<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR (g) OF THE SECURITIES ACT OF 1934
INTEGRATED COMMUNICATION NETWORKS, INC.
----------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
NEVADA 33-0670130
- ------------------------------------ ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
27061 Aliso Creek Road, Suite 100, Aliso Viejo, CA 92656
- -------------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: 949-349-1770
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.01 Par Value
<PAGE> 2
PART I
FORWARD LOOKING STATEMENTS
This Report on Form 10-SB includes certain statements that are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-SB which address
activities, events or developments that the Company expects or anticipates will
or may occur in the future, including such topics as future issuances of shares,
future capital expenditures (including the amount and nature thereof), expansion
and other developments and technological trends of industry segments in which
the Company is active, business strategy, expansion and growth of the of the
Company's businesses and operations and other such matters are forward-looking
statements. Although the Company believes the expectations expressed in such
forward-looking statements are based on reasonable assumptions, a number of
factors could cause actual results to differ materially from those expressed and
readers are cautioned to not place undue reliance on any forward-looking
statements made by or on behalf of the Company.
The Company's operations are subject to factors outside its control. Any
one, or a combination, of these factors could materially affect the results of
the Company's operations. These factors include but are not limited to: (a)
changes in levels of competition domestically and internationally from current
competitors and potential new competition; (b) the impact from any future loss
of a significant customer; (c) changes in availability or terms of working
capital financing from vendors and lending institutions; and (d) the ability of
the Company to maintain its rights in its intellectual property. The foregoing
should not be construed as an exhaustive list of all factors that could cause
actual results to differ materially from those expressed in forward-looking
statements made by the Company. There can be no assurance that the actual
results or developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on the Company or its businesses or operations. The Company disclaims
any obligation to update or revise these forward-looking statements to reflect
the occurrence of future events or circumstances.
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Integrated Communication Networks, Inc. (the "Company" or "ICN") is a
provider of domestic and international long distance and related
telecommunications services. Through its subsidiary, phoneXchange, Inc., ICN is
actively developing a telecommunications network through acquisitions and
internal growth for the purpose of offering a variety of reliable, high quality,
value added telecommunications services at competitive prices. ICN also plans to
launch call center services that will provide various international multi-
lingual services twenty-four hours a day, seven days a week.
ICN, a Nevada corporation, was originally incorporated as Theatre, Inc.
on January 16, 1997. On April 16, 1998, Theatre, Inc. merged with and into Phone
Time Resources, Inc., a Delaware corporation. Theatre, Inc. was the surviving
entity and began doing business as Global Access Pagers. The purpose of the
merger was to effect a domicile change. On May 8, 1998, Theatre, Inc. merged
with a separate entity named Global
<PAGE> 3
Access Pagers, Inc. Theatre, Inc. was the surviving entity and changed its name
to Global Access Pagers, Inc. On January 27, 1999, the transaction relating to
the merger was rescinded and 3,475,000 issued common shares of the surviving
entity were returned to the Company and cancelled. On February 29, 1999, Global
Access Pagers, Inc. changed its name to Integrated Communication Networks, Inc.
The Company's common stock is currently quoted on the OTC Bulletin Board under
the symbol "ICNW." Prior to April 16, 1999, the Company's common stock was
quoted on the OTC Bulletin Board under the symbol "GAPI."
The Company had no revenues for the period from January 16, 1997 to
February 1999. The Company began material operations on February 28, 1999 when
it purchased 8,600,000 shares or 85.14% of the issued and outstanding shares of
common stock of phoneXchange, Inc., a voice and data services carrier, in
exchange for 921,429 common shares of the Company and warrants to purchase an
additional 921,429 shares of the Company's common stock at an exercise price of
$4.50 per share. The transaction was valued at $6,450,003 and was accounted for
using the purchase method of accounting.
The Company operates its business through two majority owned
subsidiaries, phoneXchange, Inc. ("phoneXchange") and Internet Call Centers,
Inc. ("ICCI"). PhoneXchange is a publicly traded company that offers domestic
and international switched voice and data services on a wholesale basis,
primarily to U.S. based carriers, agents and resellers. PhoneXchange provides
domestic and international long distance service to more than 200 foreign
markets through termination relationships, international gateway switches,
leased and owned transmission facilities, and resale arrangements with other
long distance providers. ICCI was created as a joint venture owned 60% by ICN
and 40% by Global Industry Development & Trade Ltd., a British Virgin Islands
company. The Company currently anticipates that ICCI will commence operations in
December 1999. ICCI expects to offer web-based and toll-free call center
services, allowing its customers to outsource their customer management and
support activities. ICCI anticipates using the Internet, telephone, facsimile,
email and remote video links to provide sales, service and billing operations in
an effort to serve customers quickly, efficiently and cost-effectively.
The Company entered into a Letter of Intent for Joint Venture effective
June 1, 1999 with Global Industry Development & Trade Ltd. ("GIDT"). Pursuant to
the Letter of Intent, the parties created Internet Call Centers Inc., a joint
venture owned 60% by ICN and 40% by GIDT. Pursuant to the terms of the Letter of
Intent, the Company will pay GIDT a monthly retainer of $12,500 during the
development period of the joint venture, beginning July 1, 1999 and lasting a
minimum of six months. Subject to the successful implementation of the joint
venture project, once ICCI is fully operational and generating inbound traffic,
the parties have agreed that ICCI will enter into an employment agreement with
Jonathan Rosenberg to act as President with an annual salary of $350,000 plus 4%
of ICCI's earnings before interest and taxes. It is anticipated that funding for
the joint venture will be provided by an investors group pursuant to the Letter
of Intent for Joint Venture described in the following paragraph.
The Company entered into a Letter of Intent for Joint Venture effective
June 1, 1999 with an Investors Group consisting of the New Industrial Park Ltd.,
GIDT
3
<PAGE> 4
and The Rubin Family Irrevocable Family Trust. Pursuant to the terms of the
joint venture, the Company will build and manage platforms in Germany and the
Philippines and the Investors Group will fund the project relying, in large
part, on German Federal and state grants and loans which it contemplates
seeking. In the event that the indication for funding by the lending German bank
is not received by September 29, 1999, the joint venture will be null and void.
The required indication for funding has not yet been received but the parties
are continuing to pursue the joint venture pursuant to the terms of the Letter
of Intent.
BUSINESS
LONG DISTANCE SERVICES - PHONEXCHANGE, INC.
THE MARKET
General. International telecommunications has become an increasingly
important segment of the telecommunications market. The Company believes that
the following trends will continue to drive growth in the international
telecommunications industry:
- - Deregulation and privatization of international telecommunications
markets
- - Stable or declining international telephone rates
- - Globalization of major carriers through market expansion and mergers,
and transition to a multilateral trading system through joint ventures
and strategic alliances
- - Diversification of services through technological innovation
- - Increased international trade and travel
The evolving deregulation of telecommunications markets throughout the
world has coincided with substantial technological innovation. The proliferation
of digital fiber-optic cable in and between major markets has significantly
increased transmission capacity, speed and flexibility. Improvements in computer
software and processing technology allow for a broad range of enhanced voice and
data services. The Company believes that it will be able to benefit from these
advances without the burden of older, inflexible switching systems owned by many
of the larger and more established telecommunications providers.
Regulatory Environment. Legislation and international agreements that
have been adopted since the beginning of 1996, which are expected to lead to the
liberalization of the majority of the world's telecommunication markets,
include:
- - The U.S. Telecommunications Act signed February 1996, established
parameters for the implementation of full competition in the U.S.
national long distance market
4
<PAGE> 5
- - The European Union Full Competitive Directive, adopted in March 1996,
abolished exclusive rights for the provision of Voice Telephony services
throughout the European Union and public telecommunications operators of
any member country by January 1, 1998
- - The World Trade Organization Agreement, signed February 1997, created a
framework under which over 69 countries committed to liberalize their
telecommunications laws in order to permit increased competition and, in
most cases, foreign ownership in their telecommunications markets,
beginning February 5, 1998
The Company hopes to capitalize on current market opportunities created
by the foregoing initiatives, as well as the reduction of restrictions on the
ability of alternate carriers, such as phoneXchange, to provide
telecommunications services in international markets. In many markets, local
telecommunications operators have charged relatively high, non-competitive
prices to long distance callers in exchange for limited services. The transition
to a multilateral trading system will bring benefits in terms of greater choice
and lower prices. The International Telecommunication Union projects
substantially increased international minutes of use and revenue by the year
2000. These projections are based in part on the current market conditions and
the belief that reduced pricing will result in a substantial increase in the
demand for telecommunications services in most markets.
Target Markets. phoneXchange has initially selected the following target
markets based on market information contained in the August 1998 Federal
Communications Report "Trends in the U.S. International Telecommunications
Industry" (the "Communications Report"), the perceived ease of entry into these
markets and potential consumer demand:
- - Mexico: This represented 12.5% of the international long distance market
in 1996 or 198 million minutes of use per month with an annual growth
rate of 17.6% since 1991. The 1998 forecast of the Mexican market
contained in the Communications Report is 400 million minutes of use per
month or 19% of the international market.
- - South America: This represented 8.3% of the international long distance
market in 1996 or 132 million minutes of use per month with an annual
growth rate of 22% since 1991. The 1998 forecast of the South American
market contained in the Communications Report is 190 million minutes of
use per month or 9% of the international market.
- - Asia, including Hong Kong, the Republic of Korea and the Philippines:
This represented 19.6% of the international long distance market in 1996
or 313 million minutes of use per month with an annual growth rate of
24.5% since 1991. The 1998 forecast of the Asia market contained in the
Communications Report is 467 million minutes of use per month or 22.1%
of the international market.
- Hong Kong: This represented 2.8% of the international long
distance market in 1996 or 45 million minutes of use per month
with an annual growth rate of 41.4% since 1991. The 1998
forecast of the Hong Kong market contained in the
5
<PAGE> 6
Communications Report is 82 million minutes of use per month or
3.9% of the international market.
- Republic of Korea: This represented 2% of the international long
distance market in 1996 or 32 million minutes of use per month
with an annual growth rate of 15.7% since 1991. The 1998
forecast of the Republic of Korea market contained in the
Communications Report is 42 million minutes of use per month or
2.2% of the international market.
- Philippines: This represented 1.8% of the international long
distance market in 1996 or 29 million minutes of use per month
with an annual growth rate of 13.8% since 1991. The 1998
forecast of the Philippines market contained in the
Communications Report is 42 million minutes of use per month or
2% of the international market.
Currently, the Company has entered into contracts to provide 41 million
and 1.5 million minutes per month in the Latin American and Asian-Pacific
markets, respectively.
See "-- Sales" below.
PHONEXCHANGE NETWORK DESCRIPTION
General. phoneXchange has built a flexible and scalable switch-based
network utilizing ATM/IP. ATM/IP is a switch-based transmission standard that is
emerging as the industry's primary technology for mission critical and time
sensitive data, such as voice and video. phoneXchange uses a combination of
leased and owned transmission facilities, various foreign termination
relationships, and resale agreements with other long distance providers. The
backbone of the network is fully redundant and fault tolerant providing no
single point of failure through its switching facilities and points of presence
in Los Angeles, New York, Dallas and Mexico City. phoneXchange provides
carrier-grade quality service and routes traffic to its ultimate destination on
a least cost basis. phoneXchange's network uses products and technologies that
support a variety of standard network user interfaces and will allow for
expansion to meet future growth needs.
phoneXchange's network operations center uses state of the art
technology and network management solutions that allow it to efficiently control
remote switching and transport facilities. The ability to operate remotely
allows technicians to manage the entire network as a single entity. The network
operations center is staffed twenty-four hours per day, seven days per week.
On July 30, 1999, phoneXchange and Lucent Technologies, Inc.
InterNetworking Systems signed a Master Lease Agreement valued at $10 million.
Descriptions of the Master Lease Agreement are qualified in their entirety by
reference to the definitive agreement filed as an exhibit hereto. The agreement
provides phoneXchange with $3 million on execution to finance the lease of
telecommunications equipment from Lucent. An additional $7 million will be made
available for equipment leases once phoneXchange provides either (a)
verification that a minimum of $5 million of new equity is raised by September
30, 1999; or (b) verification that phoneXchange has demonstrated cash flow
coverage of at least 1.25 times lease payments on a rolling three months
average. The Company has not met either requirement. The Company is currently
attempting to negotiate an extension of these requirements and an increase in
the total financing to $25 million. While the amended financing agreement is
expected to be
6
<PAGE> 7
approved and executed prior to December 31, 1999, there is no assurance that any
increase or extension will be approved. If such increase or extension is not
approved, the Company may not be able to maintain its current and projected
growth.
The Lucent AC 120 series Multi-Service ATM and IP Switching equipment.
The Lucent AC 120 series Switching Solution offers multi-voice compression
equipment that consolidates voice, data, video and fax and allows for band-width
optimization. The Lucent AC 120 Solution provides dynamic routing capabilities,
international and multi-vendor signaling compatibility, sophisticated voice
adaptation techniques and cost savings via compression while delivering carrier
grade quality of service. Equipment can be delivered within 30 days from
available stock. Installation, testing and acceptance requires approximately an
additional 14 days.
The Lucent Switching System provides combined packet switching and
international gateway communication functionality in a single integrated
switching platform for North America. The system supports all key national and
international signaling interfaces and is equipped with Lucent NavisCore and
NavisAccess network management systems for developing and deploying the next
generation of enhanced services.
Cronus TSC 100 Trunk Signaling Converter. The Cronus TSC 100 trunk
signaling converter will allow phoneXchange's network to provide connectivity
between incompatible switches or network components. The system provides full
support for both protocol and rate conversion, as well as crossover connection
capability. It allows for user configurable framing and signaling parameters and
diagnostic software. It has support for multi-signaling protocols used in over
60 countries, in addition to the ability to develop custom protocols ensuring
compatibility with the network's evolving requirements.
Switching Facilities and Points of Presence. The deployment of
phoneXchange's network began in Los Angeles to serve the largest carrier and
customer demand. Los Angeles is currently on-line in the form of three NACT
tandem switches combined with the Lucent AC 120 Concentrators. The Dallas
network is also on-line via the Lucent AC 120 Concentrators. The Mexico City
network is currently on-line utilizing the Lucent AC 120 Concentrators and the
Cronus TSC 100 Trunk Signaling Converter. The Company is currently in the
process of expanding this network's capacity and termination relationships to
accommodate customer demand. The New York network is currently on-line utilizing
the Lucent AC 120 Concentrator and the Miami network is expected to go on-line
by March 31, 2000, each with a multi-service ATM/IP switch with connection to
phoneXchange's ATM network. The Company expects to implement points of presence
in Germany and the Philippines by March 31, 2000 through the joint ventures
described in "Business Development" above. To further improve service and
increase capacity, the Company intends to upgrade all of its switching
facilities to Lucent's Soft Switch Signaling Source 7 (SS7) for higher carrier
grade access and more efficient connectivity. There can be no assurance,
however, that the Company will be able to successfully bring the New York or
Miami networks on-line or implement points of presence in Germany or the
Philippines. Failure to successfully launch any or all of these networks or
points of presence could have a material adverse effect on the Company's
business, operating results and financial condition.
7
<PAGE> 8
SERVICES/COMPETITIVE ADVANTAGES
Wholesale Carrier Services. The Company's majority owned subsidiary
phoneXchange, Inc. sells domestic and international long distance service on a
wholesale basis to other facilities based carriers and resellers who seek high
quality service at competitive rates. phoneXchange provides domestic and
international long distance service to over 200 foreign markets through
termination relationships, international gateway switches, leased and owned
transmission facilities, and resale arrangements with other long distance
providers.
Wholesale Prepaid Services. In addition the wholesale carrier services,
phoneXchange provides domestic and international long distance services to
brokers, agents and resellers of prepaid long distance telephone services
including prepaid phone cards.
Customer Support. phoneXchange provides efficient, convenient, and
personalized multilingual customer service available twenty-four hours a day,
seven days a week. phoneXchange uses a state-of-the-art internal software system
that provides real-time access to on-screen call records, complete with
historical detail, to track, resolve, protect and support the individual needs
of its customers. Some areas of higher customer demand include account
histories, prepaid calling card balances, wholesale and retail rate structuring,
activity tracking, resolution of technical problems and billing.
Billing Services. phoneXchange offers billing services that include
timely and accurate invoices, traffic management reports and weekly call detail
records. The management reports and call detail records include information that
customers can use to analyze their markets and profitability by destination and
origination. phoneXchange currently offers a variety of ways for delivery of
management reports, invoices and call records, as well as assistance in
interpreting the data provided.
The management team of phoneXchange uses its real-time reporting system
to determine traffic patterns and switch capacities in order to terminate
traffic cost-effectively. Monitoring customer usage and vendor trunk reports
allows phoneXchange to manage gross margins, provide superior service and
effectively manage pricing. The reporting software compiles call, price, and
cost data into a variety of reports, which both customers and phoneXchange's
management team can use in these operations. All call data, and resulting
billing data, are backed up daily and stored redundantly. The following reports
can be generated as needed:
- - Customer usage: detailing usage by destination, in order to track sales
and respond to any rating or routing variances for a particular customer
or destination.
- - Country usage: detailing number of minutes, average cost and call
lengths.
- - Vendor rate tables: Audited for contractual accuracy and allows
management to determine and establish least cost routing.
- - Vendor usage: Facilitates the auditing and verification of vendor
invoices.
In addition, all call data can be easily transported into third party software
for further analysis.
8
<PAGE> 9
SALES
The Company markets its service through its experienced direct sales
force and account management team who leverage the long-term industry
relationships of the Company's senior management. phoneXchange reaches its
customers primarily through relationships gained through years of experience in
the telecommunications industry, domestic and international trade shows and
industry trade associations. The Company targets second and third-tier providers
of international long distance service who are unable to develop their own
network and who desire to diversify the vendors from which they obtain service
for redundancy and quality purposes.
Customers enter into carrier agreements with phoneXchange whereby they
commit to a minimum amount of minutes of use per month (generally from 1.0
million to 10.0 million minutes) or a minimum dollar requirement per month.
These contracts customarily have a term of one year. Upon execution of the
carrier agreement and prior to service, phoneXchange generally requires either a
cash deposit or letter of credit.
phoneXchange believes it can offer competitive prices by aggregating the
minutes of use from its various termination agreements and through the use of
direct circuits and compression technology, while maintaining margins as the
volume of traffic on its network increases. The savings are expected to be
offset by downward pressure on the Company's wholesale prices to its customers
due to increased competition.
The Company currently has commitments under contract to provide service
to the Latin American market for 41.0 million minutes of use per month with an
average contract commitment of 6.8 million minutes of use per month. The Company
also has non-binding letters of intent to provide service to the Latin American
market for 24.0 million minutes of use per month with an average commitment of
3.4 million minutes of use per month. The Company has non-binding letters of
intent to provide service to the Asian-Pacific market for 3.5 million minutes of
use per month with an average commitment of 875,000 minutes of use per month.
These contracts typically last for an initial term of one year.
The Company's Prepaid platform offers long distance service to customers
who sell prepaid calling cards. The Company currently has commitments under
contract under its Prepaid platform to provide 5.5 million minutes of use per
month to the Latin American market and 1.5 million minutes of use per month to
the Asian-Pacific market.
CALL CENTER SERVICES - INTERNET CALL CENTERS, INC.
THE MARKET
Teleservices, such as call centers, facilitate direct communication
between companies and their current and prospective customers. There are several
forces that drive corporations to outsource call center activities. Large
corporations, which rely heavily on communicating with customers, may be
overwhelmed with the demands on their internal systems. In addition, outsourcing
eliminates a company's exposure to rapidly changing computer telephony
technology and often permits enhanced customer service. ICCI will be targeting
small and medium sized corporations that may not have the resources to implement
call centers.
9
<PAGE> 10
ICCI NETWORK DESCRIPTION
ICCI is a development stage company that anticipates offering a variety
of call center services. The call center is evolving into a customer interaction
center where, in addition to calling, customers can send E-mail, conduct
videoconferences or shop on-line. Until recently, all telephony equipment for
call centers and business phone systems came in proprietary bundles of hardware
and software. To add a feature or function, customers had to wait for the vendor
to develop the feature or add an interface to another company's equipment.
Providing access to databases outside the call center was also complicated. ICCI
will use the network of its sister company, phoneXchange, to transport voice and
data traffic to its call centers. This network meets the requirements of the
Generally Accepted System Security Principles (GASSP) and will incorporate the
most recent technological advances in this business segment.
ICCI intends to build its call centers around each customer's sales and
service needs. ICCI has determined that the system that best meets its needs is
Lucent's Centre Vu(R) Compact Call Center Software Suite and ICCI intends to
negotiate a purchase contract for this software. Building on the performance and
flexibility of Lucent's software, ICCI can select from a powerful assortment of
features and capabilities, specifically designed to enhance call center
operations. These features allow agents to handle both inbound and outbound
calls and include Expected Wait Time and sophisticated routing algorithms
designed to help customers reach the appropriate destination and agent best
qualified to handle their call. Lucent's technology combines Internet commerce
and customer service, allowing ICCI to save network costs and agent time by
offloading basic information requests to the Internet, while allowing customers
easy access to "live" agents when required. CentreVu(R) allows customers to
navigate ICCI's call center using a variety of interactive menus and multimedia
response capabilities and offers bulletin boards, announcements and a variety of
customer-directed routing options to deliver quicker and more effective service.
To get the caller to the best agent at the least cost, Lucent's software
considers a range of variables such as the media the caller is using, the skill
set of the next available agents in all locations, caller location and likely
wait time, and the time and cost of routing the call and then selects the best
call center. The Company believes that its network will allow ICCI to provide
customer service and floor supervisor staff to an overseas multilingual speaking
location at a fraction of the local cost for U.S. based operations. The Company
intends to keep all critical systems, sales, client service support, help desks,
monitoring, billing, computer information systems and business infrastructure in
its domestic headquarters.
SERVICES
ICCI has not yet commenced operations. ICCI expects to provide
international multi-lingual services starting December 1999 through its call
center locations twenty-four hours a day, seven days a week. The services to be
offered include:
Inbound Outbound
Customer Service Help Desk Marketing Research and Surveys
10
<PAGE> 11
Catalog Orders Telemarketing/Telesales
Product Technical Information Direct Sales of Products and Services
New Product Information New Product Introduction
Consumer/Advertising Response Credit Card Applications
Order Processing Full Account Management
Direct Mail Support Lead Generation
Event Registration Trade Show Follow-up
Promotional Product Handling Fundraising
Third Party Verification
ICCI intends to offer both dedicated and overflow services. Dedicated
service will be available to customers who want to use ICCI's call center as its
primary service. Overflow service will be available to customers who want to use
ICCI's services to fill their overflow capacity. The Company views the following
industries as attractive marketing targets: Internet, catalog, computer and data
processing, entertainment, financial services, health care providers,
pharmaceuticals, transportation, subscription and publishing.
By offering both inbound and outbound services, ICCI believes it can
offer customers the opportunity to increase revenues through effective selling,
cross-selling and up-selling on a global scale. The Company has selected
hardware and software applications for implementation in its network that it
believes will enhance the productivity of its customer service representatives.
The Company expects that ICCI's call centers will be able to rapidly respond to
market conditions and coverage as well as provide clients with enhanced market
testing capabilities and account management.
GOVERNMENT REGULATION
As a provider of domestic and international long distance
telecommunications services, the Company is subject to varying degrees of
regulation in each of the jurisdictions in which it operates. As a non-dominant
carrier lacking substantial power to influence market prices in the U.S., the
Company is generally subject to less regulation than a carrier that has such
power. In the U.S., provision of the Company's services is subject to the
provisions of the Communications Act, as amended by the Telecommunications Act
of 1996 and the Federal Communications Commission (the "FCC") regulations
promulgated thereunder, as well as the applicable laws and regulations of the
various states administered by the relevant state authorities. The recent trend
in the U.S., for both federal and state regulation of telecommunications service
providers, has been in the direction of reducing regulation. Nonetheless, the
FCC and relevant state authorities continue to regulate ownership of
transmission facilities, provision of services and the terms and conditions
under which the Company's services are provided. Non-dominant carriers, such as
the Company, are required by federal and state law and regulations to file
tariffs listing the rates, terms and conditions for the services they provide.
The Company is also subject to the FCC policies and rules discussed below.
FCC International Settlements Policy ("ISP"). The ISP governs the
permissible arrangements between U.S. carriers and foreign carriers to exchange
traffic and settle the cost of terminating traffic over each other's networks.
The ISP requires that U.S. carriers receive an equal share of the accounting
rate and receive inbound traffic in proportion to the volume of U.S.
11
<PAGE> 12
outbound traffic which they generate. The ISP is primarily intended to deter
dominant foreign carriers from discriminating against competing U.S. carriers
by, for example, favoring the foreign carrier's U.S. affiliate. The Company may
provide services over international private lines without complying with the
ISP, but only between the United States and countries specifically approved by
the FCC for this activity. See "--FCC International Private Line Resale Policy"
below.
FCC International Private Line Resale Policy. The FCC's international
private line ("IPL") resale policy permits a carrier to connect IPLs to the
public switched telephone network ("PSTN") at one or both ends to provide
switched services, commonly known as International Simple Resale ("ISR"). A
carrier generally may only offer ISR services to a foreign country if the FCC
has determined that (a) the country is a member of the World Trade Organization
("WTO") and at least 50% of the U.S. billed and settled traffic to that country
is settled at or below the FCC's benchmark settlement rate or (b) the country is
not a WTO member, but it offers U.S. carriers equivalent opportunities to engage
in ISR and at least 50% of the U.S. billed and settled traffic is settled at or
below the applicable benchmark. Upon grant of any such ISR application to a
given country, the FCC's rules permit the Company to provide ISR service to that
country. If ISR is not permitted on a route, absent prior FCC consent, U.S.
facilities based international carriers must terminate switched telephone
traffic in accordance with the FCC's ISP.
FCC Policies on Transit and Refile. The Company uses both transit and
refile arrangements to terminate their international traffic. Transit
arrangements occur when traffic originating from one country and terminating in
another is routed through a third country with the consent of all three
countries. The FCC routinely approves transit arrangements by U.S. international
carriers. Refile arrangements occur when the destination country does not
consent to receiving traffic from the originating country and does not realize
that it is receiving traffic from the originating country. The FCC's rules
currently permit carriers in many cases to use ISR facilities to route traffic
via a third country for refile through the PSTN. However, the extent to which
carriers, such as the Company, may enter into refile arrangements consistent
with the ISP is currently under review by the FCC. The Company currently
terminates traffic only with carriers authorized by the ISP or ISR policy.
However, the Company's future plans to expand into other countries may be
affected by any change in FCC policy.
FCC Policies on Use of Pay Phones. A portion of the Company's customers
use pay phones to access services. The Communications Act requires long distance
carriers such as the Company to compensate pay phone owners when a pay phone is
used to originate a telephone call through a toll-free number. Recent
regulations adopted under the Communications Act mandate compensation in the
amount of $0.284 per call, although the basis for this compensation is currently
being reconsidered by the FCC pursuant to a court order. The Company passes
these costs on to its customers who use pay phones. However, there can be no
assurance that the Company will be able to successfully pass these costs on to
its customers or that these charges will not have a material adverse effect on
the Company's business, operating results and financial condition.
Recent and Potential FCC Actions. Regulatory action that may be taken in
the future by the FCC may intensify the competition which the Company faces,
impose additional operating
12
<PAGE> 13
costs, disrupt certain transmission arrangements or otherwise require the
Company to modify its operations. The FCC is encouraging new market entrants by
implementing the WTO Basic Telecommunications Agreement (the "WTO Agreement")
and through other actions. The FCC may approve pending mergers which could
produce more effective competitors in the Company's markets. The FCC may
increase regulatory fees charged to the Company and its competitors by
eliminating the exemption for carrier revenues obtained from other carriers from
certain fees or through other actions, which could raise the Company's costs of
service without assurance that the Company could pass such fee increases through
to its customers. Such increase or other action could have a material adverse
effect on the Company's business, operating results and financial condition.
State Regulation. Intrastate long distance telecommunications operations
of the Company are subject to various state laws and regulations, including
prior certification, notification, registration and/or tariff requirements. The
vast majority of states require that companies apply for certification to
provide intrastate telecommunications services. In most jurisdictions, companies
also must file and obtain prior regulatory approval of tariffs for intrastate
services. Certificates of authority can generally be conditioned, modified or
revoked by state regulatory authorities for failure to comply with state laws
and regulations. Fines and other penalties may also be imposed for such
violations. As of the date of this report, the Company believes it is in
material compliance with all applicable state laws and regulations.
Foreign Regulation. Foreign countries, either independently or jointly
as members of the International Telecommunication Union ("ITU"), or other
supra-national organizations such as the European Union or the WTO, may have
adopted or may adopt laws or regulatory requirements regarding the Company's
services. Compliance with these regulations may be difficult or expensive, and
could force the Company to choose less cost-effective routing alternatives which
could have a material adverse effect on the Company's business, operating
results and financial condition. The Company currently plans to provide a
limited range of services in Mexico and the Philippines, as permitted by
regulatory conditions in those markets, and to expand its operations as these
markets liberalize regulations to permit competition in the full range of
telecommunications services. There can be no assurance that the regulatory
regime in these countries will provide the Company with practical opportunities
to compete in the near future, or at all, or that the Company will be able to
take advantage of any such liberalization in a timely manner or at all.
Regulation of Customers. The Company's customers are also subject to
domestic or foreign regulations that may affect their ability to deliver traffic
to the Company. Future regulatory actions could materially adversely affect the
volume of traffic received from a major customer, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Taxation of Sale and Use of Prepaid Cards. The Company has been required
to and has collected a three percent (3%) federal excise tax on sales of Prepaid
Cards to its distributors. The taxation of the sale and use of Prepaid Cards is
evolving and is not specifically addressed by the laws of many of the states in
which the Company does business. In states that do impose taxes on Prepaid
Cards, the most common method of calculation and payment is predicated on usage
of the Prepaid Card and the revenue generated from the underlying long distance
service that is
13
<PAGE> 14
provided. Other states impose taxes on the face value of the Prepaid Card when
sold to consumers, with collection and remittance made by the retailer at the
point of sale. In the states where the Company does the majority of its
business, taxes on Prepaid Cards are based on their usage. The Company believes
that it has adequate reserves to pay any state taxes it may ultimately be
required to pay.
COMPETITION
The international telecommunications industry is intensely competitive
and subject to rapid change. The Company's competitors in the international
wholesale switched long distance market include large, facilities-based
multinational corporations and smaller facilities-based providers in the U.S.
and overseas, switch-based resellers of international long distance services and
international joint ventures and alliances among such companies. International
wholesale switched service providers compete on the basis of price, customer
service, transmission quality, breadth of service offerings and value-added
services. Additionally, the telecommunications industry is in a period of rapid
technological change, marked by the introduction of competitive product and
service offerings, such as the use of the Internet for international voice and
data communications. The Company is unable to predict which technological
development will challenge their competitive positions or the amount of
expenditures that will be required to respond to a rapidly changing
technological environment. Further, the number of competitors is likely to
increase as a result of the opportunities created by the WTO Agreement concluded
in February 1997. Under the terms of the WTO Agreement, starting February 5,
1998, the United States and over 68 countries have committed to open their
telecommunications markets to competition and foreign ownership and to adopt
measures to protect against anticompetitive behavior. As a result, the Company
believes that competition will continue to increase, placing downward pressure
on prices. Such pressure could adversely affect the Company's gross margins if
they are not able to reduce their costs commensurate with such price reductions.
Competition from Domestic and International Companies. A majority of the
U.S.-based international telecommunications services revenue is currently
generated by MCI WorldCom Corp. ("MCI WorldCom") and Sprint Corporation
("Sprint"), which have agreed to merge, and AT&T Corp. ("AT&T"). The Company
also competes with other U.S.-based and foreign long distance providers,
including regional bell operating companies, which presently have FCC authority
to resell and terminate international telecommunication services. Most of these
competitors have considerably greater financial and other resources and more
extensive domestic and international communications networks than the Company.
Consolidation in the telecommunications industry (including the pending merger
between MCI WorldCom and Sprint) could not only create even larger competitors
with greater financial and other resources, but could also adversely affect the
Company by reducing the number of potential customers for the Company's
services.
Competition in the Prepaid Card Market. The Company competes with other
providers of Prepaid Cards, including AT&T, MCI WorldCom, Sprint and other large
telecommunications providers. These companies are substantially larger and have
greater financial, technical, engineering, personnel and marketing resources,
longer operating histories, greater name recognition and larger customer bases
than the Company. The Company also competes with smaller, emerging carriers in
both the prepaid calling card retail market and in the wholesale
14
<PAGE> 15
market, including IDT Corporation, STAR Telecom, RSL Communications, SmarTalk
Teleservices, Inc., Pacific Gateway Exchange, Inc., FaciliCom International,
Inc. and Telegroup, Inc. The Company believes that additional competitors will
be attracted to the prepaid calling card market (including Internet-based
service providers and other telecommunications companies). Competition from
existing or new competitors or a decrease in the rates charged for
telecommunications services by the major long distance carriers or other
competitors may have a material adverse effect on the Company's business,
operating results and financial condition.
YEAR 2000 COMPUTER PROGRAM FAILURE
A significant percentage of the software that runs most of the computers
in the United States relies on two-digit date codes to perform computations and
decision-making functions. Commencing on January 1, 2000, these computer
programs may fail from an inability to interpret date codes properly,
misinterpreting "00" as the year 1900 rather than 2000. The Company has assessed
its year 2000 readiness and believes its systems are compliant. The Company has
purchased or procured its essential equipment, software, systems, and inventory
within the past 18 months. The Company has sought and received confirmation from
its key third-party suppliers and vendors that the hardware, software, products,
and services furnished by these vendors are year 2000 complaint. These vendors
include the manufacturer of the Company's proprietary computer boards and the
vendors of the servers used in the Company's products, the software publisher of
the software licensed by the Company, and satellite and communications companies
that transmit data on behalf of the Company. In addition, the vendors of the
Company's own internal network, computer, accounting, and other systems have
assured the Company that their products are year 2000 compliant.
The worst case for the Company with respect to year 2000 compliance
would be the general failure of the telecommunications infrastructure in the
United States or any other country where the Company offers services. The
Company relies on the general communications infrastructure maintained by the
established telecommunications companies to transmit its data to its Network
Operations Center uplink site, to uplink to a satellite, and to rebroadcast by
the satellite to the Company's customers. Accordingly, if the telecommunications
companies and satellite operators upon which the Company relies do not have year
2000 compliant systems, one or more components of the telecommunications
infrastructure could fail and the Company would not be able to provide promised
services to its customers. As a result, customers may refuse to pay for the
Company's services and products, resulting in a decline in revenues for the
Company. This could drive up costs, as the Company would seek to mitigate its
problems. In addition, the Company could lose its good will, reputation for
reliability, and some or all of its customer base which would have a material
adverse effect on the Company's business, operating results and financial
condition.
Total costs incurred in connection with the Company's year 2000
compliance efforts have not been material and the Company expects minimal
additional costs to assure year 2000 readiness. The Company will conduct ongoing
testing of new features, components, and systems as they are added to the
Company's products.
The Company has only generalized contingency plans for year 2000
failures. In general, the Company expects that any year 2000 problems will occur
in the telecommunications
15
<PAGE> 16
infrastructure. If such problems occur which interrupt the Company's services to
its customers, the Company intends to immediately seek to obtain such services
from telecommunications companies that are able to continue offering services.
Since the Company cannot know which companies will have year 2000 services
interruptions, the Company has not made specific plans for alternate service
providers at this time.
RISK FACTORS
Our Current Business Plan Relies on Joint Ventures that may not be
Successful. The Company has entered into a joint venture to build and manage
platforms in Germany and the Philippines. The joint venture is dependent on
funding to be raised, in large part, through German Federal and state grants
and loans. There can be no guarantee that the joint venture will receive the
funding that it requires or that, if the funding is received, it will be
successful in building platforms in either Germany or the Philippines. Failure
of the Company to build these platforms could have a material adverse effect on
the Company's business operating results and financial condition.
The Company has also entered into a joint venture to create and operate
its subsidiary, ICCI. The success of ICCI depends on the successful launch of
the platforms in Germany and the Philippines and the successful implementation
of an untested business plan. There can be no guarantee that the German and
Philippines platforms will be successfully launched or that, if successfully
launched, ICCI will be successful at generating inbound traffic. Any failure to
receive required funding for this joint venture could have a material adverse
effect on the Company's business, operating results and financial condition.
Risks of Network Failure; Dependence on Facilities and Third Parties.
Any system or network failure that causes interruptions in the Company's
operations could have a material adverse effect on its business, operating
results and financial condition. The Company's operations are dependent on its
ability to successfully expand its network and integrate new and emerging
technologies and equipment into its network, which are likely to increase the
risk of system failure and to cause strain upon the networks. The Company's
operations also are dependent on the Company's ability to protect its hardware
and other equipment from damage from natural disasters such as fires, floods,
hurricanes and earthquakes, other catastrophic events such as civil unrest,
terrorism and war and other sources of power loss and telecommunications
failures. Although the Company has taken a number of steps to prevent its
switching facilities and points of presence from being affected by natural
disasters, fire and the like, such as building redundant systems for power
supply to the switching equipment, there can be no assurance that any such
systems will prevent the Company's switches and Debit Card Platforms from
becoming disabled in the event of an earthquake, power outage or otherwise. The
failure of the Company's network, or a significant decrease in telephone traffic
resulting from effects of a natural or man-made disaster, could have a material
adverse effect on the Company's relationships with their customers and on its
business, operating results and financial condition.
The Company uses information systems and software to provide information
to management, deliver services to its customers, track inventory, control fraud
and monitor system usage. Although the Company engages in extensive testing of
its software prior to introduction, there can be no assurance that errors will
not be found in such information systems or software. Any such error may result
in an interruption in telecommunications services or a partial or total failure
of the Company's network or information systems, each of which could have a
material adverse effect on the Company's business, operating results and
financial condition.
Need for Additional Capital to Finance Growth and Capital Requirements.
The Company believes that it must continue to enhance and expand its network and
build out its telecommunications network infrastructure in order to maintain its
competitive position and continue to meet the increasing demands for service
quality, capacity and competitive pricing. The Company's ability to grow
depends, in part, on its ability to expand its operations through the ownership
and leasing of network capacity, which requires significant capital
expenditures, that are often incurred prior to the Company's receipt of the
related revenue.
The Company believes that, based upon its present business plan,
together with its existing cash resources, the Company will not have sufficient
cash to meet its currently anticipated working capital and capital expenditure
requirements for the next 12 months. Accordingly, the Company will need to raise
additional capital from equity or debt sources for capital expenditures for
expansion. Any debt financing will require the Company to pay interest, which
will affect the Company's results of
16
<PAGE> 17
operations. Any equity financing may cause substantial dilution to existing
shareholders. There can be no assurance that the Company will be able to raise
such capital on favorable terms or at all. If the Company is unable to obtain
such additional capital, the Company may be required to reduce the scope of its
anticipated expansion or curtail its operations, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence on Key Personnel. The Company's success depends to a
significant degree upon the efforts of senior management personnel and a group
of employees with longstanding industry relationships and technical knowledge of
the Company's operations. The Company does not maintain key man life insurance
with respect to any of its executive officers. The Company believes that its
future success will depend in large part upon its continuing ability to attract
and retain highly skilled personnel. Competition for qualified, high-level
telecommunications personnel is intense and there can be no assurance that the
Company will be successful in attracting and retaining such personnel. The loss
of the services of one or more of the Company's key individuals, or the failure
to attract and retain other key personnel, could materially adversely affect the
Company's respective business, operating results and financial condition.
Dependence on a Few Major Customers. While the list of the Company's
most significant customers varies from quarter to quarter, the Company's five
largest customers accounted for approximately 100% of its revenues to date. The
Company could lose a significant customer for many reasons, including the
entrance into the market of significant new competitors with lower rates than
the Company, downward pressure on the overall costs of transmitting
international calls, transmission quality problems, changes in U.S. or foreign
regulations or unexpected increases in the Company's cost structure as a result
of expenses related to installing a global network or otherwise. The loss of any
significant customer could have a material adverse effect on the Company's
business, operating results and financial condition.
Risk of Investment Company Status. The shares of phoneXchange common
stock owned by the Company may be considered "investment securities" under the
Investment Company Act of 1940. Generally, any company that owns investment
securities with a value exceeding 40% of its total assets (excluding cash items
and government securities) is an "investment company" subject to registration
under, and compliance with, the 1940 Act unless a particular exemption or safe
harbor applies. Section 3(b)(1) of the Investment Company Act provides an
exemption for any company that is primarily engaged in a business or businesses
other than that of investing, re-investing, owning, holding or trading in
securities. In addition, Rule 3a-2 under the 1940 Act, provides that
notwithstanding a company's ownership of investment securities with a value in
excess of 40% of its total assets, such a company will not be deemed an
investment company for a one-year period, provided that such company has a bona
fide intent to be primarily engaged in a business other than that of investing
or trading in securities and such intent is evidenced by (i) the company's
business activities and (ii) a resolution of its Board of Directors.
If we fail to comply with the requirements for exemption under the
Investment Company Act or are for any other reason deemed an investment company,
we would be in violation of the 1940 Act and we would be prohibited from
engaging in business or selling our securities and could be subject to civil and
criminal actions for doing so. In addition, our contracts would be voidable and
a court could appoint a receiver to take control of us and liquidate our
business. Therefore, our failure to
17
<PAGE> 18
comply with such exemption and our classification as an investment company for
this or any other reason would harm our business, operating results and
financial condition.
Our Securities May Be Deemed Penny Stocks Subject to Additional
Requirements to Trading. If the trading price of the Company's common stock in
the future is below $5.00 per share, the common stock will be considered to be
a "penny stock" that is subject to rules promulgated by the Securities and
Exchange Commission (Rule 15g-1 through 15g-9) under the Securities Exchange
Act of 1934. These rules impose significant requirements on brokers under these
circumstances, including: (a) delivering to customers the Commission's
standardized risk disclosure document; (b) providing to customers current bid
and offers; (c) disclosing to customers the brokers-dealer and sales
representatives compensation; and (d) providing to customers monthly account
statements.
TRADEMARKS
The Company, through its subsidiary phoneXchange, submitted
trademark/service mark applications to the United States Department of Commerce
(Patent and Trademark Office), to obtain trademark/service mark rights to
certain names associated with its goods and services. The Trademark Office has
notified the Company that a prior application is on file that conflicts with the
Company's request. The Company has been advised to wait until the prior
application is cleared or dropped. There is no assurance that the Company will
obtain such trademarks or servicemarks. The failure of the Company to obtain
such trademarks or servicemarks could have a material adverse effect on the
Company's business, operating results and financial condition.
EMPLOYEES
The Company presently has 23 full-time employees, including four
management executives, seven administrative staff, and various personnel for its
operations. None of its employees are represented by a labor union. The Company
has not experienced any work stoppages and believes that its relations with its
employees are good.
REPORTS TO SECURITY HOLDERS
Because of new eligibility requirements for quotation on the OTC
Bulletin Board, the Company is obligated to become a reporting company in order
to maintain its listing. In addition, the Company is required to register the
securities under Section 12(g) of the Securities Exchange Act of 1934, as
amended, no later than April 29, 2000. As a result of filing this registration
statement, the Company will be obligated to file with the Securities and
Exchange Commission (the "SEC") certain interim and periodic reports including
an annual report containing audited financial statements. The Company intends to
continue to voluntarily file these periodic reports under the Exchange Act even
if its obligation to file such reports is suspended under applicable provisions
of the Exchange Act. The public may read and copy any materials the Company
files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.
W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at (800) SEC-0330. The public
may also obtain such materials at the SEC's website at www.sec.gov.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
The Company is currently engaged in the integration of various
telecommunication networks through acquisition and internal growth for the
purpose of offering a variety of reliable, high-quality, value-added
telecommunication services at competitive prices. From the Company's inception
on January 16, 1997 through December 31, 1998, the Company had no revenues. See
"Description of Business -- Business Development."
18
<PAGE> 19
The Company began operations in February 1999, through the Company's
acquisition of phoneXchange, Inc. Management has dedicated its efforts to date
on the development and implementation of its business plan and the formation and
financing of the Company. The Company has been formed to integrate state of the
art flexible telecommunication networks that provide reliable, high-quality,
low-cost telecommunication services.
PLAN OF OPERATIONS
Because of the continuing development of its plan of operations, the
Company expects that it will incur a loss during its fiscal year ending December
31, 1999.
The Company believes that additional equity capital will be required to
accomplish its plan of operations during the next 12 months. As a result, the
Company intends to offer and sell its common stock in exempt offerings under
federal and state securities laws to further capitalize the Company, and may
also borrow from banks and other financial institutions to the extent necessary
to provide liquidity for its operations, although no present arrangements for
any borrowings have been made.
The Company has increased its development activities and the associated
costs consistent with its plan of operations in order to develop its products
and services for proposed operations. However, the Company also expects to
continue the development of its products and services to incorporate technical
changes and improvements in the future. In addition, as the Company establishes
its marketing activities, the Company will incur additional operating and
equipment costs. The Company believes that the net proceeds of its securities
offerings during fiscal 1999 will be sufficient to meet its liquidity
requirements. See "Risk Factors -- Need for Additional Capital to Finance Growth
and Capital Requirements."
The Company's plan of operations provides for an expansion of its
marketing activities, and continued research and development regarding its
products and services. The scope of this expansion is dependent upon the amount
of additional capitalization to be realized by the Company in its future
securities offerings, the amount of credit lines that may become available to
finance such activities, and its ability to enter into agreements with
sublicensees, joint venture partners and others. To the extent that the
operations of the Company substantially increase, it will be necessary to make
significant changes in the number of additional employees of the Company.
ITEM 3. DESCRIPTION OF PROPERTY
The Company leases its principle office at 27061 Aliso Creek Road, Suite
100, Aliso Viejo, California 92656. The lease agreement is for a five (5) year
term which expires June 30, 2004 and covers approximately 8,642 square feet. The
currently monthly lease rate is approximately $11,926 which increases annually
at the rate of 4%.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
19
<PAGE> 20
The following table sets forth certain information concerning the
beneficial ownership of the Company's common stock by (i) each person who is
currently a director, (ii) each executive officer of the Company, (iii) all
current directors and officers as a group and (iv) each person known to the
Company to be a beneficial owner of five percent (5%) or more of its outstanding
common stock as of December 1, 1999. Except as otherwise noted, it is believed
by the Company that all persons have full voting and investment power with
respect to the shares indicated. The table below does not give effect to (i)
common stock issuable upon conversion of 7,315,061 warrants to purchase common
stock, none of which is exercisable within the 60 days following December 1,
1999, (ii) options to purchase 100,000 shares of common stock, none of which are
exercisable within the 60 days following December 1, 1999, or (iii) common
stock issuable upon conversion of 3,167,974 shares of preferred stock (see
"Description of Securities -- Preferred Stock") none of which is convertible
within the 60 days following December 1, 1999.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK BENEFICIALLY OWNED
----------------------------------------------
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF SHARES OWNED
- ---------------- ---------------- -----------------------
<S> <C> <C>
Corporate Financial Enterprises, Inc. 1,000,000 17.0%
2224 Main Street
Santa Monica, CA 90405
David J. Chadwick 975,000(1) 15.3%
27061 Aliso Creek Road
Suite 100
Aliso Viejo, CA 92656
Gary L. Killoran 363,036(2) 5.9%
27061 Aliso Creek Road
Suite 100
Aliso Viejo, CA 92656
James E. Rott 363,036(2) 5.9%
27061 Aliso Creek Road
Suite 100
Aliso Viejo, CA 92656
Paul E. Hyde 126,786 2.2%
3882 South Perkins
Memphis, TN 38118
Thomas C. Scott 0(3) 0%
27061 Aliso Creek Road
Suite 100
Aliso Viejo, CA 92656
Albert R. Kashani 5,000 0.1%
269 South Beverly Drive
PMB 185
Beverly Hills, CA 90212
Joseph Vaughn-Perling 5,000 0.1%
Infonet Services Corporation
2100 E. Grand Avenue
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK BENEFICIALLY OWNED
----------------------------------------------
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF SHARES OWNED
- ---------------- ---------------- -----------------------
<S> <C> <C>
El Segundo, CA 90245
J&W Ventures 441,600(4) 7.5%
16248 Gulf Blvd.
Reddington, FL 33709
Officers and directors as a 1,837,858 26.9%
group (6 persons)
</TABLE>
(1) Includes beneficial ownership of 487,500 shares of common stock
which may be acquired pursuant to options exercisable at or within 60 days after
December 1, 1999.
(2) Includes beneficial ownership of 236,250 shares of common stock
which may be acquired pursuant to options exercisable at or within 60 days after
December 1, 1999.
(3) Does not include an option to purchase 100,000 shares which is
not exercisable within 60 days after November 19, 1999.
(4) J&W Ventures claims beneficial ownership to these shares
pursuant to the terms of an Asset Purchase Agreement entered into with the
Company. The shares were issued but the Company has issued a stop transfer order
and is currently suing to rescind the agreement and cancel the shares. See
"Legal Proceedings" below.
The following table sets forth certain information concerning the
beneficial ownership of the Company's Series A-1 preferred stock by each person
known to the Company to be a beneficial owner of five percent (5%) or more of
its outstanding Series A-1 preferred stock as of December 1, 1999. No shares
of the Series A-1 preferred stock are owned by any directors or executive
officers of the Company. Except as otherwise noted, it is believed by the
Company that all persons have full voting and investment power with respect to
the shares indicated.
<TABLE>
<CAPTION>
SHARES OF SERIES A-1 PREFERRED STOCK BENEFICIALLY OWNED
-------------------------------------------------------
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF SHARES OWNED
- ---------------- ---------------- -----------------------
<S> <C> <C>
Corporate Financial(1) 1,370,590 45%
Enterprises, Inc.
2224 Main Street
Santa Monica, CA 90405
American Equities, LLC(2) 326,797 10%
15th Floor
1999 Avenue of the Stars
Los Angeles, CA 90067
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
SHARES OF SERIES A-1 PREFERRED STOCK BENEFICIALLY OWNED
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF SHARES OWNED
- ---------------- ---------------- -----------------------
<S> <C> <C>
Jamie Mazur 490,196 15%
Emily Mazur 326,797 10%
Jennifer Mazur 326,797 10%
Trent Mazur 326,797 10%
</TABLE>
(1) Corporate Financial Enterprises, Inc. is a private investment banking
and consulting firm owned by Mr. Regis Possino.
(2) American Equities, LLC is a private investment banking and consulting
firm owned by Mr. and Mrs. Reid Breitman.
(3) Jamie, Jennifer, Emily and Trent Mazur are siblings. Emily and Trent
Mazur are minors, and their shares are held by their mother, Michele
Mazur, as guardian.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table sets forth certain information regarding the
executive officers and directors of the Company. All officers serve at the
pleasure of the Board of Directors. Directors serve until the next annual
meeting of stockholders and until the election and qualification of their
successors. See "Description of Securities -- Preferred Stock."
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David J. Chadwick 40 President and Chief Executive Officer
and Chairman
Gary L. Killoran 34 Secretary, Treasurer, Chief Financial
Officer and Director
James E. Rott 56 Chief Operations Officer
Paul E. Hyde 40 Vice President and Director
Thomas C. Scott 52 Vice President of Sales and Marketing
Albert R. Kashani 29 Director
Joseph Vaughn-Perling 32 Director
</TABLE>
22
<PAGE> 23
There are no family relationships among the directors and officers
indicated above.
David J. Chadwick joined the Company as President and CEO and a member
of the Board of Directors on February 8, 1999. Since April 7, 1998, Mr. Chadwick
has also been President and CEO of phoneXchange, Inc. From 1997 to present, Mr.
Chadwick has been President and CEO of C/Net: Solutions, Inc. From 1994 to 1996,
he was co-founder, Vice President and Secretary of Chadmoore Wireless Group,
Inc., a publicly traded company. Corporate responsibilities included mergers and
acquisitions, procurement and consolidation of FCC licensed spectrum and
oversight of FCC regulatory requirements and SEC reporting. From 1993 to 1994,
Mr. Chadwick was Vice President of Engineering for American Digital
Communications, also a publicly traded company. Operational duties included path
engineering, frequency coordinating, FCC regulatory filings, network property
procurement, overseeing contract personnel and supervision of technicians. He
was involved from 1990 to 1993 in the engineering and implementation of analog
and digital microwave radio, multi-pair cable, coaxial cable and fiber optic
transmission media for Contel Cellular, Pac-Tel Cellular (AirTouch), U.S.
West/New Vector and L.A. Cellular. Mr. Chadwick is a network design engineer and
has been involved in development and operational management of satellite,
microwave, SMR/ESMR, PCS and cellular systems. Mr. Chadwick holds a Bachelor of
Arts degree in Public Administration Business from the University of
Mississippi, Oxford, Mississippi and has over 16 years of experience in the
telecommunications industry.
Gary L. Killoran joined the Company as Treasurer, Secretary and Chief
Financial Officer on February 8, 1999. He was elected to the Board of Directors
on March 1, 1999. From January 1, 1999, Mr. Killoran has also been Secretary,
Treasurer and Chief Financial Officer of phoneXchange, Inc. From 1997 through
1998, Mr. Killoran operated Camden Financial Group, Inc., a company he founded,
which developed business plans, financial projection and pro forma financial
statements for various telecommunications companies. From 1995 to 1997, Mr.
Killoran was Secretary, Treasurer, Chief Financial Officer and Director for
Chadmoore Wireless Group, Inc. Mr. Killoran assisted with taking the company
public and was responsible for SEC and state regulatory reporting. Mr. Killoran
was responsible for developing financial projections involving national
deployment strategies, negotiation and execution of purchase contracts, vendor
financing agreements and acquisitions. Mr. Killoran was also responsible for
financial controls, internal and external audits, risk management, treasury
management and tax planning and reporting, and employee benefits plans. From
1988 to 1995, Mr. Killoran began with Centel Corporation in the Financial
Reporting Department and quickly moved up to Sprint Cellular's Regional
Accounting Manager for the West Region. Mr. Killoran received his Bachelor of
Arts degree in Business Administration Accounting from the University of
Wisconsin at Madison in 1988 and has over 11 years of experience in accounting
and finance in both publicly traded and privately held companies in the
telecommunications industry.
James E. Rott joined the Company as Chief Operations Officer on February
8, 1999. From April 7, 1998 until December 31, 1998, Mr. Rott was Chief
Operating Officer of phoneXchange. Mr. Rott is a certified public accountant and
has extensive experience and background in corporate, financial services and
public accounting environments. From 1992 to the present, Mr. Rott has also been
the Principal Financial Consultant for Southwind Financial Corporation in
Irvine, California, providing accounting, tax, debt financing and computer
system consultation services to corporate clientele. From 1985 to 1990, Mr. Rott
held the position of
23
<PAGE> 24
Senior Vice President and Chief Financial Officer of Beach Savings Bank in
Fountain Valley, California, directing all financial reporting functions as well
as the loan serving and saving operations. Mr. Rott was responsible for the
direction of the treasury, cash management, audit, regulatory reporting and
investments. In addition, he managed deposit acquisition, bank borrowing
relationships, investment and hedging activities and asset liability monitoring.
From 1983 to 1985, Mr. Rott was the Vice President and Chief Financial Officer
of Heartland Savings and Loan Association in El Cajon, California. His
affiliations include American Institute of CPA's, California Society of CPA's,
Washington Society of CPA's and Mortgage Banking Association. Mr. Rott graduated
from the University of Washington, Seattle, with a Bachelor of Arts degree in
Administration Accounting.
Paul E. Hyde joined the Company as Vice President on February 8, 1999.
From April 7, 1998, Mr. Hyde has been Vice President of phoneXchange. On October
15, 1999, Mr. Hyde was elected to the Board of Directors. Mr. Hyde has more than
18 years of experience in the telecommunications industry, the past 13 years in
the cellular and SMR two-way radio industry. From 1996 to 1997, he was General
Manager and Vice President for Comserv, Inc. From 1993 to 1996, Mr. Hyde was
General Manager and Vice President of Operations for Chadmoore Communications of
Tennessee, who purchased General Communications in 1994. From 1984 to 1993, Mr.
Hyde was sales manager for General Communications Radio Sales and Service and
was responsible for marketing BellSouth's first cellular service in Memphis,
Tennessee, and Ericsson's first digital system in Tennessee. Mr. Hyde was
awarded top salesperson nationally with Uniden America for two years and was
able to make General Communications the top dealer in its region for five years.
Thomas C. Scott joined the Company as Vice President of Sales and
Marketing on October 11, 1999. From 1994 to 1999 Mr. Scott was Vice President
North American Carrier Division with Primus/TresCom where he was responsible for
the North American Carrier Division. Mr. Scott developed all sales channels and
international facilities-based customer service with the emphasis in Latin
America. From 1990 to 1994, Mr. Scott was an Executive Vice President with North
American Telecom. Mr. Scott developed direct and agent sales forces in Latin
America, as well as developing MIS, marketing and customer service. From 1986 to
1990, Mr. Scott was Area Sales Manager for MetroMedia/ITT and surpassed his
quotas yearly. From 1983 to 1986, Mr. Scott was with MCI/SBS as National Account
Manager. Mr. Scott was responsible for enrolling companies, such as, Texaco,
American General Insurance, NL Industries and Shell Oil, to MCI's National
Account Service Program. From 1970 to 1981, Mr. Scott worked for AT&T where he
was promoted five times and worked closely with new business and revenue
retention for the Kraft Foods Division of the Dart/Kraft National Account. Mr.
Scott is a graduate of De Paul University with a Bachelor of Science degree in
Accounting.
Albert R. Kashani was elected to the Board of Directors on September 11,
1999. Mr. Kashani is an attorney and since March 1998, he has been the owner of
The Law Offices of Albert R. Kashani, specializing in transactional and business
litigation matters. From 1995 to 1998, Mr. Kashani was a tax consultant at Ernst
& Young, LLP in Los Angeles. From 1991 to the present, Mr. Kashani has also been
a principal executive officer of Menorah Fusing & Services, Inc., a clothing
interlining business, and its predecessors. In 1988, Mr. Kashani founded Torina,
Inc., a clothing manufacturing company. Mr. Kashani received his Bachelor of
24
<PAGE> 25
Arts degree in Economics from California State University, Northridge, in 1992,
and graduated from the University of Southern California Law Center in 1995.
Joseph Vaughn-Perling was elected to the Board of Directors on September
11, 1999 and has over 15 years of experience in the telecommunications and data
processing industry. He has served as Senior Applications Architect, Staff
Support Manager, Senior Computer Scientist, Computer Technologist, Chief
Technical Officer, Computer Analyst and Technical and Software Consultant for
Global Fortune 500 companies. Since 1997 Mr. Vaughn-Perling has worked for
Infonet Incorporated where he is currently Senior Application Architect of
Marketing, designing and implementing global communication infrastructure
systems and the applications that power them. From 1995 to 1997 he was LAN/WAN
Technologist - Research and Development for Internet technologies for William
O'Neil & Co. From 1994 to 1995 he was Chief Technical Officer for Dolphin
Developments. He also serves on the Board of Advisors for Platt College, a
technical college with several campuses in Southern California. Mr.
Vaughn-Perling attended the University of California, Los Angeles (UCLA) and
received his Bachelors of Arts Degree in Psychology and Cognitive Science.
ITEM 6. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
Since inception of the Company through the last completed fiscal year,
ending December 31, 1998, no executive officers were paid an annual salary and
bonus in excess of $100,000. During the same time period, the CEO of the
Company, Charles McGuirk, received no annual compensation or bonus. The Company
entered into employment agreements with the current CEO and three other
executive officers effective as of February 8, 1999 and with a fifth executive
officer effective as of October 11, 1999. See "-- Employment Agreements" below.
OPTIONS/SAR GRANTS
Since inception of the Company through the last completed fiscal year,
ending December 31, 1998, the Company made no grants of stock options or
freestanding SARs.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company are not currently
compensated for meeting attendance, but are entitled to reimbursement for their
travel expenses. The Company has, however, compensated Directors for their
services through the grant of common stock and intends to continue this practice
until it institutes a more formal compensation program. On September 13, 1999,
the Company issued 5,000 restricted shares of its common stock to each of
Messrs. Vaughn-Perling and Kashani. On September 24, 1999, the Company issued
500 restricted shares of its common stock to Mr. McGuirk, who has since resigned
from the Board of Directors. Directors who are employees of the Company receive
no additional compensation for their services as Directors of the Company.
EMPLOYMENT AGREEMENTS
25
<PAGE> 26
Global Access Pagers, Inc., the predecessor to the Company, entered into
employment agreements made as of January 4, 1999 with each of David Chadwick -
President and CEO, James Rott - Chief Operating Officer, Paul Hyde - Vice
President, and Gary Killoran - Chief Financial Officer. Pursuant to these
agreements, David Chadwick was guaranteed an annual salary of $180,000 and each
of James Rott, Paul Hyde and Gary Killoran were guaranteed an annual salary of
$120,000. In addition, on October 11, 1999, the Company entered into an
employment agreement with Thomas Scott, pursuant to which he will serve as the
Company's Vice President of Sales and Marketing. Mr. Scott will receive an
annual salary of $150,000, and non-qualified options to purchase 100,000 shares
of common stock at an exercise price of 8-9/16 per share. The options will vest
at a rate of one-third per year over a three year period and have a term of five
years.
The employment agreements for each of the above executives provides for
an annual review by the Board of Directors for upward adjustments of no less
than 5% per year as long as the Company has positive net income from operations.
The term of each employment agreement is for a period of three years.
BENEFIT PLANS
On July 22, 1999, the Board of Directors of the Company authorized the
grant of options to purchase up to 1,000,000 shares of the Company's common
stock at an exercise price of $3.375 to various employees. These options all
vest on grant and have a five year term. On October 13, 1999, the Board of
Directors authorized the grant of options to purchase 100,000 shares of common
stock to Thomas Scott in connection with his employment agreement. See
"--Employment Agreements" above.
The Board of Directors intends to approve, subject to approval by a
majority of the shareholders an Incentive Stock Option Plan authorizing the
grant of qualified and non-qualified options and restricted stock awards for up
to 1,000,000 shares of the Company's common stock. Such plan will be submitted
to the Company's shareholders at the next annual shareholder's meeting.
Otherwise, the Company does not have any pension plan, profit sharing plan, or
similar plans for the benefit of its officers and directors.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
David Chadwick, Gary Killoran, Paul Hyde and James Rott are executive
officers of the Company and part owners of C/Net: Solutions, Inc., a private
company formed on January 1, 1998. From January 1, 1998 through April 21, 1998,
C/Net advanced $110,412 to phoneXchange and C/Net has continued to periodically
lend additional money to phoneXchange. On April 21, 1998, the parties entered
into an Advance Agreement pursuant to which C/Net agreed to continue to lend
money to phoneXchange without interest, and phoneXchange agreed to repay the
entire amount of the outstanding debt on demand at any time.
ITEM 8. DESCRIPTION OF SECURITIES
26
<PAGE> 27
GENERAL
The Company is authorized to issue 250,000,000 shares of common stock
$.01 par value per share, and 20,000,000 shares of preferred stock, $.01 par
value per share. Of the authorized preferred stock, 7,500,000 shares are
designated as 12% Convertible Redeemable Preferred Stock, Series A-1 (the
"Series A-1 Preferred Stock") and 50,000 shares are designated as Series A
Preferred Stock (the "Series A Preferred Stock"). On December 1, 1999, there
were 5,867,780 shares of common stock issued and outstanding. This amount does
not include 7,315,061 shares of common stock subject to outstanding warrants and
1,100,000 shares of common stock issuable upon exercise of outstanding options.
As of December 1, 1999, 3,167,974 shares of Series A-1 Preferred Stock were
issued and outstanding and no shares of the Series A Preferred Stock were issued
and outstanding.
COMMON STOCK
Each share of the Company's common stock entitles the holder thereof to
one vote, either in person or by proxy, on all matters submitted to a vote of
stockholders. The holders are not permitted to vote their shares cumulatively.
Accordingly, the holders of a majority of the issued and outstanding shares of
common stock can elect all of the directors of the Company, subject to the
voting and other rights of any outstanding shares of preferred stock.
All shares of common stock are entitled to participate ratably in
dividends when and as declared by the Company's Board of Directors out of the
funds legally available therefor. Any such dividends may be paid in cash,
property or additional shares of common stock. Holders of common stock have no
preemptive or other subscription rights, conversion rights, redemption or
sinking fund provisions. In the event of the dissolution, whether voluntary or
involuntary, of the Company, each share of common stock is entitled to share
ratably in any assets available for distribution to holders of the equity
securities of the Company after satisfaction of all debts and other liabilities.
PREFERRED STOCK
GENERAL
The Board of Directors has authority to issue up to 20,000,000 shares of
preferred stock in one or more series, each series to have such designation and
number of shares as the Board of Directors may fix prior to the issuance of any
shares of such series. Each series may have such preferences and relative,
participating, optional or other special rights, with such qualifications,
limitations or restrictions as are stated in the resolution or resolutions
providing for the issue of such series as may be adopted from time to time by
the Board of Directors prior to the issuance of any shares of such series.
SERIES A PREFERRED STOCK
27
<PAGE> 28
The Board of Directors is authorized to issue up to 50,000 shares of
Series A Preferred Stock with a stated value of $3.00 per share (the "Series A
Preferred"). Subject to the approval of the Board of Directors, the Series A
Preferred shall accrue dividends at a rate of 8% per year, payable on shares of
common stock of the Company. The Series A Preferred is convertible into common
stock at the direction of the Company, at the rate of one share of common stock
for each share of Series A Preferred. The Series A Preferred can be redeemed at
the direction of the Company, at a price of $3.00 for each share.
The Series A Preferred has no voting rights, except as required by the
General Corporation Law of the State of Nevada. The Series A Preferred is not
entitled to payment of any amount in the event of liquidation. As to dividends,
the Series A Preferred is superior in right of payment to the common stock.
There are no Series A Preferred shares outstanding.
SERIES A-1 PREFERRED STOCK
The Board of Directors of the Company is authorized to issue 7,500,000
shares of 12% Convertible Redeemable Preferred Stock, Series A-1 (the "Series
A-1 Preferred"). The Series A-1 Preferred accrues dividends at a rate of 12% per
year, payable on a quarterly basis in shares of common stock of the Company,
commending June 1, 1999. The Series A-1 Preferred is convertible at any time
after December 31, 2000, at the option of the holder into shares of common stock
at the rate of 10 shares of common stock for each share of Series A-1 Preferred.
The Series A-1 Preferred is redeemable at the option of the holder, out of funds
legally available therefor, at an amount equal to 125% of the purchase price.
The holders of Series A-1 Preferred shall be entitled to ten votes for
each share of Series A-1 Preferred on all matters submitted to the stockholders
of the Company. With respect to matters affecting only the Series A-1 Preferred,
each share shall be entitled to one vote. The Series A-1 Preferred is superior
in right of payment in the event of liquidation and with respect to dividends to
the common stock of the Company and any other stock ranking junior to the Series
A-1 Preferred. The liquidation value of the Series A-1 Preferred is $1.53 per
share plus any accrued and unpaid dividends.
PART II
ITEM 1. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
GENERAL
The common stock of the Company is traded on the OTC Bulletin Board and
is quoted under the symbol "ICNW".
MARKET PRICE
If the trading price of the Company's common stock in the future is
below $5.00 per share, the common stock will be considered to be a "penny stock"
that is subject to rules
28
<PAGE> 29
promulgated by the Securities and Exchange Commission (Rule 15g-1 through 15g-9)
under the Securities Exchange Act of 1934. These rules impose significant
requirements on brokers under these circumstances, including: (a) delivering to
customers the Commission's standardized risk disclosure document; (b) providing
to customers current bid and offers; (c) disclosing to customers the
brokers-dealer and sales representatives compensation; and (d) providing to
customers monthly account statements.
The following table sets forth the range of high and low closing bid
prices per share of the Company's common stock as reported by National Quotation
Bureau, L.L.C. for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Year 1997 High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter $ 1,600.00 $ 300.00
Second Quarter $ 450.00 $ 300.00
Third Quarter $ 450.00 $ 250.00
Fourth Quarter $ 350.00 $ 100.00
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1998 High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter $ 125.00 $ 25.00
Second Quarter $ 37.50 $ 5.00
Third Quarter $ 6.50 $ 4.75
Fourth Quarter $ 6.75 $ 3.75
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1999 High Bid Low Bid
-------- -------
<S> <C> <C>
First Quarter $ 7.75 $ 4.875
Second Quarter $ 6.75 $ 4.00
Third Quarter $ 10.4375 $ 5.375
</TABLE>
The above prices have been adjusted to reflect a 1 for 40 reverse stock
split effective April 21, 1998 and a 1 for 10 reverse stock split effective June
11, 1998. Further, the above prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
HOLDERS
As of December 1, 1999, there were 5,867,780 shares of common stock
issued and outstanding, which were held by approximately 759 holders of record,
and 3,167,974 shares of Series A-1 Preferred Stock issued and outstanding, which
were held by 6 holders of record. No shares of Series A Preferred Stock were
issued and outstanding.
29
<PAGE> 30
DIVIDENDS
The Company has not paid any dividends on its common stock and does not
expect to do so in the foreseeable future. The Company intends to apply its
earnings, if any, in expanding its operations and related activities.
The payment of cash dividends in the future will be at the discretion of
the Board of Directors and will depend upon such factors as earning levels,
capital requirements, the Company's financial condition and other factors deemed
relevant by the Board of Directors. In addition, the Company's ability to pay
dividends is limited pursuant to the Series A-1 Preferred Stock, the Series A
Preferred Stock, and may become limited under future series of preferred stock
or loan agreements of the Company which may restrict or prohibit the payment of
cash dividends.
ITEM 2. LEGAL PROCEEDINGS
The Company is named as a party to the following law suits:
On August 30, 1999, a claim was filed against the Company by J&W
Ventures, Inc., alleging that the Company is in breach of contract as to the
purchase of certain telecommunications equipment. The plaintiff is seeking
$4,685,000 in damages. The Company has filed a cross-complaint seeking
rescission and damages, asserting that J&W Ventures, Inc. breached certain
representations and warranties. The Company intends to vigorously contest the
litigation and to pursue its own remedies fully. While no assurance can be given
regarding the outcome of this matter, the Company believes that it has strong
and meritorious defenses to the claims asserted. However, a determination that
the Company breached its contract with J&W Ventures, Inc. could have a material
adverse effect on the Company's business, operating results and financial
condition.
Pursuant to the J&W Ventures Asset Purchase Agreement, the Company
issued 441,600 shares of common stock and was obligated to designate a new
series of preferred stock, $2.50 par value, and issue 850,000 shares of such
preferred stock (this is recorded on the 6/30/99 balance sheet of the Company as
preferred stock subscribed). Pending the outcome of the litigation between the
parties, the Company has placed a stop transfer order on the common stock
issued, and has not designated or issued any preferred stock to the J&W Ventures
sellers. The Company has not made any reserve on its balance sheet in connection
with this litigation.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The Company selected Jack Olesk, CPA to audit its consolidated financial
statements for the fiscal year ended December 31, 1998. The Company's interim
June 30, 1999 financial statements were audited by Brad Haynes, CPA. The
decision to change auditors was approved by the Chief Financial Officer of the
Company. Mr. Olesk's report contained no adverse opinion or disclaimer of
opinion and was not modified as to uncertainty, audit scope or accounting
principles. The Company believes that there were no disagreements with Mr. Olesk
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or
30
<PAGE> 31
procedure, which, if not resolved to the satisfaction of Mr. Olesk, would have
caused him to make reference to the subject matter of the disagreements in
connection with his report.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
COMMON STOCK
On November 22, 1999, the Company sold $5.0 million principal amount of
its 4% Convertible Debentures, and received net proceeds of $4,480,000. The
Convertible Debentures and accrued interest are convertible anytime commencing
after April 1, 2000 into common stock of the Company at the lesser of (i) 80%
of the averaged three lowest closing bid prices, as reported by Bloomberg, LP,
for the Company's common stock for the twenty (20) trading days immediately
preceding the Conversion Date or (ii) $10.00. The Company also issued warrants
to purchase 80,000 shares of the Company's common stock at an exercise price of
$12.50 per share and warrants to purchase 80,000 shares of the Company's common
stock at an exercise price of $15.00 per share. The warrants are exercisable
until November 22, 2001. The Company also issued warrants to purchase 200,000
shares of the Company's common stock at exercise price of $13.75 per share and
paid $500,000 in placement fees to the May Davis Group as placement agent. The
Company also paid $20,000 in related legal fees. The warrants are exercisable
until November 22, 2004. In addition, the Company entered into a registration
rights agreement pursuant to which the Company is to register the shares
underlying the convertible debenture and warrants.
On September 22, 1999, the Company agreed to issue 185,250 shares of
restricted common stock of the Company to the SEL Group in exchange for 185,250
shares of phoneXchange, Inc. restricted common stock.
In September 1999, the Company issued 500 shares of its restricted
common stock to Charles McGuirk and 5,000 shares of restricted common stock to
each of Albert Kashani and Joseph Vaughn-Perling, all as compensation for their
services as directors of the Company. The common stock was issued to
sophisticated investors who had access to information on the Company necessary
to make an informed investment decision for cash consideration or services
pursuant to an exemption from registration under Section 4(2) of the Securities
Act of 1933.
In July 1999, the Company sold 1,332,000 shares of its common stock for
a purchase price of $.75 per share. Proceeds from the offering were used by the
Company for working capital purposes or capital expenditures related to the
build out of the Company's network. The offering was made by the Company's
management in compliance with Rule 504 of Regulation D of the Securities Act of
1933, as amended. No commissions or other remuneration was paid. No general
solicitation was utilized.
On May 25, 1999, the Company issued 25,296 shares of restricted common
stock to FM Computer Technologies, LLC pursuant to the terms of the Agreement of
Purchase and Sale of Assets between the parties. The Company received certain
telecommunications switching equipment in exchange for the stock. The shares
were issued to sophisticated investors pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933.
As of February 23, 1999, pursuant to the Stock Purchase Agreement
between the Company, phoneXchange and its stockholders, dated as of February 23,
1999, as amended, the Company issued 921,429 shares of its common stock. The
Company acquired ownership of approximately 85% of phoneXchange in exchange for
its stock. The common shares were issued to sophisticated investors pursuant to
an exemption from registration under Section 4(2) of the Securities Act of 1933.
Prior to 1999, 2,228,806 shares of the Company's common stock were
issued and outstanding, all of which were issued pursuant to exemptions from
registration under Rule 504 and Section 4(2) of the Securities Act of 1933. Any
proceeds from these issuances were used by the Company for working capital
purposes.
WARRANTS TO PURCHASE COMMON STOCK
On September 10, 1999, the Company issued warrants to purchase 350,000
shares of common stock at an exercise price of $4.50 per share to Corporate
Financial Enterprises, Inc. The warrants were granted in exchange for consulting
services and are exercisable for a term commencing December 31, 2000 and
expiring September 1, 2004. The warrants were issued pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1933. No
commissions or other remuneration was paid to anyone. No general solicitation
was utilized.
31
<PAGE> 32
On September 1, 1999 the Company issued warrants to purchase 921,429
shares of its common stock pursuant to the terms of a Stock Purchase Agreement
dated January 1, 1999, as amended on May 24, 1999, with phoneXchange, Inc. and
its stockholders. The warrants are exercisable at a purchase price of $4.50 per
share with a term of five years. The warrants were issued pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933.
On July 1, 1999 the Company issued warrants to purchase 100,000 shares
of its common stock to Elie Sakaran in exchange for consulting services
previously rendered. The warrants are exercisable at a purchase price of $7.50
per share for a term of 18 months. The warrants were issued pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933. No
commissions or other remuneration was paid to anyone. No general solicitation
was utilized.
On February 23, 1999, the Company issued warrants to purchase 5,943,633
shares of its common stock exercisable at a purchase price of $1.72 per share.
The warrants are exercisable for 5 years. The issuance was made in compliance
with the Securities Act of 1933 by Company's management. The warrants were
issued pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933. No commissions or other remuneration was paid to anyone.
No general solicitation was utilized.
PREFERRED STOCK
On February 23, 1999, the Company sold 3,267,974 shares of its Series
A-1 Preferred Stock to Corporate Financial Enterprises, Inc., American Equities,
LLC and certain other investors in exchange for $5,000,000. The warrants were
issued pursuant to an exemption from registration under Section 4(2) of the
Securities Act of 1933. No commissions or other remuneration was paid to anyone.
No general solicitation was utilized.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of the Company include a provision
eliminating the personal liability of our directors to the fullest extent
permitted by the General Corporation Law of the State of Nevada (the "GCLN"). In
addition, the Articles of Incorporation includes a provision indemnifying any
and all persons whom the Company has power to indemnify under the GCLN from and
against all expenses, liabilities or other matters covered by the GCLN,
including under circumstances in which indemnification is otherwise
discretionary. This indemnification is not exclusive of any other rights and
shall continue after such person has ceased to be a director, officer, employee
or agent of the Company. These provisions do not affect the availability of
equitable remedies for a breach of duty of care, such as an action to enjoin or
rescind a transaction involving a breach of fiduciary duty. However, in certain
circumstances equitable remedies may not be available as a practical matter.
While these provisions may be amended or repealed in the future, such change
would only have an effect on liabilities arising after such change.
The Company has been advised that in the opinion of the Securities and
Exchange Commission, indemnification for liabilities arising under the
Securities Act of 1933 is against public policy and is, therefore,
unenforceable. In the event that a claim for indemnification
32
<PAGE> 33
against such liabilities (other than the payment by the Company of expenses
incurred or paid by an indemnified person in the successful defense of any
action, suit or proceedings) is asserted by such indemnified person in
connection with any securities being registered, the Company 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 and will be governed by the final
adjudication of such issues.
33
<PAGE> 34
PART F/S
FINANCIAL STATEMENTS
The audited financial statements of the Company as of December 31,
1998, were prepared by Jaak Olesk, an independent public accountant.
The audited consolidated financial statements of the Company as of June
30, 1999, were prepared by Brad B. Haynes, an independent public accountant.
The audited financial statements of the Company's majority owned
subsidiary, phoneXchange as of December 31, 1998, were prepared by Brad Haynes,
an independent public accountant.
<PAGE> 35
Global Access Pagers, Inc.
Financial Statements
December 31, 1998
<PAGE> 36
JAAK (JACK) OLESK
Certified Public Accountant
270 North Canon Drive, Suite 203
Beverly Hills, California 90210
(310) 288-0693
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Global Access Pagers, Inc.
(A Development Stage Company)
I have audited the accompanying balance sheet of Global Access Pagers,
Inc., a Nevada corporation (a development stage company) as of December 31, 1998
and the related statements of operations, stockholders' equity (deficit) and
cash flows for the years ended December 31, 1998 and December 31, 1997 and for
the period from inception (January 16, 1997) to December 31, 1998. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audits.
I conducted my audits in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
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.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial security statements referred to above present
fairly, in all material respects, the financial position of Global Access
Pagers, Inc. a Nevada corporation (a development stage company) as of December
31, 1998 and the results of its operations and its cash flows for the years
ended December 31, 1998 and December 31, 1997 and for the period from inception
(January 16, 1997) to December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 2 to the
financial statements, the company has suffered significant losses from
operations that raises substantial doubt about its ability to continue as a
going concern. The company also has uncertainties relating to litigation matters
as described in Note 6. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
/s/ JACK OLESK CPA
Beverly Hills, California
February 3, 1999
<PAGE> 37
GLOBAL ACCESS PAGERS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<S> <C>
$ 0
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts Payable $ 1,999
Accrued Expenses 5,000
-----------
Total current liabilities 6,999
Commitments and Contingencies Note 6
Stockholders' Equity
Common stock $.01 par value;
250,000,000 shares authorized;
5,262,000 shares issued and outstanding 52,620
Preferred stock: (20,000,000 total
preferred shares authorized)
Class A 8% Non-voting preferred
stock; $3 stated value per share;
50,000 shares authorized;
0 shares issued --
Class A 12% Non-voting preferred
stock; $10 stated value per share;
5,000,000 shares authorized;
0 shares issued --
Class B 8 1/2% Non-voting preferred
stock; $100 stated value per share;
200,000 shares authorized;
0 shares issued --
Class C 10% Non-voting preferred
stock; $200 stated value per share;
500,000 shares authorized;
0 shares issued --
Additional paid in capital 8,047,480
(Deficit) accumulated during
the development stage (8,107,099)
-----------
Total Stockholders' Equity (Deficit) (6,999)
-----------
$ 0
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 38
GLOBAL ACCESS PAGERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Inception
January 16,
Year Ended Year Ended 1997 to
December 31, December 31, December 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE $ -- $ -- $ --
EXPENSES
General and
administrative 92,249 214,850 307,099
Write-off of assets 7,800,000 -- 7,800,000
----------- ---------- -----------
(Loss) from operations (7,892,249) (214,850) (8,107,099)
Income taxes -- -- --
----------- ---------- -----------
NET (LOSS) $(7,892,249) $ (214,850) $(8,107,099)
=========== ========== ===========
Net (loss)
per common share $ (1.50) $ (.04) $ (1.54)
=========== ========== ===========
Weighted average common
shares outstanding 5,262,000 5,262,000 5,262,000
=========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 39
Global Access Pagers, Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Additional During
----------------------- Paid-In Development
Shares Amount Capital Stage Total
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Common shares
issued for cash
at inception
January 16, 1997 10,000 $ 100 $ -- $ -- $ 100
Shares issued
for assets,
January, 1997 5,252,000 52,520 7,747,480 -- 7,800,000
Assets Contributed
by shareholders-
January, 1997 -- -- 300,000 -- 300,000
Net (loss) for
year ended Dec.
31, 1997 -- -- -- (214,850) (214,850)
--------- ------- ---------- ----------- -----------
Balance,
December 31, 1997 5,262,000 52,620 8,047,480 (214,850) 7,885,250
Net (loss) for
year ended Dec.
31, 1998 -- -- -- (7,892,249) (7,892,249)
--------- ------- ---------- ----------- -----------
Balance,
Dec. 31, 1998 5,262,000 $52,620 $8,047,480 $(8,107,099) $ (6,999)
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 40
GLOBAL ACCESS PAGERS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
January 16,
Year Ended Year Ended 1997 to
December 31, December 31, December 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) $(7,892,249) (214,850) $(8,107,099)
Write off of assets 7,800,000 -- 7,800,000
Adjustments to reconcile
net income (loss) to cash
used in
operating activities:
Changes in operating liabilities:
Accounts payable 1,999 -- 1,999
Accrued expenses 5,000 -- 5,000
Other 85,250 214,750 300,000
----------- ---------- -----------
Net cash used in
operating activities: -- (100) (100)
Cash flows from investing
activities:
Acquisition of assets -- -- --
Cash flows from
financing activities:
Notes payable -- -- --
Stock issuance -- 100 100
----------- ---------- -----------
Net cash provided by
financing activities: 100
Increase (decrease) in cash -- -- --
Cash at beginning of period -- -- --
----------- ---------- -----------
Cash at end of period $ -- $ -- $ --
=========== ========== ===========
Supplemental information:
Cash paid during the period for:
Income taxes $ -- $ -- $ --
=========== ========== ===========
Interest $ -- $ -- $ --
=========== ========== ===========
Non-cash financing transactions:
Shares issued
for assets $ -- $8,100,000 $ 8,100,000
=========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 41
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1 - Significant Accounting Policies
NATURE OF OPERATIONS
Global Access Pagers, Inc. (the "Company"), A Nevada corporation, was
incorporated on January 16, 1997. From January 16, 1997 through February 3,
1999 the Company attempted to enter into various business combinations, but
only one was consummated. On April 16, 1998, Theatre, Inc., a Nevada
corporation, entered into an Agreement and Plan of Merger with Phonetime
Resources, Inc., a Delaware corporation. Pursuant to the agreement, Phonetime
Resources, Inc. merged into Theatre, Inc. and Theatre, Inc. was the surviving
corporation. Upon completion of the merger, Phonetime Resources, Inc. ceased to
exist and Theatre, Inc. operated under the name Global Access Pagers, Inc. The
purpose of the merger was to effect a domicile change. In addition, the Company
entered into a merger with Global Access Pagers, Inc. a Nevada corporation (the
Company and this corporation were and are separate entities but with the same
name). That transaction was rescinded. From January 16, 1997 through February 3,
1999 the Company had no revenues and no operations.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of funds invested in money market accounts and in
investments with a maturity of three months or less when purchased.
(LOSS) PER SHARE
The computation of income (loss) per share of common stock is based on the
weighted average number of shares outstanding during the periods 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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INCOME TAXES
The Company records its income tax provision in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes". (See Note 3)
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with 1998
classifications.
<PAGE> 42
GLOBAL ACCESS PAGERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1998
NOTE 2 - Basis of presentation and considerations related to continued
existence (going concern)
The Company's financial statements have been presented on the basis that
it is a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred a net loss of $8,107,099 for the period from inception (January 16,
1997) to December 31, 1998. This factor, among others, raises substantial doubt
as to the Company's ability to obtain debt and/or equity financing and achieve
profitable operations.
NOTE 3 - Income taxes
The Company records its income tax provision in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires the use of the liability method of accounting for deferred income
taxes.
Since the Company has not generated taxable income since inception no
provision for income taxes has been provided. At December 31, 1998, the Company
did not have any significant tax net operating loss carryforwards (tax benefits
resulting from losses for tax purposes have been fully reserved due to the
uncertainty of a going concern). At December 31, 1998, the Company did not have
any significant deferred tax liabilities or deferred tax assets.
NOTE 4 - Development stage company
A development stage company is one for which principal operations
have not commenced or principal operations have generated an insignificant
amount of revenue. Management of a development stage company devotes most of
its activities to establishing a new business. Operating losses have been
incurred through December 31, 1998, and the Company continues to use, rather
than provide, working capital in this operation. Although management believes
that it is pursuing a course of action that will provide successful future
operations, the outcome of these matters is uncertain.
<PAGE> 43
GLOBAL ACCESS PAGERS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
NOTE 5 - Attempted Business Combinations
During 1997 and 1998, the Company attempted several business combinations.
However, only one business combinations was ever consummated. That transaction
was later rescinded.
Due to uncertainty of recovery, assets acquired pertaining to these
potential businesses have been written off in full.
NOTE 6 - Commitments and Contingencies
LITIGATION
1- The Company, and two of its predecessor companies are named as defendants
in a breach of a lease action brought by a large insurance company
("landlord"). Plaintiff landlord is seeking unpaid rent and other fees of not
less than $198,355. The outcome of this matter is uncertain.
2- The Company is a defendant in a second unrelated breach of contract
action. The amount in controversy is approximately $12,000. The outcome of this
matter is uncertain.
OTHER
The Company is not occupying any office space or any other premises.
<PAGE> 44
INTEGRATED COMMUNICATION NETWORKS, INC.
AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
(A Nevada Corporation)
CONSOLIDATED FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
AS OF JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999
AND FOR THE PERIOD FROM JANUARY 16, 1997 (INCEPTION) TO
JUNE 30, 1999
<PAGE> 45
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
(A Nevada Corporation)
TABLE OF CONTENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountant.........................................AR-1
Consolidated Balance Sheet as of June 30, 1999.......................................F-1 - F-2
Consolidated Statement of Operations for the Six Months
Ended June 30, 1999................................................................F-3
Consolidated Statement of Shareholders' Equity (Deficit) for the period from
January 16, 1997 (Inception) through
June 30, 1999......................................................................F-4
Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1999 .........................................................F-5 - F-6
Notes to consolidated financial statements..........................................F-7 - F-16
</TABLE>
<PAGE> 46
BRAD B. HAYNES 9005 Burton Way
CERTIFIED PUBLIC ACCOUNTANT Los Angeles, California 90048
Tel (310) 273-7417
Fax (310) 285-0865
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
The Board of Directors
Integrated Communication Networks, Inc.
We have audited the accompanying consolidated balance sheet of Integrated
Communication Networks, Inc. (a Nevada Corporation) and subsidiaries as of June
30, 1999 and related consolidated statements of income and accumulated deficit,
changes in shareholders' equity and cash flows for the six months then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position Integrated
Communication Networks, Inc. (a Nevada Corporation) and subsidiaries as of June
30, 1999 and related consolidated statements of income and accumulated deficit,
changes in shareholders' equity and cash flows for the six months then ended in
conformity with generally accepted accounting principles.
Brad B. Haynes
//s Brad B. Haynes
August 5, 1999
AR-1
<PAGE> 47
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
(A Nevada Corporation)
CONSOLIDATED BALANCE SHEET
June 30, 1999
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS
Cash $ 806,425
Accounts receivable 7,598
Deposits 251,973
Prepaid expenses 63,203
-----------
Total Current Assets $ 1,129,199
PROPERTY AND EQUIPMENT (NET) 4,084,511
ASSETS UNDER CAPITAL LEASE (NET) 309,794
OTHER ASSETS
Goodwill (Net) $ 8,489,694
-----------
TOTAL ASSETS $14,013,198
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 391,144
Accrued expenses 187,748
Taxes payable 64,220
Current portion - long-term liabilities 72,449
Current portion - capital lease obligation 47,499
Payable to C/Net Solutions, Inc. 336,000
Payable to related parties 605,000
Deferred revenue 2,981
Customer deposits 1,000
-----------
Total Current Liabilities 1,708,041
LONG-TERM LIABILITIES
Notes payable 939,698
Capital lease obligation 110,052
-----------
TOTAL LONG-TERM LIABILITIES 1,049,750
-----------
TOTAL LIABILITIES 2,757,791
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-1
<PAGE> 48
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
(A Nevada Corporation)
CONSOLIDATED BALANCE SHEET CONTINUED
June 30, 1999
<TABLE>
<S> <C> <C>
MINORITY INTEREST 481,280
SHAREHOLDERS' EQUITY
Preferred Stock, $.01 par value, authorized,
20,000,000 shares Series A-1
12% convertible redeemable
preferred stock, 650,000 shares
authorized, none issued and outstanding
Preferred Stock subscribed 4,075,000
Common Stock, $.01 par value, authorized,
250,000,000 shares, issued 3,175,531 31,755
Additional paid-in capital 16,825,874
Accumulated deficit (10,158,502)
TOTAL SHAREHOLDERS' EQUITY 10,774,127
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,013,198
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-2
<PAGE> 49
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
(A Nevada Corporation)
CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999
<TABLE>
<S> <C> <C>
REVENUE $ 301,679
COST OF SERVICES 464,884
-----------
GROSS PROFIT $ (163,205)
OPERATING EXPENSES
Selling, general and administrative expenses 1,209,553
Depreciation and amortization 308,560
Amortization of goodwill 237,179
Write-off of assets 216,600
-----------
TOTAL OPERATING EXPENSES 1,971,892
-----------
LOSS FROM OPERATIONS $(2,135,097)
OTHER INCOME (EXPENSES) 83,695
-----------
NET LOSS $(2,051,402)
===========
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER
OF COMMON SHARES OUTSTANDING 2,254,102
===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.91)
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-3
<PAGE> 50
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
(A Nevada Corporation)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
From January 16, 1997 (Inception) to June 30, 1999
<TABLE>
<CAPTION>
Preferred
Stock Common Stock Additional
Shares Amount Subscribed Shares Amount Paid-In Capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 16, 1997 $ - $ - $ - $ - $ -
Common stock issued for
cash at inception 10,000 100
Common stock issued for assets
January, 1997 5,252,206 52,522 7,747,478
Assets contributed by shareholders
January, 1997 300,000
Net Loss
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 $ - $ 5,262,206 $ 52,622 $ 8,047,478
Net loss
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 $ - $ 5,262,206 $ 52,622 $ 8,047,478
Stock to be issued for assets acquired
January 1999 2,125,000 441,600 4,416 2,170,306
Stock canceled (3,475,000) (34,750) 34,750
Stock to be issued for acquisition
of PhoneXchange February 1999 921,429 9,214 6,440,789
Stock to be issued for cash 1,950,000
Common stock issued for conversion of
debt May 1999 25,296 253 132,550
Net loss
------------ ------------ ------------ ------------ ------------
Balance, June 30, 1999 $ - $ 4,075,000 3,175,531 $ 31,755 $ 16,825,873
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Retained
Earnings Shareholders'
(Deficit) Equity
------------ ------------
<S> <C> <C>
Balance, January 16, 1997 $ - $ -
Common stock issued for
cash at inception 100
Common stock issued for assets
January, 1997 7,800,000
Assets contributed by shareholders 300,000
January, 1997
Net Loss (214,850) (214,850)
------------ ------------
Balance, December 31, 1997 $ (214,850) $ 7,885,250
Net loss
------------ ------------
Balance, December 31, 1998 $ (8,107,099) $ (6,999)
Stock to be issued for assets acquired
January 1999 4,299,722
Stock canceled -
Stock to be issued for acquisition
of PhoneXchange February 1999 6,450,003
Stock to be issued for cash 1,950,000
Common stock issued for conversion of
debt May 1999 132,803
Net loss
------------ ------------
Balance, June 30, 1999 $(10,158,502) $ 10,774,127
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE> 51
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
(A Nevada Corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,051,402)
Adjustments to reconcile to net loss to
cash used by operating activities:
Depreciation and amortization $ 308,560
Amortization of goodwill 237,179
Write-off assets due to casualty loss 39,581
Decrease (increase) in assets:
Accounts receivable 20,286
Deposits (187,008)
Prepaids (46,090)
Increase (decrease) in liabilities:
Accounts payable trade 159,694
Accounts payable carriers (88,390)
Accrued general expenses (1,198)
Accrued carrier costs (3,252)
Accrued payroll 124,000
Accrued interest short term liabilities 16,569
Accrued interest long term liabilities (2,814)
Taxes payable (7,742)
Sales tax payable (4,433)
Customer deposits 1,000
Other advance (317,802)
Payable to C/Net: Solutions, Inc. 127,705
-----------
Total Adjustments 375,845
-----------
NET CASH USED IN OPERATING ACTIVITIES (1,675,561)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,057,894)
Acquisition, net of cash acquired 18,433
-----------
NET CASH USED IN INVESTING ACTIVITIES (1,039,461)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of capital lease obligation (18,919)
Proceeds from issuance of short-term liabilities 901,391
Principal payments of short-term liabilities (61,025)
Proceeds from preferred stock subscription 1,950,001
Proceeds from issuance of common stock 750,000
-----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE> 52
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
(A Nevada Corporation)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999
<TABLE>
<S> <C>
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,521,447
----------
NET CASH PROVIDED BY ALL ACTIVITIES $ 806,425
CASH - January 1999 $ --
CASH - June 30, 1999 $ 806,425
==========
INTEREST PAID $ 33,454
==========
TAXES PAID $ 0
==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-6
<PAGE> 53
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
(A Nevada Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Formation and Description of Business
Integrated Communication Networks, Inc., and Subsidiaries
(formerly Global Access Pagers, Inc.) (the "Company" or "ICN"), a Nevada
corporation was incorporated on January 16, 1997 under the name Theatre, Inc.
The Company is currently engaged in the integration of various telecommunication
networks through acquisition and internal growth for the purpose of offering a
variety of reliable, high-quality, value-added telecommunication services at
competitive prices.
On April 16, 1998, Theatre, Inc., a Nevada corporation, entered into an
Agreement and Plan of Merger with Phonetime Resources, Inc., a Delaware
corporation. Pursuant to the agreement, Phonetime Resources, Inc. merged into
Theatre, Inc. and Theatre, Inc. was the surviving corporation. Upon completion
of the merger, Phonetime Resources, Inc. ceased to exist and Theatre, Inc.
operated under the name Global Access Pagers, Inc. The purpose of the merger
was to effect a domicile change.
On May 8, 1998, Theatre, Inc., doing business as Global Access Pagers,
Inc., entered into an Agreement and Plan of Merger with Global Access Pagers,
Inc., a Nevada corporation. Pursuant to the agreement, Global Access Pagers,
Inc. merged into Theatre, Inc. and Theatre, Inc. was the surviving corporation.
Upon completion of the merger, Global Access Pagers, Inc. ceased to exist and
Theatre, Inc. changed its name to Global Access Pagers, Inc. The transaction was
accounted for using the purchase method of accounting. The transaction relating
to the merger was rescinded pursuant to the terms of a Recission and
Cancellation Agreement entered into on January 6, 1999. Accordingly, 3,475,000
issued common shares of the surviving entity were returned to the Company and
cancelled.
From January 16, 1997 through December 31, 1998, the Company had no
revenues.
On January 1, 1999, Global Access Pagers, Inc. entered into a Stock
Purchase Agreement with phoneXchange, Inc., a Delaware corporation, whereby
Global Access Pagers, Inc. purchased 8,600,000 shares or 85.14% of the issued
and outstanding shares of common stock of phoneXchange in exchange for 921,429
common shares of Global Access Pagers, Inc. and warrants to purchase 921,429
shares of the Company's common stock at a purchase price per share of $4.50. The
transaction was valued at $6,450,003 and was effective February 28, 1999. On
January 29, 1999, management of the Company changed the name of the corporation
from Global Access Pagers, Inc. to Integrated Communication Networks, Inc. On
February 28, 1999, management of phoneXchange assumed responsibility for the
management of the Company. The transaction was accounted for using the purchase
method of accounting. On September 1,
F-7
<PAGE> 54
1999, the Company issued the 921,429 shares of common stock pursuant to the
Stock Purchase Agreement.
The Company began operation in February, 1999, through the Company's
acquisition of phoneXchange, Inc. phoneXchange is a facilities-based wholesale
carrier that provides switched voice and data services, primarily to U.S.-based
carriers. phoneXchange provides domestic and international long distance service
through foreign termination relationships, international gateway switches,
leased and owned transmission facilities and resale arrangement with other long
distance providers. Management has dedicated its efforts to date on the
development and implementation of its business plan and the formation and
financing of the Company. The Company has been formed to integrate state of the
art flexible telecommunication networks that provide reliable, high-quality,
low-cost telecommunication services. Management has spent a significant amount
of time identifying, evaluating and pursuing strategic acquisitions to
accomplish this objective. To achieve the objectives outlined in its plan, the
Company must obtain sufficient financing to obtain and complete its
long-distance network facilities and, ultimately, achieve a sufficient level of
sales and profitability to support its contemplated operations. Management is
currently pursuing various financing alternatives. However, no assurance can be
provided that management will be able to obtain financing on terms acceptable to
the Company, or at all.
(b) Principals of Consolidation
The consolidated financial statements include the accounts of
Integrated Communication Networks, Inc. and its majority-owned subsidiaries. All
significant inter-company transactions and balances have been eliminated.
Minority interest represents the minority shareholders' proportionate share of
the equity or income of the Company's majority-owned subsidiary phoneXchange,
Inc.
(c) Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principals 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 revenue and expenses during the reporting
period. The Company reviews all significant estimates affecting the financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to their issuance. Actual results could differ from those
estimates.
(d) Revenue Recognition
The Company records revenues for the sale of telecommunications
services at the time of customer usage. All services paid in advance by the
customer are recorded as unearned revenue.
(e) Cash and Cash Equivalents
F-8
<PAGE> 55
Cash and cash equivalents consist of demand deposits and money
market funds, which are highly liquid short-term instruments with original
maturities of three months or less from the date of purchase. Cash and cash
equivalents are stated at cost, which approximates market. There were no cash
equivalents for the six months ended June 30, 1999.
(f) Financial Instruments
The Company follows the guidance of Statement of Accounting
Standards ("SFAS") No. 107, "Disclosure of Fair Value Financial Instruments,"
which requires disclosure of the fair value of financial instruments; however,
this information does not represent the aggregate net fair value of the company.
Unless quoted market price indicates otherwise, the fair values of cash and cash
equivalents and deposits generally approximate market value because of the short
maturity of these instruments. The Company's notes payable and capital lease
obligations also approximate market value as the underlying borrowing rates are
similar to the other financial instruments with similar maturities and terms.
(g) Property and Equipment
Property and Equipment are stated at cost or fair values at the
date of acquisition and, in the case of equipment under capital lease, the
present value of minimum lease payments. Depreciation and amortization of
property and equipment are computed using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Operating Equipment 5 years
Leasehold Improvements 1-5 years
Furniture, Fixtures and Equipment 3 years
</TABLE>
Amortization of assets financed under capital leases was $24,305
and depreciation of purchased assets was $283,115 and depreciation on leasehold
improvements was $1,140 for the six months ended June 30, 1999.
Replacements and betterments, renewals and extraordinary repairs
that extend the life of the asset are capitalized; other repairs and maintenance
are expended.
(h) Income Taxes
The Company uses the liability method of accounting for income
taxes specified by SFAS No. 109, "Accounting for Income Taxes," whereby deferred
tax liabilities and assets are determined based on the difference between
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets are recognized and measured based on the likelihood of
realization of the related tax benefit in the future. The Company had no
material net deferred tax assets or liabilities at June 30, 1999.
(i) Loss Per Common Share
F-9
<PAGE> 56
In February 1997, the Financial Accounting Standards Board
("FASB") issued SFAS No. 128, "Earnings Per Share". The statement replaces
primary EPS with basic EPS, which is computed by dividing reported earnings
available to common shareholders by weighted average shares outstanding. The
provision requires the calculation of diluted EPS. The Company uses the method
specified by the statement.
2. ASSET PURCHASES
(a) NACT Sales and Service Agreement
On December 31, 1997, the Company entered into a sale and
services agreement (the Agreement) for the purchase of certain communications
equipment and licensed software (the System). The equipment consists primarily
of an STX telephone switching system, which is a long-distance, tandem telephone
switch. The purchase price for the System is $333,038. The Agreement calls for
20% deposit or $66,608 due upon signing, a payment of $116,561 due upon shipment
of the System, a payment of $116,561 due 30 days after shipment and a payment of
$33,009 due 60 days after shipment. On January 31, 1998, the Company paid a
deposit of $35,000 on the System. On February 24, 1998, the Company and NACT
revised the payment terms under the Agreement as follows: outstanding amounts
due will accrue interest at a rate of 10% per annum, payment of $70,000 due by
May 1, 1998, final payment of $237,598.55 due by June 1, 1998 and NACT will
allow the shipment of the System upon receipt of the $70,000 payment. On July
13, 1998, the Company and NACT revised the payment terms under the Agreement as
follows: payment of $50,000 due by July 20, 1998, final payment of $187,598.55
due by August 3, 1998. On July 21, 1998, the Company paid an additional deposit
of $50,000. On September 29, 1998, the Company entered into a lease agreement
with Rockford Industries to finance the remaining balance due to NACT on the
System. The lease agreement calls for 36 equal minimum monthly payments of
$7,119.98. Aggregate minimum lease payments total $256,319.28. The capital lease
is secured by the System.
(b) FM Technologies, LLC Agreement of Purchase and Sale of Assets
On April 27, 1998, the Company entered into an Agreement of
Purchase and Sale of Assets with FM Technologies, LLC to acquire certain
communications equipment, billing system and licensed software for $300,000, of
which $90,000 was paid in cash and $210,000 is to be paid in the form of two
promissory notes. The first promissory note in the amount of $39,142 is
non-interest bearing and is payable monthly commencing June 1, 1998 at a rate of
$13,047 per month for 3 months. The second promissory note in the amount of
$170,858 bears interest at 10% per annum and is payable monthly commencing
August 23, 1998 at a rate of $5,513 per month for 36 months. These notes are
secured by the assets acquired. On April 27, 1999, the Company, phoneXchange and
FM Technologies entered into an agreement whereby the Company agreed to pay past
due payments on the second promissory note in the amount of $49,617.99 and
convert the remaining balance on the second promissory note in the amount of
$132,808.91 into 25,296 restricted shares of common stock of the Company.
(c) GST Net, Inc. Asset Purchase Agreement
F-10
<PAGE> 57
On December 15, 1998, the Company executed an Asset Purchase
Agreement with GST Net, Inc. to acquire certain communications equipment,
billing system and licensed software for $150,000, of which $5,000 was paid in
cash and $145,000 is to be paid in the form of a promissory note. The promissory
note bears interest at 7.5% per annum and is payable monthly commencing January
15, 1999 at a rate of $6,525 per month for 24 months.
The note is secured by the assets acquired.
(d) J&W Ventures, Inc. Asset Purchase Agreement
On December 10, 1998, the Company executed an Asset Purchase
Agreement with J&W Ventures, Inc. to acquire certain telecommunications
switching equipment and software for $4,685,000, of which $300,000 was paid in
cash and the remainder is to be paid by the issuance of 441,600 shares of
restricted common stock of the Company and the issuance of 850,000 shares of the
Company's Series A Convertible Redeemable Preferred Stock, stated value of $2.50
per share. The number of shares of common stock of the Company that the Series A
Convertible Redeemable Preferred Stock is convertible into is determined by
dividing the stated value by the greater of (x) the fair market value per share
of common stock or (y) $3.50. As of June 30, 1999, the 441,600 shares of
restricted common stock and the 850,000 shares of Series A Convertible
Redeemable preferred stock have not been issued and are the subject of ongoing
litigation between the companies. See "Legal Proceedings." As such, the value of
the preferred stock is recorded as Preferred Stock Subscribed in the
accompanying Consolidated Balance Sheet. The transaction resulted in an excess
cost over fair value of the assets purchased in the amount of $2,185,000
recorded as goodwill and amortized over 15 years. Amortization for the six
months ending June 30, 1999 was $72,833.
(e) Global Network Providers, Inc. Asset Purchase Agreement
On November 1, 1998, the Company executed an Asset Purchase
Agreement with Global Network Providers, Inc. to acquire certain customer sales
contracts for domestic and international long distance services, an FCC
International 214 license and certain office equipment for $2,250,000, of which
$250,000 was to be paid in cash upon the effective date of the agreement,
$150,000 was to be paid 90 days after the effective date of the agreement,
$100,000 was to be paid 180 days after the effective date of the agreement and
the remainder to be paid by the issuance of 500,000 shares of restricted common
stock of the Company of which 200,000 shares were issuable upon the effective
date of the agreement and 300,000 shares were issuable at a rate of 50,000
shares at the end of each calendar quarter subject to certain performance
objectives. The Company paid $216,600 as deposit on the assets purchase and
subsequently determined that the transaction was not in the best interest of the
Company due to the quality of the assets. The Company canceled the Asset
Purchase Agreement. As such, the Company wrote-off the $216,600 deposit on
purchase and no common stock was issued.
(f) One Stop Wireless of America, Inc./Pre-Paid Cellular, Inc.
Chapter 11 Plan of Reorganization
The Company's subsidiary, phoneXchange, participated in a
Chapter 11 Plan of Reorganization of One Stop Wireless of America, Inc. and
Pre-Paid Cellular, Inc. Among other things, the Plan called for phoneXchange to
receive $750,000 in cash and certain telephone
F-11
<PAGE> 58
switching equipment, computer equipment, cellular telephones and office
furniture and equipment valued at approximately $750,000 in exchange for the
issuance of 200,000 shares of phoneXchange common stock. The United States
Bankruptcy Court, Central District of California, and Santa Ana Division
confirmed the Plan on June 29, 1999 and the shares were released from escrow on
that date.
(g) phoneXchange, Inc.
Pursuant to the Stock Purchase Agreement between the Company and
phoneXchange, Inc. the Company purchased 85.14% of the outstanding capital stock
of phoneXchange, Inc. as of February 28, 1999. As a result, the Company acquired
goodwill in the amount of $7,395,559, which will be amortized over 15 years.
Amortization of goodwill was $164,346 for the four months ending June 30, 1999.
3. DEPOSITS
Pursuant to an Asset Purchase Agreement dated June 2, 1999, between the
Company and SEC Group, a subsidiary of General Telephony Ltd., the Company paid
a deposit of $75,000 to SEL Group for the purchase of certain telecommunications
switching equipment for a total aggregate purchase price of $1,151,250. The
proposed agreement calls for an additional cash payment of $225,000 and the
issuance of 161,175 shares of phoneXchange common stock and warrants to purchase
an additional 161,175 shares of phoneXchange common stock at $10.00 per share,
exercisable for three years. Deposits of $126,936 consist of payments made to
long distance providers to secure service and a deposit of $50,037 is for leased
office space for operations. The deposits are refunded or applied to future
service.
4. PROPERTY AND EQUIPMENT
Property and equipment consists primarily of telecommunications
switching equipment. The recorded amount of property and equipment capitalized
and the related accumulated depreciation is as follows:
<TABLE>
<S> <C>
Operating equipment $ 4,398,863
Leasehold Improvements 6,840
Furniture, fixtures and equipment 21,283
-----------
Total property and equipment $ 4,426,986
Less: accumulated depreciation (342,475)
-----------
Property and equipment (net) $ 4,084,511
===========
Assets under capital lease 364,571
Less: accumulated amortization (54,777)
-----------
Assets under capital lease (net) $ 309,794
===========
</TABLE>
5. PAYABLE TO RELATED PARTIES
F-12
<PAGE> 59
(a) Note payable to Corporate Financial Enterprises and issued by
phoneXchange, Inc. on December 10, 1998 in the original principal amount of
$500,000. The note bears interest at 8% per annum. Monthly payments of principal
and interest in an amount not less than 20% of the outstanding balance of the
loan at the end of the prior month are due commencing on May 1, 1999, and
continuing thereafter on the first day of each month until the total balance is
paid. In the event there is an outstanding principal balance of the loan at
September 30, 1999, the entire remaining balance of principal, accrued interest,
late charges and advances, if any, shall be due and payable on September 30,
1999 or convertible to common stock.
<TABLE>
<S> <C>
Note secured by phoneXchange assets 605,000
Total Payable to Related Parties $605,000
--------
</TABLE>
(b) The payable to C/Net is non-interest bearing and is due on
demand.
6. LONG-TERM LIABILITIES
(a) phoneXchange, Inc. issued a note, dated December 15, 1998,
payable to GST Telecom, Inc., in connection with the telecommunications switch
asset purchase with GST. The note bears interest at 7.5% per annum. Principal of
$145,000 and interest are payable in monthly installments of $6,525, beginning
January 15, 1999, for 24 months. The assets acquired by phoneXchange secure the
note.
(b) Convertible Debenture, dated April 1, 1999, payable to Corporate
Financial Enterprises and issued by the Company. As of June 30, 1999, the
principal amount of the debenture was $901,390. The debenture bears interest at
8% per annum but no payments are due for the first 30 months. At the end of the
30th month, payments of principal and interest of the outstanding balance of the
Debenture are due in six equal monthly payments. Lender may opt at any time
during the term of this Debenture to convert payment from U.S. currency to
shares of the Company's preferred stock. The Debenture is secured by the
Company's assets.
<TABLE>
<S> <C>
Total Notes Payable 1,012,147
Less Current portions (74,499)
-----------
Notes Payable - Long Term $ 939,648
===========
</TABLE>
Aggregate maturities of long-term liabilities, net of discount, over the
next five years is as follows:
<TABLE>
<CAPTION>
Period Ending June 30 Amount
--------------------- ----------
<S> <C>
2000 $ 78,300
2001 32,457
2002 901,390
2003 0
2004 1,012,147
----------
$1,012,147
==========
</TABLE>
F-13
<PAGE> 60
7. LEASE COMMITMENTS
(a) Operating Leases
The Company utilizes office space for its corporate offices in
Aliso Viejo, California currently under lease by phoneXchange, Inc. The
five-year lease calls for minimum monthly payments of $16,679 on 8,642 square
feet and expires on June 30, 2004. The Company has prepaid rent and operating
expense in the amount of $166,791 representing a period of 10 months ending on
June 12, 2000. The annual base rent increase is 4% per year.
The Company leases certain switching facilities in Los Angeles
under lease with Global Network Providers, which was assumed under the merger of
Global Access Pagers, Inc. and now assumed by the Company. Notwithstanding the
rescission of the merger, the Company agreed to remain bound by the terms of
this Lease. The five-year lease calls for minimum monthly lease payments of
$2,705 expiring on May 31, 2002. The annual base rent can be increased upon
notice.
The Company has entered into a ten-year sub-lease through its
phoneXchange subsidiary for certain switching facilities in Los Angeles. The
ten-year lease calls for minimum monthly lease payments of $8,015 for the first
five years and an increase in minimum monthly lease payments to $9,017 expiring
on February 27, 2009.
The Company leases certain co-location switching facilities in
Dallas, Texas through its phoneXchange subsidiary. The one-year lease calls for
minimum monthly lease payments of $2,385 expiring on March 31, 2000.
The Company leases certain co-location switching facilities in
Laredo, Texas through its phoneXchange subsidiary. The one-year lease calls for
minimum monthly lease payments of $450 expiring on May 12, 1999.
Total rent expense for the six months ended June 30, 1999,
amounted to $121,666.
The Company leases certain telecommunications circuits through
its phoneXchange subsidiary. The one-year lease calls for minimum monthly lease
payments of $11,825 expiring on April 30, 2000.
The Company leases certain additional telecommunications
circuits through its phoneXchange subsidiary. The three-year lease calls for
minimum monthly lease payments of $10,645 expiring on March 25, 2002.
The Company leases certain telecommunications circuits through
its phoneXchange subsidiary. The one-year lease calls for minimum monthly lease
payments of $56,000 expiring on June 30, 1999.
F-14
<PAGE> 61
Total leased circuit expense for the six months ended June 30,
1999, amounted to $44,939.
(b) Capital Leases
The Company is obligated under a capital lease agreement with
Rockford Industries to finance certain telecommunications switching equipment.
The lease agreement calls for 36 equal minimum monthly payments of $6,577.13.
Aggregate minimum lease payments total $236,767. The switching equipment secures
the capital lease.
Future minimum lease payments associated with the leases
described herein, including renewal options are as follows:
<TABLE>
<CAPTION>
Year Ended June 30 Capital Leases Operating Leases
------------------ -------------- ----------------
<S> <C> <C>
2000 $ 78,928 $ 1,270,802
2001 78,928 467,126
2002 46,453 424,258
2003 0 321,316
2004 0 330,322
Thereafter 0 540,990
----------- -----------
$ 204,309 $ 3,354,814
----------- -----------
Total minimum lease
payments 204,309
-----------
Less: imputed interest (46,758)
-----------
Net present value of
minimum lease payments 157,551
-----------
Less: current portion (47,499)
-----------
Long-term capitalized lease obligation $ 110,052
===========
</TABLE>
On November 2, 1998, the Company's subsidiary, phoneXchange and
COMDISCO executed a Master Lease Agreement for the lease of certain
telecommunication products and services. As of June 30, 1999, there were no
purchases under the Master Lease Agreement.
Subsequent to June 30, 1999, the agreement was canceled.
8. EQUITY TRANSACTIONS
On February 23, 1999, the Company issued warrants to purchase 5,943,633
common shares of the Company at $1.72 per share. The warrants are excisable for
5 years.
On June 1, 1999, the Company entered into a consulting agreement whereby
the Company issued 100,000 warrants at $7.50 per share and exercisable for 18
months for certain consulting services.
9. ADVERTISING EXPENSE
F-15
<PAGE> 62
Advertising is expended as incurred.
10. YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may organize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations.
Management believes the Company's information technology system is Year 2000
compliant and other operations of the Company will not be significantly impacted
by the year 2000 issue.
11. MINORITY INTEREST
Minority interest is represented by the minority shareholders'
proportionate share of the equity or income of the Company's majority-owned
subsidiary phoneXchange, Inc. The interest is the difference between the
minority equity at February 28, 1999 (date of consolidation) of ($165,034) and
the income earned of $646,314 for the four months ended June 30, 1999. The
resulting minority interest is $481,280.
12. SUBSEQUENT EVENTS
On July 30, 1999, the Company's subsidiary, phoneXchange, and Lucent
Technologies, Inc. InterNetworking Systems executed a Master Lease Agreement for
the lease of certain telecommunication products and services valued at $10
million. $3 million was made available upon execution of the lease; the
remaining $7 million will be available for equipment leases upon providing
Lessor with one of the following (a) verification that a minimum of five million
dollars in new equity has been raised prior to September 30, 1999; or (b)
verification that the Company has demonstrated cash flow (EBITDA) coverage of
potential lease payments of at least 1.25X as measured on a rolling three months
average.
F-16
<PAGE> 63
PHONEXCHANGE, INC.
(A Delaware Corporation)
FINANCIAL STATEMENTS
AND
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
December 31, 1998
<PAGE> 64
PHONEXCHANGE, INC.
(A Delaware Corporation)
TABLE OF CONTENTS
From April 7, 1998 (Inception) To December 31, 1998
<TABLE>
Page
----
<S> <C>
Independent Auditor's Report 1
Balance Sheet 2-3
Statement of Income and Accumulated Deficit 4
Statement of Shareholders' (Deficit) 5
Statement of Cash Flows 6
Notes to Financial Statements 7-14
</TABLE>
<PAGE> 65
[BRAD B. HAYNES LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
The Board of Directors
PhoneXchange, Inc.
We have audited the balance sheet of PhoneXchange, Inc. (a Delaware
Corporation) as of December 31, 1998 and the related statements of income and
accumulated deficit, changes in shareholders' equity (deficit) and cash flows
for the period April 7, 1998 (inception) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. I believe that our audit provides 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 PhoneXchange, Inc. (a Delaware
Corporation) as of December 31, 1998 and the results of its operations, its
changes in shareholders' equity (deficit) and its cash flows for the period of
April 7, 1998 (inception) to December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. Note 1 to the financial statements,
discusses management's concerns. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management is currently
pursuing various financing alternatives. However, no assurance can be provided
that management will be able to obtain financing on terms acceptable to the
Company, or at all. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
Brad B. Haynes
/s/ BRAD B. HAYNES
April 2, 1999
1
<PAGE> 66
PHONEXCHANGE, INC.
(A Delaware Corporation)
BALANCE SHEET
December 31, 1998
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS
Cash 59,170
Accounts receivable 11,598
Deposits 64,965
------
Total Current Assets 135,733
PROPERTY AND EQUIPMENT (NET) 416,438
ASSETS UNDER CAPITAL LEASE (NET) 346,343
-------
TOTAL ASSETS 898,514
=======
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Accounts payable 242,658
Accrued expenses 45,905
Taxes payable 39,951
Current portion - long-term liabilities 144,142
Current portion - capital lease obligation 49,344
Payable to C/Net Solutions, Inc. 336,846
Notes payable - short-term 93,047
Payable to related parties 439,186
Deferred revenue 20,332
-------
Total Current Liabilities 1,411,411
LONG-TERM LIABILITIES
Notes payable 171,716
Capital lease obligation 135,576
-------
Total Long-Term Liabilities 307,292
---------
Total Liabilities 1,718,703
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE> 67
PHONEXCHANGE, INC.
(A Delaware Corporation)
BALANCE SHEET CONTINUED
December 31, 1998
<TABLE>
<S> <C> <C>
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' (DEFICIT)
Preferred Stock, .001 par value,
authorized, 5,000,000 shares issued
and outstanding - none
Common Stock, .001 par value, authorized,
50,000,000 shares issued and
outstanding 10,100,882 shares 10,101
Additional paid-in capital 298,931
Accumulated deficit (1,127,221)
----------
Total Shareholders' (Deficit) (820,189)
--------
TOTAL LIABILITIES AND
SHAREHOLDERS' (DEFICIT) 898,514
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 68
PHONEXCHANGE, INC.
(A Delaware Corporation)
STATEMENT OF INCOME AND ACCUMULATED DEFICIT
From April 7, 1998 (Inception) To December 31, 1998
<TABLE>
<S> <C> <C>
REVENUE 183,000
COST OF SERVICES 262,093
-------
GROSS PROFIT (79,093)
OPERATING EXPENSES
Selling, general and administrative expenses 940,019
Depreciation and amortization 59,996
-------
Total Operating Expenses 1,000,015
---------
LOSS FROM OPERATIONS (1,079,108)
OTHER INCOME (EXPENSES) (48,113)
---------
NET LOSS (1,127,221)
ACCUMULATED DEFICIT - April 7, 1998 0
ACCUMULATED DEFICIT - December 31, 1998 (1,127,221)
=========
BASIC AND DILUTED WEIGHTED AVERAGE NUMBER 10,002,662
OF COMMON SHARES OUTSTANDING ==========
BASIC AND DILUTED NET LOSS PER SHARE (0.11)
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 69
PHONEXCHANGE, INC.
(A Delaware Corporation)
STATEMENT OF SHAREHOLDERS' (DEFICIT)
From April 7, 1998 (Inception) To December 31, 1998
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL TOTAL
STOCK STOCK PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ---------- ------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 7, 1998 -- -- -- -- -- -- --
Issuance of Common Stock
to Founders in exchange
for cash 9,000,000 9,000 291,000 300,000
Effect of Merger with
Mars Method, Inc. 1,100,882 1,101 5,931 7,032
Net Loss (1,127,721) (1,127,221)
--------- ------ ---------- ------ ----------- ------------ ----------
0 0 10,100,882 10,101 296,931 (1,127,221) (820,189)
========= ====== ========== ====== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 70
PHONEXCHANGE, INC.
(A Delaware Corporation)
STATEMENT OF CASH FLOWS
From April 7, 1998 (Inception) To December 31, 1998
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (1,127,221)
Adjustments to reconcile to net loss to
cash used by operating activities:
Amortization and depreciation 59,996
Write-off organization cost 7,032
Decrease (increase) in assets:
Accounts receivable (11,598)
Deposits (219,965)
Increase (decrease) in liabilities:
Accounts payable 242,658
Accrued expenses 55,465
Taxes payable 8,417
Deferred income 20,332
Payable to C/Net Solutions, Inc. 336,846
--------
Total Adjustments 499,183
---------
NET CASH USED IN OPERATING ACTIVITIES (628,038)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (103,205)
----------
NET CASH USED IN INVESTING ACTIVITIES (103,205)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of short-term debt 605,500
Principal payments of short-term debt (112,408)
Principal payments of capital lease
obligation (2,679)
Proceeds from issuance of common stock 300,000
--------
NET CASH PROVIDED BY FINANCING ACTIVITIES 790,413
--------
NET CASH PROVIDED BY ALL ACTIVITIES 59,170
CASH - April 7, 1998 --
CASH - December 31, 1998 59,170
========
INTEREST PAID 13,083
========
INCOME TAXES PAID --
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 71
PHONEXCHANGE, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS
From April 7, 1998 (Inception) To December 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FORMATION AND BASIS OF PRESENTATION:
PhoneXchange, Inc., was incorporated in the State of Delaware on April 7,
1998 (Date of Inception). On April 21, 1998, the Company's founding
shareholders (the Founders) contributed 300,000 to the Company in exchange
for 9.0 million shares of the Company's common stock; and C/Net: Solutions,
Inc. (C/Net), an affiliated entity owned by the Founders, transferred its
long-distance service business to the Company in exchange for a payable of
140,892.
In January 1998, C/Net formed a group to develop and implement the
Company's long-distance service business plan. During the period from
January 1, through April 21, 1998, C/Net incurred direct and indirect
expenditures in connection with the activities of this group and in
connection with the formation of the Company aggregating 110,412. Indirect
expenditures included in this amount were allocated to the long-distance
service business based on the ratio of aggregate salaries expense of the
long-distance business to C/Net's total salaries expense during the period
from January 1, through April 21, 1998. These direct and indirect expenses
have been reflected in the accompanying Statement of Operations.
On May 1, 1998, the Company entered into an Agreement and Plan of Merger
(the Merger) with Mars Method Inc. (Mars Method), a publicly held entity
and a Delaware corporation. Pursuant to the Agreement, the Company issued
1,100,882 shares of its common stock in exchange for 14,064,216 shares of
.001 par value common stock of Mars Method, which represents 100% of the
issued and outstanding shares of Mars Method. Upon completion of the
Merger, PhoneXchange, was the surviving corporation and Mars Method ceased
to exist. The Directors and Officers of the Company are the Directors and
Officers of the surviving corporation. The exchange is exempt from
registration pursuant to Regulation D, Section 504 of the Securities and
Exchange Commission Act of 1933, as amended. The Company expended 7,082 of
organizational costs of Mars Method upon completion of the Merger which
have been reflected in the accompanying Statement of Operations. The Merger
has been accounted for under the purchase method of accounting.
The Company is being formed to build a state of the art flexible switching
network which provides reliable, high-quality, low-cost domestic and
international long-distance service on a wholesale basis to second and
third-tier U.S. based long distance providers and resellers and brokers of
domestic and international long-distance service. The Company expects to
provide long distance services through a flexible network of foreign
termination relationships, international gateway and multi-service, frame
relay, Internet Protocol switches, leased and owned transmission
facilities and resale arrangements with other long distance providers. The
Company began offering its services to customers in September of 1998.
7
<PAGE> 72
PHONEXHANGE, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONT.'D
From April 7, 1998 (inception To December 31, 1998
Management has dedicated its efforts to date on the development and
implementation of its long-distance service business plan and the formation and
financing of the Company. To achieve the objectives outlined in its plan, the
Company must obtain sufficient financing to obtain and complete its
long-distance network facilities and, ultimately, achieve a sufficient level of
sales and profitability to support its contemplated operations. Management is
currently pursuing various financing alternatives. However, no assurance can be
provided that management will be able to obtain financing on terms acceptable
to the Company, or at all. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
USE OF ESTIMATES:
The preparation of the 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 revenue and expenses during the
reporting period. The Company reviews all significant estimates effecting the
financial statements on a recurring basis and records the effect of any
necessary adjustments prior to their issuance. Actual results could differ from
those estimates.
REVENUE RECOGNITION:
The Company records revenues for the sale of telecommunications services at the
time of customer usage. All services paid in advance by the customer are
recorded as unearned revenue.
CASH AND CASH EQUIVALENT:
Cash and cash equivalents consist of demand deposits and money market funds,
which are highly liquid short-term instruments with original maturities of
three months or less from the date of purchase. There were no cash equivalents
for the period April 7, to December 31, 1997.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost or fair values at the date of
acquisition and, in the case of equipment under capital leases, the present
value of minimum lease payments. Depreciation and amortization of property and
equipment are computed using the straight-line method over the following
estimated useful lives:
8
<PAGE> 73
PHONEXCHANGE, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS cont.'d
From April 7, 1998 (Inception) To December 31, 1998
Operating Equipment 5 years
Furniture, Fixtures and Equipment 3 years
Amortization of assets financed under capital leases was 38,403 at December
31, 1998. Depreciation of purchased assets was 21,593. Total Amortization
and depreciation was 59,996.
Replacements and betterments, renewals and extraordinary repairs that
extend the life of the assets are capitalized; other repairs and
maintenance are expended.
INCOME TAXES:
The Company uses the liability method of accounting for income taxes
specified by SFAS No. 109, "Accounting for Income Taxes", whereby deferred
tax liabilities and assets are determined based on the difference between
financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse. Deferred tax assets are recognized and measured based on the
likelihood of realization of the related tax benefit in the future. The
Company had no material net deferred tax assets or liabilities at
December 31, 1998.
LOSS PER COMMON SHARE:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share". The statement replaces primary EPS
with basic EPS, which is computed by dividing reported earnings available
to common shareholders by weighted average shares outstanding. The
provisions requires the calculation of diluted EPS. The Company uses the
method specified by the statement.
2. AGREEMENT AND PLAN OF MERGER
On May 1, 1998, the Company entered into an Agreement and Plan of Merger
(the Merger) with Mars Method Inc. (Mars Method) a Delaware corporation.
Pursuant to the Agreement, the Company issued 1,100,882 shares of its
common stock in exchange for 14,064,216 shares of .001 par value common
stock of Mars Method, which represents 100% of the issued and outstanding
shares of Mars Method. Upon completion of the Merger, PhoneXchange, will
be the surviving corporation and Mars Method will cease to exist. The
exchange will be exempt from registration pursuant to Regulation D,
Section 504 of the Securities and Exchange Commission Act of 1933, as
amended. The Company expended 7,082 of organizational costs of Mars Method
upon completion of the Merger. The Directors and Officers of the Company
are the Directors and officers of the surviving corporation. The Merger is
accounted for under the purchase method of accounting.
9
<PAGE> 74
PHONEXCHANGE, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONT.'D
From April 7, 1988 (Inception) To December 31, 1998
3. DEPOSITS:
Deposits primarily consist of payments made to long distance providers to
secure service. The deposits are refunded or applied to future service.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists primarily of telecommunications switching
equipment. The recorded amount of property and equipment capitalized and
the related accumulated depreciation is as follows:
<TABLE>
<S> <C> <C>
Operating equipment 417,848
Furniture, fixtures and equipment 20,183
-------
Total property and equipment 822,777
Less: accumulated depreciation (21,593)
--------
Property and equipment net 416,438
========
Assets under capital lease 384,746
Less: accumulated amortization (38,403)
Assets under capital lease (net) (346,343)
========
</TABLE>
5. SHORT-TERM NOTES PAYABLE:
<TABLE>
<CAPTION>
SHORT-TERM RELATED PARTY
---------- -------------
<S> <C> <C>
Note payable in connection with asset purchase with
FM Technologies, LLC. Non-interest bearing. Payable
in three equal monthly installments of 13,047,
beginning June 1, 1998, until paid in full. 13,047
Note payable to individual. Interest bearing at 10%
per annum. Principal; of 47,000 and interest due on
March 8, 1999. 47,000
Note payable to individual. Interest bearing at 10%
per annum. Principal of 33,000 and interest due on
March 26, 1999. 33,000
</TABLE>
10
<PAGE> 75
PHONEXCHANGE, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONT.'D
From April 7, 1988 (Inception) To December 31, 1998
<TABLE>
<S> <C> <C>
Note payable to shareholder. Interest bearing at 10%
per annum. Principal 55,000 and interest due on
September 17, 1999. 29,186
Note payable to shareholder. Interest bearing at 10%
per annum. Principal of 50,000 and interest due on
September 17, 1999. 50,000
Note payable to shareholder. Interest bearing at 10%
per annum. Principal of 35,000 and interest due on
April 12, 1999. 35,000
Note payable to Corporate Financial Enterprises.
Interest bearing at 8% per annum. Monthly payments
of principal and interest in an amount not less than
20% of the outstanding balance of the loan at the end
of the prior month are due commencing on May 1,
1999, and continuing thereafter on the first day of
each month until the total balance is paid, but in the
event there is any outstanding principal balance of the
Loan at September 30, 1999, the entire remaining
balance of principal, accrued interest, late charges
and advances, if any, shall be due and payable on
September 30, 1999. Note secured by Company
assets and stock pledge. 325,000
------ -------
TOTAL SHORT-TERM NOTES PAYABLE 93,047 439,186
====== =======
</TABLE>
6. PAYABLE TO C/NET
The payable to C/Net is non-interest bearing and is due on demand.
7. LONG-TERM LIABILITIES
<TABLE>
<S> <C>
Note payable in connection with the asset purchase
with FM Technologies, LLC. Interest bearing at 10%
per annum. Principal of 170,858 and interest are
payable in monthly installments of 5,513, beginning
August 23, 1998, for 36 months. The Note is secured
by the assets acquired. 170,858
</TABLE>
11
<PAGE> 76
PHONEXCHANGE, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONT.'D
From April 7, 1998 (Inception) To December 31, 1998
<TABLE>
<S> <C>
Note payable in connection with the asset purchase
with GST Net, Inc. Interest bearing at 7.5% per
annum. Principal of 145,000 and interest are payable
in monthly installments of 6,525, beginning January
15, 1999, for 24 months. The Note is secured by the
assets acquired. 145,000
-------
Total notes payable 315,858
Less: Current portions 144,143
-------
Notes Payable - Long-Term 171,715
=======
</TABLE>
Aggregate maturities of long-term liabilities, net of discount, over the
next five years is as follows:
<TABLE>
<CAPTION>
Year Ending
December 31 Amount
----------- --------
<S> <C>
1999 144,143
2000 134,379
2001 37,336
2002 --
2003 --
-------
315,858
=======
</TABLE>
The company is obligated under a lease agreement with Rockford Industries to
finance certain telecommunications switching equipment. The lease agreement
calls for 36 equal minimum monthly payment of 6,577.13. Aggregate minimum
lease payments total 236,767. The capital lease is secured by the System.
8. LEASE COMMITMENTS:
The company utilizes office space for its corporate offices in Newport
Beach, California currently under lease by C/Net:Solutions, Inc. The lease
calls for minimum monthly payments of 10,558 and expires on May 15, 1999.
Rent expense has been allocated to the Company based on the amount of space
utilized by the Company as compared to the total space under lease. For the
period of January 1, 1998 to October 31, 1998, the Company was allocated 20%
of the total monthly lease payment. Effective September 1, 1998, management
determined that substantially all of the space at this facility was being
used to the benefit of the Company as the Company began offering its
services to its customers in September 1998. Therefore, the Company was
allocated 100% of the minimum monthly lease payment under the lease for the
period from September 1, 1998 to December 31, 1998. The Company intends to
secure office space for its corporate offices in a new location prior to the
expiration of the existing lease under C/Net:Solutions, Inc.
12
<PAGE> 77
PHONEXCHANGE, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONT.'D
From April 7, 1998 (Inception) To December 31, 1998
Future minimum lease payments associated with the leases described herein,
including renewal options are as follows:
<TABLE>
<CAPTION>
Year Ending Capital
December 31 Leases
- ----------- -------
<S> <C>
1999 98,657
2000 78,926
2001 89,719
2002 --
2003 --
------
</TABLE>
<TABLE>
<S> <C> <C>
Total minimum lease payments 267,402
Less: Imputed interest 82,482
-------
Net present value of minimum lease payment 184,920
Less: Current portion 49,344
-------
Long-term capital lease obligation 135,576
=======
</TABLE>
9. Total rent expense for the period from April 7, 1998 (inception) to
December 31, 1998, amounted to 72,711.
10. Advertising is expenses as incurred.
11. SUBSEQUENT EVENTS
On December 10, 1998, the company and certain shareholders of the company, the
"Sellers", entered into a letter of intent, which among other things,
contemplated the principal terms under which the Sellers would sell
approximately 85% of the issued and outstanding common stock of the Company to
Global Access Pagers, Inc., "Global", in exchange for approximately 10% of the
issued and outstanding shares of Global. Under the Letter of Intent, Global
agreed to loan the company $525,000 in the form of a Secured Promissory Note.
The Secured Promissory Note was entered into by the company, David Chadwick, an
individual, the "Borrowers" and Corporate Financial Enterprises, Inc. the
"Lender", in the amount of $525,000 in addition to all additional future
advances made by the Lender to the Borrower or creditors of the Borrower. The
Secured Promissory Note bears interest at 8% per annum. Monthly payments of
principal and interest in an amount not less than 20% of the outstanding balance
of the loan at the end of the prior month shall be made.
13
<PAGE> 78
PHONEXCHANGE, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONT'D
From April 7, 1998 (Inception) To December 31, 1998
by Borrower to Lender and received by Lender commencing on the 1st day of May,
1999, and continuing thereafter on the first day of each month until the total
balance is paid, but in the event there is any outstanding principal balance of
the Loan at September 30, 1999, the entire remaining balance of principal,
accrued interest, late charges and advances, if any, shall be due and payable
on September 30, 1999. The Secured Promissory Note is secured by a Security
Agreement under which the Lender is granted rights to all collateral of the
company which is comprised of all accounts receivable, documents, equipment,
general intangibles, inventory, all rights, title and interest in any and all
assets and proceeds of the company. In addition, the Lender entered into Pledge
Agreements with certain shareholders of the Company as a condition to entering
into the secured Promissory Note. The Pledge Agreements call for the pledge of
shares of common stock of the company owned by the shareholders. In the event of
default under the Secured Promissory Note, the Lender may exercise its right
to ownership of the shares of common stock of the company which have been
pledged. Upon payment in full of both principal and interest on the Note, the
Pledge Agreements shall terminate. As of December 31, 1998, the company
received 325,000 under the Secured Promissory Note.
On February 22, 1999, the Board of Directors of the company approved a 1:25
reverse stock split of the company's common stock. Prior to the reverse split
there were 10,100,882 shares of the company's .001 par value common stock
issued and outstanding. After the reverse split, there are 404,035 of the
company's .001 par value common stock issued and outstanding.
14
<PAGE> 79
PART III
ITEM 1. INDEX TO EXHIBITS
3.1 Articles of Incorporation of Theatre, Inc. filed January 16, 1997
3.2 Certificate of Amendment of the Articles of Incorporation of Global
Access Pagers, Inc. filed February 10, 1999
3.3 Bylaws of Theatre, Inc.
4.1 Certificate of Designation of Series A Preferred Stock
4.2 Certificate of Designation of 12% Convertible Redeemable Preferred
Stock, Series A-1
4.3 Amendment to Certificate of Designation of 12% Convertible Redeemable
Preferred Stock, Series A-1
4.4 Form of Warrant Agreement
10.1 Stock Purchase Agreement dated as of January 1, 1999 by and among Global
Access Pagers, Inc. and phoneXchange, Inc., David Chadwick, James Rott,
Paul Hyde and Gary Killoran
10.2 First Amendment to Stock Purchase Agreement by and among Global Access
Pagers, Inc. and phoneXchange, Inc., David Chadwick, James Rott, Paul
Hyde and Gary Killoran
10.3 Employment Agreement between the Company and David J. Chadwick effective
as of January 4, 1999
10.4 Employment Agreement between the Company and Gary L. Killoran effective
as of January 4, 1999
10.5 Employment Agreement between the Company and James E. Rott effective as
of January 4, 1999
10.6 Employment Agreement between the Company and Paul E. Hyde effective as
of January 4, 1999
10.7 Employment Agreement between the Company and Thomas C. Scott effective
as of October 11, 1999
10.8 Master Lease Agreement with Lucent Technologies, Inc. InterNetworking
Systems dated July 30, 1999
10.9 Lease made as of April 23, 1999 between PhoneXchange and CarrAmerica
Realty Corporation
10.10 Lease dated June 1, 1997 between Quinby Building, LLC and Global Network
Providers
10.11 Letter of Intent for Joint Venture Between Integrated Communication
Networks, Inc. and Global Industry Development & Trade Ltd. ("GIDT")
effective June 1, 1999
10.12 Form of 4% Convertible Debenture (filed herewith)
11.1 Statement re Computation of Per Share Earnings (see Consolidated
Statement of Operations and Notes to Consolidated Financial Statements,
I-i)
21.1 Subsidiaries
27.1 Financial Data Schedule
15
<PAGE> 80
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, hereunto duly authorized.
INTEGRATED COMMUNICATION NETWORKS, INC.
Date: December 3, 1999 /s/ DAVID J. CHADWICK
--------------------------------------------
David J. Chadwick
President, Chief Executive Officer and
Chairman of the Board of Directors
Date: December 3, 1999 /s/ GARY L. KILLORAN
--------------------------------------------
Gary L. Killoran
Secretary, Treasurer, Chief Financial
Officer and Director
Date: December 3, 1999 /s/ PAUL HYDE
--------------------------------------------
Paul Hyde
Vice President and Director
16
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<C> <S>
3.1* Articles of Incorporation of Theatre, Inc. filed January 16, 1997
3.2* Certificate of Amendment of the Articles of Incorporation of Global
Access Pagers, Inc. filed February 10, 1999
3.3* Bylaws of Theatre, Inc.
4.1* Certificate of Designation of Series A Preferred Stock
4.2* Certificate of Designation of 12% Convertible Redeemable Preferred
Stock, Series A-1
4.3* Amendment to Certificate of Designation of 12% Convertible Redeemable
Preferred Stock, Series A-1
4.4* Form of Warrant Agreement
10.1* Stock Purchase Agreement dated as of January 1, 1999 by and among Global
Access Pagers, Inc. and phoneXchange, Inc., David Chadwick, James Rott,
Paul Hyde and Gary Killoran
10.2* First Amendment to Stock Purchase Agreement by and among Global Access
Pagers, Inc. and phoneXchange, Inc., David Chadwick, James Rott, Paul
Hyde and Gary Killoran
10.3* Employment Agreement between the Company and David J. Chadwick effective
as of January 4, 1999
10.4* Employment Agreement between the Company and Gary L. Killoran effective
as of January 4, 1999
10.5* Employment Agreement between the Company and James E. Rott effective as
of January 4, 1999
10.6* Employment Agreement between the Company and Paul E. Hyde effective as
of January 4, 1999
10.7* Employment Agreement between the Company and Thomas C. Scott effective
as of October 11, 1999
10.8* Master Lease Agreement with Lucent Technologies, Inc. InterNetworking
Systems dated July 30, 1999
10.9* Lease made as of April 23, 1999 between PhoneXchange and CarrAmerica
Realty Corporation
10.10* Lease dated June 1, 1997 between Quinby Building, LLC and Global Network
Providers
10.11* Letter of Intent for Joint Venture Between Integrated Communication
Networks, Inc. and Global Industry Development & Trade Ltd. ("GIDT")
effective June 1, 1999
10.12 Form of 4% Convertible Debenture (filed herewith)
11.1* Statement re Computation of Per Share Earnings (see Consolidated
Statement of Operations and Notes to Consolidated Financial Statements,
I-i)
21.1* Subsidiaries
27.1* Financial Data Schedule
</TABLE>
- --------------
* Previously filed.
<PAGE> 1
EXHIBIT 12.12
DEBENTURE
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
ISSUANCE DATE DECEMBER , 1999
CONVERTIBLE DEBENTURE DUE DECEMBER , 2004
AMOUNT $ 5,000,000.00
NUMBER NOV-1999-101
FOR VALUE RECEIVED, INTEGRATED COMMUNICATION NETWORKS, INC., a Nevada
corporation (the "Company"), hereby promises to pay REBECCA LLC or registered
assigns (the "Holder") on December __, 2004, (the "Maturity Date"), the
principal amount of Five Million Dollars ($5,000,000) U.S., and to pay interest
on the principal amount hereof, in such amounts, at such times and on such terms
and conditions as are specified herein.
Article 1. Interest
The Company shall pay interest on the unpaid principal amount of this
Debenture (the "Debenture") at the time of each conversion at the rate of Four
Percent (4%) per annum, payable in arrears at the time of each conversion, in
cash or in common stock of the Company, $.01 par value per share (the "Common
Stock"), at the Company's option, until the principal amount hereof is paid in
full or has been converted. If paid in Common Stock, the number of shares of the
Company's Common Stock to be received shall be determined pursuant to Section
4(d) hereof. If the Interest is to be paid in cash, the Company shall make such
payment within 5 business days of the conversion payment date. If the interest
is to be paid in Common Stock, said Common Stock shall be delivered to the
Holder, or per Holder's instructions, within 10 business days of the conversion
date. The Debentures are subject to automatic conversion at the end of sixty
(60) months from the date of issuance at which time all Debentures outstanding
will be automatically converted based upon the formula set forth in Section 3.2.
The closing shall be deemed to have occurred on the date the "Purchase Price",
as defined in the Subscription Agreement entered into between the Company and
Holder (the "Subscription Agreement"), less fees and expenses payable by the
Company, is wired to the Company (the "Closing Date").
Article 2. Method of Payment
This Debenture must be surrendered to the Company in order for the
Holder to receive payment of the principal amount hereof. The Company shall have
the option of paying the interest on this Debenture in United States dollars or
in common stock upon conversion pursuant to Article 1 hereof. The Company may
draw a check for the payment of interest to the order of the Holder of this
Debenture and mail it to the Holder's address as shown on the Register (as
defined in Section 7.2 below). Interest and principal payments shall be subject
to withholding under applicable United States Federal Internal Revenue Service
Regulations.
Article 3. Conversion
Section 3.1. Conversion Privilege
(a) The Holder of this Debenture shall have the right, at its option, to
convert it into shares of Common Stock at any time commencing April 1, 2000 and
which is before the close of business on the Maturity Date, except as set forth
in Section 3.1(c) below. The number of shares of Common Stock
<PAGE> 2
issuable upon the conversion of this Debenture is determined pursuant to Section
3.2 and rounding the result to the nearest whole share.
(b) Less than all of the principal amount of this Debenture may be
converted into Common Stock if the portion converted is $5,000 or a whole
multiple of $5,000 and the provisions of this Article 3 that apply to the
conversion of all of the Debenture shall also apply to the conversion of a
portion of it. This Debenture may not be converted, whether in whole or in part,
except in accordance with Article 3.
(c) In the event all or any portion of this Debenture remains
outstanding on the fifth anniversary of the date hereof, the unconverted portion
of such Debenture will automatically be converted into shares of Common Stock on
such date in the manner set forth in Section 3.2.
Section 3.2. Conversion Procedure.
(a) Debentures. Upon the Company's receipt of a facsimile or original of
Holder's duly completed and signed Notice of Conversion (a copy of which is
attached hereto as Exhibit A), the Company shall instruct its transfer agent to
issue one or more Certificates representing that number of shares of Common
Stock into which the Debentures are convertible in accordance with the
provisions regarding conversion. The Company's transfer agent or attorney shall
act as Registrar and shall maintain an appropriate ledger containing the
necessary information with respect to each Debenture.
(b) Conversion Date. Such conversion shall be effectuated by
surrendering to the Company, or its attorney, the Debentures to be converted
together with a facsimile or original of the signed Notice of Conversion. The
date on which the Notice of Conversion is effective ("Conversion Date") shall be
deemed to be the date on which the Holder has delivered to the Company a
facsimile or original of the signed Notice of Conversion, as long as the
original Debentures to be converted are received by the Company or its
designated attorney within 3 business days thereafter. As long as the Debentures
to be converted are received by the Company within 3 business days after it
receives a facsimile or original of the signed Notice of Conversion, the Company
shall deliver to the Holder, or per the Holder's instructions, the shares of
Common Stock, with, unless as otherwise provided in the Subscription Agreement,
restrictive legends as set forth in the Subscription Agreement within 5 business
days of receipt of the Debentures to be converted.
(c) Common Stock to be Issued. Upon the conversion of any Debentures and
upon receipt by the Company or its attorney of a facsimile or original of
Holder's signed Notice of Conversion, Company shall instruct Company's transfer
agent to issue Stock Certificates with restrictive legends as set forth in the
Subscription Agreement, unless as otherwise provided in the Subscription
Agreement, in the name of Holder (or its nominee) and in such denominations to
be specified at conversion representing the number of shares of Common Stock
issuable upon such conversion, as applicable. Company warrants that no
instructions, other than these instructions, have been given or will be given to
the transfer agent and that the Common Stock shall otherwise be freely
transferable on the books and records of Company.
(d) Conversion Rate. Anytime commencing with April 1, 2000, Holder is
entitled to convert this Debenture, plus accrued interest, into Common Stock of
the Company at the lesser of (i) 80% of the averaged three lowest closing bid
prices, as reported by Bloomberg, LP, for the Company's Common Stock for the
twenty (20) trading days immediately preceding the Conversion Date or (ii)
$10.00 (each being referred to as the "Conversion Price"). Anytime after the
Closing Date, the first trading date, if any, when the closing bid price of the
Company's Common Stock is equal to or less than $6.00 as reported by Bloomberg,
shall be referred to as the "Soft Floor Date," and the Holder agrees that it
shall not convert any Debentures for the nine (9) trading days following, but
not including, the "Soft Floor Date, even if the closing bid price is above
$6.00 during that time. The Holder may again convert Debentures on the tenth
(10th) trading day following, but not including, the Soft Floor Date, and no
further restrictions will be imposed on conversions in the event the closing bid
price is equal to or below $6.00 anytime after the tenth (10th) trading day
following the Soft Floor Date, except as required by subsection 3.2(k) hereof.
No fractional shares or scrip representing fractions of shares will be issued on
conversion, but the number of shares issuable shall be rounded up or down, as
the case may be, to the nearest whole share.
2
<PAGE> 3
Mandatory Conversion Date. The Debentures are subject to mandatory
conversion sixty (60) months after issuance, at which time all Debentures
outstanding will be automatically converted, upon the terms set forth in this
section.
(e) Nothing contained in this Subscription Agreement shall be deemed to
establish or require the payment of interest to the Holder at a rate in excess
of the maximum rate permitted by governing law. In the event that the rate of
interest required to be paid exceeds the maximum rate permitted by governing
law, the rate of interest required to be paid thereunder shall be automatically
reduced to the maximum rate permitted under the governing law and such excess
shall be returned with reasonable promptness by the Holder to the Company.
(f) It shall be the Company's responsibility to take all necessary
actions and to bear all such costs to issue certificates for the Common Stock as
provided herein, including the responsibility and cost for delivery of an
opinion letter to the transfer agent, if so required. The person in whose name
the certificate of Common Stock is to be registered shall be treated as a
shareholder of record on and after the conversion date. Upon surrender of any
Debentures that are to be converted in part, the Company shall issue to the
Holder new Debentures representing the unconverted amount, if so requested by
Holder.
(g) In the event the Common Stock is not delivered (with legends if
before the effective date of the registration statement covering this Debenture
and without legends if after the effective date of the registration statement
covering this Debenture) per the written instructions of the Holder, within
eight (8) business days after, but not including, the Conversion Date and
delivery of the Debentures to be converted (unless such delay is caused by
operation of law) then in such event the Company shall pay to Holder one-half
percent (0.5%), in cash, of the dollar value of the Debentures being converted
per each business day following the eighth (8th) business day after the
Conversion Date and delivery of the Debentures to be converted that the Common
Stock is not delivered up to and including the eighteenth (18th) business day
following the Conversion Date and delivery of the Debentures to be converted
that the Common Stock is not delivered. In the event the Common Stock is not
delivered per the written instructions of the Holder, within eighteen (18)
business days after, but not including, the Conversion Date and delivery of the
Debentures to be converted (unless such delay is caused by operation of law)
then in such event the Company shall pay to Holder one percent (1%), in cash, of
the dollar value of the Debentures being converted per each business day
following the eighteenth (18th) business day after the Conversion Date and
delivery of the Debentures to be converted that the Common Stock is not
delivered. Notwithstanding the foregoing, the Company shall not be required to
pay liquidated damages in excess of $100,000 per month pursuant to the terms of
this section. In the event the Holder converts a portion of the Debentures after
the effective date of the registration statement covering this Offering and the
Company is unable to deliver unrestricted, freely tradable common stock to the
Holder within twenty (20) calendar days following the Conversion Date, such
inability on the Company's part shall be considered an event of default. Holder
shall then be entitled to send written notice to the Company of the default and
the Holder, at its sole option may demand full repayment of the prorata Purchase
Price of the Debentures not yet converted, including accrued interest and
liquidated damages through the date that written notice is given to the Company
(the "Acceleration Amount"). If the Company does not wire the Acceleration
Amount to the Holder within five (5) business days of receiving the default
notice from Holder the Acceleration Amount shall accrue interest at twenty-four
percent (24%) per annum. The Company acknowledges that the failure to honor a
Notice of Conversion shall cause financial hardship to the Holder.
If, by the eighth (8th) business day after the Conversion Date and
delivery of the Debentures to be converted (the "Delivery Date"), unless such
delay is caused by operation of law, due to the Company's direct or indirect
actions or its failure to act, the transfer agent fails for any reason to
deliver the Common Stock (with legends if before the effective date of the
registration statement covering this Debenture and without legends if after the
effective date of the registration statement covering this Debenture) upon
conversion by the Holder and after such Delivery Date, the Holder purchases, in
an open market transaction or otherwise, shares of Common Stock (the "Covering
Shares") solely in order to make delivery in satisfaction of a sale of Common
Stock by the Holder (the "Sold Shares"), which delivery such Holder anticipated
to make using the Common Stock issuable upon conversion (a "Buy-In"), the
Company shall pay to the Holder, in addition to any other amounts due to Holder
pursuant to this Debenture, and not in lieu thereof, the Buy-In Adjustment
Amount (as defined below). The "Buy In Adjustment Amount" is
3
<PAGE> 4
the amount equal to the excess, if any, of (x) the Holder's total purchase price
(including brokerage commissions, if any) for the Covering Shares over (y) the
net proceeds (after brokerage commissions, if any) received by the Holder from
the sale of the Sold Shares. The Company shall pay the Buy-In Adjustment Amount
to the Holder in immediately available funds within five (5) business days of
written demand by the Holder. By way of illustration and not in limitation of
the foregoing, if the Holder purchases shares of Common Stock having a total
purchase price (including brokerage commissions) of $11,000 to cover a Buy-In
with respect to shares of Common Stock it sold for net proceeds of $10,000, the
Buy-In Adjustment Amount which the Company will be required to pay to the Holder
will be $1,000.
In lieu of delivering physical certificates representing the securities
issuable upon conversion, provided the Company's transfer agent is participating
in the Depository Trust Company ("DTC") Fast Automated Securities Transfer
program, upon request of the Holder and its compliance with the provisions
contained in this paragraph, so long as the certificates therefor do not bear a
legend and the Holder thereof is not obligated to return such certificate for
the placement of a legend thereon, the Company shall use its best efforts to
cause its transfer agent to electronically transmit the shares of Common Stock
issuable upon conversion to the Holder by crediting the account of Holder's
broker with DTC through its Deposit Withdrawal Agent Commission system.
The Company acknowledges that its failure to deliver the Common Stock
within eight (8) business days after the Conversion Date will cause the Holder
to suffer damages in an amount that will be difficult to ascertain. Accordingly,
the parties agree that it is appropriate to include in this Agreement a
provision for liquidated damages. The parties acknowledge and agree that the
liquidated damages provision set forth in this section represents the parties'
good faith effort to quantify such damages and, as such, agree that the form and
amount of such liquidated damages are reasonable and will not constitute a
penalty. The payment of liquidated damages shall not relieve the Company from
its obligations to deliver the Common Stock pursuant to the terms of this
Agreement.
To the extent that the failure of the Company to issue the Common Stock
pursuant to this Section 3.2 is due to the unavailability of authorized but
unissued shares of Common Stock, the provisions of this Section 3.2(g) shall not
apply but instead the provisions of Section 3.2(h) shall apply.
(h) The Company shall at all times reserve and have available all Common
Stock necessary to meet conversion of the Debentures by all Holders of the
entire amount of Debentures then outstanding. If, at any time Holder submits a
Notice of Conversion and the Company does not have sufficient authorized but
unissued shares of Common Stock available to effect, in full, a conversion of
the Debentures (a "Conversion Default", the date of such default being referred
to herein as the "Conversion Default Date"), the Company shall issue to the
Holder all of the shares of Common Stock which are available, and the Notice of
Conversion as to any Debentures requested to be converted but not converted (the
"Unconverted Debentures"), upon Holder's sole option, may be deemed null and
void. The Company shall provide notice of such Conversion Default ("Notice of
Conversion Default") to all existing Holders of outstanding Debentures, by
facsimile, within five (5) business days of such default (with the original
delivered by overnight or two day courier), and the Holder shall give notice to
the Company by facsimile within five business days of receipt of the original
Notice of Conversion Default (with the original delivered by overnight or two
day courier) of its election to either nullify or confirm the Notice of
Conversion.
The Company agrees to pay to all Holders of outstanding Debentures
payments for a Conversion Default ("Conversion Default Payments") in the amount
of (N/365) x (.24) x the initial issuance price of the outstanding and/or
tendered but not converted Debentures held by each Holder where N = the number
of days from the Conversion Default Date to the date (the "Authorization Date")
that the Company authorizes a sufficient number of shares of Common Stock to
effect conversion of all remaining Debentures. The Company shall send notice
("Authorization Notice") to each Holder of outstanding Debentures that
additional shares of Common Stock have been authorized, the Authorization Date
and the amount of Holder's accrued Conversion Default Payments. The accrued
Conversion Default Payments shall be paid in cash or shall be convertible into
Common Stock at the Conversion Rate, at the Holder's option, payable as follows:
(i) in the event Holder elects within ten (10) days of the Authorization Notice
in writing to take such payment in cash, cash payments shall be made to such
Holder by the fifth day of the following calendar month, or (ii) if the Holder
does not so elect to receive such Conversion
4
<PAGE> 5
Default Payment in cash, such payment shall be made in Common Stock at the then
current Conversion Price within 30 days following the date of the Authorization
Notice.
The Company acknowledges that its failure to maintain a sufficient
number of authorized but unissued shares of Common Stock to effect in full a
conversion of the Debentures will cause the Holder to suffer damages in an
amount that will be difficult to ascertain. Accordingly, the parties agree that
it is appropriate to include in this Agreement a provision for liquidated
damages. The parties acknowledge and agree that the liquidated damages provision
set forth in this section represents the parties' good faith effort to quantify
such damages and, as such, agree that the form and amount of such liquidated
damages are reasonable and will not constitute a penalty. The payment of
liquidated damages shall not relieve the Company from its obligations to deliver
the Common Stock pursuant to the terms of this Agreement.
(i) Redemption. The Company reserves the right, at its sole option, to
call a mandatory redemption of any percentage of the balance on the Debentures
not then converted as follows: In the event the Company exercises such right of
redemption anytime following the Closing Date, it shall pay the Holder, in U.S.
currency One Hundred Twenty percent (120%) of the face amount of the Debentures
to be redeemed (the "Redemption Amount"), plus accrued interest. The date by
which the Debentures must be delivered to the escrow agent shall not be later
than ten (10) business days following the date the Company notifies the Holder
by facsimile of the redemption. The Company shall give the Holder at least ten
(10) business day's notice of its intent to redeem and wire the funds necessary
to redeem the Debentures to the escrow agent on or before the expiration of said
ten (10) business days during which time the Purchaser may continue to convert.
Furthermore, in the event such Redemption Amount is not timely paid, any rights
of the Company to such redemption shall terminate, and the Company shall not be
entitled to make any partial or full redemption of the unconverted Debentures
thereafter.
(j) The Company shall furnish to Holder such number of prospectuses and
other documents incidental to the registration of the shares of Common Stock
underlying the Debentures and the shares of Common Stock issuable in payment of
interest on the Debentures, including any amendment of or supplements thereto.
(k) Limits on Amount of Conversion and Ownership. In no event shall the
Holder be entitled to convert any of the Debentures to the extent that, after
such conversion, the sum of (1) the number of shares of Common Stock
beneficially owned by the Holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the Debentures), and (2) the number of shares of Common
Stock issuable upon the conversion of the Debentures with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 4.99% of the outstanding
shares of Common Stock (after taking into account the shares to be issued to the
Holder upon such conversion). For purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), except as otherwise provided in clause (1) of such proviso. The Holder
further agrees that if the Holder transfers or assigns any of the Debentures
such transfer or assignment shall be made subject to the transferee's or
assignee's specific agreement to be bound by the provisions of this Section as
if such transferee or assignee were a signatory to the Subscription Agreement.
(l) Payment of Taxes. The Company shall pay all documentary stamp taxes,
if any, attributable to the initial issuance of the Common Stock; provided,
however, that the Company shall not be required to pay any tax or taxes which
may be payable, (i) with respect to any secondary transfer of the Debentures or
the Common Stock issuable upon exercise hereof or (ii) as a result of the
issuance of the Common Stock to any person other than the Holder, and the
Company shall not be required to issue or deliver any certificate for any Common
Stock unless and until the person requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have produced evidence that
such tax has been paid to the appropriate taxing authority.
Section 3.3. Company to Reserve Stock. The Company shall reserve the
number of shares of Common Stock required pursuant to and upon the terms set
forth in the Subscription Agreement, to permit the conversion of this Debenture.
All shares of Common Stock which may be issued upon the
5
<PAGE> 6
conversion hereof shall upon issuance be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issuance thereof.
Section 3.4. Restrictions on Transfer. This Debenture has not been
registered under the Securities Act of 1933, as amended, (the "Act") and is
being issued under Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. This Debenture and the Common Stock issuable upon the
conversion thereof may only be offered or sold pursuant to registration under or
an exemption from the Act.
Section 3.5. Mergers, Etc. If the Company merges or consolidates with
another corporation or sells or transfers all or substantially all of its assets
to another person and the holders of the Common Stock are entitled to receive
stock, securities or property in respect of or in exchange for Common Stock,
then as a condition of such merger, consolidation, sale or transfer, the Company
and any such successor, purchaser or transferee shall amend this Debenture to
provide that it may thereafter be converted on the terms and subject to the
conditions set forth above into the kind and amount of stock, securities or
property receivable upon such merger, consolidation, sale or transfer by a
holder of the number of shares of Common Stock into which this Debenture might
have been converted immediately before such merger, consolidation, sale or
transfer, subject to adjustments which shall be as nearly equivalent as may be
practicable to adjustments provided for in this Article 3. Article 4. Mergers
The Company shall not consolidate or merge into, or transfer all or
substantially all of its assets to, any person, unless such person assumes in
writing the obligations of the Company under this Debenture and immediately
after such transaction no Event of Default exists. Any reference herein to the
Company shall refer to such surviving or transferee corporation and the
obligations of the Company shall terminate upon such written assumption. Article
5. Reports
The Company will mail to the Holder hereof at its address as shown on
the Register a copy of any annual, quarterly or other report or proxy statement
that it gives to its shareholders generally at the time such report or statement
is sent to shareholders. Article 6. Defaults and Remedies
Section 6.1. Events of Default. An "Event of Default" occurs if (a) the
Company does not make the payment of the principal of this Debenture when the
same becomes due and payable at maturity, upon redemption or otherwise, (b) the
Company does not make a payment, other than a payment of principal, for a period
of five (5) business days thereafter, (c) any of the Company's representations
or warranties contained in the Subscription Agreement or this Debenture were
false when made or the Company fails to comply with any of its other agreements
in the Subscription Agreement or this Debenture and such failure continues for
the period and after the notice specified below, (d) the Company shall have its
Common Stock suspended or delisted from any exchange or the over-the-counter
market from trading for in excess of five (5) consecutive trading days, or (e)
the Company pursuant to or within the meaning of any Bankruptcy Law (as
hereinafter defined): (i) commences a voluntary case; (ii) consents to the entry
of an order for relief against it in an involuntary case; (iii) consents to the
appointment of a Custodian (as hereinafter defined) of it or for all or
substantially all of its property or (iv) makes a general assignment for the
benefit of its creditors or (v) a court of competent jurisdiction enters an
order or decree under any Bankruptcy Law that: (A) is for relief against the
Company in an involuntary case; (B) appoints a Custodian of the Company or for
all or substantially all of its property or (C) orders the liquidation of the
Company, and the order or decree remains unstayed and in effect for 60 days, (e)
the Company's Common Stock is no longer listed on any recognized exchange
including electronic over-the-counter bulletin board. As used in this Section
6.1, the term "Bankruptcy Law" means Title 11 of the United States Code or any
similar federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law. A default under clause (c) above is not an Event of Default
until the holders of at least 25% of the aggregate principal amount of the
Debentures outstanding notify the Company of such default and the Company
6
<PAGE> 7
does not cure it within five (5) business days after the receipt of such notice,
which must specify the default, demand that it be remedied and state that it is
a "Notice of Default".
Section 6.2. Acceleration. If an Event of Default occurs and is
continuing, the Holder hereof by notice to the Company, may declare the
remaining principal amount of this Debenture, together with all accrued interest
and any liquidated damages, to be due and payable. Upon such declaration, the
remaining principal amount shall be due and payable immediately. Article 7.
Registered Debentures
Section 7.1. Series. This Debenture is one of a numbered series of
Debentures which are identical except as to the principal amount and date of
issuance thereof and as to any restriction on the transfer thereof in order to
comply with the Securities Act of 1933 and the regulations of the Securities and
Exchange Commission promulgated thereunder. Such Debentures are referred to
herein collectively as the "Debentures".
Section 7.2. Record Ownership. The Company, or its attorney, shall
maintain a register of the holders of the Debentures (the "Register") showing
their names and addresses and the serial numbers and principal amounts of
Debentures issued to or transferred of record by them from time to time. The
Register may be maintained in electronic, magnetic or other computerized form.
The Company may treat the person named as the Holder of this Debenture in the
Register as the sole owner of this Debenture. The Holder of this Debenture is
the person exclusively entitled to receive payments of interest on this
Debenture, receive notifications with respect to this Debenture, convert it into
Common Stock and otherwise exercise all of the rights and powers as the absolute
owner hereof.
Section 7.3. Registration of Transfer. Transfers of this Debenture may
be registered on the books of the Company maintained for such purpose pursuant
to Section 7.2 above (i.e., the Register). Transfers shall be registered when
this Debenture is presented to the Company with a request to register the
transfer hereof and the Debenture is duly endorsed by the appropriate person,
reasonable assurances are given that the endorsements are genuine and effective,
and the Company has received evidence satisfactory to it that such transfer is
rightful and in compliance with all applicable laws, including tax laws and
state and federal securities laws. When this Debenture is presented for transfer
and duly transferred hereunder, it shall be canceled and a new Debenture showing
the name of the transferee as the record holder thereof shall be issued in lieu
hereof. When this Debenture is presented to the Company with a reasonable
request to exchange it for an equal principal amount of Debentures of other
denominations, the Company shall make such exchange and shall cancel this
Debenture and issue in lieu thereof Debentures having a total principal amount
equal to this Debenture in such denominations as agreed to by the Company and
Holder.
Section 7.4. Worn or Lost Debentures. If this Debenture becomes worn,
defaced or mutilated but is still substantially intact and recognizable, the
Company or its agent may issue a new Debenture in lieu hereof upon its
surrender. Where the Holder of this Debenture claims that the Debenture has been
lost, destroyed or wrongfully taken, the Company shall issue a new Debenture in
place of the original Debenture if the Holder so requests by written notice to
the Company actually received by the Company before it is notified that the
Debenture has been acquired by a bona fide purchaser and the Holder has
delivered to the Company an indemnity bond in such amount and issued by such
surety as the Company deems satisfactory together with an affidavit of the
Holder setting forth the facts concerning such loss, destruction or wrongful
taking and such other information in such form with such proof or verification
as the Company may request.
Article 8. Dilution.
The number of shares of Common Stock issuable upon conversion of the
Debentures may increase substantially in certain circumstances. The Company's
executive officers and directors have studied and fully understand the nature of
the transactions contemplated by this Debenture and recognize that they have a
potential dilutive effect. The board of directors of the Company has concluded,
in its good faith business judgment, that such issuance is in the best interests
of the Company. The Company specifically acknowledges that its obligation to
issue additional shares of Common Stock is binding upon
7
<PAGE> 8
the Company and enforceable regardless of the dilution such issuance may have on
the ownership interests of other shareholders of the Company.
Article 9. Notices
Any notice which is required or convenient under the terms of this
Debenture shall be duly given if it is in writing and delivered in person or
mailed by first class mail, postage prepaid and directed to the Holder of the
Debenture at its address as it appears on the Register or if to the Company to
its principal executive offices. The time when such notice is sent shall be the
time of the giving of the notice.
Article 10. Time
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday, such payment may be made or condition or obligation performed on the
next succeeding business day, and if the period ends at a specified hour, such
payment may be made or condition performed, at or before the same hour of such
next succeeding business day, with the same force and effect as if made or
performed in accordance with the terms of this Debenture. A "business day" shall
mean a day on which the banks in California are not required or allowed to be
closed.
Article 11. Waivers
The holders of a majority in principal amount of the Debentures may
waive a default or rescind the declaration of an Event of Default and its
consequences except for a default in the payment of principal or conversion into
Common Stock. Article 12. Rules of Construction
In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular, and
words of the masculine gender include the feminine and the neuter, and when the
sense so indicates, words of the neuter gender may refer to any gender. The
numbers and titles of sections contained in the Debenture are inserted for
convenience of reference only, and they neither form a part of this Debenture
nor are they to be used in the construction or interpretation hereof. Wherever,
in this Debenture, a determination of the Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the Company and the Holder of this Debenture.
Article 13. Governing Law
The validity, terms, performance and enforcement of this Debenture shall
be governed and construed by the provisions hereof and in accordance with the
laws of the State of California applicable to agreements that are negotiated,
executed, delivered and performed solely in the State of California.
Article 14. Litigation
(a) Forum Selection and Consent to Jurisdiction. Any litigation based
thereon, or arising out of, under, or in connection with, this agreement or any
course of conduct, course of dealing, statements (whether oral or written) or
actions of the Company or Holder shall be brought and maintained exclusively in
the federal courts of the State of California. The Company hereby expressly and
irrevocably submits to the jurisdiction of the federal courts of the State of
California for the purpose of any such litigation as set forth above and
irrevocably agrees to be bound by any final judgment rendered thereby in
connection with such litigation. The Company further irrevocably consents to the
service of process by registered mail, postage prepaid, or by personal service
within or without the State of California. The Company hereby expressly and
irrevocably waives, to the fullest extent permitted by law, any objection which
it may have or hereafter may have to the laying of venue of any such litigation
brought in any such court referred to above and any claim that any such
litigation has been brought in any inconvenient forum. To the
8
<PAGE> 9
extent that the Company has or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether through service or
notice, attachment prior to judgment, attachment in aid of execution or
otherwise) with respect to itself or its property, the Company hereby
irrevocably waives such immunity in respect of its obligations under this
agreement and the other loan documents.
(b) Waiver of Jury Trial. The Holder and the Company hereby knowingly,
voluntarily and intentionally waive any rights they may have to a trial by jury
in respect of any litigation based hereon, or arising out of, under, or in
connection with, this agreement, or any course of conduct, course of dealing,
statements (whether oral or written) or actions of the Holder or the Company.
The Company acknowledges and agrees that it has received full and sufficient
consideration for this provision and that this provision is a material
inducement for the Holder entering into this agreement.
(c) Submission To Jurisdiction. Any legal action or proceeding in
connection with this Debenture or the performance hereof must be brought in the
federal courts located in the State of California and the parties hereby
irrevocably submit to the exclusive jurisdiction of such courts for the purpose
of any such action or proceeding.
9
<PAGE> 10
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of
the date first written above.
INTEGRATED COMMUNICATION NETWORKS, INC.
By ________________________________________
David J. Chadwick
its Chairman and CEO duly authorized
10
<PAGE> 11
Exhibit A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert the
Debentures.)
The undersigned hereby irrevocably elects, as of ______________, 199_ to
convert $_________________ of the Debentures into Shares of Common Stock (the
"Shares") of INTEGRATED COMMUNICATION NETWORKS, INC. (the "Company") according
to the conditions set forth in the Subscription Agreement dated
_________________,1999.
Date of Conversion __________________________________________
Applicable Conversion Price _________________________________
Number of Shares Issuable upon this conversion ______________
Signature ___________________________________________________
[Name]
Address _____________________________________________________
_____________________________________________________________
Phone ______________________ Fax __________________________
Assignment of Debenture
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
________________________________________________________________________________
(name, address and SSN or EIN of assignee)
Dollars ($ )
________________________________________________________________________________
(principal amount of Debenture, $5,000 or integral multiples of $5,000)
of principal amount of this Debenture together with all accrued and unpaid
interest hereon.
Date: ______________ Signed: __________________________________________________
(Signature must conform in all respects to name of
Holder shown of face of Debenture)
Signature Guaranteed:
11
