance sheet reflects various borrowings from
related parties and a line of credit with Bank of America, which was closed
effective February 29, 2000. Our current liabilities decreased by approximately
$76,000 for the nine months ended September 30, 2000 and increased by
approximately $2,067,000 for the year ended December 31, 1999 and $1,991,000 for
the year ended December 31, 1998. The material changes in our current
liabilities are described below.
During 1998 we borrowed $50,000 on a line of credit and during the nine
months ended September 30, 2000, the line of credit was cancelled with a payment
of approximately $46,000. In September 1998, we purportedly borrowed $150,000
from a shareholder, Joseph Thacker, and issued a promissory note in the
principal amount of $150,000. The promissory note accrued interest at 10% per
annum, and was due and payable on September 28, 2000. The validity of this note
is being challenged by us in the complaint filed by the Company against Joseph
Cillo, et al. in the Thirteenth Judicial Circuit of Hillsborough County,
Florida. We allege that Mr. Thacker did not make a loan to us, but rather the
$150,000 received by us actually came from payments made by persons purchasing
our stock. Mr. Thacker filed suit against us in September 2000 for failure to
pay the principal and interest due to him under this note. See the description
of these lawsuits under the heading "Business -- Legal Proceedings." Mr. Pollara
and Robin Caldwell advanced us an aggregate of $80,000 in 1999 and $91,000 in
2000 to fund operating cash shortfalls. The balance on these advances at
September 30, 2000 was approximately $30,000.
In January 2000, two notes payable and related interest totaling
approximately $570,000 were forgiven by Richard Pollara. These notes originated
as part of the joint venture agreements entered into during 1997 between Easy
Phone and Tel Com East and Tel Com West.
Our accrued local telephone service provider obligations decreased by
approximately $731,000 for the nine months ended September 30, 2000 and $341,000
for the year ended December 31, 1999. These decreases are due to efforts made to
reduce our outstanding obligations to telephone service providers, costs
reductions provided by the local telephone service providers and reductions in
our subscriber base. For the year ended December 31, 1998, our local telephone
service provider obligations increased by $721,000 due to increases in the
subscriber base, problems in monitoring these costs estimated at $40,000 and
delays of payments at the end of 1998 related to cash management.
Our accrued sales taxes, penalties and interest increased by approximately
$1,208,000 for the nine months ended September 30, 2000, $1,463,000 for the year
ended December 31, 1999 and $505,000 for the year ended December 31, 1998. These
increases resulted from additional taxes being incurred and the accrual of
related interest and penalties in excess of payments. We are delinquent in
filing various state and municipal sales and excise tax returns and have not
remitted all taxes collected. At September 30, 2000, we recorded an obligation
for unremitted taxes of $3,047,547 and for penalties and interest on such
unremitted taxes of $1,850,568.
Our rescission obligation under the Florida consent agreement to our
shareholders who were former unitholders in Tel Com East, Tel Com West or Tel
Com Jacksonville was approximately $29,243,000 as of September 30, 2000,
approximately $29,541,000 as of December 31, 1999 and approximately $29,913,000
as of December 31, 1998. The decrease of $298,000 for the nine months ended
September 30, 2000 as compared to the year ended December 31, 1999 and $372,000
for the year ended December 31, 1999 as compared to December 31, 1998 is due to
the decrease in the principal amount of our rescission obligation. The principal
amount of our rescission obligation has decreased because of our payments to
former unitholders of Tel Com Jacksonville who elected to rescind their purchase
of such units under our rescission offer in 1998. We repurchased 80 units from
such former unitholders for $995,000 plus interest. This amount is being paid
over time. We made payments of approximately $298,000 during the nine months
ended September 30, 2000, $371,000 during the year ended December 31, 1999 and
$120,000 during the year ended December 31, 1998. The remaining rescission
obligation at September 30, 2000 is approximately $108,000.
41
<PAGE> 45
Shareholders Deficit
Our shareholders deficit has changed as a result of operating losses, the
forgiveness by Mr. Pollara in January 2000 of our obligation to him under
promissory notes, which was treated as a contribution of capital, and the sale
of our common stock. We have received cash from the sale of our common stock of
$0 during the nine months ended September 30, 2000, approximately $2,190,000 for
the year ended December 31, 1999 and approximately $150,000 for the year ended
December 31, 1998. Our predecessor companies received cash of $6,451,000 from
the sale of units of ownership interests in Tel Com East, Tel Com Jacksonville
and Tel Com West during 1997 and 1998.
The following table details all sales of common stock since our inception
and sales of units of ownership interests in our predecessor companies:
<TABLE>
<CAPTION>
AMOUNT SUBJECT TO
RECEIVED BY THE EXCHANGE
DESCRIPTION DATE QUANTITY THE COMPANY OFFER
----------- ---- -------- ----------- ------------
<S> <C> <C> <C> <C>
Securities sold in 1999
(Common Shares)
Private Placement February 1999 through 446,970 $ 1,340,909 Yes
December 1999
Joseph Thacker(1) January through February 1999 400,000 $ 150,000 No
Prime Equities Group, Inc.(2) August through December 1999 670,000 $ 699,500 No
Securities sold in 1998
(Common Shares)
Joseph Thacker(1) December 1998 400,000 $ 150,000 No
Units sold
Tel Com Jacksonville units sold to D&B During 1997 160 $ 750,000 Yes
Holdings
Tel Com East units sold to Prime Equities May 1997 to September 1998 1,805 $ 2,246,939 Yes
Group, Inc.
Tel Com West units sold to Prime Equities July 1997 to September 1998 2,856 $ 3,454,002 Yes
Group, Inc.
</TABLE>
(1) We entered into an agreement with Joseph Thacker dated December 23, 1998
in which we agreed to issue to Mr. Thacker 400,000 shares of our common
stock for $150,000. In February 1999, we entered into another agreement
with Mr. Thacker in which Mr. Thacker agreed to loan us $150,000 in
exchange for 400,000 shares of our common stock, plus repayment of this
loan with interest at 10% per annum. In addition, this agreement
provided that Mr. Thacker had the option to accept repayment of the loan
in our common shares at a price of $0.50 per share. Present management
believes that this agreement was intended to effect the purchase of
400,000 shares of common stock for $150,000 and to amend the repayment
terms of our $150,000 promissory note issued to Mr. Thacker as of
September 22, 1998. In connection with the lawsuit we brought against
Joseph Cillo, et al. on September 27, 2000 in the Thirteenth Judicial
Circuit Court of Hillsborough County, Florida, we contest the validity
of these agreements between Mr. Thacker and us. Mr. Thacker brought a
lawsuit against us on September 20, 2000 for failure to pay the
principal and interest when due under the promissory note issued by us
to Mr. Thacker on September 22, 1998 in the principal amount of
$150,000. A description of these lawsuits is contained under the heading
"Business--Legal Proceedings."
(2) During 1999, we entered into the following agreements with Prime
Equities Group, Inc.:
- August 1999: Prime Equities agreed to purchase 450,000 shares of our
common stock for $450,000;
- October 1999: Prime Equities agreed to purchase 165,000 shares of
our common stock for $165,000;
- December 1999:
- Prime Equities agreed to purchase 72,500 shares of our common
stock for $72,500; and
- Prime Equities agreed to purchase 85,000 shares of our common
stock for $85,000.
We received payment of $699,500 from Prime Equities, or on behalf of
Prime Equities, in connection with these agreements. The agreement in
December 1999 for 85,000 shares of our common stock was the only
agreement under which we did not receive payment and therefore did not
issue shares. After these agreements were executed and the money had
been deposited in our account, we realized that the shares issued in
connection with these agreements had been issued not to Prime Equities
but to various individuals. At the time these shares were issued, we did
not have control of our corporate documents or stock records. We have
asserted claims against certain defendants in the lawsuit we recently
filed against Joseph Cillo, et al. in connection with such unauthorized
issuances of our shares. A description of this lawsuit is contained
under the heading "Business--Legal Proceedings"
42
<PAGE> 46
BUSINESS
THE COMPANY
We provide residential local telephone service to people with bad credit.
Typically, our customers have been disconnected by their local telephone service
provider because of nonpayment. Most local service providers require
disconnected customers to pay a security deposit in addition to their past due
balance before the provider will reconnect their service. We focus on those
consumers who have been disconnected by their local service provider and cannot
afford to reconnect service with that provider. We offer these consumers local
telephone service for a fixed monthly price without requiring a security
deposit.
We have obtained licenses from public utility commissions in 26 states to
operate as a competitive local telephone service provider within those states.
In this capacity, we are able to purchase telephone service from major local
telephone service providers, such as Verizon Communications, BellSouth,
SouthWestern Bell, Sprint, and US West at wholesale rates and then resell the
local telephone service to our customers. As of December 4, 2000, we had 14,948
customers. Our principal executive offices are located at Suite 118, 5251 110th
Avenue North, Clearwater, Florida 33760.
OUR HISTORY
We were incorporated in the State of Florida on November 19, 1997. In
February 1998, we began limited operations. From February 1998 to September
1998, we obtained licenses from approximately five state public utility
commissions to resell local telephone service and entered into several
agreements with local telephone service providers to purchase wholesale local
telephone service. As of September 30, 1998, we purchased the assets and assumed
liabilities of Tel Com East, Tel Com West and Tel Com Jacksonville. The purpose
of this transaction was to obtain operational efficiencies by combining
administrative, management, marketing and finance functions of the various
companies. In connection with this consolidation, the holders of units in each
of Tel Com Jacksonville, Tel Com East and Tel Com West received shares of our
common stock and Class A preferred stock in the amounts and at the ratios shown
below:
- Tel Com East: For each unit of Tel Com East, a holder received 800
shares of our common stock and 3,200 shares of our Class A preferred
stock.
- Tel Com West: For each unit of Tel Com West, a holder received 800
shares of our common stock and 3,200 shares of our Class A preferred
stock.
- Tel Com Jacksonville: For each unit of Tel Com Jacksonville, a
holder received 4,400 shares of our common stock and 17,600 shares
of our Class A preferred stock.
We have discovered, through our review of shareholder records, that some
former unitholders did not receive the correct number of shares of common stock
and Class A preferred stock. Although our shareholders and the unitholders of
Tel Com East, Tel Com West and Tel Com Jacksonville voted on and approved this
business combination, no documents of transfer were executed by the parties to
this transaction.
Tel Com East, Tel Com West and Tel Com Jacksonville were formed as limited
liability companies during late 1996 and early 1997 by Charles Polley. Tel Com
Plus, Inc., a Nevada corporation controlled by Mr. Polley, served as the
managing member of each of these entities. During the initial operational phase
of the Tel Com entities, Richard Pollara, our current president, was president
of, and a substantial shareholder of, Easy Phone, Inc., a company providing
cellular and residential phone service. After learning about Easy Phone's
business, Mr. Polley contacted Easy Phone and proposed forming a joint venture
between each of the Tel Com entities and Easy Phone. Easy Phone decided to enter
into joint ventures with each of the Tel Com entities.
Prior to entering into any joint venture agreements, Mr. Pollara, on behalf
of Easy Phone, and Mr. Polley, on behalf of Tel Com Plus, Inc., entered into an
agreement dated January 8, 1997 whereby the parties agreed that certain limited
liability companies would be formed to carry out the purpose of the joint
ventures. Under each of the joint venture agreements, Easy Phone agreed to grant
the ventures exclusive use of its state public utility licenses and its reseller
agreements with local telephone service providers in exchange for an ownership
percentage in each Tel Com entity. On December 30, 1997, Tel Com East, Tel Com
West and Tel Com Jacksonville entered into an agency agreement with Easy Phone,
which superceded the joint venture agreements. This agency agreement allowed the
Tel Com entities to operate under the state public utility licenses and reseller
agreements held by Easy Phone for a monthly rental fee of $20,000. In addition,
each of the Tel Com entities agreed to pay the amounts due to the local service
provider for providing local telephone service to their customers. On December
31, 1997, Easy Phone redeemed a portion of Mr. Pollara's shares in Easy Phone,
approximately 460,000 shares, and as consideration transferred to Mr. Pollara
its interest in Tel Com East, Tel Com West and Tel Com Jacksonville. The shares
of Easy Phone exchanged by Mr. Pollara were valued at approximately $170,000.
43
<PAGE> 47
Overview of Capital Raising Activities
During 1997, we believe that units of ownership interests in each of Tel Com
East, Tel Com West and Tel Com Jacksonville were sold through a series of
unregistered offerings and sales. The ultimate investors, comprised mostly of
individual investors, paid an aggregate purchase price of approximately $30
million for the securities of the Tel Com entities. However, the Tel Com
entities only received approximately $6.45 million of the aggregate purchase
price paid by the ultimate investors. We believe that the remaining amount of
the proceeds, approximately $23.55 million, was distributed to various
independent sales organizations, intermediaries and individuals involved in
these offers and sales.
The chain of events began with the Tel Com entities entering into purchase
agreements with intermediaries, namely D&B Holdings and Prime Equities. The
purchase agreements provided that the Tel Com entities would receive
approximately $20.25 million from the various intermediaries for their
securities, and the purchase price for these securities, would be paid by the
delivery of non-recourse promissory notes issued by the intermediaries. The
promissory notes issued to the Tel Com entities have not been fully satisfied as
the Tel Com entities only received an aggregate of approximately $6.45 million
of the $20.25 million principal amount of the promissory notes.
These intermediaries promptly resold the securities directly to the ultimate
investors or to independent sales organizations at a significant mark-up. The
ultimate investors were instructed by the intermediaries or the independent
sales organizations to pay the full purchase price to designated paying agents.
Once the money was deposited into these paying agent accounts, the paying agents
disbursed the funds to the Tel Com entities, Tel Com Plus, Inc., various
intermediaries, independent sales organizations and certain individuals. We
believe that the ultimate investors were unaware that the full purchase price
that they paid would not be forwarded to the issuing entity. Present management
did not participate in these offerings or sales of units in Tel Com East, Tel
Com West or Tel Com Jacksonville. We have filed a lawsuit against certain
intermediaries and individuals involved in these transactions. This lawsuit is
described under the heading "Business-Legal Proceedings."
Tel Com Jacksonville
Tel Com Jacksonville was formed in February 1997. Its sole managing member
was Tel Com Plus, Inc. During 1997 and 1998, investors paid an aggregate of
approximately $2 million for units in Tel Com Jacksonville, of which Tel Com
Jacksonville only received $750,000. The remaining $1.25 million of the proceeds
were distributed to D&B Holdings, the intermediary involved in these
unregistered offerings and sales and certain other facilitators of these
offerings and sales. An explanation of the capitalization and fund raising
activities of Tel Com Jacksonville is outlined below:
- Purchase Agreement: On December 3, 1996, prior to the filing of a
Certificate of Formation with the Florida Secretary of State, Tel
Com Jacksonville entered into a purchase agreement with D&B Holdings
for D&B Holdings to purchase a 62.5% interest in Tel Com
Jacksonville, or 160 units, for $750,000, or $4,687.50 per unit. The
purchase price was paid by delivery of a non-recourse promissory
note issued by D&B Holdings to Tel Com Jacksonville. The
promissory note was ultimately satisfied.
- Intermediaries: After the date of this purchase agreement, D&B
Holdings sold these units at significantly higher prices to
investors in unregistered offerings. To our knowledge, the per unit
price paid by ultimate investors ranged from $7,500 to $15,000.
- Disbursement of Funds: After the ultimate purchasers transferred
money to Funds Distributors, a paying agent, Funds Distributors
distributed to Tel Com Jacksonville an amount equal to the principal
amount of the non-recourse promissory note issued to Tel Com
Jacksonville by D&B Holdings ($750,000). To our knowledge, the
remainder of the proceeds was distributed by Funds Distributors to
D&B Holdings and individuals involved in these transactions.
- Joint Venture: In January 1997, Tel Com Plus, Inc. sold 25% of its
interest in Tel Com Jacksonville, to Easy Phone in exchange for Easy
Phone's agreement to grant Tel Com Jacksonville exclusive use of its
state public utility licenses and its reseller agreements with
various local telephone service providers.
The chart below summarizes the ownership interests in TelCom Jacksonville
over the relevant period.
44
<PAGE> 48
TEL COM PLUS JACKSONVILLE, LLC
<TABLE>
<CAPTION>
Owners Of Interest December 1996 January 1997 September 30, 1998
------------------ ------------- ------------ ------------------
<S> <C> <C> <C>
Tel Com Plus Inc. 96 units (37.5%) 60 units (23.4%) 60 units (23.4%)
D&B Holdings International, Inc. 160 units (62.5%) 160 units (62.5%) ----
Easy Phone, Inc. ---- 36 units (14.1%) 36 units (14.1%)
Ultimate Individual Purchasers ---- ---- 160 units (62.5%)
Total 256 units (100%) 256 units (100%) 256 units (100%)
</TABLE>
Tel Com East
On April 25, 1997, Tel Com Plus, Inc. formed another limited liability
company, Tel Com Miami, which was subsequently renamed Tel Com East. During 1997
and 1998, investors paid an aggregate of approximately $12.6 million for equity
units in Tel Com East, of which Tel Com East only received approximately $2.25
million. The remaining amount of the proceeds, $10.35 million, was distributed
to Prime Equities, the intermediary involved in these unregistered offerings and
sales, and various independent sales organizations and other individuals
involved in these unregistered offerings and sales. An explanation of the
capitalization and fund raising activities of Tel Com East is outlined below:
- Joint Venture: On February 28, 1997, prior to filing a
Certificate of Formation with the Florida Secretary of State, Tel
Com East entered into an agreement with Easy Phone. Under this
agreement, Easy Phone agreed to grant Tel Com East exclusive use of
its Florida public utility license and its reseller agreements with
local telephone service providers in Florida. Tel Com East agreed to
contribute the funds necessary to the joint venture to complete the
programs and projects contemplated by the joint venture agreement,
approximated at $3 million. The joint venture was never formally
organized as contemplated by this agreement. Rather, the operations
intended to be conducted by the joint venture were actually
conducted by Tel Com East. In return for the contribution of its
licenses and reseller agreements, Easy Phone received a 35.4%
interest in Tel Com East, or 1,240 units, plus the right to receive
$400,000. A note dated as of November 22, 1999 was issued to Mr.
Pollara, as successor to Easy Phone, for the $400,000, but Mr.
Pollara subsequently agreed to cancel this note in January 2000.
- Purchase Agreement: On July 21, 1997, Tel Com East entered into
a purchase agreement with Prime Equities in which Prime Equities
agreed to purchase 1,950 units, or 57.3% of the total equity, of Tel
Com East. The purchase price to be paid by Prime Equities was $1,539
per unit or a total of $3,001,050. This obligation was evidenced by
a non-interest bearing, non-recourse promissory note. Because Prime
Equities only purchased and sold 1,805 units, its obligation under
the non-recourse promissory note was reduced to approximately
$2,778,000. Prime Equities paid Tel Com East approximately
$2,247,000 in partial satisfaction of the note. The $531,000 balance
remains unsatisfied.
- Intermediaries: Prime Equities then promptly resold these
units to various independent sales organizations at significantly
higher prices. These independent sales organizations then resold the
units to ultimate individual investors, again at a significant
mark-up. To our knowledge, these units were sold to the ultimate
investors at per unit prices ranging from $3,000 to $12,000.
- Disbursement of Funds: After the ultimate investors transferred the
purchase price to Capital Funds, a paying agent, Capital Funds
distributed approximately $2,247,000 to Tel Com Plus East in partial
satisfaction of the promissory note issued to it by Prime Equities.
Capital Funds then distributed the remainder of the proceeds to
Prime Equities, the independent sales organizations and other
individuals involved in these sales.
The chart below summarizes the ownership interest in Tel Com East over the
relevant period.
45
<PAGE> 49
TEL COM PLUS EAST, LLC
<TABLE>
<CAPTION>
Owners Of Interest December 1996 January 1997 Prior To September 30, 1998
------------------ ------------- ------------ ---------------------------
<S> <C> <C> <C>
Tel Com Plus Inc. 310 units (20.0%) 310 units (8.9%) 310 units (9.2%)
Easy Phone, Inc. 1,240 units (80.0%) 1,240 units (35.4%) 1,240 units (40%)
Prime Equities Group, Inc. ---- 1,950 units (55.7%) ----
Ultimate Individual Purchasers ---- ---- 1,805 units (53.8%)
Total 1,550 units (100%) 3,500 units (100%) 3,355 units (100%)
</TABLE>
Tel Com West
On July 28, 1997, Tel Com Plus, Inc. formed Tel Com California, which was
subsequently renamed Tel Com West. During 1997 and 1998, individual investors
paid an aggregate of approximately $15.5 million for units in Tel Com West, of
which Tel Com West only received approximately $3.5 million. The remaining
proceeds, approximately $12 million, were distributed to Prime Equities, the
intermediary involved in the unregistered offerings and sales, and various
independent sales organizations and other individuals involved in such offerings
and sales. An explanation of the capitalization and fund raising activities of
Tel Com West is outlined below:
- Joint Venture: Tel Com West entered into an agreement with
Easy Phone on July 24, 1997. Under this agreement Easy Phone agreed
to grant Tel Com West exclusive use of its California state public
utility licenses and reseller agreements with local telephone
service providers in the state of California and Tel Com West
agreed to contribute the funds necessary to the joint venture to
complete the programs and projects contemplated by the joint
venture agreement, approximated at $16.5 million. The joint venture
was never formally organized as contemplated by this agreement.
Rather, the operations intended to be conducted by the joint
venture were actually conducted by Tel Com West. Tel Com West
actually contributed only approximately $3 million. In exchange for
its contribution of the licenses and reseller agreements, Easy
Phone received approximately 40% of the units of Tel Com West, or
8,800 units, plus the right to receive $60,000. The $60,000 was
evidenced by a promissory note issued to Mr. Pollara dated as of
November 22, 1999 as successor to Easy Phone, but Mr. Pollara
subsequently agreed to cancel his note in January 2000.
- Purchase Agreement: Tel Com West entered into a purchase
agreement with Prime Equities dated July 21, 1997, whereby Prime
Equities agreed to purchased 11,000 units in Tel Com West for a
total purchase price of approximately $16.5 million or a per unit
price of $1,495. Prime Equities issued a non-recourse, non-interest
bearing promissory note to Tel Com West for the purchase price.
Because Prime Equities only purchased and then resold 2,231 units,
its obligation under the note was reduced to approximately
$4,168,000. Prime Equities paid us approximately $3,454,000 in
partial satisfaction of the note. The balance of $714,000 remains
unsatisfied.
- Intermediaries: Prime Equities then promptly resold these
units to various independent sales organizations at significantly
higher prices. These independent sales organizations then resold the
units to ultimate individual investors, again at a significant
mark-up. To our knowledge, these units were sold to the ultimate
investors at per unit prices ranging from $3,000 to $12,000.
- Disbursement of Funds: After the ultimate investors had transferred
the purchase price to Capital Funds, Capital Funds distributed
$3,454,002 to Tel Com West in partial satisfaction of the promissory
note. The remainder of the purchase price proceeds were distributed
to Prime Equities, various independent sales organizations and other
individuals involved in these sales.
The chart below summarizes the ownership interests on Tel Com West over the
relevant period:
46
<PAGE> 50
TEL COM PLUS WEST, LLC
<TABLE>
<CAPTION>
Owners Of Interest July 1997 (Giving Effect Only July 1997 (Giving Effect To Purchase September 30, 1998
------------------ To Joint Venture) Agreement And Joint Venture) -------------------
----------------------------- ------------------------------------
<S> <C> <C> <C>
Tel Com Plus Inc. 2,200 units (20%) 2,200 units (10%) 2,200 units (15.9%)
Easy Phone, Inc. 8,800 units (80%) 8,800 units (40%) 8,800 units (63.5%)
Prime Equities Group, Inc. ---- 11,000 units (50%) 625 units (4.5%)
Ultimate Individual Purchasers ---- ---- 2,231 units (16.1%)
Total 11,000 units (100%) 22,000 units (100%) 13,856 units (100%)
</TABLE>
Tel Com Jacksonville Rescission Offer
In early to mid-1998, Tel Com Jacksonville made an offer to all of its
outstanding unitholders to repurchase their units at the purchase price paid by
the holder for such units, plus interest. The amount of Tel Com Jacksonville's
aggregate principal liability to its holders was $995,000. As of September 30,
2000, approximately $887,000 in principal has been paid by us, as successor to
Tel Com Jacksonville, to the former unitholders of Tel Com Jacksonville.
OUR STRATEGY
Our mission is to become a leading reseller of local telephone services to
consumers with bad credit. To achieve this goal, we have developed and have
begun implementing a business strategy to position us as a leader in the
reseller segment of the telecommunication services industry. Our business
strategy can be categorized into the following five main objectives:
- Expanding our market area;
- Increasing product availability for our customers;
- Automating our operational systems; and
- Advertising on a national basis.
Expansion of Market Area
We are currently licensed in 26 states and are doing business in 20 states.
We will continue to evaluate the possibility of obtaining licenses in other
states that appear to have a favorable regulatory environment and an appealing
market for our services; however, we do not anticipate obtaining licenses in
other states until the completion of this exchange offer.
Increase Product Availability
One component of our business strategy is to increase product availability
for our customers. We believe that our product, local telephone service, is made
accessible to our customers by providing convenient, easy and reliable means by
which they may pay the installation and monthly fees. Because our typical
customer does not have a checking account or a credit card, we rely on direct
payment agents for approximately half of our customer payment activity. Direct
payment agents include check cashing stores, pawn shops, rent-to-own and
convenience stores. Our agents agree to process installation and monthly
payments from our customers in exchange for receiving a percentage of the fees
as commission.
As of the date of this prospectus, we have approximately 550 direct payment
agents. As we expand our operations into larger metropolitan areas, such as New
York City and Chicago, we plan to increase the number of agents. We also offer
several alternative payment methods, including payment by check draft, Federal
Express, Western Union, US Mail and, in limited circumstances, credit card,
which methods currently account for approximately 50% of payment activity. We
are currently experimenting with providing customer service through the Internet
whereby the customer can access his account, make a customer service request and
make a payment on-line. As the Internet continues to penetrate our customer
base, we believe that e-commerce solutions will account for a growing percentage
of all customer transactions.
Automation
We have invested approximately $400,000 in a proprietary software system,
which is an integrated and automated order processing and collections system.
This system enables us to handle higher volumes of business without incremental
increases in labor costs. As a result of this new software system, the number of
our employees has decreased to 91 employees as of November 30, 2000 from
approximately 130 as of December 31, 1999.
47
<PAGE> 51
Additionally, we are seeking to automate our interactions with local
telephone service providers. On October 1, 1999, we signed an agreement with
Wisor Telecom to provide an electronic data interface with Ameritech
Corporation, a major local telephone service provider in the Midwest. The
electronic data system allows us to communicate directly and electronically
with the local telephone service providers. This greatly speeds up order
processing, suspensions and disconnections. Additionally it lowers the
processing fees that some providers charge, which can be as high as $19.00 per
manual order.
Most local telephone service providers are beginning to develop and
implement, or have already developed and implemented, their own automation
system through the use of the Internet. These providers typically have a website
which we, as a reseller of their service, can use to generate and process a
service request for telephone service.
National Advertising
We plan to begin a national advertising campaign if we become licensed in
enough states to justify the additional expense of a national advertising
campaign. Currently, we advertise on a local or regional basis in those
strategic markets where we believe our advertising will have the greatest
impact on activations. The current population base we serve is not large enough
to justify the expense of a national advertising campaign. After the completion
of this exchange offer, we intend to become licensed in most states and thus
expand our potential customer base. Once we have expanded our potential
customer base to a specified level, we believe that national advertising will
achieve greater cost efficiencies and customer awareness than local or regional
advertising.
At present, advertising in each area we enter is one of our largest variable
expenses. Once we have expanded into additional markets and have begun our
national advertising campaign, we believe that further expansion into new
markets will be more cost efficient because we will not need to incur
significant additional advertising expense.
SERVICE AND SERVICE AREAS
We provide local telephone services to those consumers that are unable to
establish traditional local telephone service with their local telephone service
provider. As a reseller of local telephone services, we purchase service from
the local telephone service provider and provide a dial tone to our
customers. We also offer additional features such as caller ID, call waiting and
call forwarding for an additional charge. We do not have any specific
telecommunications equipment requirements relating to maintaining a customer's
dial tone, such as facilities and switches, like traditional providers such as
Verizon Communications and SouthWestern Bell. Rather we activate the
service with the existing local telephone service provider. We use existing
local telephone service provider equipment and operation support systems to
provide our customers with local phone service. However, the local telephone
service provider does not have any contact with our customer. From the local
telephone service provider's perspective, we are their customer, not the
consumers to whom we resell their services.
As of December 4, 2000, we were licensed as a competitive local telephone
service provider or a reseller in each of the states listed on the following
chart. The chart indicates the providers within each state with whom we have a
resale agreement and the approximate number of customers, if any, we have within
each state.
<TABLE>
<CAPTION>
STATE NUMBER OF CARRIER AGREEMENTS
----- CUSTOMERS ------------------
---------
<S> <C> <C>
Alabama 76 Bell South, Verizon
Arizona 28 US West, Verizon
California 2,803 Pacific Bell, Verizon
Connecticut 393 SNET
Delaware 5 Verizon
Florida 2,044 Bell South, Verizon, Sprint
Georgia 0 Bell South
</TABLE>
48
<PAGE> 52
<TABLE>
<S> <C> <C>
Illinois 2,795 Ameritech, Verizon
Indiana 607 Ameritech, Verizon
Kansas 1 Southwestern Bell, Sprint
Maryland 0 Verizon
Massachusetts 379 Verizon
Michigan 4,691 Ameritech
Missouri 5 South Western Bell
Montana 0 US West
Nevada 19 Nevada Bell, Sprint,
Verizon
New Jersey 805 Verizon
New York 19 Verizon, Frontier
North Carolina 0 Bell South, Sprint
Oregon 1 US West, Sprint
Pennsylvania 3 Verizon, Sprint
Rhode Island 24 Verizon
South Carolina 0 Bell South, Sprint
Tennessee 0 Bell South, United
Telephone
Washington 0 US West, Verizon,
Sprint
Wisconsin 89 Ameritech, Verizon
------
TOTAL 14,948
------
</TABLE>
OPERATIONS
Our operations can be divided into the following three areas:
- Initial customer contact/activation fee;
- Activation/line service request; and
- Disconnects.
Initial Customer Contact/Activation Fee
In order to apply for service, a customer must first pay the activation fee,
which relates to the initial set-up and installation of a customer's line.
The activation fee that we charge ranges from $89.95 to $109.95. Some service
areas, such as New York City and Chicago, have a higher risk of nonpayment and
thus the amount we charge the customer is higher. If the customer pays the
activation fee at one of our agent locations, the agent receives a commission of
between $10.00 to $25.00 per activation fee. The fees charged to us by the local
telephone service providers range from $22.00 to $41.00 for installation
services.
Typically, a customer sees one of our print or television advertisements and
calls the 1-800 number displayed in the advertisement. This 1-800 number
automatically connects the caller to our integrated voice response system which,
based upon the caller's responses, provides him or her with service information
for the state in which he or she lives, the current price of the services, the
various acceptable methods of payment and the nearest agent payment location. If
the caller needs more information, he or she is directed to one of our sales
representatives.
A customer must pay the activation fee before an application is completed
and a service order is processed with the local telephone service provider. The
activation fee may be paid by any one of the following methods:
- Western Union;
- credit card;
- check draft;
- home pick-up by Federal Express; or
- direct payment to one of our agents.
If the customer desires to pay by credit card, check draft or Federal
Express, our integrated voice response system directs the customer to our
accounting department, which processes the payment. If the customer desires to
pay at one of our agent locations, then our integrated voice response system
directs the customer to an agent located within his or her zip code area. After
paying the activation fee, either over the phone or in person at an agent
location, the customer will receive an application number. The customer is then
asked to call our sales department or is transferred by our accounting
department to one of our sales representatives. The sales representative will
verify payment of the activation fee by confirming the customer's application
number. Once payment has been verified, the sales representative will process
the application.
We have written agreements with approximately 550 payment agents located
in 16 states. Our agents are typically check cashing stores, pawn shops,
rent-to-own stores or convenience stores. Our agents are required to use an
electronic system to accept and process the payment activity in their stores.
This electronic system records their daily activity and communicates with a
server in our operations center. We are able to access agent activity via our
server and apply the payment activity directly to our customers' accounts. The
agent
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is able to review a report from the electronic system with the gross amount they
have collected. The agents deduct their commission from their aggregate
collections prior to depositing the money in our account.
Activation/Line Service Request
Once we have verified payment of the activation fee, one of our sales
representatives will complete the customer's application over the phone.
Generally, during this call we are able to provide the customer with a phone
number and an approximate date when service will be activated. From the
information received from the customer, we generate a local service request with
the local telephone service provider with whom we have a resale agreement. This
information is then transmitted electronically to the provider who processes the
service request. Once the provider has received and processed the service
request, it will send us a firm order confirmation with the installation due
date and phone number. The customer's application is then moved from pending
applications to subscriber accounts. We generate and send a bill for the monthly
service charge to each subscriber at the earliest possible date as permitted by
the applicable state laws and regulations.
We charge a fixed monthly service fee which ranges from $49.95 to $79.95 per
month. If our customers pay the monthly service fee at one of our agent
locations, the agent receives a commission of $2.00 per monthly bill processed.
The amount of fees we owe to the various local telephone service providers per
line range from $7 to $20 per month.
Disconnects
A key factor in our operations is closely monitoring incoming payments so
that we may disconnect a non-paying customer as soon as we are legally permitted
to do so. The time period in which we are permitted to disconnect ranges from
one day to 75 days after the last due date. We have installed software which
monitors non-paying customers. This software automatically activates an
automated phone message service which calls customers whose bills are due within
24 hours and also calls customers whose bills are delinquent. If the customer is
delinquent in paying for a designated period of time, we may suspend the
service. If the customer continues to fail to pay after a designated period of
time following suspension of service, we will permanently disconnect service.
The periods of time which must pass before we either suspend or disconnect
service depend on each state's laws and regulations. The average customer
typically receives our service for a period of seven months. Our average rate of
disconnects for the three month period ended September 30, 2000 was 11.34% of
our total customers during such period, and our average rate of disconnects for
the twelve month period ended September 30, 2000 was 12.43% of our total
customers during such period.
REGULATORY ENVIRONMENT
The Telecommunications Act of 1996 introduced widespread changes in the
regulation of the telecommunications industry with its adoption of a
pro-competitive, deregulatory national policy framework. The following
discussion of the material regulatory developments and legislation presents a
description of the current material regulatory environment as it applies to
us. Existing federal and state regulations are currently the subject of
judicial proceedings, legislative hearings and administrative proposals which
could change, in varying degrees, the manner in which this industry operates.
Neither the outcome of these proceedings, nor their impact upon us or the
telecommunications industry as a whole, can be predicted at this time.
Elimination of Barriers to Entry
We have benefited from the Telecommunications Act, which eliminated many of
the legal, economic and technical barriers to entry in the local telephone
service provider market. Remaining legal barriers to entry imposed by state or
local law, rule, or regulations may be overruled by the Federal Communications
Commission. However, the Telecommunications Act maintains the authority of
individual state utility commissions to regulate local telephone and intrastate
telephone services and to impose, on a competitively-neutral basis, requirements
that are necessary to
- preserve and advance universal service;
- protect the public safety and welfare;
- ensure the continued quality of telecommunications service; and
- safeguard the rights of consumers.
The Telecommunications Act attempts to eliminate or minimize economic and
technical barriers to entry in the local telephone service market. The
Telecommunications Act set standards that govern the relationship between local
telephone service providers, such as BellSouth, Qwest, Verizon, and resellers or
competitive local telephone service providers, like us. For example, local
telephone service providers must provide to potential competitors
nondiscriminatory access and interconnection as well as retail
telecommunications services priced at wholesale rates. The wholesale rates which
the resellers are charged by the local telephone service providers generally are
discounted 10% to 24% from the retail rate. The level of the discount varies
depending on the local telephone service provider and the state in which the
telecommunications service is provided.
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Universal Service
The Telecommunications Act established a national policy to provide
affordable "universal service" to all telecommunications consumers and to
provide advanced telecommunications services to schools, libraries, and rural
health care providers. To achieve these objectives, the Telecommunications Act
mandates the adoption of explicit universal service support mechanisms funded by
equitable and nondiscriminatory assessments on telecommunications carriers
providing interstate services. States may also adopt universal service
mechanisms that are not inconsistent with the federal model and fund these
mechanisms by assessments on telecommunications carriers providing intrastate
services.
In May, 1997 the FCC adopted its universal service rules implementing this
national policy. The FCC's regulations provide for the collection of universal
service assessments based on end-user, or retail, revenues derived from the
provision of interstate telecommunications services. Under the FCC's
regulations, universal service fund assessments are revised on a quarterly
basis. During the third quarter of 2000, an interstate carrier's federal
universal service fund obligations totaled approximately five and one-half
percent (5.5%) of the carrier's end user revenues derived from
telecommunications services. State universal service fund programs are expected
to generate approximately 75% of the support mandated under the
Telecommunications Act. To the extent states in which we operate adopt universal
service mechanisms and fund these mechanisms by assessments on
telecommunications carriers providing intrastate services, a percentage of our
revenues will be used to promote universal service. We cannot predict whether
the states in which we operate will adopt universal service mechanisms or in the
event a state does adopt this mechanism, the percentage of our revenues which
will be used to fund this universal service obligation.
Local Number Portability
The Telecommunications Act specifically provides for "number portability."
The FCC has construed this term to refer to service provider number portability,
which allow residential and business customers to retain their telephone numbers
when switching telecommunications carriers. Implementation of local number
portability, which has been occurring in phases, is estimated to cost billions
of dollars. The Telecommunications Act provides that costs must be recovered in
a competitively-neutral matter. In May, 1998, the FCC determined that
telecommunications carriers will share the costs of the regional databases
necessary to implement local number portability based on carriers' intrastate,
interstate, and international end-user telecommunications revenues for each
region. Carrier-specific costs are to be borne by each carrier. Beginning
February 1, 1999 local telephone service providers have been permitted to
recover their carrier- specific costs through direct end-user charges (limited
to five years' duration) and/or a federally-tariffed intercarrier charge for
long-term number portability query services they perform for other carriers. We
have recovered our specific cost through direct end-user charges.
State Regulatory Commissions
We are subject to the jurisdiction of state regulatory commissions in each
state in which we operate. These regulatory commissions exercise jurisdiction
over intrastate communications, defined as those that originate and terminate
within a specific state. Each state maintains its own regulatory regime. State
regulation, in most cases, includes requirements for the reseller to receive
from the state commission, prior to offering service, a certificate of public
convenience and necessity authorizing it to provide service. The requirements
for such certificates vary by state, but generally include a demonstration by
the reseller that it has the financial, managerial and technical qualifications
to provide the services it proposes. The certification process may take up to
six months. There can be no assurances that we will receive all of the
certificates we need to provide service in additional markets or that these
certificates will be obtained in a timely manner.
In addition, we, as a reseller, are required to file tariffs with each state
commission detailing the rates, terms and conditions for our services. These
tariffs must be modified before we may change prices, offer new services or
change material terms and conditions. Tariff changes are generally approved
within 30 days of filing. After we are certified, we may also be required to
file periodic reports with the state commissions and pay fees to maintain our
certificates. Failure to make such filings or pay such fees could result in
fines or loss of our certificates.
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Finally, new or renegotiated resale agreements negotiated between us and
local telephone service providers must be filed with and approved by the
relevant state public service commission in which the services will be provided.
If the state commission does not act upon a filed agreement within 90 days of
filing, the agreement is deemed to be effective. Under the Telecommunications
Act, state commission decisions regarding implementation and enforcement of
these interconnection or resale agreements are appealable to the federal
district court in that state. We cannot assure you that such agreements will be
approved or that they will be approved in a timely manner.
RELATIONSHIP WITH LOCAL TELEPHONE SERVICE PROVIDERS
Presently, all of our local phone services in each market are provided
through a single underlying carrier, the local telephone service provider.
Although our relationship with each local telephone service provider is governed
by a negotiated resale agreement, the scope and availability of some of the
telephone services that we provide to our customers are primarily controlled by
the local telephone service provider. For example, in several major cities, such
as Chicago and New York City, flat rate (or unlimited) local calling plans are
not available, making it difficult to provide our local services in these
markets for a fixed monthly charge. The discontinuation of flat rate calling
plans in markets in which we operate may have an adverse impact on our ability
to offer service.
Further, some local telephone service providers refuse to block directory
assistance or other usage-based charges. Such blocking mechanisms are crucial to
the local services we provide. Because customers purchasing our local service
expect to pay a rate that does not change each month, it is difficult to collect
payments for calls for which charges are assessed on a per minute or per call
basis. Our inability to block all usage-based calls may impede future expansion
in those markets. Finally, some state commissions have held that voice mail is
not a "telecommunications service" and, therefore, local telephone service
providers are not required to resell this service. The issue of whether local
telephone service providers must resell voice mail service is currently the
subject of a proceeding before the FCC. Without voice mail, we cannot offer
potential customers the same package of services local telephone service
providers offer.
Our ability to compete in the local services market is further influenced by
the local telephone service providers' efficient, accurate and fair provision of
the service to us and our customers. Currently, local telephone service
providers take anywhere from five days to two weeks to initiate service for a
new reseller customer. In many instances, the local telephone service provider's
improper processing of reseller orders caused additional delays in initiating
service to the customer. Further, several local telephone service providers have
disparate disconnection and suspension charges, resulting in the reseller
incurring a more costly charge to suspend service to its customer than that of a
similarly-situated local telephone service provider customer. Recently, some
local telephone service providers have imposed significant deposit requirements
on resellers, which if imposed on us, could restrict our capital. In addition,
in some states, local telephone service providers are attempting to impose
significant costs on resellers for blocking, testing, and access to the local
telephone service provider's operational support systems, through which customer
orders are placed. Such costs, delays and varying treatment by the local
telephone service provider could have a significant impact on our earnings.
SALES AND MARKETING
We primarily market and sell our product through mass media advertising,
including television, radio and print. We believe that our marketing strategy
has been effective in generating demand for our product. Our call center in
Clearwater, Florida generally takes 65,000 to 75,000 calls per month from
current and potential customers.
The vast majority of our customers are in the lower middle to low income
bracket. We believe that television advertisements are very effective with our
customer base. Therefore, our television advertisements account for more than
90% of our advertising budget. Most of the television advertisements appear
between the hours of 9:00 a.m. and 5:00 p.m. and appear on local network or
independent stations. We attempt to advertise on television during daytime talk
shows, soap operas and sitcom reruns because of the high concentration of
persons within our targeted demographic base who watch these television shows.
A significant portion of our potential customer base is Hispanic. Therefore,
all advertisements are done in English and Spanish. Additionally, we use
different Hispanic dialects for advertisements appearing in south Florida,
California and the northeastern United States. We have a separate Spanish
speaking department to handle all Spanish sales and customer service questions.
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Our television advertisements follow one of three formats: informational,
testimonial or humorous. The informational advertisement provides the viewer
with all of the necessary information about the product. These advertisements
seek to emphasize three key points of our product:
- we do not require a deposit;
- we do not perform a credit check; and
- we do not require any form of identification.
We run the informational advertisements when we have just entered a market
and need to educate potential customers about our product. The testimonial
advertisement is an endorsement by actual customers. These customers speak about
their good experiences with obtaining telephone service with us. We typically
run these advertisements four to six weeks after we have entered the market. We
run humorous advertisements four to six months after we have entered a market.
These advertisements are intended to cause potential customers to remember our
name and product. In mature markets, all three types of television
advertisements are rotated throughout the day.
EMPLOYEES
As of November 30, 2000, we had 91 employees. None of our
employees is represented by a labor union, and we consider our relationship with
our employees to be good.
COMPETITION
The competition for customers with bad credit who have been disconnected by
their local telephone service provider is rapidly increasing. Competition may
affect our ability to increase our customer base and generate revenues. The
barriers to entry in the business are relatively low because the initial capital
investment required to enter our business is minimal. Therefore, there are a
large number of small, local businesses who resell local telephone service to
consumers with bad credit. These types of small businesses typically focus on a
single city or relatively compact geographic area. Although the geographic range
of these types of competitors is limited, they are fiercely competitive with us
in their fees for services and some of these companies have greater financial
resources than we do. In addition, we face increasing competition from local
telephone service providers, such as Southwestern Bell, who have begun offering
local telephone service to their own customers who have been disconnected for
nonpayment. The local telephone service providers have far more resources than
we do, and generally have lower marketing and operational costs, allowing them
to price their local telephone services at rates that are lower than the rates
we charge our customers.
PROPERTIES
Our principal executive office and operations center are located in the
Pinellas Park Square Shopping Center in Clearwater, Florida. We have a lease
agreement for Suites 104, 105, 118 and 119. The total amount of square footage
for all of the suites is approximately 11,300 square feet and the approximate
monthly rental amount is $9,510. These leases for these facilities will expire
at various times during 2003. When these leases expire, we believe that we will
be able to renew these leases or that suitable replacement space will be
available as required. We believe that our current facilities are adequate for
our expected needs over the next several years.
LEGAL PROCEEDINGS
Company's Action in Hillsborough County, Florida
We filed a complaint in the Thirteenth Judicial Circuit of Hillsborough
County, Florida on September 27, 2000 against defendants Joseph Cillo, Richard
Inzer, Joseph Thacker, Prime Equities Group, Inc., GIRI Holdings, Ltd., Raymond
Beam, Captive Administrators, Inc. In this complaint, we allege the following:
Beginning in 1996, defendants devised and implemented a fraudulent
scheme to enrich themselves and their associates by illegally
selling at grossly inflated prices using boiler-room tactics,
securities in plaintiff, United States Telecommunications, Inc. and
its predecessor entities (the "Company"). Directly and indirectly,
through the defendant entities, the individual defendants defrauded
the Company and its shareholders out of millions of dollars and
millions of shares of the Company's stock. Pursuant to the
defendants' scheme, public investors paid an aggregate purchase
price of approximately $31,000,000 for securities in the Company, of
which only approximately $6,450,000 was ever received by the
Company. The remaining $24,500,000 paid by investors was
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retained by defendants and other unlicensed brokers and facilitators
the defendants involved in their fraudulent scheme. In addition to
the proceeds they siphoned off the securities sales, the Company
also believes that defendants Joseph Cillo and Richard Inzer,
through a series of shell entities and off-shore corporations,
granted themselves approximately 10 million shares of the Company's
stock without consideration. Those shares equate to nearly 22% of
the Company's shares currently outstanding.
To further their scheme, the individual defendants served at various
times as incorporators, promoters, officers and/or directors of the
Company. Defendant Cillo also served as compliance officer and de
facto legal counsel for the Company. In those capacities, the
defendants owned fiduciary duties of care and loyalty to the Company
and its investors. In breach of those duties, the individual
defendants, among other wrongful and illegal acts, used their
positions and engaged in a pattern of deceit and illegal activity to
conceal and perpetuate their scheme from the Company and its
investors, aided and abetted the illegal offer and sale of
securities in the Company, and engaged in self-dealing to enrich
themselves and their associates at the expense of the Company and
its investors. . . . As a sole and direct result of the defendants'
actions, the Company has been subject to investigation by the
Florida Department of Banking and Finance and the SEC, and faces
potential liabilities, including possible fines, penalties,
disgorgement of up to $31,000,000, and associated legal fees and
costs.
By this action, the Company seeks the return from defendants of all
proceeds and shares in the Company they acquired as a result of
their fraudulent scheme, as well as damages to compensate the
Company for the liabilities it has and will incur as a direct result
of defendants' wrongful and illegal acts.
The complaint inaccurately provides that the SEC has required us to
structure the rescission as an exchange offer. The SEC has not required us to
structure this offer as an exchange offer. Rather, we are required under the
consent agreement with the State of Florida to make a rescission offer to
certain of our shareholders. We are making this exchange offer in lieu of the
rescission offer because we do not have sufficient funds with which to make a
rescission offer. This exchange offer does not constitute a valid rescission
offer and will therefore not satisfy our obligations under the consent
agreement.
Charles Polley and the entities he owns or controls, namely, Tel Com Plus,
Inc. and Intercontinental Brokers, Inc., were not named as defendants in this
lawsuit because of a letter agreement and corresponding mutual release dated as
of September 7, 2000 between us and Mr. Polley and his controlled entities.
Similarly, Howard Kratz was not named as a defendant in this lawsuit because of
a letter agreement and corresponding mutual release dated as of September 7,
2000 between us and Mr. Kratz. Under these letter agreements, Mr. Polley, his
controlled entities and Mr. Kratz agreed to certain obligations as shown below
in exchange for a release by us for claims we may have against them. These
obligations are as follows:
- Return and transfer to us all of our capital stock that they own or
control, subject to the injunction entered by the United States
District Court for the Middle District of Florida which enjoined
these individuals and entities from transferring or disposing of our
capital stock. If we are not able to obtain the consent of the
Securities and Exchange Commission, who requested this injunction,
to release these shares, Mr. Polley, his controlled entities and Mr.
Kratz have agreed to not vote their capital stock or give any third
party a proxy or power of attorney to vote these shares.
- Provide us and our attorneys with all information (including copies
of documents) within their knowledge relating to the involvement of
persons or entities in the planning and execution of the sales of
units in the Tel Com entities.
- Provide us and our attorneys with all information (including copies
of documents) within their knowledge relating to where the proceeds
of any sales of units in our predecessor companies were transferred
or where the proceeds are currently located.
In addition, Mr. Polley represented and warranted that his net worth is less
than $25,000 and that, therefore, he does not have the ability to return the
funds he received, either voluntarily or involuntarily, from the sale of units
in the Tel Com entities. Similarly, Mr. Kratz represented and warranted that his
net worth is less than $1,000 and that, therefore, he does not have the ability
to return to us any of the funds he received, either voluntarily or
involuntarily, from the sale of units in the Tel Com entities.
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Consent Agreement with the State of Florida
We, as successor to Tel Com East, Tel Com West and Tel Com Jacksonville,
entered into a consent agreement on May 12, 1999 with the State of Florida,
Department of Banking and Finance. The Department conducted an investigation
into the activities of the parties to the consent agreement with respect to
their offering and sale of units of ownership interests for the period beginning
February 1997 and ending as of the date of the consent agreement. As a result of
the Department's investigation, it determined, and the parties to the consent
agreement agreed, to the following:
- the units of ownership interests in Tel Com East, Tel Com West
and Tel Com Jacksonville were securities as defined by the
Florida statutes;
- the units of ownership interests in Tel Com East, Tel Com West
and Tel Com Jacksonville were offered and sold in Florida
through unregistered third persons/entities in violation of
Florida law;
- the units of ownership interests in Tel Com East, Tel Com West
and Tel Com Jacksonville offered and sold in Florida were not
registered for sale in Florida in violation of Florida law;
and
- none of these entities was registered to sell securities in
Florida.
Tel Com East, Tel Com West, Tel Com Jacksonville and Tel Com Plus, Inc.
agreed to cease and desist any and all present and future violations of the
Florida Securities and Investor Protection Act and agreed to pay an
administrative fine to the Department of $50,000. We agreed to abide by the
provisions of the Florida securities laws now and in the future. In addition,
the parties to the consent agreement agreed to complete an offer of rescission
in accordance with Florida laws on or before November 30, 1999 for the
securities of Tel Com East, Tel Com West and Tel Com Jacksonville. We were not
able to complete a rescission offer by the deadline. On December 7, 1999, the
Department notified us that we were in violation of the consent agreement and
that it intended to commence litigation against us in order to enforce the
provisions of the consent agreement. As of the date of this prospectus, the
Department has not commenced litigation against us; however, the Department has
informed us that it is retaining all options in connection with the default,
including an action to enforce the consent agreement, a motion to seek
receivership of us or other remedies.
Moreover, due to our poor financial condition, we are unable to pay in cash
the purchase price paid by the holders of our common stock or Class A preferred
stock (or the securities of one or more of our predecessor companies) who elect
to rescind their purchase. Therefore, we are offering to exchange our notes or
our shares of Class B preferred stock for the shares of common stock and Class A
preferred stock. Nevertheless, this exchange offer does not constitute a valid
rescission offer. As a result, this exchange offer will not satisfy our
rescission obligation under the consent agreement and will not have the effect
of barring any claims against us by the Department in connection with our
failure to perform under the consent agreement.
Shareholder Derivative Action
On April 13, 2000, a shareholders' derivative action was brought against Mr.
Pollara, and against us as a nominee defendant, in the Thirteenth Judicial
Circuit in Hillsborough County, Florida. The plaintiffs in this action are Prime
Equities, Stephen D. Henderson, Joe Thacker, Jr., Kent Lauson, James Gibson, M.
T. Wilbanks, Richard J. Gann d/b/a/ Trinity Alliance. The shareholders allege
that Mr. Pollara failed or refused to take action required by the board of
directors, such as providing financial statements to the board of directors and
providing directors with a draft of the registration statement to be filed with
the SEC. The complaint further alleged that Mr. Pollara has not managed our
affairs in our best interest. The complaint seeks actions for damages as a
result of the alleged misconduct of Mr. Pollara, seeks equitable relief from the
court and seeks specific performance for certain actions. On April 28, 2000, we
and Mr. Pollara filed a motion to dismiss this lawsuit. This motion claims that
the complaint is deficient in that it does not comply with the statutory
requirements of a shareholder derivative action. In addition, the motion asserts
that Prime Equities is legally disqualified from bringing a derivative action
because it is unfit and unqualified to represent the interest of the
shareholders as a whole.
Cease and Desist Orders.
To the best of our knowledge, there exists the following cease and desist
orders which are either against us or related parties:
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- Florida. In connection with the consent agreement entered into between
the State of Florida, Department of Banking and Finance, us and certain
other parties, the Department issued a cease and desist order. In
connection with the consent agreement, Tel Com Plus, Inc., Tel Com
East, Tel Com Jacksonville and Tel Com West agreed to cease and desist
any and all present and future violations of the Florida Securities and
Investor Protection Act and, in addition, we agreed to abide by the
provision of this Act. We admitted to offering and selling units not
registered or exempt from registration in Florida through unregistered
third persons in violation of Florida law for the period between
February 1997 and the date of the consent agreement. We agreed to
complete a rescission offer and pay an administrative fine in the
amount of $50,000.
- Illinois. The Illinois Securities Department issued an order of
prohibition against Tel Com Plus, Inc., Tel Com West and Tel Com East on
September 11, 1998. This order provided from June 8, 1998 to the date
of the order that Tel Com Plus, by and through its officers, directors,
employees, agents, affiliates, successors, and assigns, offered through
a web page advertisement on the Internet units in Tel Com West and Tel
Com East to residents of Illinois. Tel Com Plus, Inc., Tel Com West and
Tel Com East did not register these units with the State of Illinois and
therefore violated certain provisions of the Illinois Securities Law of
1953. The parties, including their officers, directors, employees,
agents, affiliates, successors and assigns, were prohibited from
offering or selling securities in or from the State of Illinois until
further order by the Illinois Secretary of State.
- Pennsylvania. The Pennsylvania Securities Commission issued a summary
order to cease and desist on June 23,1998 against Tel Com West, Tel Com
East, Tel Com Plus, Inc. Prime Equities Group, Inc., Satellite Capital
Group and David Allen. In this order, the Securities Commissioner
determined that units of Tel Com West and Tel Com East were being
offered for sale and sold in violation of the laws of Pennsylvania over
an unspecified period of time including an incident that occurred in
May 1998. The above named persons were ordered to cease and desist from
offering and selling its units in the State of Pennsylvania. No fines
or penalties were imposed by the state.
- North Dakota. The Securities Commissioner of the State of North Dakota
issued a cease and desist order on January 29, 1998 against Tel Com
Plus Miami, LLC, Tel Com East, Tel Com Plus, Inc., Easy Cellular,
Inc., Prime Equities Group, Inc., Capital Funds Administration, Inc.,
Applied Financial Group, Wireless Connection, Inc., Lenny Bierstein,
Neil Pinkus, Howard W. Kratz, Richard Pollara, Ted Bender, Bruce
Porter and their officers, directors, agents and employees. In this
order, the Securities Commissioner stated that he had a reasonable
basis to believe that the above named persons had engaged in, were
engaging in, or were about to engage in, acts, practices or
transactions which are prohibited by the North Dakota Corporation
Code. The acts, which occurred over an unspecified period of time,
involved offering for sale and selling unregistered securities to
residents of North Dakota and failing to register as dealers or
salesmen under the laws of North Dakota. Richard Pollara vigorously
denies any participation in the alleged acts and is actively
contesting this cease and desist order entered against him.
The above named persons were ordered to cease and desist from the
offering for sale or selling in the State of North Dakota any
investments unless and until the named persons registered with the
North Dakota State Securities Commissioner as dealers or salesmen and
unless and until the investment interest also was registered with the
state securities commissioner. Additionally, the named parties were
ordered to cease and desist from providing a guarantee on rates of
return on investments or otherwise engage in fraudulent acts while
offering for sale or selling investments in the State of North Dakota.
The order did not prohibit the offer or sale of securities through
exempt securities transactions under North Dakota securities laws. The
order noted that the cited civil violations were sufficient grounds for
the imposition of civil penalties, but rather reserved the authority to
assess civil penalties regarding the violations outlined in the order,
any future securities violations and any violations of the order
itself.
- Wisconsin. The Commissioner of Securities of the State of Wisconsin
issued a summary order of prohibition against Stephen Henderson,
Raymond H. Beam, Lydia Banes, George Holmes, Christopher Polley, David
Morris, Howard Kratz and Richard Inzer on December 22, 1998. These
orders provide that during the period of April through June 1998,
agents, on behalf of the persons and entities named in this order,
offered to at least one person in Wisconsin units of ownership in Tel
Com East, which units were never registered for offer and sale in
Wisconsin and which agents were not licensed as securities agents under
the laws of Wisconsin. These actions violated the securities laws of
the State of Wisconsin. As a result, the securities commissioner
ordered that the named persons and entities, their agents, servants,
employees, and every entity or person directly or indirectly controlled
or organized by or on his behalf, are prohibited from making or causing
to be made to any person or entity in Wisconsin any further offers or
sales of securities unless and until such securities are registered
under the securities laws of Wisconsin. The commissioner revoked all
exemptions from registration that might otherwise apply to any offer or
sale of any security by the parties. The parties were prohibited from
further violations of the securities laws of
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Wisconsin, from employing an agent to represent them in Wisconsin
unless such agent is properly licensed or excepted from the State's
licensing requirements. The commissioner did not impose any fines or
penalties.
Securities and Exchange Commission Lawsuit
The Securities and Exchange Commission brought an action in the federal
district court in the Middle District of Florida on May 12, 1999 against
Physicians Guardian Unit Investment Trust, Physicians Guardian, Inc., Physicians
Guardian Insurance Corp., Abfac, Inc., Charles Polley, Robert Singerman, Tel Com
East and Tel Com West. The complaint alleges that Charles Polley purported to be
the chief executive officer of the Physicians Guardian entities and the managing
member of Tel Com East and Tel Com West. The complaint further alleges that Tel
Com East and Tel Com West violated registration requirements of the Securities
Act by not filing a registration statement with the Commission in connection
with the offers and sales of their securities. In addition, the complaint
alleges that Tel Com East and Tel Com West knowingly or recklessly employed
devices, schemes or artifices to defraud in connection with the offers and sales
of their securities. The Commission further alleges that Tel Com East and Tel
Com West made material misleading or false statements and engaged in acts,
practices and courses of business which operated as a fraud upon the purchasers
of their securities. As a result of these allegations, the Commission seeks to
have the named defendants permanently enjoined from violating the Securities Act
and the Securities Exchange Act, to have them return the offering proceeds and
to have them subject to civil penalties.
As a successor entity, we may be liable for the actions of Tel Com East and
Tel Com West and, furthermore, the Commission has advised us that we will be
named as a defendant in this action. As of the date of this prospectus, we are
in negotiations with the Commission to settle this action. However, we can give
you no assurance that we will be able to settle this matter. If this action
proceeds to litigation, the outcome of this litigation cannot be predicted. If
we are named as a defendant and the court does rule against us, we may be
subject to civil penalties and other remedies which will have a significant and
detrimental effect on our business and financial position. Our financial
exposure in this lawsuit is in excess of $30 million.
Travelers Express Company, Inc.
In 1999, Travelers Express Company, Inc. brought an action against us in the
Circuit Court of the County of Hillsborough, Florida alleging breach of a
buy-pay utility agreement. Under this buy-pay agreement, our customers could pay
for our services at a participating Travelers Express. Travelers Express agreed
to create certain terminal paying stations where our customers could make their
payments. In return, we agreed that Travelers Express would be entitled to
receive a commission on the money they collected at these terminal paying
stations. In its complaint, Travelers Express alleged that we breached this
buy-pay agreement by not paying approximately $65,000 owed to them. We have
counterclaimed for unspecified and, as of the date of this prospectus,
undetermined damages arising out of the breach of this agreement. In our
counterclaim, we allege that Travelers Express did not establish the number of
terminal paying stations that they were obligated to establish under our
agreement. Management intends to vigorously defend Travelers Express' claim
against us and pursue our claim against them. It is not yet possible to evaluate
the likelihood of an unfavorable outcome, or provide an estimate of the
potential loss.
California Public Utility Commission
During February 2000, we filed a complaint with the California Public
Utilities Commission against Pacific Bell for failure to block our customers
from making certain toll calls and using certain usage-sensitive calling
features, such as directory assistance. We have estimated the failure to block
these items cost us approximately $239,000. As of the date of this prospectus,
we cannot predict the outcome of this litigation.
Joseph Thacker Lawsuit
In September 2000, Joseph Thacker filed a complaint against us in the Sixth
Judicial Circuit in Pinellas County, Florida for failure to pay principal and
interest when due under a promissory note issued to Mr. Thacker by us in
September 1998. The note was in the principal amount of $150,000, accrued
interest at the rate of 10% per annum and was due and payable on September 28,
2000. We are challenging the validity of this note in the complaint we filed
against Joseph Cillo, et. al. on September 27, 2000 in state court in
Hillsborough County, Florida. See a description of this lawsuit under the
heading "Business--Legal Proceedings."
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MANAGEMENT
The name, ages and positions of the directors and officers of the Company
at September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
----------------- --------- -------------------------------
<S> <C> <C>
Richard J. Pollara 46 President, Director
Bill D. Van Aken 49 Vice President, General Manager
Julie Graton 36 Secretary, Marketing Director
Sam Dean 67 Director
Reuben P. Ballis 67 Director
Paul D. Gregory 45 Director
Cleo Carlile 63 Director
</TABLE>
Richard Pollara has served as President and as a director of the Company
since January 1998. From April 1996 until December 1997, Mr. Pollara was the
President and Chief Executive Officer of Easy Phone, Inc. and its predecessor,
Easy Cellular, Inc. Easy Phone, Inc. was a pre-paid cellular and residential
phone service company. From May 1994 until January 1997, Mr. Pollara served as
President and Chief Executive Officer of Montebello Finance, LLC, a limited
liability company engaged in the rent-to-own business. Mr. Pollara attended the
University of Mississippi.
Bill Van Aken has served as Vice President of the Company since October 11,
1999 and has served as the Company's General Manager since its inception in
November 1997. In addition, Mr. Van Aken served as the General Manager of all of
the Company's predecessor companies since February 1997. From September 1994
until February 1997, Mr. Van Aken served as a Manager of Cellular, Inc., one of
GTE's Mobilenet largest agents. Mr. Van Aken attended the University of Iowa.
Julie Graton has served as Secretary of the Company since October 11, 1999
and has served as Marketing Director of the Company since its inception. Ms.
Graton also served as Marketing Director of all of the Company's predecessor
companies from July 1997 until the business combination of the Company and its
predecessor companies. Ms. Graton was employed from November 1994 until July 1,
1997 by GTE MobileNet where she serviced all their government accounts in
Pinellas County, Florida. From May 1994 until November 1994, Ms. Graton was the
campaign manager for a candidate for the state legislature of Florida. Prior to
managing this campaign, Ms. Graton worked for the Florida legislature as a
legislative aide for two state representatives. Ms. Graton and her former
husband, Robert Richey, filed for personal bankruptcy under Chapter 13 of the
United States Bankruptcy Code in July 1998. They were discharged in March 1999.
Sam Dean has served as a director of the Company since October 11, 1999. Mr.
Dean is the owner and president of Dean Plumbing & Heating which he founded in
April 1965. Mr. Dean is an investor in the Company. Mr. Dean was asked by
present management and agreed to serve on the board of directors as an
independent director and as a representative of those investors who had
purchased shares of our common stock and Class A preferred stock (or units in
our predecessor companies) through unregistered and unlawful sales.
Reuben P. Ballis has served as a director of the Company since January
1999. Mr. Ballis has served as Senior Vice President of Mesirow Insurance
Services, Inc., a division of Mesirow Financial Services, Inc. from September
1989 until present.
Paul D. Gregory has served as a director of the Company since February
1999. Mr. Gregory is presently President of Remote Management Technologies,
Inc. (RMT), a company engaged in the business of oil and gas well monitoring,
measurement and data management, utilizing wireless technology for data
transmission and has served in such position since June 2000. Mr. Gregory was
Vice President and Treasurer of FBSI, Inc., a health and beauty products
company, from August 1999 until June 2000. From September 1977 until February
1999, Mr. Gregory was a business analyst at Amoco, Inc., an oil and gas
producer. Mr. Gregory also owns approximately 2.25% of Prime Equities, Inc.
Cleo Carlile has served as a director of the Company since April 2000. Mr.
Carlile is presently a fund manager at BrookStone Fund L.L.C. Mr. Carlile has
served as chief executive officer and owner of several companies including
Star-Com, an electronic wholesale distribution company. Mr. Carlile is an
investor in the Company. Mr. Carlile was asked by present management and agreed
to serve on the board of directors as an independent director and as a
representative of those investors who had purchased shares of our common stock
and Class A preferred stock (or units in our predecessor companies) through
unregistered and unlawful sales.
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<PAGE> 62
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table contains information regarding all compensation paid or
accrued for each of the last three fiscal years for Richard J. Pollara, the
Company's President, Joseph Cillo, the Company's former Vice President and Bill
D. Van Aken, the Company's Vice President and Robin Caldwell, the Company's
banking administrator. No bonuses or other compensation were paid to the
persons listed below for the fiscal years 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------------------------------
Name and Principal Position Fiscal Year Salary
------------------------------- ------------------- ---------
<S> <C> <C>
Richard J. Pollara (1)......... 1999 $ 322,564
President 1998 $ 264,104
1997 $ 46,150
Joseph Cillo (2)............... 1999 $ 243,592
Vice President 1998 $ 166,963
1997 ---
Bill D. Van Aken (3).......... 1999 $ 158,410
Vice President 1998 $ 146,084
1997 $ 142,912
Robin Caldwell................ 1999 $ 104,189
Banking Administrator 1998 $ 96,296
1997 $ 31,600
</TABLE>
(1) Mr. Pollara has served as president of the Company since January 1998.
During this same time period and until the business combination between the
Company and the Tel Com entities was completed (September 30, 1998), Mr.
Pollara also served as operations manager for each of the Tel Com entities. Mr.
Pollara's salary in 1998 was paid in part by the Company and in part by the Tel
Com entities. Of his total salary in 1998, $64,000 was paid by the Tel Com
entities and the remaining $200,000 was paid by the Company. Mr. Pollara's
salary in 1997 was paid in full by the Tel Com entities.
(2) Mr. Cillo served as vice president of the Company from November 1997
until December 1999.
(3) Mr. Van Aken has served as vice president of the Company since October
1999 and served as the Company's general manager since its inception on
November 19, 1997. During 1997 and 1998 and prior to the business combination
between the Company and the Tel Com entities, Mr. Van Aken also served as
general manager for each of the Tel Com entities. In 1998, $94,283 of Mr. Van
Aken's total compensation was paid by the Tel Com entities. Mr. Van Aken's
salary in 1997 was paid in full by the Tel Com entities.
(4) Ms. Caldwell entered into an employment agreement with the Company
dated as of October 20, 1998. Pursuant to this employment agreement, Ms.
Caldwell is employed as the Company's business coordinating specialist for a
period of five years from the date of the employment agreement. Ms Caldwell
also served in a similar capacity for each of the Tel Com entities. Of her
total salary in 1998, $68,073 was paid by the Tel Com entities and the
remaining $28,223 was paid by the Company. Ms. Caldwell's salary in 1997 was
paid in full by the Tel Com entities.
DIRECTOR COMPENSATION
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Each director is compensated $500 in cash per day for each board of
directors meeting attended in person and $250 in cash per day for each board of
directors meeting attended telephonically. In addition, we also reimburse
directors for out-of-pocket expenses incurred in connection with attending
board of directors meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not presently have a compensation committee comprised of some or all
of our directors. Our board of directors, as a whole, determines the level and
type of executive compensation. Mr. Pollara, our president, did participate in
a board discussion regarding executive compensation in April 2000. The board,
comprised of four members at that time, unanimously approved the executive
compensation proposal presented at the meeting by Sam Dean.
CERTAIN TRANSACTIONS
Montebello Finance
In January 1997, Tel Com Plus Jacksonville, LLC purchased a portion of
the assets of Montebello Finance, LLC, which related to the pre-paid cellular
phone business, for $250,000. Since its inception in 1992, Montebello Finance
had been primarily engaged in the rent-to-own business of consumer goods. In
late 1995, Montebello Finance began renting cellular phones and selling cellular
phone service. The cellular phone segment of Montebello Finance was a small
segment of its business. Montebello Finance was, and continues to be, owned in
trust by the children of Richard Pollara. Richard Pollara served as the
President and Chief Executive Officer of Montebello Finance from May 1994 until
January 1997.
Easy Phone's Redemption of Mr. Pollara's Ownership
In December 1997, Easy Phone, Inc. redeemed approximately 460,000 of
its shares from Richard Pollara and, as consideration for such redemption,
transferred to Mr. Pollara its interest in Tel Com East, Tel Com West and Tel
Com Jacksonville. Mr. Pollara was the President and Chief Executive Officer of
Easy Cellular and was a holder of approximately 30% of the outstanding capital
stock of Easy Phone. Prior to this transaction, Easy Phone owned approximately
37.5% of the outstanding units of Tel Com East, approximately 35.4% of the
outstanding units of Tel Com West and approximately 25% of the outstanding units
of Tel Com Jacksonville. After the redemption of Mr. Pollara's Easy Phone stock,
Mr. Pollara was a direct unitholder of Tel Com East, Tel Com West and Tel Com
Jacksonville in the above percentages. The parties to this transaction valued
the transaction in excess of $170,000. Mr. Pollara also assumed ownership of the
debt owed to Easy Phone by Tel Com East and Tel Com West, which arose in
connection with the joint venture agreement entered into with each of these
entities. Tel Com East owed Easy Phone approximately $400,000 and Tel Com West
owed Easy Phone approximately $60,000. Promissory notes dated as of November 22,
1999 were issued by us, as successor to Tel Com East and Tel Com West, to Mr.
Pollara, as the successor to Easy Phone, in the aggregate amount of
approximately $460,000. Mr. Pollara subsequently agreed to cancel each of these
notes.
Easy Phone Settlement
In September 1999, a settlement agreement was reached between Tel Com East,
Tel Com West, Richard Pollara, Joseph Cillo, Charles Polley, Easy Phone, Inc.
and us in connection with the proceeding styled Tel Com Plus West, LLC and Tel
Com Plus East, LLC, Plaintiffs v. Easy Phone, Inc., Defendant, which was
pending in the United States District Court of the Middle District of Florida.
This suit involved an agreement between Easy Phone and Tel Com East and Tel Com
West whereby Easy Phone permitted each of the Tel Com entities to use its
public utility licenses and reseller agreements with local telephone service
providers. Easy Phone alleged that Tel Com East and Tel Com West had failed to
make payments to the local telephone service providers as required by this
agreement. Tel Com East and Tel Com West alleged that Easy Phone had wrongfully
accelerated the payment schedule under this agreement. The parties to this
litigation settled this litigation on the following terms:
- The litigation was dismissed with prejudice;
- Each party to the litigation released the other party from any and all
claims which were or could have been asserted in the litigation;
- We delivered to Easy Phone certain Easy Phone stock certificates,
transferred to us by Mr. Pollara and three of our employees;
- A lawsuit brought by Mr. Pollara, Robin Caldwell and Maurice Franklin
against Easy Phone, Lorrinda Bucchieri and others pending in the State
of California was dismissed with prejudice; and
- We agreed to indemnify Easy Phone, Inc. from any tax liability of any
kind owed to the States of Florida and California and incurred in
connection with the use by Tel Com East, Tel Com West or us of Easy
Phone, Inc.'s public utility commission licenses in those states.
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<PAGE> 64
Our maximum potential tax liability to Easy Phone is approximately $1.4
million. As of the date of this prospectus, Easy Phone has not notified us of
any tax obligation owed by them and, to the best of our knowledge, neither the
State of Florida nor the State of California has pursued any tax claim against
Easy Phone.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information as to the common stock
and Class A preferred stock beneficially owned as of November 30, 2000 by
- each of our directors and executive officers;
- all directors and executive officers as a group; and
- each person known to us to be the beneficial owner of more than five
percent of the outstanding shares of our capital stock.
Under the rules of the SEC, a person is deemed to be a beneficial owner of
a security if he or she has or shares the power to vote or to direct the voting
of such security, or the power to dispose or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities
which that person has the right to acquire within 60 days, as well as any
securities owned by such person's spouse, children or relatives living in the
same house. Unless otherwise indicated in a footnote, each person listed below
possesses sole voting and investment power with respect to the shares indicated
as beneficially owned by him or her.
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Percentage Pro Forma (6)
Ownership Percentage
Ownership
--------------------------------------------------------------------------------------------------------------------------------
Common Class A Preferred Total
Stock Stock
<S> <C> <C> <C> <C> <C>
DIRECTORS & EXECUTIVE
OFFICERS
Richard J. Pollara (1) 1,641,600 6,566,400 8,208,000 17.11% 5.24%
Bill Van Aken (2) 176,000 704,000 880,000 1.83% *
Julie Graton 88,000 352,000 440,000 * *
Sam Dean 24,000 96,000 120,000 * *
Reuben P. Ballis --- --- --- --- ---
Paul D. Gregory --- --- --- --- ---
Cleo Carlile 22,400 89,600 112,000 * *
ALL DIRECTORS AND EXECUTIVE
OFFICE AS A GROUP (7 Persons) 1,952,000 7,808,000 9,760,000 20.35% **%
BENEFICIAL OWNERS OF MORE THAN 5%
Richard J. Pollara (1) 1,641,600 6,566,400 8,208,000 17.11% 5.24%
Richard Inzer (3) 3,212,100 6,502,400 9,714,500 20.26% 6.20%
Charles Polley (4) 840,000 3,360,000 4,200,000 8.76% 2.68%
Joseph Cillo (5) 1,025,600 4,102,400 5,128,000 10.69% 3.27%
Class B Preferred Shareholders (5) 80%
</TABLE>
* Less than 1% ownership.
** The pro forma ownership percentage of persons who are entitled to exchange
their shares for shares of Class B preferred stock cannot be determined until
the conclusion of the exchange offer.
(1) These shares (both common stock and Class A preferred stock) are held
by Quantum Law, Inc., a corporation which is wholly-owned in trust by the two
minor children of Richard Pollara. Mr. Pollara is the trustee of this trust.
Quantum Law's address is 3320 San Miguel Street, Tampa, Florida 33629.
(2) 156,000 of these common shares and 624,000 of the Class A preferred
shares are held by Titan Capital Corporation, which is a corporation owned and
controlled by Bill Van Aken.
(3) Shares shown as beneficially owned by Richard Inzer are owned of record
by Prime Equities, which is controlled by Mr. Inzer, GIRI Holdings, which Mr.
Inzer purports to control, and Triangle Management Systems, which Mr. Inzer also
purports to control. Prime Equities owns 2,186,500 shares of our common stock
and 2,400,000 shares of our Class A preferred stock. GIRI Holdings owns 840,000
shares of our common stock and 3,360,000 shares of our preferred stock. Triangle
Management Systems owns 185,600 shares of our common stock and 742,400 shares of
our Class A preferred stock. Joseph Cillo also purports to control GIRI Holdings
and Triangle Management Systems. Mr. Inzer's address is 6494 South Washington,
Littleton, Colorado.
(4) Shares shown as beneficially owned by Charles Polley are owned of record
by Intercontinental Brokers, which is controlled by Mr. Polley. Mr. Polley's
address is 8649 North Himes Avenue, Suite 220, Tampa, Florida 33614.
(5) Shares shown as beneficially owned by Joseph Cillo are owned of record
by GIRI Holdings and Triangle Management Systems, both of which Mr. Cillo
purports to control. Mr. Cillo's address is 18828 Wibledon Circle, Lutz, Florida
33549. Mr. Inzer also purports to control these two entities.
(6) The pro forma ownership column illustrates the percentage ownership of
the Company's directors, executive officers and significant beneficial owners
assuming that one or more recipients of this prospectus elects to exchange his
or her shares of our common stock and Class A preferred stock for Class B
preferred stock. During 1999, we entered into purchase agreements with Prime
Equities Group, Inc. in which we granted Prime Equities the right to purchase
additional shares of our common stock at a purchase price of $0.05 per share if
Prime Equities ownership of our capital stock was diluted below their percentage
ownership based on the number of shares it purchased under these purchase
agreements. In the lawsuit we brought against Joseph Cillo, et. al. in
Hillsborough County, Florida, we contest the validity and enforceability of
these purchase agreements with Prime Equities. Prime Equities purportedly
purchased approximately 670,000 shares of our common stock under these
agreements and therefore allegedly has anti-dilution rights to the extent its
share ownership falls below 1.397%. If any participant in this exchange offer
exchanges his or her shares of our common stock and Class A preferred stock for
shares of our Class B preferred stock,
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<PAGE> 65
then such participants will be issued, as a group, a total of 125,307,600
shares of our Class B preferred stock, which shares will represent
approximately 80% of our issued and outstanding capital stock. However, if the
purchase agreements with Prime Equities are determined to be valid and the
anti-dilution provisions in such agreements are determined to be enforceable,
Prime Equities, as a result of the issuance of our Class B preferred stock,
will be entitled to purchase 1,549,317 shares of our common stock at $0.05 per
share. This additional issuance of our common shares would reduce the ownership
percentage of holders of our Class B preferred stock from approximately 80% to
78.88%. If Prime Equities exercises its rights and purchases all or a portion
of such additional shares of common stock, we will issue additional shares of
Class B preferred stock proportionately to the Class B preferred stock holders
to ensure that their ownership percentage remains, in the aggregate, at
approximately 80%.
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<PAGE> 66
DESCRIPTION OF INDENTURE AND NOTES
GENERAL
The notes will be issued under the indenture between , as trustee, and us
dated 2001. The indenture is by its terms subject to and governed by the
Trust Indenture Act of 1939. You may obtain copies of the indenture from the
corporate office of the trustee or from us upon request.
PRINCIPAL, INTEREST AND MATURITY
Payment of principal and interest on the notes is scheduled to be made in
equal annual installments commencing on , 2003 and continuing thereafter on
each until the notes plus accrued interest are paid in full. Interest on the
notes will accrue at ___ % per annum and will compound annually. The term of
the notes will vary between five (5) and fifteen (15) years depending on the
aggregate principal amount of notes issued as illustrated in the following
chart.
<TABLE>
<CAPTION>
AGGREGATE AMOUNT OF NOTES ISSUED COMMENCEMENT OF ANNUAL INSTALLMENT LAST DATE OF ANNUAL INSTALLMENT
-------------------------------- ---------------------------------- -------------------------------
<S> <C> <C>
$1,000,000 or less , 2003 , 2005
$1,000,001 - $5,000,000 , 2003 , 2008
$5,000,001 - $10,000,000 , 2003 , 2010
$10,000,001 - $20,000,000 , 2003 , 2012
$20,000,001 - $30,000,000 , 2003 , 2015
</TABLE>
The notes are general unsecured obligations.
FORM, AGENTS, TRANSFER AND EXCHANGE
The notes will be issued in registered form. Two of our officers must sign
each note and an authorized signatory of the trustee must sign the certificate
of authentication on each note.
We will engage an agent to whom the notes may be presented for registration
of transfer or for exchange. This person will keep a register of the notes and
of their transfer and exchange. We will also engage an agent to whom the notes
may be presented for payment. On or prior to each principal and interest
payment date, we will deposit with the agent a sum sufficient to pay the
principal and interest becoming due. This agent will agree to hold in trust for
the benefit of the holders of the notes or the trustee all money that we
deposit with it for the payment of principal and interest on the notes, to
notify the trustee of any default by us in making the payment and to comply
with the provisions of the indenture.
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<PAGE> 67
The notes will be transferable only upon surrender of a note for
registration of transfer. The holder may present the note to the appropriate
agent with a request to register a transfer or to exchange them for an equal
principal amount of notes in other denominations. The agent may charge a
reasonable fee for any registration of transfer or exchange.
COVENANTS
Payment of Notes
We have agreed to pay the principal of and interest on the notes on the
dates and in the manner provided in the notes and in the indenture.
SEC Reports
We will file with the trustee within 15 days after we file them with the SEC
copies of annual reports, periodic reports and of the information, documents and
other reports which we are required to file with the SEC. All quarterly and
annual reports which we make available to our shareholders will also be mailed
to the holders of the notes.
Compliance Certificate
We will deliver to the trustee, within 105 days after the end of each fiscal
year, a certificate signed by our principal executive officer, principal
financial officer or principal accounting officer as to the that person's
knowledge of our compliance with all conditions and covenants contained in the
indenture.
Notice of Certain Events
We will give prompt written notice to the trustee and any paying agent of
any of the following events:
- A liquidation, dissolution, bankruptcy, insolvency,
reorganization, receivership or similar proceedings under the
bankruptcy law of the United States, an assignment for the
benefit of creditors, any marshalling of assets or liabilities,
or winding up or dissolution;
- Any default or event of default under the indenture;
- Any default in the payment of any principal or interest on any
of our obligations which rank senior to our notes or any other
type of default under our obligations which rank senior to our
notes which permit the holder of such prior obligations to
declare such debt due and payable.
SUCCESSORS OF THE COMPANY
We will not consolidate or merge with or into, or transfer all or
substantially all of our assets, to any person or entity unless:
- We will be the surviving entity;
- If we are not the surviving entity, the surviving entity or
person assumes by supplemental indenture all of our obligations
under the notes and the indenture; and
- Immediately before and immediately after the transaction, no
default exists.
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<PAGE> 68
In the event of any consolidation, merger or transfer of all or
substantially all of our assets as described above, the successor corporation
formed by the consolidation or into which we are merged or to which a transfer
is made, will be obligated and may exercise every right and power which is
available to us under the indenture and the notes with the same effect as if
such successor corporation had been named in the indenture and the notes.
DEFAULTS AND REMEDIES
Events of Default
An event of default under the indenture occurs if:
- We fail to pay principal and interest payments when the same
are due and payable and we continue to fail to make payments
for a period of 30 days;
- We fail to comply with any of our other agreements in the notes
or the indenture and (i) the trustee notifies us or (ii) the
holders of at least 25% in the principal amount of the notes
notify us and the trustee of such failure and we do not cure
such failure or it is not waived within 60 days after receipt
of notice;
- We commence a voluntary case, consent to the entry of an order
for relief against us in an involuntary case, consent to the
appointment of a custodian for all or substantially all of our
property, or make a general assignment for the benefit of our
creditors, as such terms are understood under the United States
federal bankruptcy laws; or
- A court of competent jurisdiction enters a order or decree
under the United States federal bankruptcy laws that is for
relief against us in a voluntary case, appoints a custodian of
us or for all or substantially all of our property, or orders
us to liquidate and the order and decree remains unstayed and
in effect for a 60 days.
Acceleration and Other Remedies
If an event of default occurs and is continuing, the trustee by notice to
us, or the holders of at least 25% in principal amount of the notes by notice
to us and the trustee, may declare the principal of and accrued and unpaid
interest on all the notes to be due and payable. Upon such declaration, the
principal and interest shall be due and payable immediately. In addition, if an
event of default occurs and is continuing, the trustee may pursue any available
remedy to collect the payment of principal and interest on the notes or to
enforce any provision of the notes or the indenture.
Waiver of Past Defaults
Holders of a majority of the principal of the notes by notice to the
trustee may waive an existing default and its consequences except for
- a default in the payment of principal of and interest on the
notes; or
- a default with respect to the provision of the indenture or
notes that provides that the indenture cannot be amended
without the consent of each holder of the notes affected by
such amendment.
Limitation on Suits
A holder of a note may pursue a remedy with respect to the indenture or the
notes only if:
- The holder gives notice to the trustee of a continuing event of
Default;
- Holders of at least 25% in principal amount of the notes make a
request to the trustee to pursue the remedy;
- The trustee either (i) gives to such holders notice it will not
comply with the request or (ii) does not comply with the
request within 30 days after the receipt of the request; and
- The holders of a majority in principal amount of the notes do
not give the trustee directions inconsistent with the request
prior to the earlier date, if ever, on which the trustee
delivers a notice or the expiration of the period described in
the immediately preceding paragraph.
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<PAGE> 69
Priorities
After an event of default, any money or other property distributable in
respect of our obligations under the indenture will be paid in the following
order:
- First, to the trustee for amounts due under the provisions of
the indenture regarding trustee compensation;
- Second, to the holders of our debt which ranks senior to our
notes;
- Third, to the holders for amounts due and unpaid on the notes;
and
- Fourth, to us.
AMENDMENTS
Modifications and amendments of the indenture may be made by us and the
trustee with the consent of the holders of a majority in the aggregate
principal amount of the outstanding notes; provided however, that no
modification or amendment may, without the consent of the holders of all
outstanding notes, be affected to:
- Reduce the amount of the aggregate principal amount of notes
whose holders must consent to an amendment;
- Reduce the interest on or change the time for payment of
interest on the notes;
- Reduce the principal of or change the maturity of any note;
- Make any note payable in money other than that stated in the
note;
- Make any change in the provisions of the indenture regarding
the holders' rights to:
- Waive past defaults;
- Receive payment of principal and interest; or
- Approve or reject amendments or modifications to the
indenture which require the consent of each affected
holder.
- Make any change in the subordination provisions of the
indenture which adversely affects the rights of any holder.
However, without the consent of any holder, the trustee and we may amend or
supplement the indenture to cure any ambiguity, defect or inconsistency, to
provide for the assumption of our obligations to holders of the notes in the
case of a merger or consolidation or any other amendment or supplement that
does not adversely affect the rights of the holders of the notes.
SATISFACTION AND DISCHARGE OF THE INDENTURE
If we have paid or caused to have paid the principal of and interest on the
notes when due or all outstanding notes, except lost, stolen or destroyed notes
which have been replaced or paid, have been delivered to the trustee for
cancellation, the indenture will cease to be of further effect as to all
outstanding notes thereunder, except as to:
- Rights of registration of transfer and exchange;
- Rights of holders of notes to receive payment of principal and
interest on the notes;
- Rights obligations and immunities of the trustee under the
indenture; and
- Rights of the holders of the notes as beneficiaries of the
indenture with respect to any property deposited with the trustee
payable to all or any of them.
66
<PAGE> 70
TRUSTEE
The indenture provides that, except during the continuance of an event of
default, the trustee will perform the duties as are specifically set forth in
the indenture. During the existence of an event of default, the trustee will
exercise the rights and powers vested in it under the indenture and use the
same degree of care and skill in its exercise as a prudent person would
exercise under the circumstances in the conduct of the persons owns affairs.
The indenture and the provisions of the Trust Indenture Act incorporated by
reference in the indenture contain limitations on the rights of the trustee,
should it become our creditor, to obtain payment of claims in certain cases or
to realize on certain property received by it in respect of any claim as
security or otherwise. The trustee is permitted to engage in other transactions
with us or any of our affiliates, provided however, that if it acquires any
conflicting interest as defined in the indenture or in the Trust Indenture Act,
it must eliminate the conflict or resign.
GOVERNING LAW
The indenture and the notes are governed by the laws of the State of
__________.
67
<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
GENERAL
We have 500,000,000 shares of authorized capital stock, including
300,000,000 shares of common stock, no par value per share, and 200,000,000
shares of preferred stock, $0.10 par value per share. 40,000,000 shares of the
preferred stock have been designated Class A preferred stock and 130,000,000
shares of the preferred stock have been designated Class B preferred stock. As
of September 30, 2000, 11,499,214 shares of common stock, and 36,461,749 shares
of Class A preferred stock and no shares of Class B preferred stock were
outstanding. Our Second Amended and Restated Articles of Incorporation and
Bylaws are included as exhibits to the registration statement of which this
prospectus is a part. Each of these documents contains more specific information
regarding shareholder rights. The following discussion sets forth the material
features of our capital stock.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders and will vote together with the
holders of our Class A preferred stock and Class B preferred stock as one
class. The holders of common stock are entitled to receive proportionately any
dividends that may be declared by the board of directors, subject to
preferential dividends rights of outstanding preferred stock. In the event of
our liquidation, dissolution or winding up, the holders of common stock are
entitled to receive proportionately any of our assets remaining after payment
of liabilities and subject to the prior rights of any outstanding preferred
stock. Holders of common stock have no preemptive rights or rights to convert
their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock.
PREFERRED STOCK
Our board of directors has the authority, without action by the
shareholders, to designate and issue up to 30,000,000 shares of preferred stock
in one or more classes. Our board also has the authority to designate the
dividend rate, voting rights and other rights, preferences and restrictions of
each class, any or all of which may exceed those of the common stock.
One of the effects of undesignated preferred stock may be to enable the
board of directors to discourage an attempt to obtain control of us via a
tender offer, proxy contest, merger or other means. Another effect is to
protect the continuity of management. The issuance of shares of preferred stock
may adversely affect the rights of holders of common stock. For example,
preferred stock we issue may rank prior to the common stock as to dividend
rights, liquidation preferences or both. The preferred stock also may have full
or limited voting rights and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
common stock.
CLASS A PREFERRED STOCK
The rights, preferences and privileges of the Class A common stock are
summarized below:
Voting Rights: The holders of the Class A preferred stock
have the same voting power as the holders of
the common stock and vote with the common
stock and Class A preferred stock as one
class.
Dividends: The holders of the Class A preferred stock
are entitled to receive dividends ratably at
a per annum rate of 8% of their liquidation
value of the shares, if declared by the
board of directors, before any payment of
any dividend on the common stock. The
liquidation value is $0.10 per share. This
dividend preference is not cumulative
Liquidation Rights: If we liquidate, dissolve or wind up, the
holders of the Class A preferred stock will
be paid up to $0.10 per share. This amount,
if any, will be paid out of our assets
before holders of common stock are paid, but
after the full preferential amount is paid
to the holders of Class B preferred stock.
If the assets and funds distributed to the
Class A preferred stock are not sufficient
to pay these holders their full preferential
amounts, then assets and funds will be
distributed ratably among the Class A
holders only. The liquidation value of the
Class A preferred stock will be
appropriately adjusted if we effect a stock
split, stock
68
<PAGE> 72
combination, stock dividend or other
distribution, merger, share exchange or
other fundamental corporate change.
Optional Conversion: Each share of Class A preferred stock may be
converted at the option of the holder into
shares of common stock based on the then
applicable conversion rate. The initial
conversion rate is 1 to 1, meaning that one
share of Class A preferred stock may be
converted into one share of common stock.
The number of shares of common stock into
which shares of Class A preferred stock may
be converted will be appropriately adjusted
in the event that we effect a stock split,
stock combination, stock dividend or other
distribution, merger, share exchange or
other fundamental corporate change.
Mandatory Conversion: Each share of Class A preferred stock will
be automatically converted into shares of
common stock based on the then applicable
conversion rate immediately upon (1) the
closing of a public offering of our common
stock pursuant to an effective registration
statement under the Securities Act for our
account in which we receive gross cash
proceeds of at least $10,000,000, (2) any
transaction or series of transactions
(including any reorganization, merger or
consolidation) that results in the transfer
of 50% or more of our outstanding voting
securities or (3) the sale of all or
substantially all of our assets of our
Company.
CLASS B PREFERRED STOCK
The rights, preferences and privileges of the Class B preferred stock are
summarized below:
Voting Rights The holders of the Class B preferred
stock have the same voting power as
the holders of the common stock and will
vote with the Class A preferred stock and
common stock as one class.
Dividends: The holders of the Class B preferred stock
are entitled to receive dividends ratably at
a per annum rate of 8% of the liquidation
value of the shares, if declared by our
board of directors, before any payment of
any dividend on the common stock or Class A
preferred stock. The liquidation value is
$0.10 per share. The dividend preference
will be noncumulative.
Liquidation Rights: If we liquidate, dissolve or wind up, the
holders of the Class B preferred stock will
be paid up to $0.10 per share. This amount,
if any, will be paid out of our assets
before holders of common stock or Class A
preferred stock are paid. If the assets and
funds distributed to the Class B preferred
stock are not sufficient to pay these
holders their full preferential amounts,
then assets and funds will be distributed
ratably among the Class B holders only. The
liquidation value of the Class B preferred
stock will be appropriately adjusted if we
effect a stock split, stock combination,
stock dividend or other distribution,
merger, share exchange or other fundamental
corporate change.
Optional Conversion: Each share of Class B preferred stock may be
converted at the option of the holder into
shares of common stock based on the then
applicable conversion rate. The initial
conversion rate is 1 to 1, meaning that one
share of Class B preferred stock may be
converted into one share of common stock.
The number of shares of common stock into
which shares of Class B preferred stock may
be converted will be appropriately adjusted
in the event that we effect a stock split,
stock combination, stock dividend or other
distribution, merger, share exchange or
other fundamental corporate change.
Mandatory Conversion: Each share of Class B preferred stock will
be automatically converted into shares of
common stock based on the then applicable
conversion rate immediately upon (1) the
closing of a public offering of our common
stock pursuant to an effective registration
statement under the Securities Act for our
account in which we receive gross cash
proceeds of at least $10,000,000, (2) any
transaction or series of transactions
(including any reorganization, merger or
consolidation) that results in the transfer
of 50% or more of our outstanding voting
securities or (3) the sale of all or
substantially all of our assets.
Holders of our common stock, Class A preferred stock and Class B preferred
stock will be entitled under Florida law to vote as separate classes in certain
circumstances. These circumstances include an amendment to our articles which
would increase or decrease the aggregate number of authorized shares of a
class, effect an exchange of shares of one class into shares of another class,
or change the designation, rights, preferences or limitations of all or part of
the shares of the class.
EXPERTS
Our financial statements in this prospectus and elsewhere in this
registration statement, to the extent and for the periods indicated in their
reports, have been audited by Pender Newkirk & Company, CPAs and are included
herein in reliance upon its authority as an expert in accounting and auditing
in giving said reports.
69
<PAGE> 73
LEGAL MATTERS
The validity of the Class B preferred stock will be passed upon by Bush,
Ross, Gardner, Warren & Rudy, P.A. The material tax consequences will be passed
upon by Paul, Hastings, Janofsky & Walker LLP.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4 under the Securities Act with respect to this exchange
offer. While the prospectus, which forms a part of the registration statement,
contains the information that we believe is material relative to the rescission
offer, it does not contain all of the information set forth in the registration
statement. Copies of the registration statement may be examined without charge
at the Public Reference Section of the SEC, 450 Fifth Street, N.W. Room 1024,
Washington, D.C. 20549. Copies of all or any portion of the registration
statement can be obtained from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of the fees prescribed
by the SEC. The Securities and Exchange Commission maintains a World Wide Web
site that contains registration statements, reports, proxy and information
statements and other information regarding registrants (including us) that file
electronically with the SEC. The address of such site is http://www.sec.gov.
70
<PAGE> 74
APPENDIX A
LETTER OF TRANSMITTAL
for Tender of
Common Stock and Class A Preferred Stock in Exchange for Unsecured
Installment Notes or Class B Preferred Stock
of
UNITED STATES TELECOMMUNICATIONS, INC.
-------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
TAMPA, FLORIDA TIME, ON ____________ ___, 2001,
UNLESS EXTENDED BY UNITED STATES TELECOMMUNICATIONS, INC.
-------------------------------------------------------------------------------
The Exchange Agent for the Exchange Offer is:
[-------------]
By Mail: By Hand: By Overnight Courier:
[address] [address] [address]
Facsimile Transmission: Confirm by Telephone:
YOU MUST DELIVER THIS LETTER OF TRANSMITTAL TO ONE OF THE ABOVE ADDRESSES.
IF YOU DO NOT DELIVER IT AS INSTRUCTED, WE WILL NOT BE REQUIRED TO ACT ON YOUR
REQUEST.
You acknowledge receipt of our Prospectus dated _________ __, 2001 which,
together with this letter of transmittal, is our offer to exchange shares of our
common stock and Class A preferred stock that you hold for our unsecured
installment notes or shares of our Class B preferred stock.
If you exchange your shares of common stock and Class A preferred stock for
notes, you will receive notes with a principal amount equal to the purchase
price that you paid for your shares of common stock and Class A preferred stock
(or for units in our predecessor companies). The notes will be issued in
denominations of $1,000. To determine the amount of notes to be issued, your
purchase price will be rounded to the nearest thousand.
If you exchange your shares of common stock and Class A preferred stock for
shares of Class B preferred stock, then you will receive a certain number of
shares of Class B preferred stock for every $1.00 you paid for shares of common
stock and Class A preferred stock (or for units in our predecessor companies).
As a group, holders of our common stock and Class A preferred stock who exchange
their securities for shares of our Class B preferred stock will own
approximately 80% of our issued and outstanding capital stock immediately after
the exchange offer. This number will be equal to 125,307,600 divided by the
aggregate purchase price paid for shares of common stock and Class A preferred
stock (or units of our predecessor companies) by those recipients of the
Prospectus who exchange their securities for shares of Class B preferred stock.
If you do not act to exchange your shares of common stock and Class A
preferred stock on or before ______________, 2001, the expiration date, we will
assume that you have rejected this exchange offer and you will continue to hold
shares Common Stock and Class A Preferred Stock.
If you choose to exchange your shares of common stock and Class A preferred
stock for our notes or Series B preferred stock under this exchange offer, you
must deliver your shares with this letter of transmittal to the exchange agent
at the address specified above before the close of business on _________, 2001,
the expiration date. You may change your mind and withdraw your shares at any
time prior to 5:00 p.m., Tampa, Florida time, on the expiration date by sending
the exchange agent at the address specified above a facsimile transmission or
letter that lists your name, the number of shares of common stock and Class A
preferred stock that you delivered for exchange and a statement that you are
withdrawing your shares from the exchange offer.
A-1
<PAGE> 75
You may not exchange a portion of your shares of common stock and Class A
preferred stock for the notes or a portion of your shares for shares of our
Class B preferred stock. In addition, you may not withdraw a portion of your
shares of common stock and Class A preferred stock that you deliver to the
exchange agent. If you withdraw your shares, you must withdraw all shares
previously delivered.
You must check the appropriate box below and sign this letter of transmittal
to indicate the action you desire to take with respect to the exchange offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW. YOU MUST FOLLOW THE INSTRUCTIONS INCLUDED WITH
THIS LETTER OF TRANSMITTAL. QUESTIONS AND REQUESTS FOR ASSISTANCE, OR FOR
ADDITIONAL COPIES OF THE PROSPECTUS AND THIS LETTER OF TRANSMITTAL, MAY BE
DIRECTED TO THE EXCHANGE AGENT.
[] CHECK HERE IF YOU ARE DELIVERING ALL OF YOUR SHARES OF COMMON STOCK AND
CLASS A PREFERRED STOCK FOR OUR NOTES AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s): _____________________________________________
[] CHECK HERE IF YOU ARE DELIVERING ALL OF YOUR SHARES OF COMMON STOCK AND
CLASS A PREFERRED STOCK IN EXCHANGE FOR OUR SHARES OF CLASS B PREFERRED
STOCK AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s): _____________________________________________
[] CHECK HERE IF THE EXCHANGE OFFER IS REJECTED:
Name of Registered Holder(s): _____________________________________________
List below all shares of common stock and Class A preferred stock that you own
and desire to exchange. If the space provided below is inadequate, please list
the certificate numbers and purchase price amounts on a separate sheet, sign it
and attach the additional sheet or sheets to this letter of transmittal. In
addition, please attach proof that the entire purchase price for our shares (or
units in our predecessor companies) was paid in full. This proof may be in the
form of a copy of a cancelled check. You may have paid the purchase price in
either cash or property. If you paid in property, the price you paid will be
considered to be the fair market value of such property at the time of the sale.
We may require additional proof if the proof you provide is not reasonably
satisfactory to us.
DESCRIPTION OF SHARES TENDERED
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Name(s) and Addresses of Registered Purchase Price for Number
Holder(s) Certificate of Shares Represented by
(Please fill in) Number(s) Number of Shares Certificate
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Total
-----------------------------------------------------------------------------------------------
</TABLE>
Please use this letter of transmittal if certificates for our common stock
and Class A preferred stock are to be exchanged for our notes or shares of our
Class B preferred stock.
A-2
<PAGE> 76
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
I hereby tender to United States Telecommunications, Inc. all of my shares
of common stock and Class A preferred stock under the terms and subject to the
conditions contained in the prospectus dated _____________, 2001 and the letter
of transmittal. Subject to, and effective upon, acceptance by UST of my shares
of common stock and Class A preferred stock delivered to UST with this letter, I
hereby exchange, assign and transfer to, or upon the order of, UST all right,
title and interest in and to such shares. I hereby irrevocably constitute and
appoint the exchange agent as the my true and lawful agent and attorney-in-fact
(with full knowledge that this exchange agent acts as my agent in connection
with the exchange offer) to cause my shares of common stock and Class A
preferred stock to be assigned, transferred and exchanged. I represent and
warrant that
-- I have full power and authority to tender, exchange, assign and
transfer my shares of common stock and Class A preferred stock and to acquire
the notes or shares of Class B preferred stock, whichever is applicable,
issuable upon the exchange of my tendered shares of common stock and Class A
preferred stock, and
-- when the common stock and Class A preferred stock are accepted for
exchange, UST will acquire good and unencumbered title to the tendered shares of
common stock and Class A preferred stock, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claim. I
also warrant that I will, upon request, execute and deliver any additional
documents that UST requests to complete the exchange, assignment and transfer of
my tendered shares of common stock and Class A preferred stock.
All authority conferred in this letter or agreed to be conferred shall
survive my death, bankruptcy or incapacity, and my obligations in this letter
shall be binding upon my heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and any other of my
legal representatives. Shares of my common stock and Class A preferred stock may
be withdrawn at any time prior to 5:00 p.m., Tampa, Florida time, on the
_____________, 2001, expiration date, by following the procedures set forth
below.
Certificates for all notes and Class B preferred stock delivered in exchange
for shares of my common stock and Class A preferred stock shall be delivered to
me at the address shown below my signature.
A-3
<PAGE> 77
TENDERING HOLDER(S) SIGN HERE
-------------------------
-------------------------
Signature(s) of Holder(s)
Date: ____________________, 2001
(Must be signed by registered Holder(s) exactly as name(s) appear(s) on
certificate(s) for shares of common stock and Class A preferred stock or by any
person(s) authorized to become registered holder(s) by endorsements and
documents transmitted with this letter of transmittal. If signed by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation or
other person acting in a fiduciary or representative capacity, please show the
full title of such person.) See Instruction 3.
Name(s):
----------------------
----------------------
Capacity
(full title):
-----------------------------------------------------------------
Address:
Area Code and
Telephone No.:
-----------------------------------------------------------------
Address:
(Including Zip Code):
---------------------------------------------------------
Tax Id. No.:
-----------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED SEE INSTRUCTION 3)
Authorized Signature:
---------------------------------------------------------
Name:
-------------------------------------------------------------------------
Title:
------------------------------------------------------------------------
Address:
----------------------------------------------------------------------
Name of Firm:
-----------------------------------------------------------------
Area Code and Telephone No.:
--------------------------------------------------
Dated: ___________________ , 2000
A-4
<PAGE> 78
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
PAYOR'S NAME: UNITED STATES TELECOMMUNICATIONS, INC.
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE FORM W-9
Department of the Name (If joint names, list first and circle the name of the person or entity whose
Treasury number you enter in Part I below.)
Internal Revenue
Service
-------------------------------------------------------------------------------------------------------------
Business name, if different from above.
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Address
-------------------------------------------------------------------------------------------------------------
City, state and zip code
-------------------------------------------------------------------------------------------------------------
PART I-Please provide your taxpayer identification number ("TIN") in the box at Social Security Number
the right. For individuals, this is your social security number. For other or Employer
entities, this is your employer identification number. Identification Number
------------------------------------------------------------------------------------ ------------------------
PART II-If exempt from backup withholding, check the box to the right. Also
provide your TIN in Part I and sign and date this form. [ ]
------------------------------------------------------------------------------------ ------------------------
PART III-Under penalties of perjury, I certify that:
1. The number shown on this form is my correct taxpayer identification
number (or I am waiting for a number to be issued to me), AND
2. I am not subject to backup withholding because: (a) I am exempt
from backup withholding; or (b) I have not been notified by the
Internal Revenue Service that I am subject to backup withholding
as a result of a failure to report all interest or dividends; or
(c) the IRS has notified me that I am no longer subject to backup
withholding.
-------------------------------------------------------------------------------------------------------------
CERTIFICATION INSTRUCTIONS. You must cross out item 2 above if you have
been notified by the IRS that you are currently subject to backup
withholding because of underreporting interest or dividends on your tax
return.
The Internal Revenue Service does not require your consent to any
provision of this document other than the certifications required to
avoid backup withholding.
Signature Date:
----------------------------------- ------------------
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
EXCHANGE OFFER.
A-5
<PAGE> 79
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. Delivery of this Letter of Transmittal and Certificates. The exchange
agent must receive the certificates for all shares of common stock and Class A
preferred stock, evidence of the purchase price paid for these shares, a
properly completed and signed copy of this letter of transmittal and any other
documents required by this letter of transmittal, at any of its addresses listed
in this letter of transmittal on or before ________, 2001, the expiration date.
THE METHOD OF DELIVERY OF ALL REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT
YOUR ELECTION AND RISK AND, EXCEPT AS OTHERWISE PROVIDED BELOW, THE DELIVERY
WILL BE DEEMED MADE ONLY WHEN ALL REQUIRED DOCUMENTS ARE ACTUALLY RECEIVED BY
THE EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, WE RECOMMEND THAT YOU USE AN
OVERNIGHT OR HAND DELIVERY SERVICE.
We will not accept any alternative, conditional, irregular or contingent
tenders of our shares of common stock or Class A preferred stock. If you tender
your shares to us by this letter of transmittal, you will be deemed to have
waived any right to receive notice of the acceptance of the shares of common
stock and Class A preferred stock for exchange.
2. No Partial Tenders; Withdrawals. You must either reject the exchange
offer or accept it by exchanging all of your shares of common stock and Class A
preferred stock for our notes or shares of our Class B preferred stock. You may
not exchange a portion of your shares for the notes and a portion for shares of
Class B preferred stock. All shares of common stock and Class A preferred stock
delivered to the exchange agent will be considered submitted for exchange unless
otherwise indicated. To withdraw your shares from the exchange offer, you must
forward a written or facsimile transmission notice of withdrawal to the exchange
agent, and this notice must be received by the exchange agent at its address
before 5:00 p.m., Tampa, Florida time, on _________, 2001, the expiration date.
Any such notice of withdrawal must:
- specify the name of the person who tendered the shares of common stock
and Class A preferred stock to be withdrawn;
- state that all shares previously tendered are to be withdrawn;
- contain a statement that you are withdrawing your shares from the
exchange offer;
- be signed by you, as the holder of the shares, in the same manner as
you originally signed the letter of transmittal that was sent with the shares;
and
- specify the name in which any such shares are to be registered.
Any shares of common stock and Class A preferred stock that have been
submitted but that are not either withdrawn or accepted for exchange will be
returned to you without cost as soon as practicable after withdrawal or
rejection. Properly withdrawn shares may be resubmitted at any time on or before
the business day immediately preceding the expiration date.
3. Signature on this Letter of Transmittal; Written Instruments and
Endorsements; Guarantee of Signatures. If this Letter of Transmittal is signed
by the registered holder of the shares of common stock and Class A preferred
stock delivered with this letter of transmittal, the signature must correspond
exactly with the name as written on the face of certificates without any change
whatsoever.
If your deliver shares of common stock and Class A preferred stock that are
registered in your name, and the notes or shares of Class B preferred stock to
be issued in exchange for your shares are to be issued in your name, your
signature does not need to be guaranteed. In any other case, the shares of
common stock and Class A preferred stock must be endorsed or accompanied by
written instruments of transfer in form satisfactory to us and signed by the
registered holder of the shares, with signatures guaranteed by a member firm of
a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" as
defined by Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended.
If the newly issued notes or shares of Class B preferred stock or, on the
other hand, the shares of common stock and Class A preferred stock not
exchanged are to be delivered to an address other than that of the registered
holder appearing on the stock register
A-6
<PAGE> 80
for the shares of common stock and Class A preferred stock, the signature in
the Letter of Transmittal must be guaranteed as described in the previous
paragraph.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 also must be guaranteed.
If any of the shares of common stock and Class A preferred stock delivered
are owned of record by two or more joint owners, all owners must sign this
letter of transmittal.
If a number of share certificates registered in different names are
delivered, you must complete, sign and submit as many separate copies of this
letter of transmittal as there are different registrations of the shares.
When this letter of transmittal is signed by the registered holder or
holders of shares of common stock and Class A preferred stock listed and
delivered by this letter of transmittal, no endorsements of certificates or
separate written instruments of transfer or exchange are required.
If this letter of transmittal is signed by a person other than the
registered holder or holders of the shares of common stock and Class A preferred
stock listed, the delivered shares must be endorsed or accompanied by separate
written instruments of transfer or exchange in form satisfactory to us and
signed by the registered holder or holders, in either case signed exactly as the
name of the registered holder appears on the shares of common stock and Class A
preferred stock delivered.
If this letter of transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should show the
capacity in which they are signing, and, unless waived by UST, provide proper
evidence of their authority so to act.
4. Transfer Taxes. We will pay all transfer taxes, if any, applicable to the
exchange of shares of common stock and Class A preferred stock pursuant to the
exchange offer. If, however, certificates representing newly issued notes, newly
issued shares of Class B preferred stock or shares of common stock and Class A
preferred stock not tendered or accepted for exchange, are to be delivered to,
or are to be issued in the name of, any person other than the registered holder
of the shares delivered, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other person) will be payable by the
delivering holder. If satisfactory evidence of payment of such taxes or
exemption from the payment of taxes is not submitted with this letter of
transmittal, the amount of such transfer taxes will be billed directly to the
delivering holder.
Except as provided in this Instruction 4, transfer tax stamps do not need to
be affixed to the shares of common stock and Class A preferred stock listed in
this letter of transmittal.
5. Waiver of Conditions. We reserve the right to waive, in whole or in
part, any of the conditions to the exchange offer set forth in the prospectus
or in this letter of transmittal.
6. Mutilated, Lost, Stolen or Destroyed Certificates. Any holder whose
shares of common stock or Class A preferred stock have been mutilated, lost,
stolen or destroyed should contact the exchange agent at the address indicated
above for further instructions.
7. Requests for Assistance or Additional Copies. Questions relating to the
procedure for delivery and other questions relating to the exchange offer, as
well as requests for assistance or additional copies of the prospectus and this
letter of transmittal, may be directed to the exchange agent at the address and
telephone number set forth above and in the prospectus.
8. Irregularities. All questions as to the validity, form, eligibility
(including time of receipt) and acceptance of letters of transmittal or shares
of common stock and Class A preferred stock will be resolved by us. Our
determination will be final and binding. We reserve the right to reject any or
all letters of transmittal or deliveries that are not in proper form or the
acceptance of which would, in the opinion of our counsel, be unlawful. We also
reserve the right to waive any irregularities or conditions as to the particular
shares of common stock and Class A preferred stock covered by any letter of
transmittal or delivered. Neither we, the exchange agent nor any other person
will be under any duty to give notice of any defects or irregularities in
deliveries or incur any liability for failure to give any such notification. Our
interpretation of the terms and conditions of the exchange offer shall be final
and binding.
A-7
<PAGE> 81
9. Tax Identification Number. Federal income tax law requires that a holder
of any shares of common stock and Class A preferred stock that are accepted for
exchange must provide us (as payor) with its correct taxpayer identification
number ("TIN"), which, in the case of a holder who is an individual, is his or
her social security number. If we are not provided with the correct TIN, the
holder may be subject to a $50 penalty imposed by the Internal Revenue Service.
(If withholding results in an overpayment of taxes, a refund may be obtained.)
Certain holders (including, among others, all corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements; however, these holders should still submit the Substitute Form
W-9.
To prevent backup withholding, each tendering holder must provide a correct
TIN by completing the Substitute Form W-9 included in this letter of
transmittal, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN), and that
- the holder is exempt from back up withholding,
- the holder has not been notified by the Internal Revenue Service that such
holder is subject to backup withholding as a result of failure to report
all interest or dividends or
- the Internal Revenue Service has notified the holder that such holder is
no longer subject to backup withholding. The Form must be signed, even if
the holder is exempt from backup withholding.
We reserve the right in our sole discretion to take whatever steps are
necessary to comply with our obligation regarding backup withholding.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF (TOGETHER WITH
CERTIFICATES FOR SHARES OF COMMON STOCK AND CLASS A PREFERRED STOCK AND ALL
OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO
THE EXPIRATION DATE.
A-8
<PAGE> 82
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
UNITED STATES TELECOMMUNICATIONS, INC:
Independent Auditors' Report...................................................................................... F-2
Balance Sheets as of September 30, 2000 (unaudited), December 31, 1999 and December 31, 1998...................... F-3
Statements of Operations for the nine months ended September 30, 2000 and 1999
(unaudited) and the years ended December 31, 1999 and 1998 and the period from
inception (November 19, 1997) to December 31, 1997............................................................ F-5
Statements of Changes in Stockholders' Deficit for the nine months ended September 30, 2000
(unaudited) and the years ended December 31, 1999 and 1998 and the period from inception
(November 19, 1997) to December 31, 1997...................................................................... F-6
Statements of Cash Flows for the nine months ended September 30, 2000 and 1999 (unaudited)
and the years ended December 31, 1999 and 1998 and the period from inception
(November 19, 1997) to December 31, 1997...................................................................... F-7
Notes to Financial Statements..................................................................................... F-9
COMBINED FINANCIAL STATEMENTS OF TEL COM PLUS EAST, L.L.C., TEL
COM PLUS WEST, L.L.C., AND TEL COM PLUS JACKSONVILLE, L.L.C. Clearwater, Florida:
Independent Auditors' Report...................................................................................... F-25
Balance Sheet as of September 30, 1998 and December 31, 1997...................................................... F-26
Statements of Operations for the period ending September 30, 1998 and the period
from inception to December 31, 1997........................................................................... F-27
Statements of Changes in Members Capital for the period ending September 30, 1998
and the period from inception to December 31, 1997............................................................ F-28
Statements of Cash Flows for the period ending September 30, 1998 and the period from
inception to December 31, 1997................................................................................ F-29
Notes to Financial Statements..................................................................................... F-30
</TABLE>
F-1
<PAGE> 83
(PNCCPAs LOGO)
Independent Auditors' Report
Board of Directors
United States Telecommunications, Inc.
Clearwater, Florida
We have audited the accompanying balance sheets of United States
Telecommunications, Inc. as of December 31, 1999 and 1998 and the related
statements of operations, changes in stockholders' equity (deficit), and cash
flows for the years ended December 31, 1999 and 1998 and the period from
inception (November 19, 1997) to December 31, 1997. These financial statements
are the responsibility of the management of United States Telecommunications,
Inc. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of United States
Telecommunications, Inc. as of December 31, 1999 and 1998 and the results of its
operations and its cash flows for the years ended December 31, 1999 and 1998 and
the period from inception (November 19, 1997) to December 31, 1997 in conformity
with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As further discussed in Note B to the
financial statements, the Company incurred an operating loss of approximately
$8,083,000 and used approximately $2,151,000 of cash in operations during the
year ended December 31, 1999. In addition, the Company had negative working
capital of approximately $6,667,000 and its liabilities exceeded its assets by
approximately $36,800,000 at December 31, 1999. Additionally, the Company is in
violation with a consent agreement with the State of Florida Department of
Banking and Finance relating to a rescission of securities sold in violation of
federal and state securities laws. Further, the Company has not filed all
required state and municipal sales and excise tax returns, nor has the company
remitted the related payments of these taxes estimated to be approximately
$3,683,000 including penalties and interest at December 31, 1999. Also, as
further discussed in Note N, the Company could face civil or criminal penalties
in California as well as the loss of its California Public Utilities Commission
license. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The accompanying financials statements have been restated for 1999 and 1998 from
the financial statements accompanying an S-4 registration statement filed with
the Securities and Exchange Commission on October 11, 2000, to reflect a change
in the treatment of the rescission liability, as more fully discussed in Note E.
/s/ Pender Newkirk & Company
----------------------------
Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
July 24, 2000, except for NOTE E as to which the date is November 30, 2000.
F-2
<PAGE> 84
UNITED STATES TELECOMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(unaudited) 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash (including $50,000 restricted at 1999 and 1998) $ -- $ 56,111 $ 627,854
Accounts receivable, net of allowance for doubtful
accounts of $1,112,506, $1,297,474, and $2,638,331
at 2000, 1999, and 1998, respectively 863,459 887,256 1,015,235
Agent receivables, net of allowance for doubtful
accounts of $17,028, $51,260 and $0 at 2000, 1999,
and 1998, respectively 140,102 153,799 132,534
Note receivable 134,269
Prepaid expenses and other 48,561 200 1,400
------------- ------------- -------------
TOTAL CURRENT ASSETS 1,186,391 1,097,366 1,777,023
------------- ------------- -------------
Property and equipment, net of accumulated
depreciation of $390,377, $240,289 and $47,732 at
2000, 1999 and 1998, respectively 323,123 457,642 453,530
OTHER ASSETS
Licenses, net of accumulated amortization of
$25,307, $16,577 and $5,108 at 2000, 1999, and
1998, respectively 149,294 158,024 137,633
Software, net of accumulated amortization of
$356,895, $216,528, and $57,353 at 2000, 1999,
and 1998, respectively 221,131 303,074 353,351
Goodwill, net of accumulated amortization of
$380,163, $237,602, and $47,520 at 2000, 1999,
and 1998, respectively 2,471,061 2,613,622 2,803,703
Customer base, net of accumulated amortization of
$633,605, $396,003, and $79,201 at 2000, 1999,
and 1998, respectively 316,803 554,405 871,208
Deposits 153,816 225,316 204,541
Other assets 52,451 46,301 28,000
------------- ------------- -------------
TOTAL OTHER ASSETS 3,364,556 3,900,742 4,398,436
------------- ------------- -------------
TOTAL ASSETS $ 4,874,070 $ 5,455,750 $ 6,628,989
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 85
UNITED STATES TELECOMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(unaudited) 1999 1998
------------- ------------- -------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 363,554 $ 367,643 $ 90,800
Bank overdraft 245,938 -- --
Accrued liabilities 412,009 491,964 432,822
Accrued interest 621,718 488,899
Accrued carrier costs 1,040,567 1,771,365 2,112,027
Accrued sales tax and penalties 4,378,488 3,324,409 1,861,792
Unearned revenue 267,550 256,034 136,105
Notes payable and obligations - related party 179,881 678,886 609,003
Unit rescission obligation-current 107,502 338,252 403,998
Rescission accrued interest-current 70,740 -- --
Line of credit -- 46,481 50,151
------------- ------------- -------------
TOTAL CURRENT LIABILITIES 7,687,947 7,763,933 5,696,698
------------- ------------- -------------
LONG TERM LIABILITIES
Unit rescission obligation:
Common stock; no par value; 3,571,244 shares issued
and outstanding at 2000, 1999, and 1998, respectively
Preferred stock; $0.10 par value; 12,945,149 shares issued
and outstanding at 2000, 1999, and 1998, respectively 29,135,642 29,202,942 29,508,644
Rescission accrued interest 7,301,963 5,293,207 2,335,095
------------- ------------- -------------
TOTAL LONG TERM LIABILITIES 36,437,605 34,496,149 31,843,739
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock; $0.10 par value; 200,000,000
shares authorized; 23,516,600 shares issued
and outstanding at 2000, 1999, and 1998, respectively 1,572,951 1,572,951 1,572,951
Common stock; no par value; 100,000,000 shares authorized;
7,927,970; 7,927,970; 5,984,000 shares issued and
outstanding at 2000, 1999, and 1998, respectively -- -- --
Additional paid in capital 5,166,379 4,596,090 2,378,681
Accumulated deficit (45,963,812) (42,946,373) (34,863,080)
------------- ------------- -------------
(39,224,482) (36,777,332) (30,911,448)
Less subscription receivable on common stock (27,000) (27,000) --
------------- ------------- -------------
TOTAL STOCKHOLDERS' DEFICIT (39,251,482) (36,804,332) (30,911,448)
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4,874,070 $ 5,455,750 $ 6,628,989
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 86
UNITED STATES TELECOMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
Nine Months Ended Inception
September 30, Years Ended (November 19,
----------------------------- December 31, 1997) to
2000 1999 ----------------------------- December 31,
(unaudited) (unaudited) 1999 1998 1997
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Sales $ 13,359,062 $ 15,042,829 $ 19,738,566 $ 5,066,448 $ --
Cost of sales 4,467,211 5,579,939 7,514,529 2,317,945 --
------------- ------------- ------------- ------------- -------------
GROSS PROFIT 8,891,851 9,462,890 12,224,037 2,748,503 --
Advertising expenses 814,458 1,144,516 1,383,815 430,703 --
Depreciation and amortization expense 681,438 665,605 869,174 215,811 --
Provision for doubtful accounts receivable 3,545,941 6,241,074 7,709,478 1,953,860
General and administrative expenses 4,532,297 6,193,366 8,283,538 2,517,470 (250)
Impairment loss -- -- -- 31,674,670 --
Loss on promoter receivable write off resulting
from rescission obligation interest 2,079,497 2,221,499 2,958,111 748,459 --
------------- ------------- ------------- ------------- -------------
OPERATING (LOSS) (2,761,780) (7,003,170) (8,980,079) (34,792,470) (250)
Interest expense (255,659) (196,046) (361,461) (70,360) --
------------- ------------- ------------- ------------- -------------
NET LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (3,017,439) (7,199,216) (9,341,540) (34,862,830) (250)
Income tax benefit -- 469,326 469,326 -- --
------------- ------------- ------------- ------------- -------------
NET LOSS BEFORE EXTRAORDINARY ITEM (3,017,439) (6,729,890) (8,872,214) (34,862,830) (250)
EXTRAORDINARY ITEM
Extraordinary item, net of
income tax of $469,326 -- 788,921 788,921 -- --
------------- ------------- ------------- ------------- -------------
NET LOSS $ (3,017,439) $ (5,940,969) $ (8,083,293) $ (34,862,830) $ (250)
============= ============= ============= ============= =============
Per share data:
Basic and diluted loss per share
before extraordinary item $ (0.26) $ (0.66) $ (0.84) $ (5.68) $ --
============= ============= ============= ============= =============
Basic and diluted loss per share $ (0.26) $ (0.58) $ (0.77) $ (5.68) $ --
============= ============= ============= ============= =============
Weighted average number of common
shares used in basic and diluted loss
per share calculations 11,499,214 10,236,796 10,560,947 6,140,532 --
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 87
UNITED STATES TELECOMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
Nine months ended September 30, 2000 (unaudited) and years ended December 31,
1999 and 1998 and period from inception (November 19, 1997) to December 31, 1997
<TABLE>
<CAPTION>
Preferred Additional
-------------------------- Common Paid In Accumulated Subscription
Shares Stock Shares Capital Deficit Receivable Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Inception, November 19, 1997 -- $ -- -- $ -- $ -- $ -- $ --
Net loss -- -- -- -- (250) (250)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 -- -- -- -- (250) -- (250)
Shares issued to founders 18,102,400 -- 4,525,600 -- -- -- --
Shares issued to employees
For services 1,840,000 -- 460,000 -- -- -- --
Shares issued for cash -- -- 400,000 150,000 -- -- 150,000
Acquisitions Transactions of
Tel Com West 9,543,810 954,381 2,375,267 2,228,681 -- -- 3,183,062
Acquisitions Transactions of
Tel Com East 5,726,057 536,957 1,482,005 -- -- -- 536,957
Acquisitions Transactions of
Tel Com Jacksonville 1,249,482 81,613 312,372 -- -- -- 81,613
Shares subjected to the rescission (12,945,149) -- (3,571,244)
Net loss -- -- -- -- (34,862,830) -- (34,862,830)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 23,516,600 1,572,951 5,984,000 2,378,681 (34,863,080) -- (30,911,448)
Shares issued for cash -- -- 1,070,000 849,500 -- -- 849,500
Shares issued for subscription
note receivable -- -- 27,000 27,000 -- (27,000) --
Private placement memorandum
net of offering costs of
approximately $10,000 -- -- 446,970 1,340,909 -- -- 1,340,909
Shares issued for offering costs -- -- 400,000 -- -- -- --
Net loss -- -- -- -- (8,083,293) -- (8,083,293)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 23,516,600 1,572,951 7,927,970 4,596,090 (42,946,373) (27,000) (36,804,332)
Forgiveness of stockholder note
payable (unaudited) -- -- -- 570,289 -- 570,289
Net loss (unaudited) -- -- -- -- (3,017,439) -- (3,017,439)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at September 30, 2000
(unaudited) 23,516,600 $ 1,572,951 7,927,970 $ 5,166,379 $(45,963,812) $ (27,000) $(39,251,482)
============ ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 88
UNITED STATES TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period
From
Nine Months Ended Inception
September 30, Years Ended (November 19,
--------------------------- December 31, 1997) to
2000 1999 --------------------------- December 31,
(unaudited) (unaudited) 1999 1998 1997
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (3,017,439) $ (5,940,969) $ (8,083,293) $(34,862,830) $ (250)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities
Depreciation and amortization 681,438 665,605 869,174 215,811 --
Loss on promoter receivable 2,079,497 2,221,499 2,958,111 748,459 --
Impairment loss -- -- -- 31,674,670 --
Provision for doubtful accounts receivable 3,545,941 6,241,074 7,709,478 1,953,860 --
Gain from Easy Phone settlement -- (1,258,247) (1,258,247) -- --
Note issued for reimbursement of advertising
expenses (134,269) -- -- -- --
Changes in operating assets and liabilities:
(Increases) decreases in:
Accounts receivables and agent receivables (3,508,446) (6,105,807) (7,602,766) (2,411,164) --
Deposits and other assets 16,988 (39,129) (37,876) (201,499) --
Licenses -- (34,247) (31,860) (142,741) --
Increases (decreases) in:
Accounts payable (4,091) 91,032 276,843 58,355 250
Accrued liabilities 162,062 173,975 548,047 211,971 --
Accrued carrier costs (730,798) 916,133 917,835 721,035 --
Accrued taxes and penalties 1,054,079 1,074,132 1,462,365 504,632 --
Unearned revenues 11,517 107,101 119,928 136,105
------------ ------------ ------------ ------------ -------------
Total adjustments to reconcile net loss to net
cash provided (used) by operating activities 3,173,918 4,053,121 5,931,032 33,469,494
------------ ------------ ------------ ------------ -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 156,479 (1,887,848) (2,152,261) (1,393,336)
------------ ------------ ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash resulting from the acquisition -- -- -- 296,326 --
Purchase of software (58,424) (108,847) (108,878) (365,647) --
Purchases of property and equipment (15,571) (170,710) (195,779) (111,251)
------------ ------------ ------------ ------------ -------------
NET CASH USED BY INVESTING ACTIVITIES (73,995) (279,557) (304,657) (180,572)
------------ ------------ ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 245,938 34,826 -- -- --
Payable to Tel Com East, Tel Com West and Tel Com
Jacksonville -- -- -- 1,406,738 --
Net cash provided (payments) under line of credit (46,481) (6,346) (3,670) 50,151 --
Net Proceeds from (principal payments on) note (40,002) (1,500) 69,883 (41,355) --
payable - related
Proceeds received from the issuance of a note -- -- -- 150,000 --
payable
Payments related to the Jacksonville rescission (298,050) (321,974) (371,448) (120,000) --
Payments received on note receivable -- -- -- 606,228
Proceeds received from issuance of common stock
for cash -- 1,834,545 2,190,410 150,000 --
------------ ------------ ------------ ------------ -------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (138,595) 1,539,551 1,885,175 2,201,762 --
------------ ------------ ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH $ (56,111) $ (627,854) $ (571,743) $ 627,854 $ --
------------ ------------ ------------ ------------ -------------
CASH AT BEGINNING OF PERIOD $ 56,111 $ 627,854 $ 627,854 $ -- --
============ ============ ============ ============ =============
CASH AT END OF PERIOD $ -- $ -- $ 56,111 $ 627,854 $ --
============ ============ ============ ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 89
UNITED STATES TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Nine Months Ended Inception
September 30, Years Ended (November 19,
------------------------- December 31, 1997) to
2000 1999 ------------------------- December 31,
(unaudited) (unaudited) 1999 1998 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING ACTIVITIES
On September 30, 1998 the Company acquired the
asset of Tel Com East, Tel Com Jacksonville and
Tel Com West (See Note D)
Fair value of assets acquired $ -- $ -- $ -- $ 3,446,164 $ --
----------- ----------- ----------- ----------- -----------
Net liabilities assumed $ -- $ -- $ -- $35,120,834 $ --
----------- ----------- ----------- ----------- -----------
Fair value of common stock issued $ -- $ -- $ -- $ 3,801,632 $ --
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF NON-CASH
FINANCING ACTIVITIES
Issuance of stock for a subscription receivable $ -- $ -- $ 27,000 $ -- $ --
=========== =========== =========== =========== ===========
Issuance of stock for acquisitions of Tel Com East,
Tel Com Jacksonville and Tel Com West $ -- $ -- $ $ 3,801,632 $ --
----------- ----------- ----------- ----------- -----------
Issuance of 400,000 shares of common stock for
offering costs $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Recession obligation interest $ 2,199,549 $ 2,221,499 $ 2,958,111 $ 748,459 $ --
----------- ----------- ----------- ----------- -----------
Forgiveness of related party note payable $ 570,289 $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 760 $ 3,086 $ 1,606 $ 315 $ --
----------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 90
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS
United States Telecommunications, Inc. ("UST" or the "Company") was incorporated
on November 19, 1997 under the laws of the State of Florida and began operations
during February 1998. The Company is a reseller of local telephone services to
consumers with bad credit throughout the United States. The Company's business
could be significantly affected by regulatory and legislative developments. Such
effects could include increased competition and, as a result, decreased
revenues.
On September 30, 1998 (effective as of October 1, 1998) UST purchased the assets
and assumed liabilities of Tel Com Plus Jacksonville, L.L.C. ("Tel Com
Jacksonville") Tel Com Plus East, L.L.C. ("Tel Com East") and Tel Com Plus West,
L.L.C. ("Tel Com West") In connection with the acquisition, unitholders of Tel
Com Jacksonville, Tel Com East and Tel Com West received shares of common stock
and Class A preferred stock of UST. (See Note F).
Tel Com Florida, L.L.C. which changed its name to Tel Com Plus Jacksonville,
L.L.C. on February 28, 1997 was formed on February 6, 1997. Tel Com Plus Miami
L.L.C. ("TCM"), which changed its name to Tel Com East on April 9,1998, was
formed on April 25, 1997. Tel Com Plus California, L.L.C. ("TCC"), which changed
its name to Tel Com Plus West ("Tel Com West") on April 9, 1998, was formed on
July 28, 1997.
NOTE B - GOING CONCERN UNCERTAINTY
As indicated in the accompanying financial statements, the Company incurred net
losses of $3,017,439 (unaudited) and $8,083,293 and used $156,479 (unaudited)
and $2,152,261 of cash to fund operations during the nine months ended September
30, 2000 and the year ended December 31, 1999, respectively. At September 30,
2000 and December 31, 1999 the Company had negative working capital of
$6,501,556 (unaudited) and $6,666,567, respectively and negative equity of
$39,251,482 (unaudited) and $36,804,332, respectively. Additionally, the Company
has entered into a Stipulation and Consent Agreement with Final Order dated May
12, 1999 with the State of Florida, Department of Banking and Finance whereby
the Company agreed to complete a rescission offer on or before November 30, 1999
with respect to securities of Tel Com East, Tel Com West, and Tel Com
Jacksonville sold in violation of Florida securities laws. The Company failed to
complete a rescission offer by this deadline and the Department notified the
Company on December 7, 1999, that the Company was in violation of the Consent
Agreement. Further, the Department indicated that action will be taken against
the Company to enforce compliance with the Consent Agreement including a motion
to seek receivership of the Company or other remedies. However, the Company does
not have sufficient funds available to fund the rescission obligation.
Therefore, it is offering eligible shareholders the opportunity to exchange
their shares for an installment note or Class B preferred stock. Based on its
obligation under the Consent Agreement to make an offer of rescission, the
Company has recorded a rescission liability of approximately $30,000,000 plus
interest thereon as discussed in Note M. This estimate is based on the purchase
price paid for equity units in Tel Com East, Tel Com West and Tel Com
Jacksonville by all eligible shareholders. The actual amount of the rescission
liability will not be known until the Company makes and completes a rescission
offer to all eligible shareholders or the Department of Banking and Finance
amends or supplements the Consent Agreement to no longer require the Company to
make a rescission offer.
As further discussed in Note N, the Company could face civil or criminal
penalties in California as well as the loss of its California Public Utilities
Commission license because of the submission of false financial information to
the Commission in connection with its application for a license.
The Company is delinquent in its filings of various federal, state, and
municipal tax returns and has not remitted all taxes collected. Management has
estimated a liability of $4,969,843 (unaudited) and $3,682,909 at September 30,
2000 and December 31, 1999, respectively for un-remitted taxes including
penalties and interest. This estimate is based on collected revenues and the
applicable tax rates including an estimate for penalties and interest. The
Company is currently negotiating with various tax agencies to settle these
liabilities. Due to uncertainties in the settlement process, however, it is at
least reasonably possible that management's estimate of the outcome will change
during the next year. That amount cannot be estimated.
These factors, among others, raise substantial doubt as to the Company's ability
to continue as a going concern.
Management believes four major steps are important for the Company's future.
- Final settlement of the alleged federal and state violations of the
securities laws, which have drained the Company of time and resources;
- Complying with all state and municipal tax reporting requirements and
payment of taxes, penalties and interest due;
F-9
<PAGE> 91
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE B - GOING CONCERN UNCERTAINTY - continued
- Expansion of the customer base through increased advertising efforts in
existing markets and securing new operating licenses and territories; and
- Securing additional capital to fund future expansion.
Management believes that securing adequate liquidity for the Company is also
based on resolution of the four major steps outlined above. If all eligible
holders participate in the exchange offer and exchange their shares for notes
(described in Note M), the potential liability of the Company under the exchange
offer is approximately $30,000,000 plus interest. The amount due under the notes
plus interest will be paid over time. Management believes making payments over a
period of time in annual installments will ease the financial burden imposed by
the notes. However, if a significant number of eligible holders exchange their
shares for notes, the likelihood of repayment decreases.
The Company has made non-recurring payments of approximately $814,000
(unaudited) in accounting and legal fees during the period from May 1999 to
September 2000 in connection with the preparation and filing of a registration
statement with the United States Securities and Exchange Commission. Upon
completion of the exchange offer, management anticipates approximately $56,000
per month of additional cash to be available.
In addition, the Company has made monthly payments of approximately $33,000 as
part of the rescission offer to unitholders of Tel Com Jacksonville. These
payments commenced during September 1998. The majority of these former
unitholders are expected to be paid in full by December 2000. This will result
in approximately $33,000 per month of additional available cash.
Also, the Company has made improvements in monitoring and reducing costs during
the nine months ended September 30, 2000. This has improved the Company's
operating margin by 30% during the nine months ending September 30, 2000
compared to the year ending December 31, 1999, and has resulted in net cash
provided from operations of $156,479 for the nine months ended September 30,
2000. Further, the Company has used excess cash to reduce past due carrier
obligations that are now current, resulting in additional cash to fund
operations.
Management believes that with the improvements in the operating margin and the
expansion of the customer base, the Company's operating losses could be reduced,
and to the extent the Company's business strategy is realized, the Company's
operating losses could be eliminated. By eliminating the non-recurring payments
and the Tel Com Jacksonville rescission payments and with improvements in the
operating cash flow, management believes that this will increase the cash
available to service the debt, if any, resulting from the exchange offer, fund
tax obligations, fund operations as well as expand the customer base.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
or classification of liabilities which may result from the possible inability of
the Company to continue as a going concern.
NOTE C - EXTRAORDINARY ITEM
As discussed in Note M, during the year ended December 31, 1999, the Company
entered into a settlement agreement with Easy Phone, Inc. ("Easy"). As a result
of the settlement, the Company was released from accrued carrier obligations
owed to Easy of $1,315,742 in exchange for approximately 1,900,000 shares of
Easy stock and other general releases. The Easy stock given up was held by
Richard Pollara and three other employees of the Company. The Company agreed to
pay these individuals $57,495 for their shares.
F-10
<PAGE> 92
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE C - EXTRAORDINARY ITEM - continued
This resulted in an extraordinary gain calculated as follows:
<TABLE>
<S> <C>
Release of accrued carrier costs $ 1,315,742
Cost of Easy stock purchased (57,495)
-----------
1,258,247
Income tax 469,326
-----------
Net extraordinary gain $ 788,921
===========
</TABLE>
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Statements
The financial statements as of September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 are unaudited. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations as of such date and for such periods.
Results of interim periods are not necessarily indicative of the results to be
expected for the entire fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts reported in the prior periods have been reclassified to conform
with the current period's presentation.
Cash and Cash Equivalents
Restricted cash at December 31, 1999 and 1998 consists of a certificate of
deposit held as collateral on the line of credit.
For purposes of the statement of cash flows, cash equivalents include time
deposits, certificates of deposits, and all highly liquid debt instruments with
original maturities of three months or less when purchased.
F-11
<PAGE> 93
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Accounts Receivables
Accounts receivable occur solely from sales of telephone services.
Management reserves for all receivable balances that have not been collected
within 60 days. Accounts over 90 days are written off. Management determines the
reserve based upon reviews of individual accounts, recent loss experience,
current economic conditions and other pertinent factors. Allowances for
uncollectible billed services are adjusted monthly.
Agent Receivables
The Company has entered into agreements with various agents to receive payments
for phone services. The agents are typically check cashing stores, pawnshops,
rent-to-own stores and convenience stores. At the time of customer payment to
the agent, the Company transfers the receivables from accounts receivable to
agent receivable. At the time of agent collection, a commission obligation to
the agent is recorded.
Asset Impairment
When the Company has long-lived assets which have a possible impairment
indicator, the Company estimates the future cash flows from the operation of
these assets. If the estimated cash flows recoup the recorded value of the
assets, they remain on the books at that value. If the net recorded value cannot
be recovered, the assets are written down to their market value if lower than
the recorded value.
Property and Equipment
Property and equipment are stated at cost. The Company provides for depreciation
on the straight-line method over the estimated useful lives of the related
assets. Assets held under leasehold improvements are amortized using the
straight-line method over the life of the lease or life of the improvement,
whichever is less. Major classes of property and equipment and their related
lives are as follows:
<TABLE>
<CAPTION>
Life in
Major Class Years
--------------------------------- -------
<S> <C>
Leasehold improvements 3-5
Furniture, fixtures and equipment 5-7
Computer equipment 3
Equipment 5
</TABLE>
Maintenance and repairs are expensed as incurred. Replacements and betterments
are capitalized.
Capitalized License Costs
The Company must obtain a license from each state's public utility commission in
which it intends to operate. The requirements for these certificates vary by
state, but generally include a demonstration by the Company that it has adequate
managerial and technical qualifications to provide the services it proposes. In
addition, the Company is required to file a tariff with each state's public
utility commission in which it intends to operate. The Company must also file
with each state's public utility commission the new or negotiated resale
agreement negotiated with the incumbent local exchange carrier.
The direct cost of acquiring the certificates of authority, the tariffs, and the
approval of the resale agreements are capitalized and amortized on a
straight-line basis over 15 years.
F-12
<PAGE> 94
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Goodwill and Customer Base
Goodwill is the difference between the purchase price paid and liabilities
assumed over the estimated fair value of assets acquired from Tel Com East, Tel
Com Jacksonville and Tel Com West. Goodwill recorded in connection with the
acquisition of Tel Com East, Tel Com Jacksonville and Tel Com West amounted to
$26,607,226 and is being amortized using the straight-line method over 15 years.
Additional goodwill resulted from the acquisition of the customer base amounted
to $8,869,075. This amount is being amortized over three years. On an on-going
basis, management reviews recoverability, the valuation and amortization of
goodwill. As part of this review, management considers the un-discounted value
of the projected future net earnings in evaluating the value of goodwill. If the
un-discounted value of the projected future net earnings is less than the stated
value, the goodwill would be written down to its fair value.
In October 1998, the Company determined that the goodwill and customer base was
impaired. This determination was based on an assessment of the continued
operating and cash flow losses of the Company, as well as the recorded maximum
liability of approximately $30,000,000 plus interest thereon relating to the
Company's rescission obligation under the Consent Agreement with the State of
Florida. (See Note M). Due to these factors, the Company recognized an
impairment loss of $31,674,670 during October 1998. The amount of the loss
recognized was based on an appraisal of the fair value of the Company's assets.
Promoter Receivable
The Company is accruing interest at 8% per annum on the outstanding rescission
obligation related to the Tel Com Jacksonville rescission offer. (See Note M).
The Company has established a receivable from D&B Holdings, the promoter of
these units, for the amount of interest accrued. This receivable is immediately
written off since D&B Holdings is no longer in existence.
Software Capitalization
The Company has adopted Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
standard requires certain direct development costs associated with internal-use
software to be capitalized, including external direct costs of material and
services and payroll costs for employees devoting time to the software projects.
These costs are amortized over a period of three years beginning when the asset
is substantially ready for use. On October 1, 1998 the Company completed the
application development stage and upon placing the software in use, began
amortizing the capitalized software. The Company capitalized external direct
material and service costs of $58,424, $108,847, $108,878, $365,647, and $0 for
software costs during the nine months ended September 30, 2000 and 1999
(unaudited) and the years ended December 31, 1999 and 1998 and the period from
inception (November 19, 1997) to December 31, 1997, respectively.
The Company recorded amortization of $140,367, $125,203, $161,003 $2,500 and $0
for the nine months ending September 30, 2000 and 1999 (unaudited) and the years
ending December 31, 1999 and 1998 and the period from inception (November 19,
1997) to December 31, 1997 respectively.
Revenue Recognition
Telephone service revenue is recognized at the time when the services are
provided. Customers are billed monthly for telephone services. The portion of
the monthly billing that relates to the following month's services is recorded
as unearned revenue and is recognized as income in the following month when the
services are provided.
F-13
<PAGE> 95
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Activation revenue is recognized when the telephone services are applied for
and payment is received. The activation fee is charged for the initial set-up
and installation of a customer's line. Any excess of the activation revenue
over the direct costs related to the activation is amortized over the period
the customer uses our services. However, since inception, the Company has not
amortized any such excess, because the direct costs of activation approximates
the activation revenue.
Advertising
Advertising costs, other than direct response advertising, are expensed as
incurred. Costs associated with direct response advertising are capitalized and
amortized over the estimated benefit period. During the periods presented, the
Company had no direct response advertising costs.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability
approach. Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and tax base of assets and
liabilities that will result in taxable or deductible amounts in the future,
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the tax payable or refunded for the period
plus or minus the change during the period in deferred tax assets and
liabilities.
Earnings Per Share
Basic earnings (loss) per common share is calculated by dividing net earnings
(loss) by the average number of common shares outstanding during the year.
Diluted earnings (loss) per common share is calculated by adjusting outstanding
shares, assuming conversion of all potentially dilutive stock options. At
September 30, 2000 and 1999 (unaudited) and December 31, 1999, 1998, and 1997,
there were no dilutive instruments outstanding.
Carrier Contracts
The Company purchases traditional local telephone service from various incumbent
local exchange carriers. The provision of telephone service is provided to the
Company pursuant to a resale agreement entered into between the Company and each
incumbent local exchange carrier. As of September 30, 2000 the Company was
authorized to provide residential local telephone service to consumers in 26
states. The Company is presently doing business in 19 states.
Fair Value
The Company believes that the carrying amounts of its current assets and current
liabilities approximate the fair value of such items due to their short-term
nature. The carrying amount of cash, accounts receivable, accounts payable and
other liabilities are carried at amounts that reasonably approximate their fair
values.
Credit Risk
Cash is at risk to the extent that it exceeds Federal Deposit Insurance
Corporation ("FDIC") insured amounts (approximately $436,000 at December 31,
1998). To minimize risk, the Company places its cash with high credit quality
institutions.
F-14
<PAGE> 96
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE E - RESTATEMENT
The Company has restated financial information reported for December 31, 1999
and 1998 to reflect a change in its treatment of its obligation under the
Florida Consent Agreement to make a rescission offer to certain of its
shareholders. (See Note M). In the previously reported financial information
accompanying an S-4 registration statement filed with the Securities and
Exchange Commission on October 11, 2000, the Company did not record a liability
for its rescission obligation under the Consent Agreement, but estimated a
contingent liability for the maximum amount of the principal and accrued
interest on the notes issued in the exchange offer if all eligible shareholders
exchanged their shares for notes. In the restated financial information, the
Company has recorded a liability for its maximum rescission obligation under the
Florida Consent Agreement. This amount is the aggregate purchase price paid for
equity units in Tel Com East, Tel Com West and Tel Com Jacksonville by all
eligible shareholders. Under the Consent Agreement, the Company agreed to make a
rescission offer with respect to securities of Tel Com East, Tel Com West, and
Tel Com Jacksonville that were sold in violation of Florida law. However, the
Company does not have sufficient funds available to fund the rescission offer.
As a result, the Company is offering to eligible shareholders the opportunity to
exchange their shares for either an installment note or Class B preferred stock.
The shareholders who accept the Class B preferred stock will receive shares on a
pro rata basis that result in such shareholders owning 80% of the outstanding
capital stock of the Company. This exchange offer is not a valid rescission
offer, and therefore does not satisfy the requirement of the Consent Agreement.
A summary of the significant effects of the restatement is as follows:
Balance Sheet Data:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
--------------------------- --------------------------
As previously As previously
reported As restated reported As restated
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Unit rescission obligation 67,300 29,202,942 373,002 29,508,644
Rescission accrued interest 196,760 5,293,207 152,212 2,335,095
----------- ----------- ----------- -----------
TOTAL LONG TERM LIABILITIES 264,060 34,496,149 525,214 31,843,739
=========== =========== =========== ===========
STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated deficit (8,714,284) (42,946,373) (3,544,555) (34,863,080)
=========== =========== =========== ===========
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (2,572,243) (36,804,332) 407,077 (30,911,448)
=========== =========== =========== ===========
</TABLE>
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
---------------------------- ----------------------------
As previously As previously
reported As restated reported As restated
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Impairment loss -- -- 1,088,250 31,674,670
============ ============ ============ ============
Loss on promoter receivable write off 44,547 2,958,111 16,354 748,459
============ ============ ============ ============
OPERATING LOSS (6,066,515) (8,980,079) (3,473,945) (34,792,470)
============ ============ ============ ============
NET LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (6,427,976) (9,341,540) (3,544,305) (34,862,830)
------------ ------------ ------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEM (5,958,650) (8,872,214) (3,544,305) (34,862,839)
============ ============ ============ ============
NET LOSS (5,169,729) (8,083,293) (3,544,305) (34,862,830)
============ ============ ============ ============
Per share data:
Basic and diluted loss per share
Before extraordinary item $ (0.56) $ (0.84) $ (0.59) $ (5.68)
============ ============ ============ ============
Basic and diluted loss per share $ (0.49) $ (0.77) $ (0.59) $ (5.68)
============ ============ ============ ============
</TABLE>
F-15
<PAGE> 97
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE F - ACQUISITION
On October 1, 1998, UST purchased the assets and assumed liabilities of Tel Com
East, Tel Com West and Tel Com Jacksonville. The consideration paid by UST in
connection with the Acquisition consisted of 4,169,644 shares of common stock of
UST and 16,519,349 shares of Class A preferred stock of UST. These shares were
distributed to certain holders of units in Tel Com East, Tel Com West and Tel
Com Jacksonville.
The total purchase price was approximately $35,476,302. The following are the
assets acquired and liabilities assumed:
<TABLE>
<S> <C>
Current assets $ 991,194
Property and equipment 376,021
Other assets 1,472,718
Current liabilities (3,925,852)
Long term liabilities (31,194,983)
Unit holder promissory note 606,232
-------------
Net liabilities assumed (31,674,670)
Value of securities issued 3,801,632
-------------
Intangible assets $ 35,476,302
=============
</TABLE>
The intangible asset generated from the excess of the purchase price over the
net liabilities assumed was allocated $8,869,076 to the customer base and
$26,607,226 to goodwill.
F-16
<PAGE> 98
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE F - ACQUISITION - continued
The following unaudited pro forma consolidated amounts give effect to the
acquisition as if it had occurred on January 1, 1997, by consolidating the
results of operations of Tel Com East, Tel Com Jacksonville and Tel Com West
with the results of UST for the year ended December 31, 1998 and the period from
inception (November 19, 1997) to December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
Revenues $ 16,141,912 $ 3,558,018
Net loss (24,488,713) (10,631,935)
--------------- =============
Net loss per common share $ (2.68)
===============
Weighted average shares used in net loss per
common share calculation 9,138,928
===============
</TABLE>
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the acquisition accounted for as of the date it actually occurred and should
not be construed as being representative of future operating results.
NOTE G - NOTE RECEIVABLE
The Company has been disbursing funds for television and radio advertising.
During 2000, the Company discovered that some of these funds have not been used.
On October 16, 2000 the Company received cash of $24,269 and a 10% per annum,
note receivable for $110,000 from the advertising agency. The note specifies
monthly payments of $22,000 starting November, 2000 and is personally
guaranteed. The overfunded amount of $134,269 was reflected on the statement of
operations as a reduction of advertising expenses.
NOTE H - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, December 31,
2000 ------------------------------
(unaudited) 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
Furniture and equipment $ 62,209 $ 62,209 $ 61,631
Leasehold Improvements 18,469 18,469 17,567
Equipment 389,310 386,862 253,560
Computer equipment 243,512 230,391 168,504
------------- ------------ ------------
713,500 697,931 501,262
------------- ------------ ------------
Less accumulated
depreciation 390,377 240,289 47,732
------------- ------------ ------------
$ 323,123 $ 457,642 $ 453,530
============= ============ ============
</TABLE>
Depreciation expense was $150,089, $138,628, $189,817, $83,982 and $0, for the
nine months ending September 30, 2000 and 1999 (unaudited) and years ending
December 31, 1999 and 1998 and for the period from inception (November 19, 1997)
to December 31, 1997 respectively.
NOTE I - REVOLVING LINE OF CREDIT
During 1998, the Company established a line of credit with Bank of America,
which provides for advances up to a maximum of $50,000. Amounts advanced under
the line of credit bear interest at 8% and interest payments are due monthly.
The line of credit with the bank is secured by a $50,000 certificate of deposit
and personally guaranteed by a stockholder of the Company. The amount
outstanding on the line was $46,481 and $50,151 at December 31, 1999 and
December 31, 1998, respectively. On February 29, 2000 the certificate of deposit
was withdrawn and the line of credit was repaid and cancelled.
F-17
<PAGE> 99
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE I - REVOLVING LINE OF CREDIT - continued
Interest expense on the line of credit was $774, $3,086, $3,615, $2 and $0, for
the nine months ending September 30, 2000 and 1999 (unaudited) and years ending
December 31, 1999 and 1998 and for the period from inception (November 19, 1997)
to December 31, 1997, respectively.
NOTE J - NOTES PAYABLE AND OBLIGATIONS - RELATED PARTY
The Company held two obligations with Richard Pollara, president of the Company
and a significant shareholder of the Company. The obligations are non-interest
bearing, however the Company has imputed interest at 8.5% per annum. The
obligations outstanding were $459,003 at December 31, 1998. On November 22, 1999
the Company converted these obligations to notes payable. The notes payable bear
interest at 8.5% per annum, with the principal due on demand. The notes are
unsecured. The outstanding balance was $459,003 at December 31, 1999 and 1998.
Interest expense on the above obligations was $0, $29,261, $39,015, $9,754 and
$0 for the nine months ending September 30, 2000 and 1999 (unaudited) and years
ending December 31, 1999 and 1998 and for the period from inception (November
19, 1997) to December 31, 1997, respectively. At December 31, 1999, accrued
interest on these notes was $111,286. On January 15, 2000 the above notes
payable and accrued interest were forgiven and treated as a contribution of
capital.
On September 22, 1998 the Company entered into an unsecured promissory note with
a shareholder, Joseph Thacker, for $150,000. The note payable bears interest at
10% and was due no later then September 28, 2000. Interest expense on the note
payable was $11,250, $11,250, $15,000, $333 and $0, for nine months ending
September 30, 2000 and 1999 (unaudited) and years ending December 31, 1999 and
1998 and for the period from inception (November 19, 1997) to December 31, 1997,
respectively. Pursuant to a common stock purchase agreement dated February 1999,
Mr. Thacker has an option to accept repayment of the loan in shares of the
Company's common stock at a price of $0.50 per share. The Company has disputed
the validity of this promissory note in the complaint filed by the Company
against Joseph Cillo, et. al. on September 27, 2000 in the Thirteenth Judicial
Circuit Court of Hillsborough County, Florida. Mr. Thacker filed suit against
the Company on September 20, 2000 for failure to pay principal and interest on
the note when due. The outstanding principal balance of $150,000 at September
30, 2000 (unaudited) and December 31, 1999 and 1998 remains unpaid and is due on
demand.
In September 1999 the company entered into a settlement agreement with Easy
Phone, Inc. (See Note M). In this agreement, the Company promised to pay Mr.
Pollara and three employees $57,495 for returning stock that they held in Easy
Phone to Easy Phone as consideration for the settlement. The outstanding promise
to pay was $0, $26,053 and $0 at September 30, 2000 (unaudited) and December 31,
1999 and 1998, respectively.
During 1999 and 2000, Mr. Pollara and an employee advanced the Company money to
fund operating cash shortfalls. The balances owed to Mr. Pollara and the
employee at September 30, 2000 (unaudited) and December 31, 1999 and 1998 were
$29,881, $43,831 and $0 respectively. There are no formal agreements or
repayment terms in connection with these agreements.
The above related party transactions and agreements are not necessarily
indicative of the amounts that would have been incurred had comparable
transactions and agreements been entered into with independent parties.
NOTE K - STOCKHOLDERS' DEFICIT
On November 2, 1999 the Company increased the par value of its preferred stock
from no par to $0.10. The par value has been restated for all periods presented.
Class A Preferred Stock
The holders of Class A preferred stock have voting rights identical to the
holders of shares of common stock and are entitled to vote with the holders of
shares of common stock as one voting class. The holders of Class A preferred
stock are entitled to receive ratably dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available therefor
in preference of any dividends paid on shares of the common stock. In the event
of the Company's liquidation, dissolution or winding up, the holders of Class
F-18
<PAGE> 100
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE K - STOCKHOLDERS' DEFICIT - continued
A preferred stock are entitled to share ratably in all assets remaining after
the payment of liabilities. The right of the holders of Class A preferred stock
upon our liquidation, dissolution or winding up is in preference to the rights
of the holders of the common stock. Holders of Class A preferred stock have no
preemptive rights or rights to convert their Class A preferred stock into any
other securities. There are no redemption or sinking fund provisions applicable
to the Class A preferred stock.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders. The holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available
therefor. This entitlement to dividends is subject to preferences of the Class A
preferred stock and of any outstanding shares of any other class of preferred
stock that may be issued with dividend preferences. In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities and
liquidation preferences on the shares of Class A preferred stock and on any
outstanding shares of any other class of preferred stock that may be issued that
have liquidation preferences. Holders of common stock have no preemptive rights
or rights to convert their common stock into any other securities.
During 1998, UST issued an aggregate of 4,525,600 shares of common stock and
18,102,400 shares of Class A preferred stock to its founders. These shares were
valued at $0 since the Company was a start up organization.
During 1998, UST issued an aggregate of 460,000 shares of common stock and
1,840,000 shares of Class A preferred stock to employees. These shares were
valued at $0 since the Company was a start up organization.
On September 30, 1998, the Company issued 4,169,644 shares of common stock and
16,519,349 shares of Class A preferred stock in connection with the acquisition
of Tel Com East, Tel Com West and Tel Com Jacksonville.
On December 23, 1998, UST issued an aggregate of 400,000 shares of Common
Stock, at a purchase price of $150,000.
On February 12, 1999, the Company offered up to 1,600,000 shares of common stock
at an offering price of $3 per share to private investors. The Company sold
446,970 shares, resulting in net proceeds of $1,340,909 to the Company. The
offering was closed during December 1999.
On September 23, 1999 the Company entered into an agreement with Prime Equities
Group, Inc. for the issuance of 400,000 shares of the Company's common stock.
These shares were issued in exchange for Prime Equities release of UST from any
claims it may have had against UST regarding Prime's claims that it was
entitled to approximately 2,500,000 shares of common stock of UST. Shares of
UST's common stock were allegedly promised to Prime as payment for offering
costs incurred by Prime on Tel Com East and Tel Com West unit sales.
During 1999 the Company issued 1,070,000 shares of it common stock for cash of
$849,500 to various individuals, pursuant to purchase agreements. Certain
purchase agreements grant the holders of these shares the right to purchase
additional shares of the Company's common stock at a purchase price of $0.05 per
share if their ownership of our common stock was diluted below their percentage
ownership based on the number of shares they purchased under these purchase
agreements.
During 1999, the Company entered into purchase agreements with Prime Equities
Group, Inc. for the sale of 670,000 shares of its common stock in which we
granted Prime Equities Group the right to purchase additional shares of the
Company's common stock at $0.05 per share to avoid dilution based on the number
of shares it purchased under these purchase agreements.
NOTE L - INCOME TAXES
Deferred income tax assets and liabilities at December 31, 1999 and 1998 consist
of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Current deferred tax asset $ 498,684 $ 1,012,737
Non-current deferred tax asset 15,621,309 12,219,172
Valuation allowance (16,119,993) (13,231,909)
------------- -------------
Net deferred tax asset $ -- $ --
============= =============
</TABLE>
The current deferred tax asset results mainly from the provision for doubtful
accounts, which is not currently deductible for income tax purposes. The
non-current deferred tax asset results from the intangible asset impairment
deductible for financial reporting
F-19
<PAGE> 101
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE L - INCOME TAXES - continued
purposes not deductible for tax purposes as well as depreciation and
amortization expensed for financial reporting purposes in excess of the
deduction for income tax purposes and the benefits of net operating loss
carryovers available to offset future taxable income. The net deferred tax asset
has a 100% valuation allowance recorded against it due to the uncertainty of
generating future taxable income.
The Company's income tax benefit differed from the statutory Federal rate of 34%
applied to net income before income taxes as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
------------- -------------
<S> <C> <C>
Statutory rate of 34% applied to the Company's net loss $ 2,748,320 $ 11,853,362
Decreased (increase) in income taxes resulting from:
Permanent differences (161,521) (1,811)
State income taxes, net of federal tax effect 301,285 1,380,358
Income tax effect of extraordinary item 469,326 --
Change in valuation allowance (2,888,084) (13,231,909)
------------- -------------
Total income tax benefit $ 469,326 $ --
============= =============
</TABLE>
At December 31, 1999, the Company has a net operating loss carryforward of
approximately $11,621,000, which expires beginning in 2018. The valuation
allowance increased by $2,888,084 during 1999.
NOTE M - RESCISSION OBLIGATION
The State of Florida, Department of Banking and Finance entered into a
Stipulation and Consent Agreement (the "Consent Agreement") with Final Order
dated May 12, 1999 with the Company, Tel Com East, Tel Com West, Tel Com
Jacksonville. The Agreement relates to the sale of securities of Tel Com East,
Tel Com West, Tel Com Jacksonville, which securities were offered and sold and
were subsequently exchanged for shares of the Company's common stock and Class A
preferred stock in violation of federal and state securities laws. In the
Agreement, the Company, as legal successor to Tel Com East, Tel Com West and Tel
Com Jacksonville, admitted that the predecessors' securities were sold in
violation of the securities laws of the State of Florida and agreed to make a
rescission offer to certain of its security holders by November 30, 1999. On
December 7, 1999, the State of Florida, Department of Banking and Finance
notified the Company that it was in violation of the Consent Agreement and that
it intended to commence litigation against the Company in order to enforce the
provisions of the Agreement. As of November 30, 2000, the Department has not
commenced litigation against the Company; however, the Department has informed
the Company that it is retaining all options in connection with the default,
including an action to enforce the Agreement, a motion to seek receivership of
the Company, or other remedies.
Because of the Company's financial condition, it is not able to make a
rescission offer pursuant to the terms of the Agreement. Therefore, the Company
is offering certain holders of its common stock and Class A preferred stock the
right to exchange their purchase of the Company's securities or the securities
of one or more of its predecessor entities for the Company's notes or shares of
Class B convertible preferred stock. The Company is not making the exchange
offer to shareholders who were or are executive officers of the Company, who did
not pay cash for his or her securities, or who participated in the offer and
sale of the securities which are the subject of this exchange.
The Company has recorded the maximum amount of the rescission of approximately
$30,000,000, plus interest. The accrued rescission obligation is $29,243,144,
$29,541,194 and $29,912,642 at September 30, 2000, and December 31,1999 and
1998, respectively. The accrued rescission obligation interest is $7,443,443,
$5,293,207 and $2,335,095 at September 30, 2000, and December 31,1999 and 1998,
respectively. This accrual is based on all eligible shareholders accepting the
offer. The exchange offer will have an expiration date that is between thirty
and sixty days following the effectiveness of the Company's registration
statement filed with the Securities and Exchange Commission.
In early to mid-1998, an offer to repurchase units was made by Tel Com
Jacksonville to all the unitholders of Tel Com Jacksonville who had purchased
units during 1997. The rescission offer was accepted by 80 unitholders,
resulting in a rescission obligation of approximately $995,000, which is
included in the above rescission obligation of approximately $30,000,000. The
$995,000 represented
F-20
<PAGE> 102
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE M - RESCISSION OBLIGATION - continued
the full amount originally paid by the unitholders to the promoter. The Company
received $377,301 of the $995,000 from the promoter in 1997. The remaining
$617,699 was established as a promoter receivable by Tel Com Jacksonville and
was subsequently written off during 1997. All accrued interest on the rescission
obligation is offset by a promoter receivable and is immediately written off as
uncollectible. Accrued interest was $91,083, $196,760 and $152,212 at September
30, 2000 (unaudited) and December 31, 1999 and 1998, respectively. Accrued
interest and the promoter receivable write off was $14,375, $36,326, $44,547,
$16,354 and $0, for nine months ending September 30, 2000 and 1999 (unaudited)
and years ending December 31, 1999 and 1998 and for the period from inception
(November 19, 1997) to December 31, 1997 respectively.
The obligation is being paid out over a period of time by UST, as successor in
interest to Tel Com Jacksonville.
At September 30, 2000 (unaudited), the principal balance will be repaid within
one year.
NOTE N - COMMITMENTS AND CONTINGENCIES
Operating Leases
As of September 30, 2000 (unaudited), the Company is obligated under
non-cancelable operating leases for future minimum rent payments for office
space and furniture and equipment as follows:
<TABLE>
<S> <C>
2001 $ 36,748
2002 24,514
2003 4,241
--------
$ 65,503
========
</TABLE>
Rent expense was $129,774, $139,785, $186,868, $52,640 and $0, for nine months
ending September 30, 2000 and 1999 (unaudited) and years ending December 31,
1999 and 1998 and for the period from inception (November 19, 1997) to December
31, 1997 respectively.
Surety Bonds
The Company has eight surety bonds held by Hartford. The bonds have been posted
in lieu of required security deposits guaranteeing payment. The surety bonds are
for $120,000 related to state licensing bonding requirements and $646,950
related to carrier bonding requirements. As of September 30, 2000 (unaudited)
and December 31, 1999 and 1998, there were no amounts outstanding on these
bonds. These bonds are personally guaranteed by Mr. Pollara and a shareholder.
Employment Agreement
On October 20, 1998, the Company entered into a five-year employment agreement
with the Company's banking administrator. During the first year of employment,
the Company will pay the employee $105,200 and thereafter the Company shall
raise the salary by 6% annually. If the Company terminates this agreement
without cause, the Company would be obligated to pay the entire amount of the
agreement.
Liability to Purchasers of Securities in Private Placement
From February 1999 until December 1999, the Company offered common shares to
investors at a purchase price of $3.00 per share. At the time of this offering,
the Company was advised by former counsel that this offering was exempt under
the securities laws. During this offering, the Company sold 446,970 shares of
its common stock for an aggregate purchase price of $1,340,909 to purported
accredited persons who were already investors in the Company. The Company has
been advised by current counsel that this offering did not comply with the
securities laws. Therefore, the Company is offering to exchange its notes or
shares of its Class B
F-21
<PAGE> 103
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - continued
preferred stock for those previously issued shares of the Company's common
stock. This exchange offer may not extinguish any rights that purchasers of
common stock in this offering may have under federal and state securities laws.
Litigation
In September 1999, a settlement agreement was reached between Tel Com East, Tel
Com West, Richard Pollara, Joseph Cillo, Charles Polley, Easy Phone, Inc. and
the Company in connection with the proceeding styled Tel Com Plus West, LLC and
Tel Com Plus East, LLC, Plaintiffs v. Easy Phone, Inc. Defendants which was
pending in the United States District Court, Middle District of Florida. The
parties to this litigation settled on the following terms:
- The litigation was dismissed with prejudice.
- Each party to the litigation released the other parties from any and all
claims that were or could have been asserted in this litigation.
- The Company delivered to Easy Phone, Inc. its Easy Phone, Inc stock
certificates.
- The lawsuit brought by Mr. Pollara, and 2 employees against Easy Phone
and Lorrinda Bucchieri and others pending in the state of California was
dismissed with prejudice.
- The Company agreed to indemnify Easy Phone, Inc. from any tax liability
of any kind to the States of Florida and California incurred in
connection with the use by Tel Com East, Tel Com West or the Company of
Easy Phone, Inc.'s public utility commission licensing those states.
In 1999, Travelers Express Company, Inc. brought an action against the Company
alleging breach of a buy-pay utility agreement. Pursuant to this buy-pay
agreement, the Company's customers could pay for services at a participating
Travelers Express. Travelers Express agreed to create certain terminal paying
stations where the Company's customers could make their payments. In return, the
Company agreed that Travelers Express would be entitled to receive a commission
on the money they collected at these terminal paying stations. Travelers Express
alleges that the Company breached this buy-pay utility agreement by not paying
money owed to them in the amount of approximately $65,000. The Company has
counterclaimed for unspecified and, as of the date of this prospectus,
undetermined damages arising out of the breach of this agreement. It is the
Company's position that Travelers Express did not establish the number of
terminal paying stations that they were obligated to do under this agreement.
Management intends to vigorously litigate this matter. It is not yet possible to
evaluate the likelihood of an unfavorable outcome, or provide an estimate of the
potential loss.
The Company entered into arbitration proceedings with MCI Telecommunications
Corp. ("MCI") for nonpayment of phone service provided by MCI. The Company
disputed the phone usage charge. During 2000, a settlement agreement and release
was reached. Based on the settlement agreement reached with MCI, the Company has
reserved $152,000 which was to be paid in full by September 15, 2000. As of
September 30, 2000 the company has made one payment of $25,000 and the remaining
balance of the obligation of $127,000 is in default.
During February 2000 the Company filed a complaint with the California Public
Utilities Commission against Pacific Bell for failure to block the Company's
customers from making certain toll calls and using certain usage-sensitive
calling features, such as directory assistance. The Company has estimated the
failure to block these items cost the Company approximately $239,000. It is not
yet possible to evaluate the likelihood of a favorable outcome.
On April 13, 2000, a shareholders' derivative action was brought against Mr.
Pollara and the Company. The plaintiffs in this action are Prime Equities,
Stephen D. Henderson, Joe Thacker, Jr., Kent Lauson, James Gibson, M. T.
Wilbanks, and Richard J. Gann d/b/a/ Trinity Alliance. The shareholders allege
that Mr. Pollara failed or refused to take action required by the board of
directors, such as
F-22
<PAGE> 104
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE N - COMMITMENTS AND CONTINGENCIES - continued
providing financial statements to the board of directors and providing directors
with a draft of the registration statement to be filed with the SEC. The
complaint further alleged that Mr. Pollara has not managed the Company's affairs
in the Company's best interest. The complaint seeks actions for damages as a
result of the alleged misconduct of Mr. Pollara, seeks equitable relief from the
court and seeks specific performance for certain actions. On April 28, 2000, the
Company filed a motion to dismiss regarding the shareholder derivative suit.
This motion claims that the complaint is deficient in that it does not comply
with the statutory requirements of a shareholder derivative action. In addition,
the motion asserts that Prime Equities is legally disqualified from bringing a
derivative action because it is unfit and unqualified to represent the interest
of the shareholders as a whole. The Company intends to vigorously defend the
action.
On September 27, 2000, the Company filed a complaint in the Circuit Court of the
Thirteenth Judicial Circuit for Hillsborough County Florida against Joseph
Cillo, Richard Inzer, Joseph Thacker, Prime Equities Group, Inc., GIRI Holdings,
Inc., Raymond Beam and Captive Administrators, Inc. This complaint alleges that
the defendants devised and implemented a fraudulent scheme to enrich themselves
and their associates by illegally selling at grossly inflated prices using
boiler room tactics, securities of the Company. Furthermore, the complaint
alleges that the individual defendants defrauded the Company and its
shareholders of millions of dollars and fraudulently obtained a large equity
stake in the Company. According to the allegations set forth in the complaint,
public investors in the Company paid an aggregate purchase price of
approximately $30,000,000 for securities in the Company of which only
approximately $6,450,000 was ever received by the Company. It is alleged that
the remaining $23,550,000 paid by investors was retained by the defendants and
other unlicensed brokers and facilitators involved in the fraudulent scheme. The
Company further alleges that defendants Joseph Cillo and Richard Inzer, through
a series of shell entities and off-shore corporations, granted themselves
approximately 10,000,000 shares of the Company's securities, which equate to
nearly 22% of the outstanding capital stock of the Company. In addition, the
complaint alleges that the individual defendants also caused themselves to serve
as incorporators, promoters, officers and directors of the Company and in such
capacity owed fiduciary duties of care and loyalty to the Company and its
investors. It is alleged that the defendants breached these duties of care and
loyalty by engaging in a pattern of deceit and illegal activity to conceal and
perpetuate their scheme, by aiding and abetting the illegal offers and sales of
the Company's securities and by engaging in self-dealing to enrich themselves
and their associates at the expense of the Company and its investors. By this
complaint, the Company is seeking the return from defendants of all proceeds and
shares in the Company the defendants acquired as a result of their fraudulent
scheme, as well as damages to compensate the Company for the liabilities it has
and will incur as a direct result of the defendants' wrongful and illegal acts.
It is not possible to evaluate the likelihood of a favorable outcome.
On September 20, 2000, Joseph Thacker brought a lawsuit against the Company for
failure to pay the principal and interest when due under a promissory note
issued by the Company to Mr. Thacker on September 22, 2000. The note is for a
principal amount of $150,000 and bears interest at a rate of 10% per annum.
Under the terms of the note, the Company was obligated to pay Mr. Thacker the
principal amount plus all accrued interest on or before September 28, 2000. The
Company is challenging the validity of this promissory note in the complaint it
filed against Joseph Cillo, et.al. on September 27, 2000 in state court in
Hillsborough County, Florida.
During the course of the Company's internal investigation, it discovered that a
letter containing false financial information had been sent to the California
Public Utilities Commission to support the Company's application for a
certificate of convenience and necessity to provide telephone service in
California. In the Company's complaint filed on September 27, 2000 in state
court in Hillsborough County, Florida against Joseph Cillo, et al., the Company
alleges that Richard Inzer caused the letter to be fraudulently created and
forged, or caused to be forged, the signature of the bank's president on such
letter. As a result of this submission containing false information to the
California Public Utilities Commission, the Company has been informed by legal
counsel that it could face civil or criminal penalties as well as loss of its
public utility license in California. The Company promptly notified the
California Public Utilities Commission of this letter containing false financial
information and is currently in negotiations with the commission to resolve this
matter.
Securities and Exchange Commission Litigation
The Securities and Exchange Commission brought an action on May 12, 1999 against
Tel Com East and Tel Com West. The complaint alleges violation of Sections 5(a),
5(b) and 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 of the
Securities Exchange Act of 1934 all in connection with the alleged unlawful
sales of units of Tel Com East and Tel Com West. The complaint seeks injunctive
relief, and disgorgement of "ill-gotten profits and proceeds" of the alleged
sales. The Commission has advised the Company that we will be named as a
defendant in this action. The outcome of this litigation cannot be predicted. If
the Company is named as a defendant and the court does rule against the Company,
the Company may be subject to severe civil penalties and other remedies which
will have a material adverse effect on the Company's business and financial
position.
In the normal course of its business, the Company is subject to litigation.
Management, based on discussions with its legal counsel, does not believe any
claims, individually or in the aggregate, will have a material adverse impact on
the Company's financial position other than disclosed above.
F-23
<PAGE> 105
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE O - OTHER RELATED PARTY TRANSACTIONS
In December 1997, Easy Phone, Inc. (formerly Easy Cellular, Inc.) redeemed a
substantial portion of the shares of its stock held by Richard Pollara,
president and a shareholder of UST, in exchange for Easy Phone's interest in Tel
Com East, Tel Com West and Tel Com Jacksonville. Subsequent to this redemption,
Mr. Pollara was no longer a significant shareholder of Easy Phone, Inc.
On December 30, 1997, Tel Com East, Tel Com Jacksonville and Tel Com West
operated under a license agreement with Easy Phone. The agreement allowed Tel
Com East, Tel Com Jacksonville and Tel Com West to use the Easy Phone licenses
to resell telecommunication services for monthly payments of $20,000.
In January 1997, Tel Com Jacksonville purchased the assets of Montebello
Finance, LLC, a Florida Limited Liability Company, for cash of $50,000 and a
note payable of $200,000 from Richard Pollara, president of UST. The note
payable was paid off during 1998.
The Company had two obligations arising from joint venture agreements entered
into between two predecessor entities of the Company and Easy Cellular, Inc. One
joint venture agreement was entered into by Tel Com East and Easy Cellular, Inc.
on February 28, 1997 whereby Tel Com East agreed to pay Easy Cellular, Inc.
$400,000 from the proceeds of the venture. The second joint venture agreement
was entered into by Tel Com West and Easy Cellular on July 24, 1997 whereby Tel
Com West agreed to pay Easy Cellular approximately $60,000. Mr. Pollara
succeeded to the rights of Easy Cellular, Inc. under these joint venture
agreements. On January 15, 2000 these obligations were forgiven.
During 1998, the Company entered into oral agreements with Captive
Administrators ("Captive"), which is controlled by the Company's former Vice
President of Compliance. The agreements stipulated monthly payments of $5,000 to
Captive for management fees, monthly payments of between $33,728 and $39,344 for
salaries of the president and vice president, and other miscellaneous expenses
of the company. This agreement was terminated during December 1999.
Management fee payments of $57,000 and $51,000, salary payments of $459,246 and
$250,073 and other expense payments of $6,625 and $728 were made to Captive
during the years ended December 31, 1999 and 1998, respectively.
The above related party transactions and agreements are not necessarily
indicative of the amounts that would have been incurred had comparable
transactions and agreements been entered into with independent parties.
F-24
<PAGE> 106
(PNC CPAs Letterhead)
Independent Auditors' Report
Board of Directors Tel Com Plus East, L.L.C., Tel Com Plus West, L.L.C., and Tel
Com Plus Jacksonville, L.L.C. Clearwater, Florida
We have audited the accompanying combined balance sheets of Tel Com Plus East,
L.L.C., Tel Com Plus West, L.L.C., and Tel Com Plus Jacksonville, L.L.C. as of
September 30, 1998 and December 31, 1997 and the related combined statements of
operations, members' capital, and cash flows for the period ended September 30,
1998 and the period from inception (Tel Com Jacksonville - February 28, 1997,
Tel Com East - April 25, 1997 and Tel Com West - July 28, 1997) to December 31,
1997. These combined financial statements are the responsibility of the
management of Tel Com Plus East, L.L.C., Tel Com Plus West, L.L.C., and Tel Com
Plus Jacksonville, L.L.C. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. These standards require that we plan and
perform the audits to obtain reasonable assurance about whether the combined
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall combined financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Tel Com Plus East,
L.L.C., Tel Com Plus West, L.L.C., and Tel Com Plus Jacksonville, L.L.C. as of
September 30, 1998 and December 31, 1997 and the results of their operations and
(Tel Com Jacksonville - February 28, 1997, Tel Com East - April 25, 1997 and Tel
Com West - July 28, 1997) cash flows for the period ended September 30, 1998 and
the period from inception to December 31, 1997 in conformity with accounting
principles generally accepted in the United States of America.
Effective October 1, 1998, all of the assets and liabilities of Tel Com Plus
East, L.L.C., Tel Com Plus West, L.L.C., and Tel Com Plus Jacksonville, L.L.C.
were acquired by United States Telecommunications, Inc. in a transaction
accounted for as a purchase. We have audited the financial statements of United
States Telecommunications, Inc. for the year ended December 31, 1998 and 1999
and have emphasized in our report dated July 24, 2000 the conditions which raise
substantial doubt about its ability to continue as a going concern.
The accompanying financial statements have been restated to reflect a change in
the treatment of the rescission obligation, as more fully discussed in Note D.
/s/ Pender Newkirk & Company
----------------------------
Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
July 24, 2000, except for Note D, as to which the date is November 30, 2000
F-25
<PAGE> 107
TEL COM PLUS EAST, L.L.C., TEL COM PLUS WEST, L.L.C.,
AND TEL COM PLUS JACKSONVILLE, L.L.C.
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 296,328 $ 71,934
Accounts receivable, net of allowance for doubtful
accounts of $2,006,732 and $280,916, respectively 656,680 323,272
Agent receivable 33,786 33,102
Prepaid expenses and Other 4,400 3,979
------------- -------------
Total current assets 991,194 432,287
------------- -------------
PRE BILLED ACCOUNTS RECEIVABLE 147,672
------------- -------------
PROPERTY AND EQUIPMENT, NET 376,021 237,000
OTHER ASSETS
Deposits 13,041 24,971
Operating license net of amortization of $0 and
$4,167 at 1998 and 1997, respectively 95,833
Software net of amortization of $7,136 and $2,299 at
1998 and 1997, respectively 37,943 7,753
Receivable from United States Telecommunications,
Inc. 1,406,734
Other 15,000 15,000
------------- -------------
Total other assets 1,472,718 143,557
------------- -------------
TOTAL ASSETS $ 2,839,933 $ 960,516
============= =============
LIABILITIES AND MEMBERS' CAPITAL
CURRENT LIABILITIES
Accounts payable $ 32,445 $ 85,915
Accrued liabilities 220,850 117,513
Accrued sale tax 1,357,160 443,833
Accrued carrier charges 1,390,742 1,113,460
Unit Rescission Obligations-current
424,298 218,000
Notes Payable and obligations - related parties 500,357 613,270
------------- -------------
Total current liabilities 3,925,852 2,591,991
------------- -------------
DEFERRED PRE BILLED ACCOUNTS RECEIVABLE 147,672
------------- -------------
LONG TERM LIABILITIES
Unit rescission obligation 29,608,344 6,682,774
Unit rescission obligation accrued interest 1,586,636 366,183
------------- -------------
Total long term liabilities 31,194,980 7,048,957
------------- -------------
COMMITMENTS AND CONTINGENCIES
MEMBERS' CAPITAL (32,280,899) (8,828,104)
------------- -------------
TOTAL LIABILITIES AND MEMBERS' CAPITAL $ 2,839,933 $ 960,516
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 108
TEL COM PLUS EAST, L.L.C., TEL COM PLUS WEST, L.L.C.,
AND TEL COM PLUS JACKSONVILLE, L.L.C.
COMBINED STATEMENTS OF OPERATIONS
PERIOD ENDED SEPTEMBER 30, 1998 AND THE PERIOD FROM INCEPTION (TEL COM
JACKSONVILLE - FEBRUARY 28, 1997, TEL COM EAST - APRIL 25, 1997
AND TEL COM WEST JULY 28, 1997) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 11,075,464 $ 3,558,018
Cost of revenues 3,436,453 2,098,000
------------ ------------
Gross profit 7,639,011 1,460,018
Advertising expenses 1,662,704 1,455,009
Depreciation and amortization
expense 77,402 73,546
Provision for doubtful accounts
receivable 3,292,145 280,916
General and administrative expenses 4,952,102 3,570,850
Impairment loss 126,721 200,356
Loss on promoter receivable 18,840,882 6,453,979
------------ ------------
Loss from operations (21,312,945) (10,574,638)
Interest expense (114,329) (57,047)
------------ ------------
Net loss $(21,427,274) $(10,631,685)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 109
TEL COM PLUS EAST, L.L.C., TEL COM PLUS WEST, L.L.C.
AND TEL COM PLUS JACKSONVILLE, L.L.C.
COMBINED STATEMENTS OF CHANGES IN MEMBERS CAPITAL
PERIOD ENDED SEPTEMBER 30, 1998 AND THE PERIOD FROM INCEPTION
(TEL COM JACKSONVILLE - FEBRUARY 28, 1997, TEL COM EAST - APRIL 25, 1997
AND TEL COM WEST - JULY 28, 1997) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
Tel Com Tel Com Tel Com Unit Holder
East West Jacksonville Members' Promissory Members'
Units Units Units Capital Note Capital
-------- -------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tel Com East units issued
to founders 310 $ 12,499 $ 12,499
Tel Com East units issued
to founders for license 1,240 50,000 50,000
Tel Com East unit offering 1,805 2,777,910 $(2,621,226) 156,684
Tel Com West units issued
to founders 2,200 12,496 12,496
Tel Com West units issued
to founders for license 8,800 50,000 50,000
Tel Com West unit offering 2,856 4,167,809 (3,911,345) 256,464
Tel Com Jacksonville units
issued to founders 96
Tel Com Jacksonville unit
offering 160 750,000 750,000
Payments on Tel Com East
unit holders promissory note 571,218 571,218
Payments on Tel Com West
unit holders promissory note 770,500 770,500
Write off Tel Com East
uncollectible promissory note 374,286 374,286
Write off Tel Com West
uncollectible promissory note 457,340 457,340
Rescission offering to Tel Com
East (356) (548,086) (548,086)
Rescission offering to Tel Com
West (238) (347,791) (347,791)
Rescission offering to Tel Com
Jacksonville (160) (750,000) (750,000)
Distributions (12,029) (12,029)
Net loss (10,631,685) (10,631,685)
-------- -------- ----------- ------------ ----------- ------------
Balance at December 31, 1997 2,999 13,618 96 (4,468,877) (4,359,227) (8,828,104)
Payments on Tel Com East
unit holders promissory note 1,675,721 1,675,721
Payments on Tel Com West
unit holders promissory note 2,077,274 2,077,274
Rescission offering to Tel Com
East (1,449) (2,229,826) (2,229,826)
Rescission offering to Tel Com
West (2,323) (3,379,606) (3,379,606)
Distributions (169,084) (169,084)
Net loss (21,427,274) (21,427,274)
-------- -------- ----------- ------------ ----------- ------------
Balance at September 30, 1998 1,550 11,295 96 $(31,674,667) $ (606,232) $(32,280,899)
======== ======== =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 110
TEL COM PLUS EAST, L.L.C., TEL COM PLUS WEST, L.L.C.,
AND TEL COM PLUS JACKSONVILLE, L.L.C.
COMBINED STATEMENTS OF CASH FLOWS
PERIOD ENDED SEPTEMBER 30, 1998 AND THE PERIOD FROM INCEPTION
(TEL COM JACKSONVILLE - FEBRUARY 28, 1997, TEL COM EAST - APRIL 25, 1997 AND
TEL COM WEST - JULY 28, 1997)
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from operations $(21,427,274) $(10,631,685)
------------ ------------
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 77,402 73,546
Provision for bad debt 3,292,145 280,916
Impairment loss 126,721 200,356
Issuance of units for services 24,995
Write off of offering costs and imputed interest 836,263
Loss on promoter receivable write off 18,840,882 6,453,979
Changes in operating assets and liabilities:
(Increases) decreases in:
Accounts receivable and agent receivables (3,626,238) (637,289)
Prepaid expenses and other assets 13,543 (43,950)
Increase (decreases) in:
Accounts payable (53,470) 85,915
Accrued liabilities 103,338 117,513
Accrued taxes 913,327 443,833
Accrued carrier charges 277,282 1,113,460
------------ ------------
Total adjustments to reconcile net loss to net cash used
by operating activities 19,964,932 8,949,537
------------ ------------
Net cash used by operating activities (1,462,342) (1,682,148)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Montebello finance, LLC (50,000)
Purchase of software (35,026) (10,051)
Purchases of property and equipment (208,612) (255,711)
------------ ------------
Net cash used by investing activities (243,638) (315,762)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Receivable from United States
Telecommunications, Inc. (1,406,738)
Payments on note payable - related party (148,799) (9,845)
Cash received from repayment of non-recourse
Promissory notes 3,752,995 1,341,718
Cash received from the issuance of units 750,000
Payments on rescission obligation (98,000)
Distributions to unit holders (169,084) (12,029)
------------ ------------
Net cash provided by financing activities 1,930,374 2,069,844
------------ ------------
NET INCREASE IN CASH 224,394 71,934
Cash at beginning of period 71,934
------------ ------------
Cash at end of period $ 296,328 $ 71,934
============ ============
SUPPLEMENTAL NON-CASH INVESTING ACTIVITIES:
Promoter receivable for rescission $ 18,840,882 $ 6,453,979
============ ============
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Issuance of a note payable for the purchase of
Montebello Finance $ $ 200,000
============ ============
Issuance of obligations for offering costs $ 35,888 $ 423,115
============ ============
Issuance of a non recourse promissory note
in exchange for units $ $ 6,945,719
============ ============
Issuance of a operating license in exchange for units $ $ 100,000
============ ============
Issuance of units to founders $ $ 24,995
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 14,001 $ 23,755
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 111
TEL COM PLUS EAST, L.L.C., TEL COM PLUS WEST, L.L.C.,
AND TEL COM PLUS JACKSONVILLE, L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOTE A - NATURE OF OPERATIONS
Tel Com Plus Florida, L.L.C. ("Tel Com Florida") which changed its name to Tel
Com Plus Jacksonville, L.L.C. ("Tel Com Jacksonville") was formed on February
28, 1997, Tel Com Plus Miami L.L.C. ("TCM") was formed on April 25, 1997, and on
March 9, 1998 TCM changed its name to Tel Com Plus East, L.L.C. ("Tel Com East")
and Tel Com Plus California, L.L.C. ("TCC") was formed on July 28, 1997 and on
March 9, 1998 TCC changed its name to Tel Com Plus West, L.L.C. ("Tel Com West")
collectively referred to as the "Company".
The Company was a reseller of local telephone services to credit challenged
consumers throughout the United States.
As of September 30, 1998 (effective as of October 1, 1998), Tel Com East, Tel
Com West and Tel Com Jacksonville, entered into an agreement (the "Agreement")
with United States Telecommunications, Inc. ("UST"). The Agreement provided for
the transfer and assignment to UST of all the assets and liabilities of Tel Com
East, Tel Com West and Tel Com Jacksonville in exchange for shares of common
stock and Class A preferred stock of UST. For accounting purposes the
acquisition was accounted for under the purchase method.
F-30
<PAGE> 112
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The combined financial statements for the periods ended December 31, 1997 and
September 30, 1998 present the accounts of Tel Com Plus East L.L.C., Tel Com
Plus West L.L.C., and Tel Com Plus Jacksonville L.L.C. All significant
intercompany accounts and transactions have been eliminated. As the companies
were under common management, in the same industry, and were merged with United
States Telecommunications, Inc, combined financial statements have been
presented.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all cash on hand and in banks, certificates of deposits
and other highly liquid investments with maturities of three months or less,
when purchased, to be cash and cash equivalents.
Accounts Receivables
Accounts receivable occur solely from sales of telephone services. Management
reserves for all receivable balances that have not been collected within 60
days. Accounts over 90 days are written off. Management determines the reserve
based upon reviews of individual accounts, recent loss experience, current
economic conditions and other pertinent factors. Allowances for uncollectible
billed services are adjusted monthly.
Agent Receivable
The Company has entered into agreements with various agents to receive payments
for phone services. The agents are typically check cashing stores, pawnshops,
rent-to-own stores and convenience stores. At the time of customer payment to
the agent, the Company transfers the receivables from accounts receivable to
agent receivable. At the time of agent collection, a commission obligation to
the agent is recorded.
F-31
<PAGE> 113
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Property and Equipment
Property and equipment are stated at cost. The Company provides for depreciation
on the straight-line method over the estimated useful lives of the related
assets. Assets held under leasehold improvements are amortized using the
straight-line method over the life of the lease or life of improvement,
whichever is less. Major classes of property and equipment and their related
lives are as follows:
<TABLE>
<CAPTION>
Life in
Major Class Years
----------- -------
<S> <C>
Leasehold improvements 3-5
Furniture, fixtures and 5-7
equipment
Computer equipment 3
Equipment 5
</TABLE>
Maintenance and repairs are expensed as incurred. Replacements and betterments
are capitalized.
Revenue Recognition
Revenues are recognized monthly at the time of billing. The customers are billed
mid-month for the current months services. Billings were performed under the
carrier license name of Easy Cellular, predecessor of Easy Phone, Inc.
Activation revenue is recognized when the telephone services are applied for and
payment is received. Any excess of the activation revenue over the direct costs
related to the activation revenue is amortized over the period the customer uses
the Company's services. The direct costs of activation approximate the revenue
resulting in the revenue to be recognized immediately. The activation fee is for
the initial set-up and installation of a customer's line.
Cell phone services were provided on a prepaid basis and recorded as deferred
revenue. Revenue was recognized when services were performed. Operations ceased
during November 1997.
Advertising Costs
Advertising costs other than direct response advertising are expensed as
incurred. Costs associated with direct response advertising are capitalized and
amortized over the estimated benefit period. During the periods presented the
Company had no direct response advertising costs.
Goodwill
Goodwill relates to the original purchase in 1997 of Montebello Finance, LLC's
cellular phone assets and business by Tel Com Jacksonville and represents the
excess of cost over fair value of net assets acquired and was amortized using
the straight line method over 15 years. On an on-going basis, management reviews
recoverability, the valuation and amortization of goodwill. As part of this
review, management considers the undiscounted value of the projected future net
earnings in evaluating the value of goodwill. If the undiscounted value of the
projected future net earnings is less than the stated value, the goodwill would
be written down to its fair value.
During 1997 Tel Com Jacksonville determined that the remaining goodwill was
impaired and recognized a loss on the write off of this goodwill of $200,356.
F-32
<PAGE> 114
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued
Software Capitalization
The Company has adopted Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
standard requires certain direct development costs associated with internal-use
software to be capitalized including external direct costs of material and
services and payroll costs for employees devoting time to the software projects.
These costs are amortized over a period of three years beginning when the asset
is substantially ready for use.
Income Taxes
Taxable income or loss of the Company is allocated to the unit holders in
accordance with the provisions of the operating agreement. The Company qualifies
as an S-Corporation and as such, Federal income taxes accrue to the unitholders
rather than to the Company. Accordingly, the statements of operations of the
Company include no provision for Federal income taxes.
Credit Risk
Cash is at risk to the extent that it exceeds Federal Deposit Insurance
Corporation ("FDIC") insured amounts (approximately $78,000 at September 30,
1998). To minimize risk, the Company places its cash with high credit quality
institutions.
Carrier Contracts
The Company purchases traditional local telephone service from various incumbent
local exchange carriers pursuant to a resale agreement. During 1998 and 1997 the
Company had entered into resale agreements with four major carriers to provide
residential local telephone service to consumers.
Asset Impairment
When the Company has long-lived assets, which have a possible impairment
indicator, the Company estimates the future cash flows from the operation of
these assets. If the estimated cash flows recoup the recorded value of the
assets, they remain on the books at that value. If the net recorded value cannot
be recovered, the assets are written down to their market value if lower than
the recorded value.
NOTE C - RESTATEMENT
The Company has restated financial information reported for September 30, 1998
and December 31, 1997 throughout this filing to reflect a change in its
treatment of its obligation under a consent agreement with the State of Florida,
Department of Banking and Finance, dated May 12, 1999, to make a rescission
offer to certain of its shareholders (See Note G). In the previously reported
financial information, accompanying an S-4 registration statement filed with the
Securities and Exchange Commission on October 11, 2000, the Company did not
record a liability for its obligation to make this rescission offer. In the
restated financial information, the Company is recording a rescission liability.
The amount of this rescission liability is the aggregate purchase price paid for
units in the Company by all holders entitled to rescission rights under the
Florida consent agreement.
F-33
<PAGE> 115
NOTE C - RESTATEMENT- continued
A summary of the significant effects of the restatement is as follows:
Balance Sheet Data:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
--------------------------------- -------------------------------
As previously As previously
reported As restated reported As restated
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Unit rescission obligation 472,702 29,608,344 777,000 6,682,774
Rescission accrued interest 135,858 1,586,636 76,158 366,183
----------- ----------- ----------- -----------
TOTAL LONG TERM LIABILITIES 608,560 31,194,980 853,158 7,048,957
=========== =========== =========== ===========
MEMBERS' CAPITAL (1,694,479) (32,280,899) (2,632,305) (8,828,104)
=========== =========== =========== ===========
</TABLE>
Statement of Operations Data:
<TABLE>
<CAPTION>
Period Ended Period Ended
September 30, 1998 December 31, 1997
--------------------------------- -------------------------------
As previously As previously
reported As restated reported As restated
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Loss on promoter receivable write off 59,700 18,840,882 1,526,756 6,453,979
=========== =========== =========== ===========
Loss from operations (2,531,763) (21,312,945) (5,647,415) (10,574,638)
=========== =========== =========== ===========
Net loss (2,646,092) (21,427,274) (5,704,462) (10,631,685)
=========== =========== =========== ===========
</TABLE>
NOTE D - OPERATING LICENSE
The Company operated under licenses, tariffs and carrier contract to resell
local telecommunications services provided from a joint venture with Easy
Cellular, Inc. from inception through December 1997. On December 30, 1997, Tel
Com East and Tel Com West entered into an Agency Agreement with Easy Phone, Inc.
(formerly Easy Cellular, Inc.)(See Note K). The agreement allows the Company to
continue to operate under operated under licenses and tariffs held by Easy Phone
for a monthly rental fee of $20,000. Rental expense was $289,222 in 1998 and
$31,458 in 1997, respectively.
NOTE E - ACQUISITIONS
During January 1997 (at the time of inception), Tel Com Jacksonville acquired
the cellular phone assets and business of Montebello Finance, LLC, in exchange
for cash of $50,000 and a note payable of $200,000. Since its inception,
Montebello Finance had been engaged primarily in the rent-to-own business
involving consumer goods. The cellular phone segment of the business of
Montebello Finance, LLC constituted a small segment of the overall business. The
acquisition was accounted for using the purchase method. The purchase price of
$250,000, has been recorded as an intangible asset and is being amortized over a
period of three years. During 1997 the intangible asset became impaired and a
loss on impairment was recognized. (See Note B).
NOTE F - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Furniture and equipment $ 64,691 $ 38,398
Equipment 180,295 95,883
Leasehold Improvements 34,934 34,184
</TABLE>
F-34
<PAGE> 116
NOTE F - PROPERTY AND EQUIPMENT - continued
<TABLE>
<S> <C> <C>
Computer equipment 183,128 85,971
--------- --------
463,048 254,436
Less accumulated depreciation 87,027 17,436
--------- --------
$ 376,021 $237,000
========= ========
</TABLE>
Depreciation expense for 1998 and 1997 was $69,591 and $ 17,436, respectively.
The Company issued a note payable to Richard Pollara, a significant unitholder
and the general manager of the day-to-day operations of the Company, bearing
interest at 12% per annum, principal due on demand. Certain assets of the
Company secure the note. The balance outstanding was $41,355 and $190,155 at
September 30, 1998 and December 31, 1997 respectively. Interest expense was
$14,004 and $23,755 for 1998 and 1997, respectively.
The Company has an obligation with Mr. Pollara in the principal amount of
$400,000. The obligation is non-interest bearing, however the Company has
imputed interest at 8.5% per annum. The obligation outstanding was $400,000 at
September 30, 1998 and December 31, 1997. Interest expense was $25,500 and
$31,167 for 1998 and 1997, respectively. (See Note I).
The Company has an obligation with Mr. Pollara in the principal amount of
$59,002. The obligation is non-interest bearing, however the Company has imputed
interest at 8.5% per annum. The obligation outstanding was $59,002 and $23,115
at September 30, 1998 and December 31, 1997, respectively. Interest expense was
$3,825 and $2,125 for 1998 and 1997, respectively. (See Note I).
The above related party transactions and agreements are not necessarily
indicative of the amounts that would have been incurred had comparable
transactions and agreements been entered into with independent parties.
NOTE G - RESCISSION OBLIGATION AND PROMOTER RECEIVABLE
Rescission Obligation
The State of Florida, Department of Banking and Finance entered into a
Stipulation and Consent Agreement (the "Agreement") with Final Order dated May
12, 1999 with UST, Tel Com East, Tel Com West, Tel Com Jacksonville. The
Agreement relates to the sale of securities of Tel Com East, Tel Com West, Tel
Com Jacksonville in violation of Florida securities laws.
Pursuant to the Agreement, UST agreed to make a rescission offer in accordance
with Florida laws on or before November 30, 1999 for the securities of Tel Com
East, Tel Com West and Tel Com Jacksonville. On December 7, 1999, the Department
of Banking and Finance notified Tel Com East, Tel Com West, Tel Com Jacksonville
and UST that they were in violation of the Agreement and that it intended to
commence litigation against UST in order to enforce the provisions of the
Agreement. As of November 30, 2000, the Department has not commenced litigation
against UST; however, the Department has informed UST that it is retaining all
options in connection with UST's failure to perform under the Agreement,
including an action to enforce the Agreement, a motion to seek receivership of
UST and other remedies.
As a part of the exchange offer, UST is offering certain holders of its common
stock and Class A preferred stock the right to exchange their securities for
notes or the Company's Class B preferred stock.
F-35
<PAGE> 117
NOTE G - RESCISSION OBLIGATION AND PROMOTER RECEIVABLE - continued
Rescission Obligation
Because of the Agreement, the Company has restated its financial information to
provide for a rescission liability. The amount of this liability is the
aggregate purchase price paid by holders of units of ownership interests in the
Company. In addition, the Company has calculated interest at 10% on the
outstanding rescission obligation. The Company has established a rescission
obligation of $30,032,642 and $6,900,774, rescission obligation interest of
$1,586,636 and $366,183 and a receivable from the promoters of these unlawful
sales and offerings for $18,840,882 and $6,453,979 during 1998 and 1997
respectively. The Company wrote off the promoter receivable of $18,840,882 and
$6,453,979 during 1998 and 1997, respectively.
In early to mid 1998, the Company made an offer to repurchase units from all the
unitholders of Tel Com Jacksonville. The rescission offer was accepted by 80
unitholders resulting in the rescission obligation of $995,000, which is
included in the above rescission obligation. The obligation is being paid over
time. Tel Com Jacksonville only received $377,301 from the sale of these 80
units. The Company established a receivable from the promoter for $617,699, the
amount of the rescission obligation in excess of the amount received by the
Company. The Company has accrued interest at 8%, per annum, on the outstanding
balance, which was $135,858 and $76,158 at September 30, 1998 and December 31,
1997, respectively. Interest expense was $59,700 and $76,158 for the nine months
ending September 30, 1998 and period ending December 31, 1997, respectively. The
Company considered the receivable to be uncollectible and wrote off the amount
in excess of the amount received by the Company plus accrued interest of $59,700
and $693,857 during 1998 and 1997, respectively.
At September 30, 1998, future principle repayments on the rescission obligation
are as follows:
<TABLE>
<S> <C>
1999 424,298
2000 352,976
2001 119,726
--------
$897,000
========
</TABLE>
Promoter Receivable
The promoter receivable also includes amounts owed to the Company pursuant to
the purchase agreement between Prime Equities and Tel Com East and Tel Com West.
(See Note K). The unsatisfied portion of the purchase agreement was $1,244,774.
This amount was reduced by imputed interest at 8% per annum amounting to
$411,875.
The promoter receivable with D&B Holdings and Prime Equities was considered
uncollectible and was written off in during 1997. All interest related to the
rescission obligation is accrued with an offset to the promoter receivable and
is considered uncollectible and is written off when it is accrued.
The loss on promoter receivable is as follows:
<TABLE>
<CAPTION>
Period From
Period Ended Inception to
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Portion of the receivable from
D&B Holdings which was
Considered uncollectible $ -- $ 617,699
Portion of the receivable from
Prime Equities which was
Considered uncollectible -- 1,244,774
Portion of rescission obligation
Not received by the company 17,620,429 4,637,198
Accrued interest 1,220,453 366,183
Reduction of the receivable due
to imputed interest -- (411,875)
------------ ------------
$ 18,840,882 $ 6,453,979
============ ============
</TABLE>
NOTE J - COMMITMENTS AND CONTINGENCIES
F-36
<PAGE> 118
TEL COM PLUS EAST, L.L.C., TEL COM PLUS WEST, L.L.C.,
AND TEL COM PLUS JACKSONVILLE, L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOTE H - COMMITMENTS AND CONTINGENCIES
As of September 30, 1998, the Company is obligated under non-cancelable
operating leases for future minimum rent payments for office space and
furniture and equipment as follows:
<TABLE>
<S> <C>
1998 $ 57,009
1999 207,056
2000 141,935
2001 39,266
2002 34,287
2003 7,265
---------
$ 486,818
=========
</TABLE>
The Company was delinquent in its filings of various federal, state, and
municipal tax returns and did not remit all taxes collected. Management
estimated a liability of $1,357,161 at September 30, 1998 for un-remitted taxes
including penalties and interest. This estimate was based on collected revenues
and the applicable tax rates including an estimate for penalties and interest.
UST, as successor to the Tel Com entities, is currently negotiating with various
tax agencies to settle these liabilities.
Rent expense for the periods ended September 30, 1998 and December 31, 1997 was
$138,169 and $79,355, respectively. These leases were assumed by UST (See Note
A).
The Securities and Exchange Commission ("SEC") brought an action against Tel
Com East and Tel Com West. The SEC alleges among other things, violation of
Rule 10b-5 of the Securities and Exchange Act of 1943, as amended, and fraud in
the sale of their securities. The outcome of this litigation cannot be
predicted.
In the normal course of its business, the Company is subject to litigation.
Management, based on discussions with its legal counsel, does not believe any
claims, individually or in the aggregate, will have a material adverse impact
on the Company's financial position.
NOTE I - OTHER RELATED PARTY TRANSACTIONS
In January 1997, Tel Com Plus Jacksonville purchased the cellular phone assets
and business of Montebello Finance, LLC for cash of $50,000 and a note payable
of $200,000. Montebello Finance was owned in trust by the children of Mr.
Pollara.
In January 1997 Tel Com East entered into a joint venture agreement with Easy
Cellular, Inc. to obtain the use of operating licenses. (See Note K).
In July 1997 Tel Com West entered into a joint venture agreement with Easy
Cellular, Inc. (owned by a related party) to obtain the use of operating
licenses. (See Note L).
In December 1997, Easy Phone, Inc. redeemed a portion of the shares of stock
held by Mr. Pollara and certain other shareholders of the Company in exchange
for Easy Phone's interest in Tel Com East, Tel Com West and Tel Com
Jacksonville.
The Company has two obligations arising from the joint venture agreements
entered into between the Company and Easy Cellular, Inc. Mr. Pollara succeeded
to the rights of Easy Cellular, Inc. under these joint venture agreements. One
joint venture agreement was entered into by Tel Com East and Easy Cellular,
Inc. on February 28, 1997 whereby Tel Com East agreed to pay Easy Cellular,
Inc. $400,000 from the proceeds of the venture. As of September 30, 1998 this
amount had not been paid to Mr. Pollara, as successor in interest to Easy
Cellular, Inc. The second joint venture agreement was entered into by Tel Com
West and Easy Cellular on July 24, 1997 whereby Tel Com West agreed to pay Easy
Cellular approximately $60,000. As of September 30, 1998 this amount had not
been paid to Mr. Pollara, as successor in interest to Easy Cellular, Inc.
On November 22, 1999, these obligations were converted to unsecured notes
payable bearing interest at 8.5%, with principle due on demand. On January 15,
2000, the notes and related accrued interest was forgiven and recognized as a
capital contribution of $570,289.
The above related party transactions and agreements are not necessarily
indicative of the amounts that would have been incurred had comparable
transactions and agreements been entered into with independent parties.
F-37
<PAGE> 119
NOTE J - MEMBERS' CAPITAL
Joint Venture Agreements
On February 28, 1997, Tel Com East issued 1,240 units of its ownership interests
to Easy Cellular to obtain the use of Easy Cellular's operating licenses valued
at $50,000 and a note payable in the principal amount of $400,000, bearing
interest at 8.5% per annum, to provide capitalization of Tel Com East pursuant
to a Joint Venture Agreement with Easy Cellular (See Note I).
On July 24, 1997 Tel Com West issued 8,800 units of its ownership interests to
Easy Cellular to obtain the use of Easy Cellular's operating licenses valued at
$50,000 and issued an 8.5% note payable for 3% of the capitalization of Tel Com
West pursuant to the Joint Venture Agreement with Easy Cellular (See Note I).
Purchase Agreements
On December 3, 1996, Tel Com Jacksonville entered into a purchase agreement
pursuant to which D&B Holdings International, Inc. agreed to purchase 160 units
(representing 62.5% of the Tel Com East outstanding membership units) in a
private placement. As part of the agreement a $750,000, 8% per annum,
non-recourse promissory note was delivered for the units. The net proceeds from
the unit offering were $0 and $750,000 for the nine months ended September 30,
1998 and the period from inception to December 31, 1997, respectively.
During January 1997, Tel Com Jacksonville issued 96 units to the founding
members. These units were valued at $0 since the Company was a start up
organization.
On May 1, 1997, Tel Com Miami (presently Tel Com East) entered into a purchase
agreement pursuant to which Prime Equities Group, Inc. agreed to purchase 1,950
units (representing 50% of the Tel Com East outstanding units) in a private
placement for $1,539 per unit. As part of the agreement a $3,001,050
non-interest bearing, non-recourse promissory note was delivered for the units.
The Company reduced the note to $2,777,910 for units returned to the Company and
$156,684 for imputed interest. The net proceeds from the Unit Offering were
$1,675,721 and $571,218 for the nine months ended September 30, 1998 and the
period from inception to December 31, 1997, respectively. Tel Com East imputed
interest at a rate of 8%. During 1997 Tel Com East wrote off the uncollected
portion of the promoter non-recourse promissory note of $374,286.
During January 1997, Tel Com Miami (presently Tel Com East) issued 310 units to
the founding members. The units were valued at $12,499 based on the value
placed on the units issued for the operating license.
On July 21, 1997, Tel Com West entered into a purchase agreement pursuant to
which Prime Equities Group, Inc. agreed to purchase 11,000 units (representing
50% of the Tel Com West outstanding membership units) in a private placement for
$1,495 per unit. As part of the agreement a $16,455,000 non-interest bearing;
non-recourse promissory note was delivered for the units. The Company reduced
the note to $4,167,809 for units returned to the Company and imputed interest of
$256,464. The net proceeds from the unit offering were $2,077,274 and $770,500
for the nine months ended September 30, 1998 and the period from inception to
December 31, 1997, receptively. Tel Com West imputed interest at a rate of 8%
per annum. During 1997 Tel Com West wrote off the uncollected portion of the
promoter non-recourse promissory note of $457,340.
During July 1997, Tel Com West issued 2,200 units to the founding members. The
units were valued at $12,496 based on the value placed on the units issued for
the operating license.
NOTE K - OPERATING AGREEMENTS
Under an operating agreement dated April 9, 1997 the members of Tel Com East
and Tel Com West agreed that net income, net loss, or capital gains of Tel Com
East and Tel Com West for each fiscal year is allocated and apportioned among
the members pro rata in accordance with their respective ownership interests.
The agreement provides that no member is liable under judgement, decree, or
F-38
<PAGE> 120
order of the court, or in any other manner, for debt, obligations or liability
of the Company, except as provided by law. The duration of the Company and the
operating agreement is until December 31, 2025, unless the Company is dissolved
earlier.
F-39
<PAGE> 121
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
<TABLE>
<S> <C>
SEC Registration Fee $3,878.30
Legal fees $
Accounting fees $
Printing expenses $
Miscellaneous expenses $
---------
TOTAL $
</TABLE>
Item 20. Indemnification of Directors and Officers.
In accordance with the Florida Business Corporation Act, Article VII of
United States Telecommunications, Inc.'s (the "Corporation") Articles of
Incorporation provide as follows:
Article VII
The Corporation shall, to the fullest extent permitted by the provisions of
the Florida Business Corporation Act, as the same may be amended and
supplemented, indemnify directors from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said provisions, and
the indemnification provided for herein shall not be deemed exclusive of any
other rights to which directors may be entitled under any provision of the
Bylaws, vote of shareholders or disinterested directors, or otherwise, both as
to action in his official capacity as director and as to action in another
capacity, including without limitation, as an officer or employee of the
Corporation, while serving as a director and shall continue as to a person who
has ceased to be a director and shall inure to the benefit of the heirs,
executors and administrators of such a person.
The Corporation may, to the fullest extent permitted by the provisions of
the Florida Business Corporation Act, as the same may be amended and
supplemented, indemnify any and all person whom it shall have the power to
indemnify under said provisions from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by such provisions, and
the indemnification provided for herein shall not be deemed exclusive of any
other rights to which those indemnified by may be entitled under any provisions
of the bylaws, vote of shareholders or disinterested directors, or otherwise,
both as to action in his official capacity as to action in another capacity
whiled holding such office and shall continue as to a person who has ceased to
be an officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
Article Eight of the Corporation's Bylaws provides as follows:
Article VIII
8.1. Definitions: As used in this Article, the following terms shall have
the following meanings:
(a) "Corporation" includes, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger, so that any person who is or was a director, officer,
employee, or agent of a constituent corporation, or is or was serving at the
request of a constituent corporation as a director, officer, employee, or agent
of another corporation,
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partnership, joint venture, trust, or other enterprise, is in the same position
under this section with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued;
(b) "Other enterprises" includes employee benefit plans;
(c) "Expenses" includes counsel fees, including those for appeal;
(d) "Liability" includes obligations to pay a judgment, settlement, penalty,
fine (including an excise tax assessed with respect to any employee benefit
plan), and expenses actually and reasonably incurred with respect to a
proceeding;
(e) "Proceeding" includes any threatened pending, or completed action, suit,
or other type of proceeding, whether civil, criminal, administrative, or
investigative and whether formal or informal;
(f) "Agent" includes a volunteer;
(g) "Serving at the request of the corporation" includes any service as a
director, officer, employee, or agent of the corporation that imposes duties on
such persons, including duties relating to an employee benefit plan and its
participants or beneficiaries; and
(h) "Not opposed to the best interest of the corporation" describes the
actions of a person who acts in good faith and in a manner he reasonably
believes to be in the best interests of the participants and beneficiaries of an
employee benefit plan.
8.2 Authority to Indemnify.
(a) Except as otherwise provided in this Section, the Corporation (i) shall
indemnify any person who was or is a director of the Corporation and was or is a
party to any proceeding (other than an action by, or in the right of, the
Corporation), by reason of the fact that he is or was a director, officer,
employee, or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise and (ii) may indemnify
any other person who was or is a party to any proceeding (other than an action
by, or in the right of, the Corporation), by reason of the fact that he is or
was an officer, employee or agent of the Corporation or is or was serving at the
request of the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, against
liability incurred in connection with such proceeding, including any appeal
thereof, if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the Corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any proceeding by judgment, order,
settlement, or conviction or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in, or not opposed to,
the best interests of the Corporation or, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The Corporation (i) shall indemnify any person who was or is a director
of the Corporation and who was or is a party to any proceeding by or in the
right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee, or agent of the
Corporation or is or was serving at the request of the Corporation as director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise, and (ii) may indemnify any other person who was or
is a party to any proceeding by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was an officer,
employee, or agent of the Corporation or is or was serving at the request of the
Corporation as director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against expenses and
amounts paid in settlement not exceeding, in the
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judgment of the Board of Directors, the estimated expense of litigating the
proceeding to conclusion, actually and reasonably incurred in connection with
the defense or settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, except that no indemnification shall be made under this
subsection in respect of any claim, issue, or matter as to which such person
shall have been adjudged to be liable unless, and only to the extent that, the
court in which such proceeding was brought, or any other court of competent
jurisdiction, shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is fairly
and reasonably entitled to indemnity for such expenses which such court shall
deem proper.
(c) To the extent that a director of the Corporation has been successful on
the merits or otherwise in defense of any proceeding referred to in subsection
(a) or subsection (b), or in defense of any claim, issue, or matter therein, he
shall be indemnified against expenses actually and reasonably incurred by him in
connection therewith. To the extent that an officer, employee, or agent of the
Corporation has been successful on the merits or otherwise in defense of any
proceeding referred to in subsection (a) or subsection (b), or in defense of any
claim, issue, or matter therein, he may be indemnified against expenses actually
and reasonably incurred by him in connection therewith.
8.3 Advances for Expenses.
(a) Expenses incurred by a director in defending a civil or criminal
proceeding shall be paid by the Corporation in advance of the final
disposition of such proceeding upon receipt of an undertaking by or on
behalf of such director to repay such amount if he is ultimately found
not to be entitled to indemnification by the Corporation pursuant to
this section. Expenses incurred by an officer in defending a civil or
criminal proceeding may be paid by the Corporation in advance of the
final disposition of such proceeding upon receipt of an undertaking by
or on behalf of such officer to repay such amount if he is ultimately
found not to be entitled to indemnification by the Corporation pursuant
to this section. Expenses incurred by other employees and agents may be
paid in advance upon such terms or conditions that the Board of
Directors deems appropriate.
(b) The indemnification and advancement of expenses provided pursuant to
this Article are not exclusive, and a Corporation may make any other or further
indemnification or advancement of expenses of any of its directors, officers,
employees, or agents, under any bylaw, agreement, vote of shareholders or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office.
However, indemnification or advancement of expenses shall not be made to or on
behalf of any director, officer, employee, or agent if a judgment or other final
adjudication establishes that his actions, or omissions to act, were material to
the cause of action so adjudicated and constitute:
(i) A violation of the criminal law, unless the director, officer,
employee, or agent had reasonable cause to believe his conduct was
lawful or had no reasonable cause to believe his conduct was unlawful;
(ii) A transaction from which the director, officer, employee, or agent
derived an improper personal benefit;
(iii) In the case of a director, a circumstance under which the
liability provisions for unlawful distributions are applicable; or
(iv) Willful misconduct or a conscious disregard for the best interests
of the Corporation in a proceeding by or in the right of the
Corporation to procure a judgment in its favor or in a proceeding by or
in the right of a shareholder.
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(c) Indemnification and advancement of expenses as provided in this
Article shall continue as, unless otherwise provided when authorized or
ratified, to a person who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the heirs,
executors, and administrators of such a person, unless otherwise
provided when authorized or ratified.
8.4 Determination and authorization of indemnification.
(a) Any indemnification under subsection 8.2 (a) or subsection 8.2(b),
unless pursuant to a determination by a court, shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee, or agent is proper in the
circumstances because he has net the applicable standard of conduct set forth in
subsection 8.2(a) or subsection 8.2(b). Such determination shall be made:
(i) By the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to such proceeding;
(ii) If such a quorum is not obtainable or even if obtainable, by
majority vote of a committee duly designated by the Board of Directors
(in which directors who are parties may participate) consisting solely
of two or more directors not at the time parties to the proceeding;
(iii) By independent legal counsel:
l. Selected by the Board of Directors prescribed in paragraph
(i) or the committee prescribed in paragraph (ii); or
2. If a quorum of the directors cannot be obtained for
paragraph (i) and the committee cannot be designated under
paragraph (ii), selected by majority vote of the full Board
of Directors (in which directors who are parties may
participate); or
(iv) By the shareholders by a majority vote of a quorum consisting of
shareholders who were not parties to such proceeding or, if no such
quorum is obtainable, by a majority vote of shareholders who were not
parties to such proceeding.
(b) Evaluation of the reasonableness of expenses and authorization of
indemnification shall be made in the same manner as the determination that
indemnification is permissible. However, if the determination of permissibility
is made by independent legal counsel, persons specified by subsection
8.4(a)(iii) shall evaluate the reasonableness of expenses and may authorize
indemnification.
8.5 Application to Court for indemnification or advancement of expenses.
(a) Unless the Corporation's articles of in Corporation provide otherwise,
notwithstanding the failure of a Corporation to provide indemnification, and
despite any contrary determination of the Board or of the shareholders in the
specific case, a director, officer, employee, or agent of the Corporation who is
or was a party to a proceeding may apply for indemnification or advancement of
expenses, or both, to the court conducting the proceeding, to the circuit court,
or to another court of competent jurisdiction. On receipt of an application, the
court, after giving any notice that it considers necessary, may order
indemnification and advancement of expenses, including expenses incurred in
seeking court-ordered indemnification or advancement of expenses, if it
determines that:
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(i) The director, officer, employee, or agent is entitled to mandatory
indemnification under subsection 8.2(c), in which case the court shall also
order the Corporation to pay the director reasonable expenses incurred in
obtaining court-ordered indemnification or advancement of expenses;
(ii) The director, officer, employee, or agent is entitled to
indemnification or advancement of expenses, or both, by virtue of the
exercise by the Corporation of its power pursuant to subsection 8.3(b); or
(iii) The director, officer, employee, or agent is fairly and reasonably
entitled to indemnification or advancement of expenses, or both, in view of
all the relevant circumstances, regardless of whether such person met the
standard of conduct set forth in subsection, 8.2(a), subsection 8.2(b), or
subsection 8.3(b).
Item 21. Exhibits and Financial Statement Schedule
The exhibits filed as part of this registration statement are as follows:
Exhibit
Number Description of Exhibit
3.1++ Form of Second Amended and Restated Articles of
Incorporation of the Corporation
3.2++ Bylaws of the Corporation
3.3 Revised Form of Second Amended and Restated
Articles of Incorporation of the Corporation
4.1++ Form of Note for Corporation's Unsecured Installment Notes
(included in Exhibit 4.2)
4.2++ Form of Indenture related to the Corporation's Notes
4.3++ Promissory Note issued by Joseph Thacker to the Corporation
dated as of September 22, 1998
5.1+ Opinion of Bush, Ross, Gardner, Warren & Rudy, P.A.
regarding the legality of the Class B preferred stock being
registered.
8.1+ Opinion of Paul, Hastings, Janofsky & Walker LLP regarding
material tax consequences of the exchange offer.
10.1++ Resale Agreement between GTE North Incorporated and Contel
of the South Incorporated d/b/a/ GTE Systems of the South
and the Corporation
10.2++ Local Exchange Telecommunications Services Resale Agreement
by and between Ameritech Information Industry Services and
the Corporation
10.3++ Resale Service Agreement by and between New England
Telephone and Telegraph Company d/b/a/ Bell Atlantic -
Massachusetts and the Corporation
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10.4++ Resale Agreement by and between BellSouth
Telecommunications, Inc. and the Corporation
10.5++ Resale Agreement by and between Southwestern Bell Telephone
Company and the Corporation dated as of October 1, 1998
10.6++ Master Resale Agreement for the State of Indiana by and
between United Telephone Company of Indiana and the
Corporation dated as of November 1, 1998
10.7++ Purchase Agreement between D&B Holdings International, Inc.
and Tel Com Plus Jacksonville, LLC dated as of December 3,
1996, together with promissory note
10.8++ Purchase Agreement between Prime Equities, Inc. and Tel Com
Plus Miami, LLC dated as of July 21, 1997, together with
promissory note
10.9++ Joint Venture Agreement between Tel Com Plus Miami, LLC and
Easy Cellular, Inc. dated as of February 28, 1997
10.10++ Purchase Agreement between Prime Equities, Inc. and Tel Com
Plus California, LLC dated as of July 21, 1997
10.11++ Joint Venture Agreement between Tel Com Plus California,
LLC and Easy Cellular, Inc. dated as of July 24, 1997
10.12++ Employment Agreement between the Corporation and Robin
Caldwell dated as of November 12, 1998
10.13 Agreement dated as of December 21, 1999 by and among
Quantum Law, Inc., Prime Equities, Inc. and
Intercontinental Brokers, Inc.
10.14++ Letter Agreement and Corresponding Release Agreement dated
September 7, 2000 by and between Charles Polley, Tel Com
Plus, Inc., Intercontinental Brokers, Inc. and the
Corporation
10.15++ Letter Agreement and Corresponding Release dated as of
September 7, 2000 by and between Howard Kratz and the
Corporation
10.16++ Agency Agreement dated as of December 30, 1997 by and among
Easy Phone, Inc., Tel Com Plus West, LLC and Tel Com Plus
East, LLC
10.17++ Agreement between Joseph Thacker, the Corporation and
Total Com, Inc. dated December 23, 1998.
10.18++ Agreement between Joseph Thacker and the Corporation
dated February 2, 1999.
10.19++ Agreement between Prime Equities, Inc. and the Corporation
dated August 4, 1999.
10.20++ Agreement between Prime Equities, Inc. and the Corporation
dated October 1, 1999.
10.21++ Agreement between Prime Equities, Inc. and the Corporation
dated December 1, 1999.
10.22++ Agreement between Prime Equities, Inc. and the Corporation
dated December 22, 1999.
10.23 Agreement between Tel Com Plus, Inc. and Easy Cellular,
Inc.
dated January 8, 1997
11 Statement re: Computation of Per Share Earnings
23.1 Consent of Independent Auditors
23.2+ Consent of Bush, Ross, Gardner, Warren & Rudy, P.A.
(included in Exhibit 5.1)
23.3+ Consent of Paul, Hastings, Janofsky & Walker LLP (included
in Exhibit 5.2)
25+ Form of Form T-1
27.1 Financial Data Schedule for the nine months ended
September 30, 2000 (for SEC use only)
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27.2 Restated Financial Data Schedule for the year ended
December 31, 1999 (for SEC use only)
27.3 Restated Financial Data Schedule for the nine months ended
September 30, 1999 (for SEC use only)
27.4 Restated Financial Data Schedule for the year ended
December 31, 1998 (for SEC use only)
99.1++ Complaint filed by the Corporation on September 27, 2000 in
the Thirteenth Judicial Circuit of Hillsborough County,
Florida
99.2++ Consent agreement with Final Order with State of Florida,
Department of Banking and Finance
99.3++ Form of Letter of Transmittal
99.4++ Complaint filed by Joseph Thacker on September 20, 2000 in
the Sixth Judicial Circuit of Pinellas County, Florida
+ To be filed by amendment
++ Previously filed.
Item 22. Undertakings.
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 Corporation, or otherwise, the Corporation 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 Corporation of expenses incurred or paid by a director,
officer or controlling person of the Corporation 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
Corporation 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.
The undersigned registrant hereby undertakes to respond to request for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represents a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
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(iii) To 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) That, for purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offering therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
Company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto, duly authorized, in the City of Clearwater, State of
Florida, on December 18, 2000.
UNITED STATES TELECOMMUNICATIONS, INC.
By: /s/ Richard J. Pollara
------------------------------------
Richard J. Pollara
President
Duly Authorized Representative
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
/s/ Sam Dean
---------------------------------------------
Sam Dean, Chairman of the Board of Directors Date: December 18, 2000
-----------------
/s/ Richard J. Pollara
---------------------------------------------
Richard J. Pollara, President, Principal
Accounting and Financial Officer and Director Date: December 18, 2000
-----------------
/s/ Cleo Carlile
---------------------------------------------
Cleo Carlile, Director Date: December 18, 2000
-----------------
/s/ Paul D. Gregory
---------------------------------------------
Paul D. Gregory, Director Date: December 18, 2000
-----------------
/s/ Reuben P. Ballis
---------------------------------------------
Reuben P. Ballis, Director Date: December 18, 2000
-----------------
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