<PAGE> 1
As Filed with the Securities and Exchange Commission on October 11, 2000
Registration No. 333-93149
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO FORM S-1
ON FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
UNITED STATES TELECOMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<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. / /
<PAGE> 2
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. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE(1) REGISTRATION FEE(2)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unsecured Installment Notes $ 31,471,548 100% $31,471,548 $2,769.50
Common Stock Issuable upon 126,000,000 N/A N/A N/A
Conversion of Class B
Convertible Preferred Stock
Class B Convertible Preferred Stock 126,000,000 N/A N/A $1,108.80
TOTAL $3,878.30
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) of the Securities Act of 1933.
(2) A registration fee of $7,835 was paid in connection with the initial filing
of this Registration Statement on December 21, 1999 which provided for a
proposed maximum offering price of $29,677,218. Therefore, no additional
registration fee is owed.
------------------------
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.
<PAGE> 3
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 , 2000, 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 in our predecessor
entities; 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.
However, holders who were or are our executive officers, who did not
pay cash consideration for their equity interest in one or more of our
predecessor entities or who, to the best of our knowledge, actively participated
in the unlawful sales of the securities of one or more of our predecessor
entities will not be entitled to participate in this exchange offer. We will
receive no proceeds from the exchange offer.
NOTES
If you exchange your 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 our securities or the securities of our
predecessor entities. The interest rate of the notes will be the applicable
federal rate determined as of the date on which the notes are issued (estimated
to be approximately 6.5% to 7.5% per annum). The notes will be issued in
denominations of $1,000. The trustee of the notes is .
CLASS B PREFERRED STOCK
If you exchange your common stock and Class A preferred stock for
shares of our Class B preferred stock, you will receive a pro rata portion of
that number of Class B preferred stock which will equal 80% of our issued and
outstanding capital stock. The Class B preferred stock ranks senior to our
common stock and Class A preferred stock in the payment of dividends and upon
the event of liquidation or dissolution. In addition, each share of Class B
preferred stock is convertible into shares of our common stock. We intend to
apply to have our common stock and Class B preferred stock approved for
quotation on the OTC Bulletin Board.
EITHER REJECTION OR ACCEPTANCE OF THIS EXCHANGE OFFER IS SPECULATIVE
AND INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6 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.
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 , .
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY........................................................................................... 1
RISK FACTORS................................................................................................. 6
THE EXCHANGE OFFER........................................................................................... 11
FEDERAL INCOME TAX CONSEQUENCES.............................................................................. 16
PRO FORMA CAPITALIZATION..................................................................................... 20
SELECTED FINANCIAL DATA...................................................................................... 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................ 23
BUSINESS .................................................................................................... 34
MANAGEMENT .................................................................................................. 48
COMPENSATION OF EXECUTIVE OFFICERS........................................................................... 50
CERTAIN TRANSACTIONS......................................................................................... 50
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................................... 51
DESCRIPTION OF INDENTURE AND NOTES........................................................................... 53
DESCRIPTION OF CAPITAL STOCK................................................................................. 57
EXPERTS ..................................................................................................... 59
LEGAL MATTERS................................................................................................ 59
WHERE YOU CAN FIND ADDITIONAL INFORMATION.................................................................... 59
APPENDIX A .................................................................................................. A-1
</TABLE>
-i-
<PAGE> 5
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. Local telephone service providers are
also referred to as local exchange carriers. Most local exchange carriers
require disconnected customers to pay their past due balance in addition to a
security deposit before the carrier will reconnect their service. We focus on
those consumers who have been disconnected by their local exchange carrier and
cannot afford to reconnect service with the carrier. 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 exchange carrier within those states. In this
capacity, we are able to purchase telephone service from local exchange
carriers, 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 August 28, 2000, we had 16,169 customers. Our
principal executive offices are located at Suite 118, 5251 110th Avenue North,
Clearwater, Florida 33760.
LEGAL ACTION
On September 27, 2000, we filed a complaint 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. 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
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 owed 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. Despite serving as compliance officer and de facto
legal counsel for the Company, defendant Cillo failed to
disclose that he had voluntarily surrendered his license to
practice law in Florida and was the subject of at least four
separate permanent injunctions entered respectively by
California, Utah and three by the United States Securities and
Exchange Commission (the "SEC") because of complaints charging
him with securities fraud and selling unregistered securities.
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 EXCHANGE OFFER
We are making this exchange offer because of the Stipulation and
Consent Agreement with Final Order dated May 12, 1999 between the State of
Florida, Department of Banking and Finance, Tel Com Plus, Inc., Tel Com Plus
East, LLC, Tel Com Plus West, LLC, Tel Com Plus Jacksonville, LLC and us, as
successor in interest to Tel Com East, Tel Com West and Tel Com Jacksonville. In
this Consent Agreement, we, as successor to Tel Com East, Tel Com West and Tel
Com Jacksonville, admitted that ownership units of Tel Com East, Tel Com West
and Tel Com Jacksonville were offered and sold in Florida in violation of
Florida law. In addition, we believe ownership units of Tel Com East, Tel Com
West and Tel Com Jacksonville, were sold in violation of federal and other state
securities laws. The ultimate investors in our predecessor entities paid an
aggregate purchase price of approximately $30 million for units of ownership;
however, Tel Com East, Tel Com West and Tel Com Jacksonville only received a
total of approximately $6.45 million from these sales. Set forth below is a
chart which contains the number of units sold to investors, the aggregate amount
of proceeds we received, the aggregate amount of proceeds we believe the various
intermediaries, independent sales organizations and individuals received and the
total purchase price paid by the ultimate investors.
<TABLE>
<CAPTION>
|-------------------------------------|--------------|-----------------|---------------------|------------------|------------------|
| DESCRIPTION | DATE | NUMBER OF UNITS | AMOUNT RECEIVED BY | ESTIMATED AMOUNT | TOTAL PURCHASE |
| | | | THE COMPANY | RECEIVED BY | PRICE PAID BY |
| | | | | INTERMEDIARIES, | ULTIMATE |
| | | | | INDEPENDENT | INVESTORS |
| | | | | SALES ORGANIZA- | |
| | | | | TIONS AND | |
| | | | | INDIVIDUALS | |
|-------------------------------------|--------------|-----------------|---------------------|------------------|------------------|
|<S> | <C> | <C> | <C> | <C> | <C> |
|-------------------------------------|--------------|-----------------|---------------------|------------------|------------------|
|Units sold | | | | | |
|-------------------------------------|--------------|-----------------|---------------------|------------------|------------------|
| Tel Com Jacksonville | During 1997 | 160 | $750,000 | $1,218,333 | $1,968,333 |
| units initially sold to | | | | | |
| D&B Holdings | | | | | |
|-------------------------------------|--------------|-----------------|---------------------|------------------|------------------|
| Tel Com East units | May 1997 to | 1,805 | $2,246,939 | $10,384,072 | $12,631,011 |
| initially sold to Prime | September | | | | |
| Equities Group, Inc. | 1998 | | | | |
|-------------------------------------|--------------|-----------------|---------------------|------------------|------------------|
| Tel Com West units | July 1997 | 2,856 | $3,454,002 | $12,077,293 | $15,531,295 |
| initially sold to Prime | September | | | | |
| Equities Group, Inc. | 1998 | | | | |
|-------------------------------------|--------------|-----------------|---------------------|------------------|------------------|
|Total Amount | | 4,821 | $6,450,941 | $23,679,698 | $30,130,639 |
|-------------------------------------|--------------|-----------------|---------------------|------------------|------------------|
</TABLE>
<PAGE> 6
We are also making this exchange offer to holders of our common stock who
purchased their shares 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. All of the investors in this private placement were accredited investors
who were already shareholders at the time of this offering. We were advised by
former counsel that the offer was not required to be registered under the
securities laws; however, we have been subsequently advised that this offering
may not have complied with the registration requirements of the securities laws.
Therefore, we are offering to exchange these shares of common stock for our
notes or shares of our Class B preferred stock.
As a result of these sales and offerings, we are offering to exchange
the shares of our securities held by recipients of this prospectus for our
unsecured installment 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 our predecessor entities).
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 Class B preferred shares which will equal 80% of our
issued and outstanding capital stock. You will receive your
proportional share of Class B preferred stock based on the price you
paid for your shares of common stock and Class A preferred stock and
the total number of other 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 exchange your shares for
our notes or Class B preferred stock by the expiration date of this
exchange offer, you will be treated as having 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 participant of this exchange offer 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 securities for our notes and a portion for the Class
B preferred stock.
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, the ownership of our outstanding securities will dramatically
change. As of the date of this prospectus, shareholders eligible to participate
in this exchange offer own only approximately 35% of our issued and outstanding
shares of capital stock. Upon completion of this exchange offer, those
shareholders who exchange their shares for shares of Class B preferred stock
will own approximately 80% of our issued and outstanding shares of capital
stock. We believe that this ownership percentage represents a more equitable
stake in our capital stock for such shareholders.
Unsecured Installment Notes
The notes will be issued in increments of $1,000 and will accrue
interest at the applicable federal rate, compounded annually. The applicable
federal rate (estimated to be approximately 6.5% to 7.5% per annum) will be
determined by the provisions of the Internal Revenue Code as of the date the
notes are issued. Payment of principal and interest will be made in equal annual
installments commencing on , 2003 and continuing thereafter on each ,
until the notes, plus accrued interest, are paid in full. The term of the
notes will vary between five (5) to fifteen (15) years, depending on the
aggregate principal amount of notes issued as shown in the following chart:
2
<PAGE> 7
<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 2006
----------------------------------------------------------------------------------------------------------------------
$5,000,001 - $10,000,000 2003 2008
----------------------------------------------------------------------------------------------------------------------
$10,000,001 - $20,000,000 2003 2010
----------------------------------------------------------------------------------------------------------------------
$20,000,001 - $30,000,000 2003 2015
----------------------------------------------------------------------------------------------------------------------
</TABLE>
You are entitled to receive that aggregate amount of notes which have
an aggregate principal amount equal to the purchase price that you paid for our
securities or the securities of our predecessor entities, which purchase price
will be rounded to the nearest thousand.
Class B Convertible Preferred Stock
The rights, preferences and privileges of the Class B preferred stock
are summarized under the heading "Description of Capital Stock."
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 can be categorized into the following five main objectives:
- Expand our market area;
- Increase product availability for our customers;
- Automate and upgrade our operational systems;
- Advertise on a national basis; and
- Develop and introduce new add-on products, such as Internet
services.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences of participating in the exchange
offer will depend primarily on your particular circumstances and on the exchange
option you select. Tax consequences also will depend on the characterization of
the transaction for federal income tax purposes. 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.
3
<PAGE> 8
The exchange of our shares of common stock and Class A preferred stock
for our notes will generally be a taxable event and will result in the
realization of 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. If you
were allocated tax losses during the period in which you owned units in our
predecessor entities, you are likely to realize gain from the exchange in an
amount equal to such prior losses (assuming such prior losses have not
previously been recaptured). However, because you are receiving an installment
note as payment in full for your shares, you should be able to defer the
recognition of this gain (and thus any resulting tax liability) until you
receive principal payments on your note.
In addition, if you exchange your shares of common stock and Class A
preferred stock for our notes, you will be subject to the tax rules regarding
original issue discount. Under these complicated rules, you will be required to
report interest on the note as ordinary income at the time such interest accrues
rather than at the time such interest is paid. Thus, until 2003, you will
realize taxable income because you own the note even though you will not have
received any payments on the note during this period.
If you exchange common stock and Class A preferred stock for Class B
preferred stock, the exchange should not be a taxable event. The receipt of the
Class B preferred stock should be nontaxable because it will be received in a
tax-free recapitalization. Also, the original issue discount rules mentioned
above will not apply.
GOING CONCERN
Pender Newkirk & Company, our independent public accountants, have
audited our financial statements for the years ending 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. These conditions combined with the exchange
offer have raised substantial doubt about our ability to continue as a going
concern, resulting in Pender Newkirk & Company adding a going concern
explanatory paragraph in their opinion.
RISK FACTORS
Either rejection or acceptance of this exchange offer is speculative
and involves a high degree of risk. Retaining an equity investment in the
Company is suitable only for persons of substantial financial means who are able
to bear the risk of loss of their entire investment. However, our debt
obligations will significantly increase if recipients of this prospectus elect
to exchange their equity for debt. This increase in our liabilities will have a
material adverse effect on our financial condition and results of operations.
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 6, prior to acting on our offer.
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 six months ended June 30,
1999 and 2000. In addition, the following table summarizes our balance sheet
data as of June 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.
4
<PAGE> 9
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Period From
Six Months Ended Years Ended Inception
June 30, December 31, (November 19,
--------------------------------------------------------------- 1997) to
2000 1999 December 31,
(unaudited) (unaudited) 1999 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Sales ....................................... $ 9,320,626 $ 10,069,449 $ 19,738,566 $ 5,066,448 $ --
Cost of sales ............................... 3,160,286 4,083,348 7,514,529 2,317,945 --
------------ ------------ ------------ ------------ --------
Gross profit ................................ 6,160,340 5,986,101 12,224,037 2,748,503 --
------------ ------------ ------------ ------------ --------
Operating loss .............................. (301,340) (3,825,581) (6,066,515) (3,473,945) (250)
------------ ------------ ------------ ------------ --------
Net loss .................................... $ (466,456) $ (3,900,467) $ (5,169,729) $ (3,544,305) $ (250)
============ ============ ============ ============ =======
Per share data:
Basic and diluted loss per share ............ $ (0.04) $ (0.39) $ (0.49) $ (0.59) $ --
============ ============ ============ ============ =======
Weighted average number of common
shares used in basic and diluted loss
per share calculations ........................ 11,499,214 10,033,715 10,560,947 6,140,532 --
============ ============ ============ ============ =======
Consolidated Statement of Cash Flow Data:
Net cash provided (used) by operating
activities .................................... $ 201,397 $ (1,405,498) $ (2,152,261) $ (1,393,336) $ --
------------ ------------ ------------ ------------ --------
activities .................................... $ (70,140) $ (225,081) $ (304,657) $ (180,572) $ --
------------ ------------ ------------ ------------ --------
Net cash provided (used) by financing
activities .................................... $ (187,368) $ 1,098,642 $ 1,885,175 $ 2,201,762 $ --
------------ ------------ ------------ ------------ --------
Depreciation and amortization .................... $ 454,908 $ 435,779 $ 869,174 $ 215,811 $ --
------------ ------------ ------------ ------------ --------
Capital expenditures ............................. $ 11,720 $ 82,287 $ 195,779 $ 111,251 $ --
------------ ------------ ------------ ------------ --------
Other data:
EBITDA (1) ....................................... $ 153,568 $ (3,389,802) $ (3,939,094) $ (3,314,634) $ (250)
------------ ------------ ------------ ------------ --------
Deficiency of earnings available to
To cover fixed charges (1) .................... $ (466,456) $ (3,900,467) $ (5,169,729) $ (3,544,305) $ (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.
<TABLE>
<CAPTION>
Balance Sheet Data June 30, 2000
-------------
<S> <C>
Working capital deficit.................................................. $ 6,183,283
-------------
Total assets............................................................. $ 4,997,025
-------------
Unit rescission obligation............................................... $ 205,850
-------------
Rescission accrued interest............................................. $ 208,883
-------------
Total stockholders' deficit.............................................. $ (2,468,410)
-------------
</TABLE>
5
<PAGE> 10
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS FACTORS AND OTHER
INFORMATION IN THIS PROSPECTUS BEFORE ACTING ON THIS EXCHANGE OFFER.
LACK OF DOCUMENTATION OF PAST CORPORATE ACTIONS
During the period from our inception until April 2000, the date on
which our current board of directors began serving, we and our predecessor
entities 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 or mechanisms and those internal corporate
control procedures which were in place were not maintained. Our inadequate and
incomplete accounting records and stock records reflect our failure to put in
place and maintain internal control procedures. Our stock records, public
utility compliance records and certain other corporate records were located at
the office of Captive Administrators, Inc., a company engaged by us and our
predecessor entities to manage and maintain our stock records, public utility
compliance records and certain other corporate records. We terminated this
relationship on December 15, 1999. Captive Administrators refused to permit
members of our present management to review our records from December 1999 until
July 2000, when we successfully brought a legal action to recover these records.
Based on the recovered records, we believe that an undetermined number of shares
of our securities were issued without the proper authorization of our board of
directors. In addition, other corporate actions have not been authorized or
properly and adequately documented. For example, our purchase of the assets and
liabilities of our predecessor entities, Tel Com East, Tel Com West and Tel Com
Jacksonville, was not supported by any transfer documentation. There may be
other corporate actions which were not properly approved or documented and which
may not be properly described in this prospectus. As a result of this lack of
documentation of corporate actions, we may be unaware of corporate acts which
may have a material adverse effect on our business, financial condition or
results of operations.
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 increasing portfolio of 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 which we
believe did not satisfy the requirements of federal and state securities laws.
We believe our predecessor entities offered and sold ownership interests in
these entities to persons in violation of the federal securities laws and
applicable state securities laws. In addition, these securities in our
predecessor entities were then exchanged for shares of our common stock and
Class A preferred stock in an exchange transaction as of September 30, 1998 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. However, this exchange offer will not cut
off any rights that you may have under federal securities laws and applicable
state securities laws against us for violating these laws.
Tel Com Jacksonville, one of our predecessor entities, made an offer in
early to mid-1998 to each of its investors to repurchase his or her units at a
purchase price equal to the initial purchase price paid by such investor. Tel
Com Jacksonville offered to pay the purchase price over time in monthly
installments together with accrued interest at a rate of eight percent (8%) per
annum. Eighty (80) unit holders accepted Tel Com Jacksonville's offer to
repurchase, resulting in an aggregate liability to Tel Com Jacksonville of
$995,000. As of June 30, 2000, we, as successor to Tel Com Jacksonville, have
paid $789,150 to the former unitholders who elected to have their shares
repurchased and we owe an additional $205,850 in principal amount to these
former unitholders. We believe that the Tel Com Jacksonville rescission offer
did not comply with applicable federal and state securities laws because it was
not registered with the Securities and Exchange Commission or with any state
securities commission and was not exempt from any such registration
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<PAGE> 11
requirements. Therefore, the rescission offer by Tel Com Jacksonville does not
have the effect of barring any claims brought or which may be brought by holders
of Tel Com Jacksonville.
From February 1999 until December 1999, we offered common shares to
investors at a purchase price of $3.00 per share. At the time of this offering,
we were advised by former counsel that the offering was not required to be
registered under 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 in the Company. Based on
current counsel's review and assessment of this offering, we now believe that
this offering may not have complied with the registration requirements of the
securities laws; therefore we are offering to exchange our notes or share of our
Class B preferred stock for these previously issued shares of our common stock.
However, this exchange offer may not cut off any rights that such purchasers of
our common stock may have against us for violating the securities laws.
If any or all of such claims prevail, our business, financial condition
and results of operations would all be materially and adversely affected. Even
if we are successful in defending any claims under applicable securities laws,
their mere assertion could be costly and would require us to spend a significant
amount of time defending such actions.
ACTION BY THE STATE OF FLORIDA DEPARTMENT OF BANKING AND FINANCE
We entered into a Stipulation and 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 entities
violated Florida law and we further agreed to complete an offer of rescission
with respect to these securities in accordance with the Florida Securities and
Investor Protection Act on or before November 30, 1999. We were unable to make
this rescission offer because, among other things, our auditors were unable to
complete an audit of our financial statements. If we did not deliver
audited financials with our rescission offer, the offer would not comply with
applicable securities laws. 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 this default, including an action to
enforce the Consent Agreement, a motion to seek receivership or 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 will not have the effect of barring any
claims against us by the Department in connection with our default under the
Consent Agreement.
SECURITIES AND EXCHANGE COMMISSION LITIGATION RISKS
Our business and financial prospects may be materially adversely
affected by the outcome of an action brought by the Securities and Exchange
Commission against our predecessor entities. Tel Com East and Tel Com West have
been named as defendants in a lawsuit brought in federal court in Tampa, Florida
in which the SEC alleges, among other things, violation of Rule 10b-5 of the
Securities Exchange Act of 1934. The complaint further alleges that Tel Com East
and Tel Com West committed fraud in the sale of their securities. As a successor
entity, we may be liable for the actions of Tel Com East and Tel Com West.
Further, the Commission has advised us that we will be named as a defendant in
this action. As a result, we have entered into settlement negotiations with the
SEC. We cannot assure you that we will be able to enter into an acceptable
settlement agreement with the SEC. If we are named as a defendant and litigation
goes forward, the outcome of this litigation cannot be predicted. We may be
subject to severe civil penalties and other remedies, such as disgorgement,
which will have a material adverse effect on our business and financial
condition.
RISK OF NONPAYMENT OF PRINCIPAL AND INTEREST ON 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. No principal or interest will be
paid during the first two years. Principal plus all accrued interest are
scheduled to be paid in annual equal installments commencing on ,
2003 and continuing thereafter on each until the interest plus
principal is paid in full.
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<PAGE> 12
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 our operating
revenues exceed our operating expenses. For the six months ended June 30, 2000,
our operating revenue was $9,320,626, and we had an operating loss of $301,340.
It is possible that our operating revenues may never materially exceed our
operating expenses, or achieve profitability on a quarterly or 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 and the
trustee may accelerate payment of the full amount of principal and accrued
interest under the notes. Further, we may not be able to raise funds with which
to make payments to the holders of the notes. It is possible that we will not be
able to pay all of the notes, or even a portion of them, regardless of the
aggregate principal amount of notes issued pursuant to this exchange offer. In
addition, the notes are general unsecured obligations and the noteholder will
have no collateral to foreclose against if we default on the notes.
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;
- automate our operations;
- 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 six months ended June 30, 2000, we incurred an operating loss of $301,340.
Since our inception, we have incurred operating losses and negative cash flows
each fiscal year. We cannot assure you that our revenues will increase to the
level necessary to cover our expenses. In addition, our financial condition may
be materially adversely affected as a result of this exchange offer if our
aggregate liability as a result of the issuance of the notes is a material
amount as compared to the amount of cash we are able to generate from our
operating activities. Our sole source of funds for the payment of the notes
issued pursuant to this exchange offer will be our operating revenues.
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 $4.2 million for unremitted taxes,
including penalties and interest as of June 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
of these tax liabilities will likely have a material adverse affect on our
operations and impair our ability to implement our business strategies.
GOING CONCERN
Pender Newkirk & Company, our independent public accountants, have
audited our financial statements for the years ending December 31, 1999 and 1998
and 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
payment of these taxes. These conditions, combined with this exchange offer,
have raised substantial doubt about our ability to continue as a going concern.
Pender Newkirk & Company has added adding a going concern explanatory paragraph
to their opinion.
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<PAGE> 13
LIQUIDITY AND FINANCING REQUIREMENTS
In order to pursue our business strategy and growth plans, we will
require significant amounts of capital. Currently, we do not have any
arrangements to finance future growth and expansion. We cannot assure you that
financing will be available at all or on terms acceptable to us. 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 material adverse effect on our business, financial condition and
future prospects.
RISK OF NONPAYMENT FROM CUSTOMERS
Because most of our customers have bad credit, there is a significant
risk of nonpayment. We disconnect service 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 service carrier 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 which 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
materially adversely effected. We cannot assure you that additional states will
not increase the required notice period in connection with 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 exchange carriers such as Southwestern Bell, who have
begun offering local telephone service to their own customers who have been
disconnected for nonpayment. These local service carriers 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, are lower than the rates we charge our
customers.
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 material adverse 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.
NO PUBLIC MARKET FOR OUR SECURITIES
There is no public or other market for our equity or debt securities
and we do not anticipate that any such market will develop. Consequently,
investors may be required to hold our equity securities for an indefinite period
of time and our debt securities until maturity and repayment.
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<PAGE> 14
ABSENCE OF DIVIDENDS
We have never declared or paid cash dividends on our common stock or
Class A preferred stock and we do not anticipate paying any cash dividends in
the foreseeable future on any of our capital stock, including our Class B
preferred stock.
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 material
adverse 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 a material 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 service carrier for nonpayment of
long-distance service. Several states are examining the billing policies of
these carriers which permit them to disconnect their customers for nonpayment of
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 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 within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are based on management's
beliefs, current expectations, estimates and projections about the
telecommunications industry, the 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; however, this prospectus also contains other
forward-looking statements in addition to historical information. Such
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, without limitation, 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 operate and
grow our business.
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<PAGE> 15
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 who have typically been disconnected from residential telephone service
by their local exchange carrier. 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
securities of Tel Com East, Tel Com West and Tel Com Jacksonville were offered
and sold to persons 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 of securities.
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 offer and sale of these securities and
their exchange for our securities may have been in violation of federal
securities laws and applicable state securities laws.
From February 1999 until December 1999, we offered common shares 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 not required to be registered
under 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 complied with 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.
We, as successor to Tel Com East, Tel Com West and Tel Com
Jacksonville, entered into a Stipulation and Consent Agreement with Final Order
with the State of Florida, Department of Banking and Finance, on May 12, 1999.
In this Consent Agreement, we admitted that the sale of securities of our
predecessor entities violated Florida laws. In order to resolve this matter
expeditiously and without the need for litigation, 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 law. In the Consent
Agreement, as amended, we agreed to complete the rescission offer by November
30, 1999. We were not able to make this rescission offer because, among other
things, our auditors were not able to complete the audit of our financial
statements due to the difficulty in locating corporate records. If we did not
deliver audited financials with our rescission offer, the offer would not have
complied with applicable securities laws. On December 7, 1999, the State of
Florida, Department of Banking and Finance, 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 or 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 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 applicable federal and
state securities laws and therefore does not 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 or entities who
purchased for cash equity interests in one or more of the Tel Com entities and
subsequently received shares of our common stock and Class A preferred stock in
exchange for their ownership interest in our predecessor entities and persons or
entities who purchased shares of our common stock during the period from
February 1999 to December 1999 in an
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<PAGE> 16
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 consideration for
his or her equity interests in Tel Com East, Tel Com West or Tel Com
Jacksonville or who, to the best of our knowledge, actively participated in the
unlawful sale of one or more of our predecessor entities' securities are not
eligible to participate in this exchange offer.
LEGAL ACTION
On September 27, 2000, we have 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".
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<PAGE> 17
TERMS OF THE EXCHANGE OFFER
As a result of these sales and offerings, we are offering to exchange
the shares of our securities held by holders who are eligible to participate in
this exchange offer for our unsecured installment 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 our predecessor entities). 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 which 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 and the
total number of other 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 recipient of this exchange offer 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 securities 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 the applicable federal
rate determined as of the date the notes are issued (estimated to be
approximately 6.5% to 7.5% per annum), determined in accordance with Section
1274(d) of the Internal Revenue Code, 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 __________ __, 2006
---------------------------------------------------------------------------------------------------------------
$5,000,001 - $10,000,000 __________ __, 2003 __________ __, 2008
---------------------------------------------------------------------------------------------------------------
$10,000,001 - $20,000,000 __________ __, 2003 __________ __, 2010
---------------------------------------------------------------------------------------------------------------
$20,000,001 - $30,000,000 __________ __, 2003 __________ __, 2015
---------------------------------------------------------------------------------------------------------------
</TABLE>
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 our
predecessor entities), 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 in our predecessor entities)
who elect to exchange their securities 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 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
rights, preferences and privileges of the Class B preferred stock are summarized
below:
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<PAGE> 18
Voting Rights: The holders of the Class B preferred stock
will 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
will be entitled to receive dividends
ratably at a per annum rate of 8% of the
liquidation value of the shares of Class B
preferred stock as and when declared by our
board of directors, prior to and in
preference to any declaration or payment of
any dividend on the common stock or Class A
preferred stock. This dividend preference
will not be cumulative.
Liquidation Rights: In the event of a liquidation, dissolution
or winding up of the Company, the holders of
the Class B preferred stock will be entitled
to be paid an amount equal to $0.10 per
share. This amount will be paid out of our
assets before any payment is made with
respect to the common stock or Class A
preferred stock. If the assets and funds
distributed to the Class B preferred stock
are insufficient to permit the payment to
the holders of their full preferential
amounts, then such assets and funds will be
distributed ratably among the holders of the
then outstanding Class B preferred stock.
The liquidation value of the Class B
preferred stock is subject to appropriate
adjustments in the event that 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 is subject to appropriate
adjustment 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 under an
effective registration statement under the
Securities Act covering the offering and
sale of the common stock for the account of
the Company in which the gross cash proceeds
to the Company are at least $10,000,000, (2)
any transaction or series of transactions
(including, without limitation, any
reorganization, merger or consolidation)
that results in the transfer of 50% or more
of the outstanding voting securities of the
Company or (3) the sale of all or
substantially all of the assets of the
Company.
We will exchange all shares of our common stock and Class A preferred
stock that are validly tendered to us. 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. We will not receive any proceeds from the exchange offer.
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 the exchange agent.
HOW TO ACCEPT THIS EXCHANGE OFFER
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 , 2000. 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.
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.
14
<PAGE> 19
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
pursuant to the exchange offer, if any, will be canceled and will resume the
status of authorized but unissued shares.
15
<PAGE> 20
FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the principal United States federal
income tax consequences to holders of our securities who participate in the
exchange offer and of holding the notes or Class B preferred stock after the
exchange. The discussion is limited to the current holders of our common stock
and Class A preferred stock who participate in this exchange offer. 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, special counsel to the Company, regarding the material
federal income tax consequences to holders of our securities who elect 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 ("IRS") or the courts. We have not requested and will not request an
advance ruling from the IRS as to the tax consequences of the exchange offer.
Neither this summary, nor the opinion of counsel, 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
Generally, 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 realize a
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. In most cases, such
aggregate tax basis will equal the sum of (1) the purchase price of the common
stock, if any, purchased by you directly from the Company in 1999 and (2) the
purchase price for your membership interests in our predecessor entities reduced
by any tax losses previously allocated to you in connection with your ownership
of such membership interests. Thus, if you were allocated tax losses during the
period in which you owned units in our predecessor entities, you are likely to
realize gain from the exchange in an amount equal to such prior losses (assuming
such prior losses have not previously been recaptured). However, because you are
receiving an installment note in payment for your stock, you should be able to
defer the recognition of this gain (and thus any resulting tax liability) 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%.
The exchange of common stock and Class A preferred stock for our notes
may be characterized (1) solely as a redemption by the Company of the issued and
outstanding common stock and Class A preferred stock actually held by you (i.e.,
the entire note will be treated as issued in exchange for the stock you
currently own), or (2) as a bifurcated transaction, with a portion of the note
being issued in redemption of your existing stock and a portion of the note
being issued in exchange for any rights you might have to receive additional
stock because ownership interests in our predecessor entities were sold in
violation of applicable securities laws (hereinafter, such rights are referred
to as "Stock Rights"). In other words, the transaction could be viewed as if a
portion of the note is being issued as a replacement for the stock that you
should have received (but did not) as a result of your initial investment in our
predecessor entities, rather than in exchange for our stock that you actually
own. It should be noted, however, that regardless of which characterization is
adopted, the overall tax consequences of electing the note option should be the
same.
TREATMENT OF THE NOTES
Original Issue Discount
General. The notes will be issued with original issue discount ("OID"),
which will require you to include in income (as ordinary income) interest on the
notes when such interest accrues rather than when such interest is paid.
The Amount of Original Issue Discount. The amount of OID with respect
to each note is equal to the excess of (1) its "stated redemption price at
maturity" over (2) the "issue price" of the note. In this case, the "stated
redemption price at maturity" of each note is the sum of all cash payments
(whether denominated as principal or interest) provided by the note and the
issue price of each note is the face amount of the note.
Taxation of Original Issue Discount. If you exchange our common stock
and Class A preferred stock for our note you will be required to include in
gross income (generally as ordinary interest income) for U.S. federal income tax
purposes the sum of the "daily portions" of such OID for all days during the
taxable year on which the you hold the note. The daily portions of
16
<PAGE> 21
OID required to be included in your gross income in a taxable year is determined
upon a constant yield-to-maturity basis by allocating to each day during the
taxable year on which you hold the note a pro rata portion of the OID on such
note which is attributable to the "accrual period" (generally the period between
interest payment or compounding dates) in which such day is included. The amount
of the OID attributable to each "accrual period" is the product of (1) the
"adjusted issue price" at the beginning of such accrual period and (2) the
"yield to maturity" of the note (stated in a manner appropriately taking into
account the length of the accrual period). The "adjusted issue price" of each
note at the beginning of an accrual period generally will be equal to the issue
price of the note plus the aggregate amount of OID that accrued in all prior
accrual periods, less any cash payments that have been made on the note.
Payments on the notes will not be separately include in your income as interest,
but rather will be treated first as payments of previously accrued and unpaid
OID and then as payments of principal.
Sale, Exchange or Redemption of the Notes
Unless a non-recognition provision applies, the sale, exchange,
redemption or other disposition of our note will be a taxable event for U.S.
federal income tax purposes. If you sell or dispose of our note, you will
recognize gain or loss equal to the difference between (1) the amount of cash
plus the fair market value of any property received upon such sale, exchange,
redemption or other taxable disposition and (2) your adjusted tax basis in the
note. Your adjusted tax basis in a note generally will equal the issue price of
such note (face amount in this case) increased by the amount of OID previously
included in your income with respect to such note and decreased by the amount of
any principal or interest payments previously received by you on such note. Gain
or loss realized on a sale, exchange, redemption or other taxable disposition of
a note should be capital gain or loss, and will be long-term capital gain or
loss if such note has been held by you for more than one year at the time of
such sale, exchange, redemption or other taxable disposition. Generally the
maximum federal income tax rate imposed on long-term capital gains realized by
an individual is 20%. The deductibility of capital losses is subject to
limitations.
EXCHANGE OF STOCK FOR CLASS B PREFERRED STOCK
If you exchange your common stock and Class A preferred stock for Class
B preferred stock, such exchange should be treated for federal income tax
purposes as a tax-free exchange made pursuant to a recapitalization of the
Company described in Section 368(a)(1)(E) of the Code. Consequently, no gain or
loss should be recognized by you as a result of the exchange. However, because
of the unusual nature of this transaction, it is not clear whether the holding
period of all the Class B preferred stock which you receive will be based on the
holding period of the common stock and Class A preferred stock which was
exchanged for shares of Class B preferred stock. Consequently, if you sell any
Class B preferred stock within one year after the date of the exchange, all or a
portion of any gain recognized from such sale may be treated as short-term
capital gain rather than long-term capital gain.
As indicated above, this exchange could be viewed as either an exchange
of Class B preferred stock solely for common stock and Class A preferred stock,
or an exchange of Class B preferred stock for common stock, Class A preferred
stock and Stock Rights. Under either scenario, your tax basis in the Class B
preferred stock received in the exchange will equal the aggregate tax basis of
the assets exchanged therefor. Generally, your aggregate tax basis should equal
the sum of (1) the purchase price of the common stock, if any, that you
purchased directly from the Company during 1999, and (2) the purchase price that
you paid for your units in our predecessor entities reduced by any tax losses
allocated to you in connection with your ownership of such units.
If the transaction is treated as an exchange of Class B preferred stock
solely for common stock and Class A preferred stock, the holding period of the
Class B preferred stock will include the respective holding periods of the
common stock or Class A preferred stock exchanged therefor. Thus, the holding
period of any Class B preferred stock issued in exchange for common stock
purchased directly from the Company in 1999 will include your holding period for
such common stock. Similarly, the holding period of any Class B preferred stock
issued in exchange for common stock and Class A preferred stock received in
exchange for your membership interests in our predecessor entities will include
your holding period for such common stock and Class A preferred stock.
If the transaction is treated as an exchange of Class B preferred stock
for common stock, Class A preferred stock and Stock Rights, it is likely that
the holding period for any Class B preferred stock issued in exchange for Stock
Rights will not include your holding period for such Stock Rights. Consequently,
your holding period for such Class B preferred stock will commence on the date
of the exchange. As a result, if you sell any Class B preferred stock issued in
exchange for Stock Rights within one year after the date of the exchange, it is
likely that any gain recognized from such sale will be treated as short-term
capital gain rather than long-term capital gain.
TREATMENT OF THE CLASS B PREFERRED STOCK
17
<PAGE> 22
Distributions on Class B Preferred Stock.
The amount of any cash distribution with respect to the Class B
preferred stock will be treated as a dividend, taxable as ordinary income to the
recipient thereof, to the extent of our current or accumulated earnings and
profits as determined under United States federal income tax principles. To the
extent that the amount of such 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, as discussed above).
Dividends received by a corporate shareholder which owns less than 20%
of our stock, by vote or value, generally will be eligible for the 70%
dividends-received deduction under section 243 of the Code, subject to various
exceptions and limitations contained in the Code. United States corporate
shareholders should note, however, that there can be no assurance that
distributions with respect to the Class B preferred stock will not exceed the
amount of our current or accumulated earnings and profits. Accordingly, there
can be no assurance that the dividends-received deduction will apply to
distributions on the Class B preferred stock. Corporate holders should consult
their tax advisors as to the availability of, and the limitations relating to,
the dividends-received deduction.
Sale or other Disposition of the Class B Preferred Stock.
A sale or other disposition (other than a redemption) of Class B
preferred stock will normally be a taxable event. Upon such taxable sale or
other disposition, you will generally recognize capital gain or loss equal to
the difference between the amount of cash and the fair market value of property
received by you for the Class B preferred stock and your adjusted tax basis in
those shares. Such gain or loss will be long-term capital gain or loss if your
holding period for such Class B preferred stock exceeds one year. Generally, the
maximum federal income tax rate imposed on long-term capital gains realized by
an individual is 20%.
If your Class B preferred stock is redeemed, such redemption will be
treated as a dividend to the extent that the amount of cash does not exceed our
current or accumulated earnings or profits, as determined for federal income tax
purposes, unless that redemption satisfies one of the tests set forth in Section
302(b) of the Code and is therefore treated as a sale or exchange of the
redeemed shares. The redemption will be treated as a sale or exchange if it (i)
is "substantially disproportionate" with respect to the holder, (ii) results in
a "complete termination" of the holder's stock interest in the Company or (iii)
is "not essentially equivalent to a dividend" with respect to the holder, all
within the meaning of Section 302(b) of the Code. In determining whether any of
these tests have been met, shares of capital stock considered to be owned by the
holder by reason of certain constructive ownership rules set forth in the Code,
as well as shares of capital stock actually owned by the holder, must generally
be taken into account. Because the determination as to whether any of the
alternative tests of Section 302(b) of the Code will be satisfied with respect
to any particular holder of Series B preferred stock depends upon the facts and
circumstances at the time the determination is to be made, holders of Series B
preferred stock are advised to consult their own tax advisors to determine such
tax treatment.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Certain non-corporate United States holders may be subject to backup
withholding at a rate of 31% on any dividends paid on the Class B preferred
stock and interest payments with respect to the notes (including OID). United
States holders should consult their tax advisors regarding their qualification
for exemption from backup withholding and the procedure for obtaining such an
exemption, if applicable. Amounts paid as backup withholding do not constitute
an additional tax and will be credited against the holder's United States
federal income tax liabilities, so long as the required information is provided
to the IRS.
GENERAL DEFINITIONS
The discussion contained in this section entitled "Federal Income Tax
Consequences" addresses only certain federal income tax consequences of
exchanging common stock and Class A preferred stock for our notes or Class B
preferred stock and holding the notes or Class B preferred stock after the
exchange. It does not address all of the tax consequences that may be relevant
to particular shareholders in light of their personal circumstances, or to some
types of shareholders, such as:
- some types of financial institutions;
- dealers or traders in securities or commodities;
- insurance companies;
18
<PAGE> 23
- "S" corporations;
- expatriates;
- Non-United States holders, as defined below;
- tax-exempt organizations; or
- persons who are subject to alternative minimum tax.
In addition, this discussion of the principal United States federal
income tax consequences only applies to United States holders of our notes,
common stock, Class A preferred stock or Class B preferred stock. A holder is a
United States holder for United States federal income tax purposes if such
holder is:
- a citizen or resident of the United States,
- a corporation or partnership created or organized in or under
the laws of the United States or any state or division
thereof, including the District of Columbia,
- an estate the income of which is subject to United States
federal income taxation regardless of its source, or
- a trust (1) the administration over which a United States
court can exercise primary supervision and (2) all of the
substantial decisions of which one or more United States
persons have the authority to control and other types of
trusts considered United States Holders for federal income tax
purposes.
A Non-United States holder is any holder of our note, common stock,
Class A preferred stock or Class B preferred stock other than a United States
holder.
19
<PAGE> 24
PRO FORMA CAPITALIZATION
The following table sets forth our pro forma capitalization as of June
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 June
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 June 30, 2000
----------------
<S> <C>
Current obligations
Unit rescission obligation(1)...................................... $ 183,578
Note payable - related party...................................... 150,000
-------------
Total current obligations................................................. $ 333,578
Long-term obligations(1)
Unit rescission obligation......................................... $ 22,272
Unit rescission obligation accrued interest........................ 208,883
-------------
Total Long-term obligations............................................... $ 231,155
-------------
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, 36,461,749 shares issued and
outstanding
Class B Preferred Stock, $0.10 par value per share,
130,000,000 shares authorized, no shares issued and
outstanding(2)
Common Stock, no par value, 300,000,000 shares
authorized, 11,499,214 shares issued and outstanding(3) --
Additional Paid-In Capital......................................... 5,166,379
Accumulated Deficit................................................ ($9,180,740)
-------------
Total Stockholders' Deficit............................................... ($2,441,410)
=============
Total Capitalization...................................................... ($1,876,677)
=============
</TABLE>
(1) These rescission obligations relate to a rescission offer made by Tel
Com Jacksonville in early to mid-1998 to all the unit holders of Tel
Com Jacksonville. The rescission offer was accepted by eighty (80) unit
holders resulting in an aggregate rescission obligation in the
principal amount of $995,000. The rescission obligation bears interest
at 8% per annum. As of June 30, we, as successor to Tel Com
Jacksonville, have paid $789,150 in principal to the former unitholders
who elected to have their shares repurchased, and we owe an additional
$205,850 in principal amount to these former unitholders.
(2) This assumes that our Second Amended and Restated Articles of
Incorporation, which designates 130,000,000 shares of Class B preferred
stock, were in effect as of June 30, 2000.
(3) 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 in effect as of June
30, 2000.
20
<PAGE> 25
SELECTED FINANCIAL DATA
The following 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 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 six
months ended June 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.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
SIX MONTHS ENDED YEARS ENDED (NOVEMBER 19,
JUNE 30, DECEMBER 31 1997) TO
DECEMBER 31,
1997
-----------------------------------------------------------------------------
2000 1999
(unaudited) (unaudited) 1999 1998
----------- ----------- ---- ----
<S> <C> <C> <C> <C> <C>
Sales ............................................. $ 9,320,626 $ 10,069,449 $ 19,738,566 $ 5,066,448 $ --
Cost of sales ..................................... 3,160,286 4,083,348 7,514,529 2,317,945 --
------------ ------------ ------------ ------------ ----------
GROSS PROFIT ................................. 6,160,340 5,986,101 12,224,037 2,748,503 --
Advertising expenses .............................. 590,532 803,295 1,383,815 430,703 --
Depreciation and amortization expense ............. 454,908 435,779 869,174 215,811 --
Provision for doubtful accounts receivable ........ 2,342,292 4,500,221 7,709,478 1,953,860
General and administrative expenses ............... 3,061,825 4,046,222 8,283,538 2,517,470 (250)
Impairment loss ................................... 1,088,250 --
Loss on promoter receivable write off ............. 12,123 26,165 44,547 16,354 --
------------ ------------ ------------ ------------ ----------
OPERATING (LOSS) ............................. (301,340) (3,825,581) (6,066,515) (3,473,945) (250)
Interest expense .................................. (165,116) (74,886) (361,461) (70,360) --
------------ ------------ ------------ ------------ ----------
NET LOSS BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM .............................................. (466,456) (3,900,467) (6,427,976) (3,544,305) (250)
Income tax benefit .......................... -- -- 469,326 -- --
------------ ------------ ------------ ------------ ----------
NET LOSS BEFORE EXTRAORDINARY ITEM (466,456) (3,900,467) (5,958,650) (3,544,305) (250)
EXTRAORDINARY ITEM
Extraordinary item, net of income tax of
$469,326 ................................. -- -- 788,921 -- --
------------ ------------ ------------ ------------ ----------
NET LOSS .................................... $ (466,456) $ (3,900,467) (5,169,729) $ (3,544,305) $ (250)
============ ============ ============ ============ ==========
Per share data:
Basic and diluted loss per share before
extraordinary item ................................ $ (0.04) $ (0.39) $ (0.56) $ (0.59)
============ ============ ============ ============
Basic and diluted loss per share .............. $ (0.04) $ (0.39) $ (0.49) $ (0.59)
============ ============ ============ ============
Weighted average number of common shares used in
basic and diluted loss per share calculations ..... 11,499,214 10,033,715 10,560,947 6,140,532
============ ============ ============ ============
Consolidated Statement of Cash Flow
Data:
Net cash provided (used) by operating
Activities...................................... $ 201,397 $ (1,405,498) $ (2,152,261) $ (1,393,336) $ --
============ ============ ============ ============ ==========
Net cash used by investing
Activities...................................... (70,140) $ (225,081) $ (304,657) ($ 180,572) $ --
============ ============ ============ ============ ==========
Net cash provided (used) by financing
Activities...................................... $ (187,368) $ 1,098,642 $ 1,885,175 $ 2,201,762 $ --
============ ============ ============ ============ ==========
Depreciation and amortization...................... $ 454,908 $ 435,779 $ 869,174 $ 215,811 $ --
============ ============ ============ ============ ==========
Capital expenditures............................... $ 11,720 $ 82,287 $ 195,779 $ 111,251 $ --
============ ============ ============ ============ ==========
</TABLE>
21
<PAGE> 26
<TABLE>
<S> <C> <C> <C> <C> <C>
Other data:........................................
EBITDA (1) ........................................ $ 153,568 $ (3,389,802) $ (3,939,094) $ (3,314,634) $ (250)
============ ============ ============ ============ ==========
Deficiency of earnings available to
To cover fixed charges (1)...................... $ (466,456) $ (3,900,467) $ (5,169,729) $ (3,544,305) $ (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>
BALANCE SHEET DATA: JUNE 30, DECEMBER 31,
2000 1999 1999 1998 1997
---- ---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Working capital deficit $ 6,183,283 $$6,510,002 $ 6,666,567 $ 3,919,675 ($250)
Total assets 4,997,025 6,152,241 5,455,750 6,628,989 --
Unit rescission obligation 205,850 554,825 405,552 770,000 --
Rescission obligation interest 208,883 178,377 196,760 152,212 --
Total Stockholders' equity (deficit) ($2,468,410) ($2,168,649) ($2,572,243) 407,077 ($250)
</TABLE>
22
<PAGE> 27
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
The following discussion of the results of operations and liquidity and
capital resources are based on the combined results of operations and liquidity
and capital resources of our predecessor entities since the inception of all
entities. We believe that the combined results present a more accurate
presentation of historical operations since Tel Com West, Tel Com East and Tel
Com Jacksonville effectively operated jointly during 1997 and 1998 prior to our
acquisition of the assets and liabilities of the Tel Com entities.
The following table contains, for the periods indicated, the unaudited
pro forma results of operation as if the acquisition of Tel Com East, Tel Com
Jacksonville and Tel Com West had occurred on January 1, 1997. The unaudited
combined pro forma financial information is not necessarily indicative of the
results of operations that would have been reported had the acquisition of the
assets and liabilities of Tel Com East, Tel Com Jacksonville and Tel Com West
actually been accounted for on the date it occurred, September 30, 1998, nor is
it necessarily indicative of our future results.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------
SIX MONTHS ENDED Period From
JUNE 30, Inception to
-------------------- December 31,
2000 1999 1999(3) 1998 (2) 1997 (1)
---- ---- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Sales ......................................... $ 9,320,626 $ 10,069,449 $ 19,738,566 $ 16,141,912 $ 3,558,018
Cost of sales ................................. 3,160,286 4,083,348 7,514,529 5,754,398 2,098,000
------------ ------------ ------------ ------------ ------------
GROSS PROFIT ............................. 6,160,340 5,986,101 12,224,037 10,387,514 1,460,018
Advertising expenses .......................... 590,532 803,295 1,383,815 2,093,407 1,455,009
Depreciation and amortization expense ......... 454,908 435,779 362,291 166,492 73,546
Provision for doubtful accounts receivable .... 2,342,292 4,500,221 7,709,478 5,246,006 280,916
General and administrative expenses ........... 3,061,825 4,046,222 8,283,538 7,469,571 3,571,100
Impairment loss ............................... -- -- 126,721 200,356
Loss on promoter receivable write off ......... 12,123 26,165 44,547 76,054 1,526,756
------------ ------------ ------------ ------------ ------------
OPERATING (LOSS) ......................... (301,340) (3,825,581) (5,559,632) (4,790,737) (5,647,665)
Interest expense .............................. (165,116) (74,886) (361,461) (184,689) (57,047)
------------ ------------ ------------ ------------ ------------
NET LOSS BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM .......................................... (466,456) (3,900,467) (5,921,093) (4,975,426) (5,704,712)
Income tax benefit ...................... -- -- 469,326 -- --
------------ ------------ ------------ ------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEM ............ (466,456) (3,900,467) (5,451,767) (4,975,426) (5,704,712)
EXTRAORDINARY ITEM
Extraordinary item, net of income tax of
$469,326 ............................. -- -- 788,921 -- --
------------ ------------ ------------ ------------ ------------
NET LOSS ................................ $ (466,456) $ (3,900,467) $(4,662,846) $ (4,975,426) $ (5,704,712)
============ ============ ============ ============ ============
</TABLE>
(1) Reflects the operations of the Company for the period from inception
(November 19, 1997) to December 31, 1997 and the operations of Tel Com East, Tel
Com West and Tel Com Jacksonville for the period from inception to December 31,
1997.
(2) Reflects the operations of the Company for the year ended December 31, 1998
and the operations of Tel Com East, Tel Com West and Tel Com Jacksonville for
the nine months ended September 30, 1998. Also reflects the reduction of the
acquired goodwill and customer base impairment write off of $1,088,250 and the
amortization of goodwill and customer base of $126,721 resulting from the
Company's acquisition of the assets and liabilities of the Tel Com entities.
(3) Reflects the reduction of amortization of goodwill and customer base of
$506,883 resulting from the acquisition of Tel Com East, Tel Com West and Tel
Com Jacksonville.
23
<PAGE> 28
Source of revenue and revenue recognition policy
We generate revenues from activating local telephone service for a
consumer and through monthly billing for the telephone services provided.
Activation revenue, which ranges from $89.95 to $109.95 per customer, is
recognized when telephone services are applied for and payment is received.
Telephone service revenue is recognized monthly at the time when the services
are provided. Customers are billed monthly for telephone services ranging from
$49.95 to $79.95. We record deferred revenue for services which are billed but
not yet earned.
Source of Costs of Revenues
Our costs of revenues result from the purchases of traditional local
telephone service from various local exchange carriers. We pay for this
telephone service in arrears. We obtain telephone service to provide to our
customers through resale agreements entered into with each local exchange
carrier 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 liabilities of
Tel Com East, Tel Com West and Tel Com Jacksonville. The following table
contains, for the periods indicated, pro forma results of operations data as a
percentage of revenues as if the acquisition of Tel Com East, Tel Com
Jacksonville and Tel Com West had occurred on January 1, 1997. Our results of
operations are reported as a single business segment.
<TABLE>
<CAPTION>
Six Months Ended Periods Ended
June 30 December 31
------------------- -----------------------------------
2000 1999 1999 1998 1997
------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales (33.9) (40.6) (38.1) (35.6) (59.0)
------ ------- ------- ------- -------
GROSS PROFIT 66.1 59.4 61.9 64.4 41.0
Advertising expenses (6.3) (8.0) (7.0) (13.0) (40.9)
Depreciation and amortization expense (4.9) (4.3) (1.8) (1.0) (2.1)
Provision for doubtful accounts
Receivables (25.1) (44.7) (39.1) (32.5) (7.9)
General and administrative expenses (32.9) (40.2) (42.0) (46.3) (100.4)
Impairment loss -- -- -- (.8) (5.6)
Loss on promoter receivable
write off (0.1) (0.2) (0.2) (0.5) (42.8)
------ ------- ------- ------- -------
OPERATING (LOSS) (3.2) (38.0) (28.2) (29.7) (158.7)
Interest expense (1.8) (0.7) (1.8) (1.1) (1.6)
Net loss before income taxes and
extraordinary items (5.0) (38.7) (30.0) (30.8) (160.3)
Income tax benefit -- -- 2.4 -- --
Net loss before extraordinary items (5.0) (38.7) (27.6) (30.8) (160.3)
Extraordinary items -- -- 4.0 -- --
NET LOSS (5.0)% (38.7)% (23.6)% (30.8)% (160.3)%
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
Revenues
Our revenues decreased 7% from approximately $10,069,000 for the six
months ended June 30, 1999 to approximately $9,321,000 for the six months ended
June 30, 2000; however, our average revenues per customer (based on the average
number of customers for the six month periods ended June 30, 2000 and 1999)
increased from $71 to $95. The decrease in our total revenues is mainly due to a
reduction of approximately 30% 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 entering states with
higher billing rates. The improvement in our profit margin and doubtful accounts
is primarily the result of our efforts to improve our collections by closely
monitoring customer accounts that were delinquent in payment. If a customer
fails to pay, we first suspend the service and then, after the applicable period
of time has passed according to state regulations, we permanently disconnect the
service. We have increased our emphasis on monitoring 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 allows 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.
24
<PAGE> 29
Cost of Revenues
Our cost of revenues decreased 23% from approximately $4,083,000 for
the six months ended June 30, 1999 to approximately $3,160,000 for the six
months ended June 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 exchange carriers' encrypted bills to audit discrepancies by
developing a software program to read the information provided by the carrier
and create an audit format to reconcile bill 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 which commenced in November 1999 and will continue for a
period of two years. We currently purchase services at a discount which ranges
between 6% and 21%. Based on current carrier billings, we believe this discount
program may result in an annual decrease in costs of revenues of over $900,000.
Our cost of revenues also decreased as a result of the implementation
of an electronic data interface with Ameritech Corporation. This interface
allows us to communicate directly and electronically with Ameritech, which
greatly accelerates order processing, suspensions, and disconnections.
Additionally, it lowers processing fees that Ameritech charges, which can be as
high as $19.00 per manual order.
Advertising
Our advertising cost decreased $212,000 from approximately $803,000 for
the six months ended June 30, 1999 to approximately $591,000 for the six months
ended June 30, 2000. Because less money was available to be spent on advertising
due to our efforts to satisfy our outstanding obligations to local exchange
carriers and to pay non-recurring professional fees, we have focused our
promotional efforts in less expensive markets. In 1999 we shifted a significant
portion of our advertising budget out of expensive markets such as Boston, Los
Angeles and Miami, where we were competing with multiple competitors, to less
expensive markets such as Detroit, Flint and Indianapolis, where there is less
competition and advertising rates are cheaper. As a result, we have been able to
generate a similar amount of business with less cost.
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 $455,000 during the six months ended June
30, 2000 compared to approximately $436,000 for the same period in 1999. The
increase of $19,000 is the result of capital additions, such as computer
equipment and software, during the six month period ended June 30, 2000.
Provision for Doubtful Accounts Receivable
Our provision for doubtful accounts receivable cost decreased
$2,158,000 from approximately $4,500,000 for the six months ended June 30, 1999
to approximately $2,342,000 for the six months ended June 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 problem accounts, thereby, increasing our collection percentage.
This monitoring has resulted in a more timely disconnection of problem accounts,
thus decreasing the provision doubtful accounts.
General and Administrative Expenses
Our general and administrative expenses decreased $984,000 from
approximately $4,046,000 for the six months ended June 30, 1999 to approximately
$3,062,000 for the six months ended June 30, 2000. The change in general and
administrative expenses primarily resulted from the following: (i) a decrease of
$604,000 in wages due to a decrease in the work force and from salary reductions
at the management level; (ii) a decrease of $257,000 in consulting and
management fees due to the termination of a management contract with Captive
Administrators, Inc. in late 1999; (iii) a decrease of $72,000 in agent
commissions (iv) a decrease of $46,000 in office supplies due a smaller work
force and closer monitoring; (v) a decrease of $40,000 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 (vi) a
25
<PAGE> 30
decrease of $58,000 in travel expenses due to less travel to agent locations as
a result of increased automation. These decreases were offset by (i) an increase
of $36,000 in tax penalties on unpaid taxes; (ii) an increase of $27,000 in
phone expenses due to higher rates, higher usage and late fees; (iii) an
increase of $29,000 in director fees not offered in 1999 and; (iv) 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 $14,000 from
June 30, 1999 to June 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, we 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 unitholders, 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 the holders to the promoter of Tel Com Jacksonville, D&B
Holdings. We received only $377,301 of the $995,000 from the promoter. The
remaining $617,699 was established as a promoter receivable. This entire amount
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. As the principal amount of the
rescission obligation decreases as a result of our continued payments on this
amount, the promoter receivable amount for interest on this rescission
obligation also decreases.
Interest Expense
For the six months ended June 30, 2000, interest expense increased
$90,000 from approximately $75,000 for the six months ended June 30, 1999
compared to approximately $165,000 for the six months ended June 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 the two notes he held with the Company in the aggregate amount of
approximately $460,000.
Net Loss
Our net loss for the six months ended June 30, 2000 was approximately
$466,000 as compared to a net loss of approximately $3,900,000 for the six
months ended June 30, 1999. The $3,434,000 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 carriers.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenues
Our revenues increased 22% from approximately $16,142,000 for the year
ended December 31, 1998 to approximately $19,739,000 for the year ended December
31, 1999. The $3,597,000 increase was attributable to an increase in the number
of our subscribers.
Cost of Revenues
Our cost of revenues increased 31% from approximately $5,754,000 for
the year ended December 31, 1998 to approximately $7,515,000 for the year ended
December 31, 1999. The increase of $1,761,000 in costs was due to a flaw in the
billing system that allowed customers to receive services without a bill being
generated, as well as our inability to decipher the local exchange carriers'
encrypted bills to audit discrepancies. We believe we have solved the problems
in the billing system and that all services provided are billed. In June 1999,
we developed a software program to read the information provided by the local
exchange carrier and create an audit format to reconcile bill discrepancies.
Advertising
Our advertising cost decreased $709,000 from approximately $2,093,000
for the year ended December 31, 1998 to approximately $1,384,000 for the year
ended December 31, 1999. Our advertising costs have decreased because we have
focused our promotional efforts in less expensive markets. In 1999 we shifted a
significant portion of our advertising budget out of expensive markets such as
Boston, Los Angeles and Miami, where we were competing with multiple
competitors, to less expensive markets such
26
<PAGE> 31
as Detroit, Flint and Indianapolis where there is less competition and
advertising rates are cheaper. As a result, we have been able to generate a
similar amount of business with less cost.
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 $362,000 during the year ended December
31, 1999 compared to approximately $166,000 for the year ended December 31,
1998. The increase of $196,000 is due to capital expenditures in 1999
contributing to approximately $35,000 of additional depreciation in 1999 and a
full year of amortization of the billing software placed into use in September
1998.
Provision for Doubtful Accounts Receivable
Our provision for doubtful accounts receivable cost increased
approximately $2,463,000 from approximately $5,246,000 for the year ended
December 31, 1998 to approximately $7,709,000 for the year ended December 31,
1999. Traditionally our doubtful accounts range from between 25% to 45% of our
monthly billings. This rate is a high percentage of the billings due to the high
credit risk of our customer. During 1999, we experienced problems in our billing
system tracking capabilities and we were not monitoring problem accounts
closely. These problems were addressed, and we believe corrected, during 1999
and 2000.
General and Administrative Expenses
Our general and administrative expenses increased $814,000 from
approximately $7,470,000 for year ended December 31, 1998 to approximately
$8,284,000 for the year ending December 31, 1999. The increased general and
administrative expenses was attributable to (i) a $1,008,000 increase in wages
from a full year of wages and an increase in the work force during 1999; (ii) a
$306,000 increase in accounting fees to complete the audits of 1997 and 1998
along with an increase of $378,000 in legal fees, both of which are directly
related to the filing of a registration statement; and (iii) an increase of
$377,000 in telephone expenses due to entry into new markets. These increases
were offset by (i) a decrease of $260,000 in license fees as a result of
obtaining most of our licenses from the state public affiliates during 1998 (ii)
a decrease of $149,000 in consulting and management fees due to the termination
of Captive Administrators, Inc.; (iii) a decrease of $152,000 for the one time
charge related to an settlement with MCI regarding a contract dispute in 1999;
(iv) a decrease in office expenses of $85,000; (v) a decrease of $69,000 in
agent commission; (vi) a decrease of $34,000 in rent expense due to nonrenewal
of several leases in 1999; and (vii) a decrease of $37,000 in expenses related
to start-up costs.
Impairment Loss
Our impairment losses decreased $126,721 from $126,721 in 1998 to $0 in
1999. This impairment loss was the non-recurring impairment in 1998 of the
operating licenses resulting from the Easy Phone joint ventures with Tel Com
East, Tel Com West and Tel Com Jacksonville.
Loss on Promoter Receivable Write Off
The loss on promoter receivable decreased by approximately $32,000 from
December 31, 1998 to December 31, 1999 because of the decrease in interest
accrued on the rescission obligation to former unitholders of Tel Com
Jacksonville as a result of continued payment on the unit rescission obligation.
Interest Expense
For the year ended December 31, 1999, interest expense increased
$176,000 to approximately $361,000 for the year ended December 31, 1999 as
compared to approximately $185,000 for the year ended December 31, 1998. The
increase resulted from interest accrual on unpaid taxes and a full year of
interest accrual related to a shareholder note payable.
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 exchange carrier obligations and Easy Phone agreed to release us
from this obligation in
27
<PAGE> 32
exchange for us transferring 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 of
the Company 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 carrier obligations to Easy Phone.
We had assumed these obligations owed to Easy Phone as part of the acquisition
of the predecessor entities, Tel Com East, Tel Com West and Tel Com
Jacksonville, 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
$4,663,000, as compared to a net loss of approximately $4,975,000 for the year
ended December 31, 1998. The $312,000 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
carrier obligation with Easy Phone and a reduction of advertising expenses in
1999 of approximately $709,000. These gains in 1999 were offset by an increase
of approximately $2,463,000 in bad debts, increases in wages of
$1,008,000, and an increase in professional fees of approximately $684,000.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues
Our revenues increased 354% from approximately $3,558,000 for the
period ended December 31, 1997 to approximately $16,142,000 for the year ended
December 31, 1998. The $12,584,000 increase was primarily attributable to
expansion of our operations in Florida and California during the period. The
underlying subscriber base increased from 8,007 in 1997 to 24,718 in 1998 due to
our entering new states in late 1998, such as Arizona, Massachusetts, and New
Jersey, and by increasing our advertising in Florida and California. The
increase in subscribers also resulted from Tel Com Jacksonville starting
operations in January 1997, Tel Com East starting operations in April 1997 and
Tel Com West starting operations in July 1997, resulting in a partial year of
operations in 1997 compared to twelve months in 1998.
Cost of Revenues
Our cost of revenues increased 174% from $2,098,000 for the period
ended December 31, 1997 to approximately $5,754,000 for the year ended
December 31, 1998, primarily due to an increase in subscribers and a full year
of operations for the operating entities.
Advertising
Our advertising cost increased $638,000 from approximately $1,455,000
for the period ended December 31, 1997 to approximately $2,093,000 for the year
ended December 31, 1998, due to entering new markets. Also, Tel Com Jacksonville
began operations in January 1997, Tel Com East began operations in April 1997
and Tel Com West began operations in July 1997, resulting in a partial year of
operations in 1997 compared to twelve months in 1998.
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 expenses of approximately $74,000 during the period ended December
31, 1997 compared to approximately $166,000 for the year ended December 31,
1999. The increase of $92,000 is the result of capital additions after December
31, 1997, such as the development of the billing system software and purchases
of office equipment, including computer hardware.
28
<PAGE> 33
Provision for Doubtful Accounts Receivable
Our provision for doubtful accounts receivable increased $4,965,000 from
approximately $281,000 for the period ended December 31, 1997 to approximately
$5,246,000 for the year ended December 31, 1998. This increase was due to
increases in activity in 1998 and is directly related to the increase in the
subscriber base. In addition, this increase is a result of a full year of
operation in 1998 compared to only a partial year in 1997.
General and Administrative Expenses
Our general and administrative expenses increased $3,899,000 from
approximately $3,571,000 for period ended December 31, 1997 to approximately
$7,470,000 for the year ended December 31, 1998. The increased general and
administrative expenses was attributable to an increase of $1,668,000 in wages
from an increase in the work force. We also had the following increases in
expenses: (i) a $429,000 increase in agent commissions; (ii) a $162,000 increase
in office supplies; (iii) a $148,000 increase in postage; and (iv) a $97,000
increase in travel from increased sales activity. In addition, we had increases
in accounting and legal fees of $168,000. We incurred an increase in rent of
$107,000 due to opening two new centers of operations, an increase in management
fees of $70,000 due to increases in the cost of complying with state utility
compliance requirements and an increase in consulting fees of $742,000 as a
result of additional outside services utilized in 1998 to obtain licenses in
various states as well as the use of contract labor. We had an increase in tax
penalties of $370,000 due to our software system's failure to recognize and
collect taxes. Further, we incurred higher general and administrative expenses
in 1998 due to a full year of operations compared to 1997.
Impairment Loss
Our impairment losses decreased $73,000 from approximately $200,000 in
1997 to approximately $127,000 in 1998. This impairment loss was attributable to
an impairment in 1997 of the goodwill related to the Tel Com Jacksonville's
acquisition of Montebello Finance and the impairment in 1998 of the operating
licenses resulting from the Easy Cellular, Inc. joint venture.
Loss on Promoter Receivable Write Off
The loss on promoter receivable decreased by approximately $1,451,000
from 1997 to 1998. This decrease in loss on promoter receivable was primarily
the result of a large write off in 1997 of the entire amount of the promoter
receivable from D&B Holdings, the promoter of Tel Com Jacksonville, and the
entire amount of the promoter receivable from Prime Equities Group, Inc., the
promoter of Tel Com East and Tel Com West. The promoter receivable from D&B
Holdings was approximately $618,000 and the promoter receivable from Prime
Equities was approximately $840,000. Subsequent to these initial write offs in
1997, we have only written off as uncollectible the interest accrued on our
rescission obligation to the former unitholders of Tel Com Jacksonville.
Interest Expense
For the year ended December 31, 1998, interest expenses was
approximately $185,000 as compared to approximately $57,000 for the period ended
December 31, 1997. The difference is comprised of interest expense from related
party notes payable, a line of credit with Bank of America and an increase in
interest related to unpaid taxes of $107,000.
Net Loss
Our net loss for the year ended December 31, 1998 was approximately
$4,975,000, as compared to a net loss of approximately $5,705,000 for the period
ended December 31, 1997. The $730,000 decrease in our loss was primarily due to
improved profit margins and the 1997 write off of the promoter receivable. This
decrease was offset by additional costs incurred from expansion, mainly in
advertising and general and administrative expenses along with non-recurring
loss on the promoter receivable write off.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have satisfied our cash requirements primarily
from our revenues from operations and from the sale of the Company's common
stock and sales of units of 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 borrowed $150,000 from a
shareholder and periodically drawn upon a $50,000 bank line of credit and
advances from Richard Pollara to fund our growth and working capital
requirements. We have disputed the validity of this promissory note issued by
us to the shareholder in the principal amount of $150,000 in the complaint we
filed against Joseph Cillo, et. al. on September 27, 2000 in the Thirteenth
Judicial Circuit Court of Hillsborough County, Florida. The bank line of credit
has been closed.
29
<PAGE> 34
We had negative cash and cash equivalents totaling approximately
$122,000 and a negative working capital of approximately $6,183,000 at June 30,
2000 compared to cash and cash equivalents of approximately $56,000 and negative
working capital of $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.
Changes in Financial Position
Net cash provided by operating activities was approximately $201,000
for the six months ended June 30, 2000. Net cash used by operating activities
was approximately $1,405,000 for the six months ended June 30, 1999, $2,152,000
for the year ended December 31, 1999, $2,856,000 for the year ended December 31,
1998, and $1,682,000 for the period ended December 31, 1997. The increase in net
cash provided by operating activities for the six month period ended June 30,
2000 as compared to the six month period ended June 30, 1999 resulted primarily
from our decrease in net loss for such period. The decrease of $704,000 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 decrease in
net loss for the year ended December 31, 1999 as compared to December 31, 1998.
The increase of $1,174,000 in net cash used by operating activities for the year
ended December 31, 1998 as compared to the period ended December 31, 1997
primarily resulted from a full year of operations and expansion during 1998 as
compared to only a partial year of operations during 1997.
Net cash used by investing activities was approximately $70,000 for the
six months ended June 30, 2000 as compared to $225,081 for the six months ended
June 30, 1999. This decrease 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
$424,000 for the year ended December 31, 1998. This decrease 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 due to a decrease in the purchase of
software, property and equipment during 1999. Net cash used by investing
activities for the period ended December 31, 1997 was approximately $316,000.
The increase of $108,000 in net cash used by investing activities during 1998 as
compared to the net cash used by investing activities during 1997 primarily
resulted from a full year of operations and expansion during 1998 as compared to
only a partial year of operations during 1997. This increase in net cash used by
investing activities for the year ended December 31, 1998 was offset by cash
used during 1997 to purchase the assets of Montebello Finance, LLC, a
rent-to-own business which was owned in trust by the children of Mr. Pollara.
Net cash used by financing activities was approximately $187,000 for
the six months ended June 30, 2000. Net cash provided by financing activities
was approximately $1,098,000 for the six months ended June 30, 1999. This
decrease in net cash provided by financing activities primarily resulted from
the absence of any proceeds being received from the issuance of capital stock
for cash during the six months ended June 30, 2000 as compared to proceeds of
approximately $1,324,000 from the issuance of our common stock for cash during
the six months ended June 30, 1999. Net cash provided by financing activities
was approximately $1,885,000 for the year ended December 31, 1999 as compared to
$4,132,000 for the year ended December 31, 1998. This decrease of $2,247,000 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 the
occurrence of promissory notes issued to the Company during 1998 in the amount
of approximately $3,753,000 which greatly impacted the net cash provided by
financing activities for the year ended December 31, 1998. The net cash provided
by financing activities for the period ended December 31, 1997 was approximately
$2,040,000. This amount is less than the net cash provided by financing
activities during 1998 because the Company did not have a full year of
operations during 1997.
Assets
The asset portion of the balance sheet provides liquidity primary
through cash and cash equivalents and the collection of accounts receivables.
Our current assets decreased $46,000 for the six months ended June 30, 2000 and
$680,000 for the year ended December 31, 1999 and increased $1,345,000 for the
year ended December 31, 1998.
The material changes to current assets are the results of changes in
the cash and accounts receivable balances. For the six months ended June 30,
2000 the accounts receivable balance, net of the allowance for doubtful
accounts, decreased by approximately $79,000 from December 31, 1999 which
contributed to the largest change in current assets. This decrease is due to a
decrease in the number of subscribers, partially offset by improvements in
collections. 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. For the year ended December 31, 1998, the increase of
approximately $692,0000 in 1998 from 1997 was due to cash received from the sale
of units and increases in accounts receivables resulting from increases in the
subscriber base.
30
<PAGE> 35
We purchased equipment and made leasehold improvements totaling
approximately $12,000 for the six months ended June 30, 2000, $196,000 for the
year ended December 31, 1999 and $320,000 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 six months ended June 30, 2000, $109,000 for
the year ended December 31, 1999 and $401,000 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 provides liquidity through
various borrowings from related parties and a line of credit with Bank of
America, which was closed effective . Our current liabilities decreased
by approximately $530,000 for the six months ended June 30, 2000 and increased
by approximately $2,067,000 for the year ended December 31, 1999 and $3,105,000
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 six
months ended June 30, 2000 the line of credit was cancelled with a payment of
$46,000. In September 1998 we 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 the Company
in the complaint filed by the Company against Joseph Cillo, et al. in the
Thirteenth Judicial Circuit of Hillsburgh County, Florida. Mr. Thacker filed
suit against the Company 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." During 1999, Mr. Pollara and an
employee advanced the Company an aggregate of $80,000 to fund operating cash
shortfalls. The balance at June 30, 2000 was approximately $1,000 and was
$44,000 at December 31, 1999.
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
Cellular and Tel Com East and Tel Com West.
Our accrued local exchange carrier obligations decreased by
approximately $767,000 for the six months ended June 30, 2000 and $341,000 the
year ended December 31, 1999. These decreases are due to efforts made to reduce
the outstanding obligations, costs reductions provided by the local exchange
carriers and reductions in the subscriber base. For the year ended December 31,
1998, our carrier obligations increased by $999,000 due to increases in the
subscriber base and problems in monitoring these costs.
Our accrued sales taxes, penalties and interest increased by
approximately $878,000 for the six months ended June 30, 2000, $1,463,000 for
the year ended December 31, 1999 and $1,418,000 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.
In addition, we repurchased 80 units from former Tel Com Jacksonville
unitholders in a rescission offer for $995,000 plus interest, which is being
paid over time. We made payments of approximately $200,000 during the six months
ended June 30, 2000, $371,000 during the year ended December 31, 1999 and
$218,000 during the year ended December 31, 1998. The remaining rescission
obligation at June 30, 2000 is approximately $206,000.
Shareholders Deficit
Our shareholders deficit has changed through operating losses, the
forgiveness of the Mr. Pollara's notes payable (treated as additional paid-in
capital) during January 2000 and the sale of common stock and units. We have
received cash from the sale of the Company's common stock of $0 during the six
months ended June 30, 2000, approximately $2,190,000 for the year ended
December 31, 1999 and $150,000 for the year ended December 31, 1998. Our
predecessor entities received cash of $6,451,000 from the sale of Tel Com East,
Tel Com Jacksonville and Tel Com West units during 1997 and 1998.
The following table details all sales of common stock and units since
inception:
31
<PAGE> 36
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Description Date Quantity Amount Subject to
Received by the Exchange
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 intend to 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 are 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"
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 securities exchange their
securities 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. Our capital requirements will depend on numerous factors
and include possible expansion, acquisitions of complementary businesses or
technologies and the resources we dedicate to new technologies and new markets.
We may need to raise additional capital to fund the payment of
principal and interest on the notes. If additional funds are raised through the
issuance of equity, 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.
We have the following material commitments and contingent liabilities:
- to our shareholders related to the exchange offering,
- to our former shareholders relating to the Tel Com
Jacksonville rescission offer;
- to Easy Cellular, Inc. related to sales taxes, excise taxes
and related interest and penalties, In August 1999 we reached
a settlement with Easy Phone, Inc. whereby Easy Phone, Inc.
agreed to assume a carrier liability and we agreed to
indemnify Easy Phone from any tax liability. The tax
liabilities of Easy Phone, Inc. had been assumed by us as part
of the business combination between us and our predecessor
entities. Prior to the business combination, Tel Com East, Tel
Com West and Tel Com Jacksonville had operated under Easy
Phone, Inc. operating licenses, resulting in a tax liability
under Easy
32
<PAGE> 37
Phone's name. The indemnified tax liability and accrued
interest and penalties is $1,687,000 at June 30, 2000. We plan
to finance this liability from operations.
- During 2000, a settlement agreement and release for nonpayment
of phone service was reached with MCI Telecommunications Corp.
The Company has reserved $152,000 in respect of this
obligation and we plan to fund this obligation from
operations.
- 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.
33
<PAGE> 38
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 their past due balance in addition to a security
deposit before the carrier will reconnect their service. We focus on those
consumers who have been disconnected by their local service providers 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 exchange carrier within those states. In this
capacity, we are able to purchase telephone service from major local exchange
carriers, 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 August 28, 2000, we had 16,169 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 obtaining licenses from various state public utility
commissions to resell local telephone service. We permitted Tel Com East, Tel
Com West and Tel Com Jacksonville to use these licenses. 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 a
greater degree of operational efficiency by combining administrative,
management, marketing and finance functions of the various companies. In
connection with this consolidation, the holders 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 set forth 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 entities'
unitholders voted on and approved this business combination, no documents of
transfer were executed by the parties to this transaction.
Each of Tel Com East, Tel Com West and Tel Com Jacksonville were formed
during late 1996 and early 1997 by Charles Polley. Tel Com Plus, Inc., a Nevada
corporation controlled by Mr. Polley, served as the initial managing member of
each of these entities. During the initial 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 the business of Easy Phone, Mr. Polley
contacted Easy Phone and inquired about 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. Pursuant to each of the joint
venture agreements, Easy Phone granted the venture 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 and Tel Com West entered into an agency
agreement with Easy Phone, which partially superceded the joint venture
agreements. This 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. On December 31, 1997, Easy Phone exchanged a
portion of Mr. Pollara's shares in Easy Phone for all of its interest in Tel Com
East, Tel Com West and Tel Com Jacksonville. The shares of Easy Phone exchanged
by Mr. Pollard constituted approximately 20% of the issued and outstanding
shares of Easy Phone and were valued at approximately $170,000.
Overview of Capital Raising Activities
During 1997, we believe that units 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,
were distributed to various independent sales organizations, intermediaries and
individuals involved in these
34
<PAGE> 39
offers and sales. The chain of events began with the Tel Com entities entering
into purchase agreements with intermediaries. 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 accounts, these 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 sales and distributions 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 initial 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 a
non-recourse promissory note issued to Tel
Com Jacksonville. The promissory note was
ultimately satisfied.
- Intermediaries: After the date of this purchase
agreement, D&B Holdings sold these
securities at significantly higher prices to
investors in unregistered offerings, without
the assistance of the Company's present
management. To our knowledge, the per unit
price sold to ultimate investors ranged from
$7,500 to $15,000.
- Disbursement of Funds: After the ultimate purchasers transferred
money to Funds Distributors, it 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 exchange carriers.
The chart below summarizes the ownership interests in TelCom
Jacksonville over the relevant period.
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%)
-----------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 40
<TABLE>
<S> <C> <C> <C>
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 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 approximately $3 million in cash.
In return for the contribution of its
licenses and 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 $2,777,909.
Prime Equities paid Tel Com East
$2,246,939 in partial satisfaction of
the note. The $530,970 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, Capital
Funds distributed $2,246,939 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.
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>
36
<PAGE> 41
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 approximately
$16.5 million in cash. Tel Com West actually
contributed only approximately $3 million.
In exchange for its contribution, 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 $4,167,806. Prime Equities paid us
$3,454,002 in partial satisfaction of the
note. The balance of $713,804 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.
37
<PAGE> 42
The chart below summarizes the ownership interests on Tel Com West over the
relevant period:
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 June 30, 2000,
$789,150 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;
- Advertising on a national basis; and
- Developing and introducing new products.
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.
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
589 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 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.
38
<PAGE> 43
Automation
We have invested approximately $400,000 in a proprietary software
system, which is an integrated and automated order processing and collections
system. As of the date of this prospectus, this system is fully functional and
operational. It enables us to handle higher volumes of business without
incremental increases in labor costs. In fact, the number of our employees has
decreased to 89 employees as of July 31, 2000 from approximately 130 as of
December 31, 1999 due in part to this new software system.
Additionally, we are seeking to automate our interactions with the
local telephone service provider. On October 1, 1999, we signed an agreement
with Wisor Telecom to provide an electronic data interface with Ameritech
Corporation, a major local exchange carrier in the Midwest of the United States.
The electronic data system allows us to communicate directly and electronically
with the carriers. This greatly speeds up order processing, suspensions and
disconnections. Additionally it lowers the processing fees that some carriers
charge, which can be as high as $19.00 per manual order.
National Advertising
We plan to begin a national advertising campaign if we become licensed
in enough states to justify the additional expense of national advertising.
Currently, we advertise on a local or regional basis in areas of dominant
influence. The current population base we serve is not large enough to justify
the expense of a national advertising campaign. 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 extremely cost efficient because we will not need to incur
significant additional advertising expense.
New Products
We intend to offer new products to incrementally increase the revenues
we receive from each customer. We have explored relationships with several
wholesale Internet service providers in order to become a direct Internet
service provider for our customer base, as well as other consumers who cannot
obtain Internet service due to their lack of a credit card. We believe that the
demographic base we service will have the largest percentage increase of new
Internet users over the next several years and we want to be positioned to be
their main provider. The demographic base we service has not historically been
able to afford to purchase a personal computer and thus are precluded from
accessing the Internet. We believe that personal computers will become more
available to our customer base because of declining cost and alternative
purchasing methods for personal computers, such as rent-to-own. As a result of
this increase in computer access, we believe that we will be able to provide our
customers with Internet access without requiring a credit card as typical
Internet service providers do.
SERVICE AND SERVICE AREAS
We provide local telephone services to those consumers that are unable
to establish traditional local telephone service with their local exchange
carrier. As a reseller of local telephone services, we purchase service from the
local exchange carrier and simply 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 carriers such as Verizon
Communications and SouthWestern Bell. Rather we simply activate the service with
the existing local exchange carrier. Existing local exchange carrier equipment
and operation support systems are used to provide our customers with local phone
service. However, the local exchange carrier does not have any contact with our
customer. From the local exchange carrier's perspective we are their customer,
not the consumers to whom we resell their services.
As of August 28, 2000, we were licensed as a competitive local exchange
carrier or a reseller in each of the states listed on the following chart. The
chart indicates the carriers within each state with whom we have a resale
agreement and the approximate number of customers, if any, we have within each
state.
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<TABLE>
<CAPTION>
STATE NUMBER OF CARRIER AGREEMENTS
CUSTOMERS
<S> <C> <C>
Alabama 122 Bell South, Verizon
Arizona 38 US West, Verizon
California 3,260 Pacific Bell, Verizon
Connecticut 314 SNET
Delaware 10 Verizon
Florida 2,474 Bell South, Verizon, Sprint
Georgia 0 Bell South
Illinois 3,028 Ameritech, Verizon
Indiana 613 Ameritech, Verizon
Kansas 1 Southwestern Bell, Sprint
Maryland 0 Verizon
Massachusetts 539 Verizon
Michigan 4,638 Ameritech
Missouri 12 South Western Bell
Montana 0 US West
Nevada 24 Nevada Bell, Sprint, Verizon
New Jersey 762 Verizon
New York 220 Verizon, Frontier
North Carolina 0 Bell South, Sprint
Oregon 0 US West, Sprint
Pennsylvania 6 Verizon, Sprint
Rhode Island 28 Verizon
South Carolina 0 Bell South , Sprint
Tennessee 0 Bell South, United Telephone
Washington 0 US West, Verizon, Sprint
Wisconsin 75 Ameritech, Verizon
-------
TOTAL 16,169
-------
</TABLE>
OPERATIONS
Our operations can be divided into the following three areas:
- Initial customer contact/installation payment;
- Activation/line service request; and
- Disconnects.
Initial Customer Contact/Installation Payment.
In order to apply for service, a customer must first pay the
installation fee. The installation 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 installation fee at one of our agent locations, the agent
receives a commission of between $10.00 to $25.00 per installation fee.
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 an 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 installation fee before an application is
completed and a service order is processed with the local exchange carrier. The
installation fee may be paid by any one of the following methods: (1) Western
Union; (2) check draft; (3) home pick-up by Federal Express; or (4) direct
payment to one of our agents. If the customer desires to pay by credit card,
check draft or Federal Express, the 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 the integrated voice
response system directs the customer to an agent located within his or her zip
code area. After paying the installation 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 installation 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 over 589 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
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server in our operations center. We are able to access their activity via our
server and apply the payment activity directly to our customers' accounts. The
agent 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 installation 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 exchange carrier with whom we have a resale agreement. This
information is then transmitted electronically to the carrier who processes the
service request. Once the carrier 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 exchange carriers 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 1 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.
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 summary
of material regulatory developments and legislation offers an overview of the
current material regulatory environment as it applies to us. Other 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 exchange
telephone market. Remaining legal barriers to entry imposed by state or local
law, rule, or regulations may be overruled by the Federal Communications
Commission (FCC). However, the Telecommunications Act maintains the authority of
individual state utility commissions to regulate local exchange and intrastate
interexchange services and to impose, on a competitively-neutral basis,
requirements that are necessary to (1) preserve and advance universal service;
(2) protect the public safety and welfare; (3) ensure the continued quality of
telecommunications service; and (4) safeguard the rights of consumers. This
overview does not purport to identify all state-level obligations owed by us.
The Telecommunications Act attempts to eliminate or minimize economic
and technical barriers to entry in the local exchange telephone market. The
Telecommunications Act set standards that govern the relationship between local
exchange carriers, such as BellSouth, Qwest, Verizon, and resellers or
competitive local exchange carriers, like us. For example, local exchange
carriers 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 exchange carriers generally are discounted 10% to 24% from the retail
rate. The level of the discount varies depending on the local exchange carrier
and the state in which the telecommunications service is provided.
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On July 18, 2000, the United States Court of Appeals for the Eighth Circuit
struck down the FCC's rules interpretation regarding specific aspects of the
method by which the wholesale discounts for resellers are established. The FCC
is expected to seek comments on the effect of the court's decision. However, it
is unclear at this time whether the Court decision will lead to changes in the
wholesale discount paid by resellers to local exchange carriers.
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 ("LNP"), 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 LNP 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 exchange carriers 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.
Finally, new or renegotiated resale agreements negotiated between us and
local exchange carriers must be filed with and approved by the relevant state
public service commission where the services will be provided. If the state
commission does not act upon a filed
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agreement within 90 days of filing, the agreement is deemed to go into effect.
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. There can be no
assurance that such agreements will be approved or that they will be approved in
a timely manner.
RELATIONSHIP WITH LOCAL EXCHANGE CARRIERS
Presently, all of our local phone services in each market are provided
through a single underlying carrier, the local exchange carrier. Although the
relationship between us and each local exchange carrier is governed by a
negotiated resale agreement, we face risks in that the scope and availability of
some of the telephone services are primarily controlled by the local exchange
carrier. 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 exchange carriers 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 exchange carriers are not
required to resell this service. The issue of whether local exchange carriers
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 exchange carriers offer.
Our ability to compete in the local services market is further influenced by
the local exchange carriers' efficient, accurate and fair provision of the
service to us and our customers. Currently, local exchange carriers take
anywhere from five days to two weeks to initiate service for a new reseller
customer. In many instances, additional delays are caused by the local exchange
carrier's improper processing of reseller orders. Further, several local
exchange carriers have disparate disconnection and suspension charges, resulting
in the reseller incurring a more costly charge to suspend service to its end
user customer than that of a similarly-situated local exchange carrier customer.
Recently, some local exchange carriers have begun imposing significant deposit
requirements on resellers, which if imposed on us, could restrict the capital
available to us for other uses. In addition, local exchange carriers in some
states are attempting to impose significant costs on resellers for blocking,
testing, and access to the local exchange carrier's operational support systems,
through which customer orders are placed. Such costs, delays and varying
treatment by the local exchange carrier 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.
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: (1) we do not require a
deposit; (2) we do not perform a credit check; and (3) 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. The humorous advertisements are used four to six months
after we have entered a market and are used to cause potential customers to
remember our name and product. In mature markets, all three types of television
advertisements are rotated throughout the day.
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EMPLOYEES
As of July 31, 2000, we had 89 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 exchange carrier 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. In addition, we face increasing competition from local
exchange carriers, such as Southwestern Bell, who have begun offering local
telephone service to their own customers who have been disconnected for
nonpayment. The local exchange carriers have far more resources than we do, and
will 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 2000. 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 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
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. Despite serving as compliance officer and de facto
legal counsel for the Company, defendant Cillo failed to
disclose that he had voluntarily surrendered his license to
practice law in Florida and was the subject of at least four
separate permanent injunctions entered respectively by
California, Utah and three by the United States Securities and
Exchange Commission (the "SEC") because of complaints charging
him with securities fraud and selling unregistered securities.
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.
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
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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. Pursuant to these letter agreements,
Mr. Polley, his controlled entities and Mr. Kratz agreed to certain obligations
as set forth below in exchange for a release by us for claims we may have
against them. The obligations of these individuals and entities are as follows:
- Return and transfer to us all of our capital stock owned or controlled
by them, 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 their capital
stock of the Company. If we are not able to obtain the consent of the
Securities and Exchange Commission, who brought this injunctive action,
to release these restrictions, Mr. Polley, his controlled entities and
Mr. Kratz have agreed to not vote their capital stock or give any third
party the proxy right or power of attorney to vote this capital stock. -
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 entities were
transferred or where the proceeds are currently located.
Consent Agreement with the State of Florida
This exchange offer is being made as a result of the Stipulation and Consent
Agreement with Final Order dated May 12, 1999 between the State of Florida,
Department of Banking and Finance, Tel Com Plus, Inc., Tel Com East, Tel Com
West, Tel Com Jacksonville and us, as successor in interest to Tel Com East, Tel
Com West and Tel Com Jacksonville. The Department conducted an investigation
into the activities of the parties to the Consent Agreement with respect to
their offering and sale of ownership units 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 ownership units of Tel Com East, Tel Com West and Tel Com
Jacksonville were securities as defined by the Florida statutes;
- the ownership units of 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 ownership units of 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 this Act now and in the future. In addition, the parties to the
Consent Agreement agreed to complete an offer of rescission in accordance with
the Florida Securities and Investor Protection Act 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 because of, among other things,
the inability of our auditors to complete their audit of our financial
statements due to difficulty in locating corporate records. If we did not
deliver audited financials with our rescission offer, the offer would not comply
with applicable securities laws. On December 7, 1999, the State of Florida,
Department of Banking and Finance, 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 entities)
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
have the effect of barring any claims against us by the Florida Department of
Banking and Finance in connection with our default under the Consent Agreement.
Shareholder Derivative Action
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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:
- 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.
- 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.
- 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
46
<PAGE> 51
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.
- 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 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 Tel Com
East and Tel Com West. The complaint alleges violation of Sections 5(a), 5(b)
and 17(a) of the Securities Act of 1933 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. As a successor entity, we may be liable for the actions of Tel Com East
and Tel Com West. Further, 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, no assurances
can be given that an agreeable settlement will be reached. 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 severe civil penalties and other remedies which will have a material
adverse effect on our business and financial position.
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. Travelers Express alleges that we breached this buy-pay utility
agreement by not paying them money owed to them in the amount of approximately
$65,000. We have counterclaimed for unspecified and, as of the date of this
prospectus, undetermined damages arising out of the breach of this agreement. It
is our position that Travelers Express did not establish the number of terminal
paying stations that they were obligated to do under our 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.
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 the Company for
failure to pay principal and interest when due under a promissory note issued to
Mr. Thacker by the Company 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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<PAGE> 52
MANAGEMENT
The name, ages and positions of the directors and officers of the Company at
June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard J. Pollara 45 President, Director
Bill D. Van Aken 47 Vice President, General Manager
Julie Graton 35 Secretary, Marketing Director
Sam Dean 66 Director
Reuben P. Ballis 66 Director
Paul D. Gregory 44 Director
Cleo Carlile 62 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 the
Company's predecessor entities 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 the Company's predecessor entities
from July 1997 until the business combination of the Company and its predecessor
entities. 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 entities) 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 entities) through
unregistered and unlawful sales.
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<PAGE> 53
On December 21, 1999, Quantum Law, Inc. and Intercontinental Brokers, Inc.
entered into an agreement which addressed the composition of the board of
directors, among other issues. Quantum Law, Inc. is a company wholly-owned in
trust by the two minor children of Mr. Pollara and of which Mr. Pollara is
trustee. Intercontinental Brokers, Inc. is a company owned and controlled by
Charles Polley. Prime Equities was a named party in the agreement but did not
execute the agreement. The specific items of the agreement provided as follows:
- The Board of Directors would consists of Reuben Ballis, Paul
Gregory, Aaron Grunfield, Sam Dean and Richard Pollara or his
assigns.
- The I-Nex Consulting Group Agreement would be executed by the proper
parties.
- The lawsuit filed by the Company to enjoin Reuben Ballis, Paul
Gregory and Stephen Henderson would be dismissed.
- Mr. Pollara would cancel the promissory notes issued to him by the
Company in November 1999.
We dismissed the lawsuit to enjoin Reuben Ballis, Paul Gregory and Stephen
Hendersen and Mr. Pollara has cancelled the promissory notes that were issued to
him by the Company. However, we have been advised that the validity and
enforceability of this agreement is questionable.
49
<PAGE> 54
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
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.
CERTAIN TRANSACTIONS
Montebello Finance
In January 1997, Tel Com Plus Jacksonville, LLC purchased the assets of
Montebello Finance, LLC, a rent-to-own business, for $250,000. Montebello
Finance was owned in trust by the children of Richard Pollara. Richard Pollara
had served as 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. exchanged its interest in Tel Com East,
50
<PAGE> 55
Tel Com West and Tel Com Jacksonville for all of Mr. Pollara's shares of Easy
Phone capital stock. 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 the Company, 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 exchange carriers. Easy
Phone alleged that Tel Com East and Tel Com West had failed to make payments to
the local exchange carriers 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;
- 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.
Although our potential tax liability to Easy Phone could reach approximately
$1.4 million, we do not believe that we will incur a material amount of tax
liability to Easy Phone under this settlement agreement.
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 July 31, 2000 by
- each of the Company's 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 capital stock of the Company.
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.
51
<PAGE> 56
<TABLE>
<CAPTION>
Name of Beneficial Owner Number of Shares Percentage Pro Forma (5)
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 20.23% 6.23%
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) 3,026,500 5,760,000 8,786,500 18.32% 5.61%
Charles Polley (4) 1,436,000 3,344,000 4,780,000 9.96% 3.05%
Class B Preferred Shareholders (5) 80%
</TABLE>
* Less than 1% ownership.
(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 is located at 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 and GIRI Holdings. Prime Equities is controlled by Richard
Inzer. To the best of our knowledge, GIRI Holdings is controlled by Richard
Inzer. Mr. Inzer is located at 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 is
located at 8649 North Himes Avenue, Suite 220, Tampa, Florida 33614.
(5) 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 connection with the lawsuit we brought against Joseph Cillo, et.
al. in Hillsbrough County, Florida, we intend to 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 based on these purchase agreements 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,
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%.
52
<PAGE> 57
DESCRIPTION OF INDENTURE AND NOTES
GENERAL
The notes will be issued under the indenture between , as
trustee, and us dated 2000 (the "Indenture"). The statements under this
caption relating to the notes and the Indenture are summaries and are not
intended to be complete. In addition, they are subject to, and are qualified by
the actual provisions of the Indenture. 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 annual equal 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 the applicable federal rate as
determined in accordance with Section 1274(c) of the Internal Revenue Code as of
the date the notes are issued (estimated to be approximately 6.5% to 7.5% per
annum). Interest 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 Commencement of Annual Last Date of Annual
Notes Issued Installment Installment
----------------------------------------------------------------------------------------
<S> <C> <C>
$1,000,000 or less 2003 2005
$1,000,001 - $5,000,000 2003 2006
$5,000,001 - $10,000,000 2003 2008
$10,000,001 - $20,000,000 2003 2010
$20,000,001 - $30,000,000 2003 2015
</TABLE>
The notes are unsecured and are subordinate to the following
obligations (the "Senior Debt"):
- Any obligations to the U.S. Internal Revenue Service or
any state, county or local government for taxes due and
payable;
- Any of our obligations under surety bonds issued in
connection with the licensing requirements of state
public utility commissions or resale agreements entered
into between local exchange carriers and us; and
- Our obligations to the previous unitholders of Tel Com
Jacksonville pursuant to the rescission offer made to
the unitholders in 1998.
The notes are senior to the rights of any holders of our debt, except
for holders of our Senior Debt.
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 (the "Registrar") and to whom the notes
may be presented for payment (the "Paying Agent"). The Registrar will keep a
register of the notes and of their transfer and exchange. On or prior to each
principal and interest payment date, we will deposit with the Paying Agent a sum
sufficient to pay the principal and interest becoming due. The Paying Agent
agrees 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 subordination provisions of the Indenture.
The notes will be transferable only upon surrender of a note for
registration of transfer. The holder may present the note to the Registrar with
a request to register a transfer or to exchange them for an equal principal
amount of notes in other denominations. The Registrar may charge a reasonable
fee for any registration of transfer or exchange.
We may issue some or all of the notes in temporary or permanent global
form. We may issue a global note only to a depository, which may transfer a
global security only to its nominee or to a successor depository. Beneficial
owners of part or all of a global security will be subject to the rules of the
depository as in effect from time to time. We nor the trustee nor the agents
will be
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<PAGE> 58
responsible for any acts or omissions of a depository, for any depository
records of beneficial ownership interest or for any transactions between the
depository and beneficial owners.
COVENANTS
Payment of Notes
We will 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 and of the information, documents and other
reports which we are required to file with the SEC pursuant to Section 13 or
15(d) of the Securities Exchange Act. 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 brief 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 (as defined below);
- Any Senior Debt Payment Default or Senior Debt Default
Notice (as defined below); or
- If and when the notes are listed on any stock exchange.
"Senior Debt Payment Default" means a default in the payment of any
principal of or interest on any Senior Debt. "Senior Debt Default Notice" means
any notice of a default (other than a Senior Debt Payment Default) that permits
the holders of any Senior Debt to declare such Senior 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 or such person or entity
into which we consolidate, merge or transfer all or
substantially all of our assets is a corporation organized
and existing under the laws of the United States, a state
thereof or the District of Columbia;
- 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.
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
54
<PAGE> 59
An event of default (an "Event of Default") 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.
A default (a "Default") is any event which is, or after the notice or
passage of time would be, an Event of Default.
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.
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 pursuant to the
provisions of the Indenture regarding trustee compensation;
- Second, to the holders of the Senior Debt;
- Third, to the holders for amounts due and unpaid on the
notes, without preference or priority of any kind, according
to the amounts due and payable on the notes for principal
and interest; and
55
<PAGE> 60
- 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.
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
.
56
<PAGE> 61
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 June 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. 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 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 the liquidation value of the
shares of Class A preferred stock as and when
declared by our board of directors, prior to and
in preference to any declaration or payment of
any dividend on the common stock.
Liquidation Rights: In the event of a liquidation, dissolution or
winding up of the Company, the holders of the
Class A preferred stock will be entitled to be
paid an amount equal to $0.10 per share. This
amount will be paid out of our assets before any
payment is made with respect to the common
stock, but after the full preferential amount is
made with respect to the Class B preferred
stock. If the assets and funds distributed to
the Class A preferred stock are insufficient to
permit the payment to the holders of their full
preferential amounts, then such assets and funds
will be distributed ratably among the holders of
the then outstanding Class A preferred stock.
The liquidation value of the Class A preferred
stock is subject to appropriate adjustments in
the event that we effect a stock split, stock
combination, stock dividend or other
distribution, merger, share exchange or other
fundamental corporate purpose.
57
<PAGE> 62
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 will 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 will
be entitled to receive dividends ratably at a
per annum rate of 8% of the liquidation value of
the shares of Class B preferred stock as and
when declared by our board of directors, prior
to and in preference to any declaration or
payment of any dividend on the common stock or
Class A preferred stock. The dividend preference
will be noncumulative.
Liquidation Rights: In the event of a liquidation, dissolution or
winding up of the Company, the holders of the
Class B preferred stock will be entitled to be
paid an amount equal to $0.10 per share. This
amount will be paid out of our assets before any
payment is made with respect to the common stock
or Class A preferred stock. If the assets and
funds distributed to the Class B preferred stock
are insufficient to permit the payment to the
holders of their full preferential amounts, then
such assets and funds will be distributed
ratably among the holders of the then
outstanding Class B preferred stock. The
liquidation value of the Class B preferred stock
is subject to appropriate adjustments in the
event that 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 number of shares
of common stock into which shares of Class B
preferred stock may be converted is subject to
appropriate adjustment 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 pursuant to an effective
registration statement under the Securities Act
covering the offering and sale of the common
stock for the account of the Company in which
the gross cash proceeds to the Company are at
least $10,000,000, (2) any transaction or series
of transactions (including, without limitation,
any reorganization, merger or consolidation)
that results in the transfer of 50% or more of
the outstanding voting securities of the Company
or (3) the sale of all or substantially all of
the assets of the Company.
58
<PAGE> 63
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.
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-1 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. Statements contained in this prospectus as to the contents of any
document are not necessarily complete, and, in each instance, reference is made
to the copy of the contract or document filed as an exhibit to 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.
59
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
UNITED STATES TELECOMMUNICATIONS, INC:
<S> <C>
Independent Auditors' Report........................................................... F-2
Balance Sheets as of June 30, 2000 (unaudited), December 31, 1999
and December 31, 1998.............................................................. F-3
Statements of Operations for the for the six months ended June 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' Equity (Deficit) for the six months ended
June 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 six months ended June 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.:
Independent Auditors' Report........................................................... F-23
Balance Sheet as of September 30, 1998 and December 31, 1997........................... F-24
Statements of Operations for the period ending September 30, 1998 and the period
from inception to December 31, 1997................................................ F-25
Statements of Changes in Members' Capital for the period ending September 30, 1998
and the period from inception to December 31, 1997................................. F-26
Statements of Cash Flows for the period ending September 30, 1998 and the period from
inception to December 31, 1997..................................................... F-28
Notes to Financial Statements.......................................................... F-30
</TABLE>
F-1
<PAGE> 65
(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
$5,197,000 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 $2,527,000 at December 31, 1999. 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.
These conditions combined with the exchange offer, which has a maximum
contingent liability associated with it of approximately $30,000,000 plus
interest, as more fully discussed in Note M, 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 1998 to reflect a
change in the treatment of the offer to existing shareholders to exchange common
stock from a rescission offer to an exchange offer, to reflect a change in a
liability and to reflect a correction of an error, as more fully discussed in
Note E.
/s/ Pender Newkirk & Company
----------------------------------------
Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
July 24, 2000
F-2
<PAGE> 66
UNITED STATES TELECOMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 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 $1,160,338, $1,297,474, and $2,638,331
at 2000, 1999, and 1998, respectively 807,797 887,256 1,015,235
Agent receivables, net of allowance for doubtful
accounts of $12,000, $51,260 and $0 at 2000, 1999,
and 1998, respectively 168,141 153,799 132,534
Prepaid expenses and other 75,059 200 1,400
---------- ---------- ----------
TOTAL CURRENT ASSETS 1,050,997 1,097,366 1,777,023
---------- ---------- ----------
Property and equipment, net of accumulated
depreciation of $343,156, $240,289 and $47,732 at
2000, 1999 and 1998, respectively 366,494 457,642 453,530
OTHER ASSETS
Licenses, net of accumulated amortization of
$22,397, $16,577 and $5,108 at 2000, 1999, and
1998, respectively 152,204 158,024 137,633
Software, net of accumulated amortization of
$309,307, $216,528, and $57,353 at 2000, 1999,
and 1998, respectively 268,719 303,074 353,351
Goodwill, net of accumulated amortization of
$332,642, $237,602, and $47,520 at 2000, 1999,
and 1998, respectively 2,518,581 2,613,622 2,803,703
Customer base, net of accumulated amortization of
$554,405, $396,003, and $79,201 at 2000, 1999,
and 1998, respectively 396,003 554,405 871,208
Deposits 194,566 225,316 204,541
Other assets 49,461 46,301 28,000
---------- ---------- ----------
TOTAL OTHER ASSETS 3,579,534 3,900,742 4,398,436
---------- ---------- ----------
TOTAL ASSETS $4,997,025 $5,455,750 $6,628,989
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 67
UNITED STATES TELECOMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(unaudited) 1999 1998
----------- ---- ----
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 420,082 $ 367,643 $ 90,800
Bank overdraft 122,436 -- --
Accrued liabilities 365,897 491,964 432,822
Accrued interest 535,175 488,899
Accrued carrier costs 1,004,480 1,771,365 2,112,027
Accrued sales tax and penalties 4,202,220 3,324,409 1,861,792
Unearned revenue 244,150 256,034 136,105
Notes payable and obligations - related party 156,262 678,886 609,003
Unit rescission obligation-current 183,578 338,252 403,998
Line of credit -- 46,481 50,151
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 7,234,280 7,763,933 5,696,698
----------- ----------- -----------
LONG TERM LIABILITIES
Unit rescission obligation 22,272 67,300 373,002
Rescission accrued interest 208,883 196,760 152,212
----------- ----------- -----------
TOTAL LONG TERM LIABILITIES 231,155 264,060 525,214
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock; $0.10 par value; 200,000,000
shares authorized; 36,461,749 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; 11,499,214; 11,499,214; 9,555,244
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 (9,180,740) (8,714,284) (3,544,555)
----------- ----------- -----------
(2,441,410) (2,545,243) 407,077
Less subscription receivable on common stock (27,000) (27,000) --
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (2,468,410) (2,572,243) 407,077
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,997,025 $ 5,455,750 $ 6,628,989
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 68
UNITED STATES TELECOMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
Six Months Ended Years Ended Inception
June 30, December 31, (November
-------- ------------ 19, 1997) to
2000 1999 December 31,
(unaudited) (unaudited) 1999 1998 1997
----------- ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales $ 9,320,626 $ 10,069,449 $ 19,738,566 $ 5,066,448 $ --
Cost of sales 3,160,286 4,083,348 7,514,529 2,317,945 --
------------ ------------ ------------ ------------ ------------
GROSS PROFIT 6,160,340 5,986,101 12,224,037 2,748,503 --
Advertising expenses 590,532 803,295 1,383,815 430,703 --
Depreciation and amortization expense 454,908 435,779 869,174 215,811 --
Provision for doubtful accounts receivable 2,342,292 4,500,221 7,709,478 1,953,860
General and administrative expenses 3,061,825 4,046,222 8,283,538 2,517,470 (250)
Impairment loss -- -- -- 1,088,250 --
Loss on promoter receivable write off 12,123 26,165 44,547 16,354 --
------------ ------------ ------------ ------------ ------------
OPERATING (LOSS) (301,340) (3,825,581) (6,066,515) (3,473,945) (250)
Interest expense (165,116) (74,886) (361,461) (70,360) --
------------ ------------ ------------ ------------ ------------
NET LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM (466,456) (3,900,467) (6,427,976) (3,544,305) (250)
Income tax benefit -- -- 469,326 -- --
------------ ------------ ------------ ------------ ------------
NET LOSS BEFORE EXTRAORDINARY ITEM (466,456) (3,900,467) (5,958,650) (3,544,305) (250)
EXTRAORDINARY ITEM
Extraordinary item, net of
income tax of $469,326 -- -- 788,921 -- --
------------ ------------ ------------ ------------ ------------
NET LOSS $ (466,456) $ (3,900,467) $ (5,169,729) $ (3,544,305) $ (250)
============ ============ ============ ============ ============
Per share data:
Basic and diluted loss per share
before extraordinary item $ (0.04) $ (0.39) $ (0.56) $ (0.59) $ --
============ ============ ============ ============ ============
Basic and diluted loss per share $ (0.04) $ (0.39) $ (0.49) $ (0.59) $ --
============ ============ ============ ============ ============
Weighted average number of common
shares used in basic and diluted loss
per share calculations 11,499,214 10,033,715 10,560,947 6,140,532 --
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 69
UNITED STATES TELECOMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Six months ended June 30, 2000 (unaudited) and years ended December 31, 1999
and 1998 and period from inception (November 19, 1997) to December 31, 1997
<TABLE>
<CAPTION>
Additional
Preferred 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
Net loss -- -- -- -- (3,544,305) -- (3,544,305)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 36,461,749 1,572,951 9,555,244 2,378,681 (3,544,555) -- 407,077
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 -- -- -- -- (5,169,729) -- (5,169,729)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 36,461,749 1,572,951 11,499,214 4,596,090 (8,714,284) (27,000) (2,572,243)
Forgiveness of stockholder note
payable (unaudited) -- -- -- 570,289 -- 570,289
Net loss (unaudited) -- -- -- -- (466,456) -- (466,456)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 2000
(unaudited) 36,461,749 $ 1,572,951 11,499,214 $ 5,166,379 $(9,180,740) $ (27,000) $(2,468,410)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 70
UNITED STATES TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period
From
Six Months Ended Inception
June 30, Years Ended (November
-------- ----------- 19, 1997) to
2000 1999 December 31, December 31,
(unaudited) (unaudited) 1999 1998 1997
----------- ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (466,456) $(3,900,467) $(5,169,729) $(3,544,305) $ (250)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities
Depreciation and amortization 454,908 435,779 869,174 215,811 --
Loss on promoter receivable 12,123 26,165 44,547 16,354 --
Impairment loss -- -- -- 1,088,250 --
Provision for doubtful accounts receivable 2,342,292 4,500,221 7,709,478 1,953,860 --
Gain from Easy Cellular settlement -- -- (1,258,247) -- --
Changes in operating assets and liabilities:
(Increases) decreases in:
Accounts receivables and agent receivables (2,277,174) (4,599,911) (7,602,766) (2,411,164) --
Deposits and other assets (47,270) (41,984) (37,876) (201,499) --
Licenses -- (28,296) (31,860) (142,741) --
Increases (decreases) in:
Accounts payable 52,437 55,531 276,843 58,355 250
Accrued liabilities (477,069) 63,424 548,047 211,971 --
Accrued carrier costs (766,885) 1,259,069 917,835 721,035 --
Accrued taxes 1,386,374 706,408 1,462,365 504,632 --
Unearned revenues (11,883) 118,563 119,928 136,105
----------- ----------- ----------- ----------- -----------
Total adjustments to reconcile net loss to net
cash provided (used) by operating activities 667,853 2,469,969 3,017,468 2,150,969
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 201,397 (1,405,498) (2,152,261) (1,393,336)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash resulting from the acquisition -- -- -- 296,326 --
purchase of software (58,420) (142,794) (108,878) (365,647) --
Purchases of property and equipment (11,720) (82,287) (195,779) (111,251)
----------- ----------- ----------- ----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (70,140) (225,081) (304,657) (180,572)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 122,436 -- -- -- --
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) (2,172) (3,670) 50,151 --
Net Proceeds from (principal payments on) note (63,621) (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 (199,702) (222,175) (371,448) (120,000) --
Payments received on note receivable -- -- -- 606,228
Proceeds received from issuance of common stock
for cash -- 1,324,489 2,190,410 150,000 --
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (187,368) 1,098,642 1,885,175 2,201,762 --
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH $ (56,111) $ (531,937) $ (571,743) $ 627,854 $ --
----------- ----------- ----------- ----------- -----------
CASH AT BEGINNING OF PERIOD $ 56,111 $ 627,854 $ 627,854 $ -- --
=========== =========== =========== =========== ===========
CASH AT END OF PERIOD $ -- $ 95,917 $ 56,111 $ 627,854 $ --
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 71
UNITED STATES TELECOMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Six Months Ended Years Ended Inception
June 30, December 31, (November 19,
-------- ------------ 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 $ -- $ -- $ -- $1,088,250 $ --
---------- ---------- ---------- ---------- ------------
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 $ 12,123 $ 26,165 $ 44,547 $ 16,354 $ --
---------- ---------- ---------- ---------- ------------
Forgiveness of related party note payable $ 570,289 $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 760 $ 2,334 $ 1,606 $ 315 $ --
---------- ---------- ---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 72
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 a
net loss of $5,169,729 and used $2,152,261 of cash to fund operations during the
year ended December 31, 1999. At December 31, 1999 the Company had negative
working capital of $6,666,567 and negative equity of $2,572,243. 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 an exchange offer with respect to
securities of Tel Com East, Tel Com West, and Tel Com Jacksonville sold in
violation of federal and state securities laws. The Department of Banking and
Finance for the State of Florida notified the Company on December 7, 1999, that
the Company was in violation of the Consent Agreement. Further, the Department
of Banking and Finance indicated that action will be taken against the Company
to enforce compliance with the Consent. The Company has estimated maximum
contingent liability of $30,000,000 plus interest thereon in anticipation of
possible payments related to the exchange offer discussed in note M. This
estimate is based on all eligible shareholders accepting the exchange offer. The
actual amount of the exchange offer will not be known until the offer is closed.
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 $3,682,909 at December 31, 1999 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;
- 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.
F-9
<PAGE> 73
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE B - GOING CONCERN UNCERTAINTY - continued
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 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 exchange offer. However, if a significant number of participants accept the
exchange offer by exchanging for notes, the likelihood of repayment decreases.
The Company has made non-recurring payments of approximately $729,000 in
accounting and legal fees during the period from May 1999 to June 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 six months ended June 30, 2000. This has improved the Company's operating
margin by 30% during the six months ending June 30, 2000 compared to the year
ending December 31, 1999, and has resulted in net cash provided from operations
of $201,397 for the six months ended June 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 there will be cash available to
service the debt 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.
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>
F-10
<PAGE> 74
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Condensed Interim Financial Statements
The condensed financial statements as of June 30, 2000 and for the six months
ended June 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.
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.
F-11
<PAGE> 75
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D - 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 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.
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
$3,667,412 and is being amortized using the straight-line method over 15 years.
Additional goodwill resulted from the acquisition of the customer base amounted
to $1,222,470 and 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 an estimated maximum
contingent liability of approximately $30,000,000 plus interest thereon relating
to the exchange offering. (See Note M). Due to these factors, the Company
recognized an impairment loss of $1,088,250 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 rescission offer. (See Note L). 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.
F-12
<PAGE> 76
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D - 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. 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 $58,420, $142,794, $108,878, $365,647, and $0 for
software costs during the three months ended June 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 $92,779, $78,468, $161,003 $2,500 and $0
for the six months ending June 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.
Activation revenue is recognized when the telephone services are applied for and
payment is received, as there is no ongoing obligation to provide services. The
activation fee is for the initial set-up and installation of a customer's line.
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 June
30, 2000 and 1999 (unaudited) and December 31, 1999, 1998, and 1997, there were
no dilutive instruments outstanding.
F-13
<PAGE> 77
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE D - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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 June 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.
NOTE E - RESTATEMENT
The Company has restated financial information reported for December 31, 1998 to
reflect a change in its treatment of the offer to existing shareholders to
exchange common stock from a rescission offer to an exchange offer (See note M).
In the previously reported financial information the Company recorded a
liability for the maximum amount of the rescission offer as if all shares were
repurchased. The company will treat this offer as an exchange of debt securities
for common and preferred shares of the Company's common stock and will record a
liability at the time the offers to exchange are accepted.
Further, the 1998 financial information has been restated to reflect the
ultimate liability for the MCI litigation. The liability has been increased from
$25,000 to $152,000, based on the settlement. (See Note M).
Finally, the 1998 financial information has been restated to correct an error in
the recording of Tel Com Jacksonville rescission payments. In 1998, $120,000 of
rescission payments was incorrectly expensed.
A summary of the significant effects of the restatement is as follows:
Balance Sheet Data:
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
As previously
reported As restated
-------- -----------
CURRENT LIABILITIES
<S> <C> <C>
Accrued liabilities 305,819 432,822
=========== ==========
Unit rescission obligation-current -- 403,998
=========== ==========
TOTAL CURRENT LIABILITIES 5,165,697 5,696,698
=========== ==========
Unit rescission obligation 30,032,642 373,002
Rescission accrued interest 2,335,095 152,212
----------- ----------
TOTAL LONG TERM LIABILITIES 32,367,737 525,214
=========== ==========
STOCKHOLDERS' EQUITY (DEFICIT)
Accumulated deficit (34,856,077) (3,544,555)
=========== ==========
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (30,904,445) 407,077
=========== ==========
</TABLE>
F-14
<PAGE> 78
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE E - RESTATEMENT -continued
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
As previously
reported As restated
-------- -----------
<S> <C> <C>
General and administrative expenses, including
depreciation and amortization and provision for
doubtful accounts receivable 5,017,832 4,968,335
============= =============
Impairment loss 31,674,670 1,088,250
============= =============
Loss on promoter receivable write off 748,459 16,354
============= =============
OPERATING LOSS (34,841,967) (3,473,945)
============= =============
NET LOSS (34,855,827) (3,544,305)
============= =============
Per share data:
Basic and diluted loss per share $ (5.68) $ (0.59)
============= =============
</TABLE>
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 which were given to
certain holders of units in Tel Com East, Tel Com West and Tel Com Jacksonville.
The total purchase price for the Acquisition was approximately $3,802,000, plus
the assumption of net liabilities of approximately $1,088,000. Approximately
$4,890,000 of the purchase price, has been accounted for as goodwill and
customer base.
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 (4,975,426) (5,704,712)
------------ ------------
Net loss per common share $ (0.54)
============
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 - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 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 388,220 386,862 253,560
Computer equipment 240,752 230,391 168,504
-------- -------- --------
709,650 697,931 501,262
-------- -------- --------
Less accumulated 343,156 240,289 47,732
-------- -------- --------
depreciation
$366,494 $457,642 $453,530
======== ======== ========
</TABLE>
Depreciation expense was $102,867, $92,418, $189,817, $83,982 and $0, for the
six months ending June 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.
F-15
<PAGE> 79
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE H - 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.
Interest expense on the line of credit was $774, $2,334, $3,615, $2 and $0, for
the six months ending June 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 - 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, $19,508, $29,015, $39,015 and
$33,257 for the six months ending June 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.
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 is due no later then September 28, 2000. Interest expense on the note
payable was $7,500, $7,500, $15,000, $333 and $0, for six months ending June 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 our 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 principle and interest on the note when
due. The outstanding principle balance of $150,000 at June 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 $6,262, $26,053 and $0 at June 30, 2000 (unaudited) and December 31,
1999 and 1998, respectively.
During 1999, Mr. Pollara and an employee advanced the Company $80,000 to fund
operating cash shortfalls. The balances at June 30, 2000 (unaudited) and
December 31, 1999 and 1998 were $1,331 and $43,831 and $0 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-16
<PAGE> 80
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE J - STOCKHOLDERS' EQUITY (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 our liquidation, dissolution or winding up, the holders of Class 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 the 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 August 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 for
payment of offering costs 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.
F-17
<PAGE> 81
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE K - 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 $ 518,142 $ 746,368
Non-current deferred tax asset 2,516,459 506,138
Valuation allowance (3,034,601) (1,252,506)
----------- -----------
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 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. 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 $ 1,757,708 $ 1,205,064
Decreased (increase) in income taxes resulting from:
Permanent differences (161,521) (83,220)
State income taxes, net of federal tax effect 188,908 130,662
Income tax effect of extraordinary item 469,326 --
Change in valuation allowance (1,785,095) (1,252,506)
----------- -----------
Total income tax benefit $ 469,326 $ --
=========== ===========
</TABLE>
At December 31, 1999, the Company has a net operating loss carryforward of
approximately $5,320,000, which expires beginning in 2018. The valuation
allowance increased by $1,785,095 during 1999.
NOTE L - RESCISSION OBLIGATION
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. The $995,000
represented 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 $208,883,
$196,760 and $152,212 at June 30, 2000 (unaudited) and December 31, 1999 and
1998, respectively. Accrued interest and the promoter receivable write off was
$12,123, $26,165, $44,547, $16,354 and $0, for six months ending June 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 June 30, 2000 (unaudited), principal repayments due within each of the next
two years are as follows:
<TABLE>
<S> <C>
2001 $ 183,578
2002 22,272
---------
$ 205,850
=========
</TABLE>
F-18
<PAGE> 82
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES
Operating Leases
As of June 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 $ 67,882
2002 39,266
2003 14,973
---------
$ 122,121
=========
</TABLE>
Rent expense was $74,639, $78,957, $186,868, $52,640 and $0, for six months
ending June 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 Mesirow Financial, which employs one
of the Company's Board of Directors. 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 June 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 Banking Administrator, Robin Caldwell. During the first year of
employment, the Company will pay the Banking Administrator $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.
Exchange Offer
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 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 July 24, 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 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 or who actively
participated in the offer and sale of the securities which are the subject of
this exchange.
F-19
<PAGE> 83
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES - continued
The Company has estimated the maximum amount of the exchange offer is
$30,000,000, plus interest. This estimate is based on all eligible shareholders
accepting the exchange offer and electing to receive notes in exchange for their
shares. The actual amount of the exchange offer will not be known until the
offer is closed and the Company will record amounts as liabilities at the time
the exchange offers are accepted. The 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.
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 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, Robin Caldwell and Maurice
Franklin 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. The settlement agreement provides that should the Company
default on any payments, it would be liable for a consent judgement of $213,000.
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.
F-20
<PAGE> 84
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES - continued
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 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.
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-21
<PAGE> 85
UNITED STATES TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE N - 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-22
<PAGE> 86
(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 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
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 offer to existing shareholders to exchange common stock
from a rescission offer to an exchange offer, as more fully discussed in Note D.
/s/ Pender Newkirk & Company
----------------------------
Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
July 24, 2000
F-23
<PAGE> 87
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 472,702 777,000
Unit rescission obligation accrued interest 135,858 76,158
----------- -----------
Total long term liabilities 608,560 853,158
----------- -----------
COMMITMENTS AND CONTINGENCIES
MEMBERS' CAPITAL (1,694,479) (2,632,305)
----------- -----------
TOTAL LIABILITIES AND MEMBERS' CAPITAL $ 2,839,933 $ 960,516
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 88
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 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 59,700 1,526,756
------------ ------------
Loss from operations (2,531,763) (5,647,415)
Interest expense (114,329) (57,047)
------------ ------------
Net loss $ (2,646,092) $ (5,704,462)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 89
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 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
Jacksonville (80) (377,301) (377,301)
Distributions (12,029) (12,029)
Net loss (5,704,462) (5,704,462)
----- ------ --- ----------- ----------- -----------
Balance at December 31, 1997 3,355 13,856 176 $(1,726,922) $(4,359,227) $(2,632,305)
===== ====== === =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 90
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 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>
Balance at December 31, 1997 3,355 13,856 176 (1,726,922) (4,359,227) (2,632,305)
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
Distributions (169,077) (169,077)
Net loss (2,646,092) (2,646,092)
----- ----- --- ------------ ----------- ------------
Balance at September 30, 1998 3,355 13,856 176 $ (1,088,247) $ (606,232) $ (1,694,479)
===== ====== === ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 91
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
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from operations $(2,646,092) $(5,704,462)
----------- -----------
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 59,700 1,526,756
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 1,183,750 7,386,610
----------- -----------
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
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 92
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
TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
SUPPLEMENTAL NON-CASH INVESTING ACTIVITIES:
Promoter receivable for rescission $ 59,700 $1,526,756
============ ==========
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> 93
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 is a reseller of local telephone services to credit challenged
consumers 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.
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.
NOTE B - GOING CONCERN UNCERTAINTY
As indicated in the accompanying financial statements, the Company incurred an
operating loss of $2,646,092 and used $2,869,080 of cash to fund operations
during the period ended September 30, 1998. At September 30, 1998 the Company
had negative working capital of $2,934,658 and negative equity of $1,694,479.
Additionally the Company has entered into a stipulation and consent agreement
with final order dated May 12, 1999 with the State of Florida whereby the
Company agreed to complete a rescission offer with respect to securities of Tel
Com East, Tel Com West, and Tel Com Jacksonville sold in violation of federal
and state securities laws. The Company has made an exchange offer with respect
to securities of the Company and has estimated an approximate maximum contingent
liability of $30,000,000 plus interest thereon in anticipation of payments
related to the exchange offering should all offers be accepted for the Company's
notes.
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 $1,357,161 at September 30, 1998 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.
As indicated above, on September 30, 1998 the Company entered into an agreement
with UST.
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;
- 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.
F-30
<PAGE> 94
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 B - GOING CONCERN UNCERTAINTY - continued
Management of UST believes adequate liquidity of the Company is also based on
the four major steps outlined above. The potential liability of the Company
under the exchange offers is approximately $30,000,000 plus interest. If the
actual amount of liability of this exchange offer exceeds $100,000, then the
amount due plus interest will be paid over time. Management of UST believes
making payments over a period of time in annual installments will ease the
financial burden imposed by the exchange offer. However, if a significant number
of participants accept the exchange offer for the Company's notes, the
likelihood of repayment decreases.
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 - 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
are 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> 95
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 C - 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.
Activation revenue is recognized when the telephone services are applied for and
payment is received, as there is no ongoing obligation to provide services. 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 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> 96
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 C - 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. 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 $35,026 and $10,051 for software costs during
fiscal 1998 and 1997 respectively. During 1998 and 1997 the company recorded
amortization of $7,136 and $2,299, respectively.
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 a 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 D - 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 the offer to existing shareholders to exchange common stock from a
rescission offer to an exchange offer. In the previously reported financial
information the Company recorded a liability for the maximum amount of the
rescission offer as if all shares were repurchased. The Company will treat this
offer as an exchange of debt securities for common and preferred shares of the
Company's common stock and will record the liability at the time the offers to
exchange are accepted.
F-33
<PAGE> 97
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 D - 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>
CURRENT LIABILITIES
Unit rescission
obligation-current -- 424,298 -- 218,000
=========== ========== ========== ==========
TOTAL CURRENT LIABILITIES 3,501,554 3,925,852 2,373,991 2,591,991
=========== ========== ========== ==========
Unit rescission obligation 30,032,642 472,702 6,900,774 777,000
Rescission accrued interest 1,586,636 135,858 366,183 76,158
----------- ---------- ---------- ----------
TOTAL LONG TERM LIABILITIES 31,619,278 608,560 7,266,957 853,158
=========== ========== ========== ==========
MEMBERS' CAPITAL (32,280,899) (1,694,479) (8,828,104) (2,632,305)
=========== ========== ========== ==========
</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 18,830,888 59,700 6,453,979 1,526,756
=========== =========== =========== ==========
Loss from operations (21,383,945) (2,602,763) (10,574,638) (5,647,415)
=========== =========== =========== ==========
Net loss (21,427,274) (2,646,092) (10,631,685) (5,704,462)
=========== =========== =========== ==========
</TABLE>
NOTE E - 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 L). 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 F - ACQUISITIONS
During January 1997 (at the time of inception), Tel Com Jacksonville acquired
the inventory and a carrier contract of Montebello Finance, LLC, in exchange for
cash of $50,000 and a note payable of $200,000. 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 C).
F-34
<PAGE> 98
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 G - 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
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.
NOTE H - NOTE PAYABLE-RELATED PARTY
The Company issued a note payable to Richard Pollara, president of the Company
and significant unitholder 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 Richard Pollara, president of the Company and
a significant shareholder of the Company. 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 K).
The Company has an obligation with Richard Pollara, president of the Company and
a significant shareholder of the Company. 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 K).
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 I - EXCHANGE OFFER, RESCISSION OBLIGATION AND PROMOTER RECEIVABLE
Exchange Offer
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 federal and state securities laws.
Pursuant to the Agreement, UST agreed to make a rescission offer in accordance
with the Florida Securities and Investor Protection Act 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 State of Florida, 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 July 24, 2000, the Department has not commenced litigation against UST;
however, the Department has informed UST that it is retaining all options in
connection with the default, including an action to enforce the Agreement, a
motion to seek receivership of UST, or other remedies.
F-35
<PAGE> 99
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 I - EXCHANGE OFFER, RESCISSION OBLIGATION AND PROMOTER RECEIVABLE
-continued
Exchange Offer - continued
As a part of the exchange 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. These securities of the Company were
offered and sold and were subsequently exchanged for shares of UST common stock
and Class A preferred stock in violation of federal and state securities laws.
In a Stipulation and Consent Agreement with Final Order dated May 12, 1999
between the State of Florida, Department of Banking and Finance, UST and other
parties, UST 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. Accordingly, UST is offering to
certain shareholders the right to exchange these securities for notes or the
Company's Class B preferred stock. UST is not making the exchange offer to
shareholders who were nor are executive officers of the UST or who actively
participated in the offer and sale of the securities which are the subject of
this exchange.
UST has made the exchange offer to all the unitholders of Tel Com East, Tel Com
Jacksonville and Tel Com West who now hold shares of the Company's common stock
and Class A preferred stock.
Rescission Obligation
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. 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 L). 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.
F-36
<PAGE> 100
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 I - EXCHANGE OFFER, RESCISSION OBLIGATION AND PROMOTER RECEIVABLE
-continued
Promoter Receivable - continued
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
Accrued interest 59,700 76,158
Reduction of the receivable due
to imputed interest - (411,875)
------------- ------------
$ 59,700 $ 1,526,756
============= ============
</TABLE>
NOTE J - 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>
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. If
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
our business and financial condition.
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 K - OTHER RELATED PARTY TRANSACTIONS
In January 1997, Tel Com Plus Jacksonville purchased the assets 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 the Founders of Tel Com
Jacksonville.
In January 1997 Tel Com East 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 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).
F-37
<PAGE> 101
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 K - OTHER RELATED PARTY TRANSACTIONS - continued
In December 1997, Easy Phone, Inc. redeemed all of the shares of stock held by
the Company's president and certain other Company shareholders 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.
NOTE L - MEMBERS' CAPITAL
Joint Venture Agreements
On February 28, 1997 Tel Com East issued 1,240 units payable to obtain the use
of operating licenses valued at $50,000 and a $400,000, 8.5% note payable to
provide capitalization of Tel Com East pursuant to a Joint Venture Agreement
with Easy Cellular (See Note H).
On July 24, 1997 Tel Com West issued 8,800 units to obtain the use operating
licenses valued at $50,000 and a 8.5% note payable for 3% of the capitalization
of Tel Com West pursuant to the Joint Venture Agreement with Easy Cellular (See
Note H).
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% 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 membership 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.
F-38
<PAGE> 102
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 L - MEMBERS' CAPITAL - continued
Purchase Agreements - continued
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
$1,539 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 East imputed interest at a rate of 8%.
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 M - 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 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> 103
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
<TABLE>
<S> <C>
SEC Registration Fee $ 8,419
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,
II-1
<PAGE> 104
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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<PAGE> 105
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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<PAGE> 106
(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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<PAGE> 107
(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 Amendment and Restated Articles of
Incorporation of the Corporation
3.2++ Bylaws 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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<PAGE> 108
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.
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 year ended December 31,
1999 (for SEC use only)
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<PAGE> 109
(for SEC use only)
27.2 Financial Data Schedule for the six months ended June 30,
2000 (for SEC use only)
27.3 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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<PAGE> 110
(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.
II-8
<PAGE> 111
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 October 11, 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: October 11, 2000
-----------------
/s/ Richard J. Pollara
---------------------------------------------
Richard J. Pollara, President, Principal
Accounting Officer and Director Date: October 11, 2000
-----------------
/s/ Cleo Carlile
---------------------------------------------
Cleo Carlile, Director Date: October 11, 2000
-----------------
---------------------------------------------
Paul D. Gregory, Director Date:
-----------------
---------------------------------------------
Reuben P. Ballis, Director Date:
-----------------
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